Tuesday 2 July 2013

Court Upholds "Wind-Driven Rain Exclusion"

    A Little Rain Must Fall

You asked your broker to make sure you had good coverage for your business, so you figure you can focus on your customers now and shouldn't have to worry about high winds, rains, or ice storms.  Maybe you should think again.

Many commercial property policies exclude water damage to the interior of the building or building contents unless wind or hail creates an opening in an exterior wall, allowing rain or other precipitation to enter the building.  This type of exclusion, known as a "Wind-Driven Rain Exclusion", can be an unwelcome surprise to the business owner when rain seeps into the building during a storm.

That's what happened to Vernon and Judy Smith, Alberta farmers who returned from a summer vacation to find that the insulation and contents of their barn had suffered water damage.  There had been a heavy snowfall the previous winter, and according to an expert who examined the roof after the loss, the weight of a 4' accumulation of snow in March had loosened seams and fasteners in the metal roofing.  Damage to the building and contents from the rain in July amounted to some $70,000.

The barn was covered under a Farm Property Policy issued by Wawanesa.  That policy contained an exclusion for damage to the interior of the building caused by rain, "unless an opening in the roof or wall is made by wind or hail and the rain...enters concurrently through this opening".

The case was tried by Madam Justice Veit in Grande Prairie on the basis of an agreed statement of facts.  The judge relied on the established principles of interpretation applicable to insurance policies:

  • the insurance company bears the onus of establishing that an exclusion clause applies;
  • the insurer's burden of proof is on a balance of probabilities;
  • the words in the policy are to be given their natural and ordinary meaning;
  • exclusion clauses in insurance contracts should receive a narrow interpretation in favour of the insured;
  • coverage provisions, on the other hand, are construed broadly;
  • the court may consider the reasonable expectations of the parties, but only if that will help to resolve an ambiguity in the language of the exclusion clause.

The Smiths argued that the policy must be ambiguous, because they thought they would be covered for the kind of damage that occurred.  The judge pointed out, however, that the standard for ambiguity is not the subjective expectations of the insured, but the objective intention of the parties as determined by reading the policy as a whole.  Like any contractual language, the words in an insurance policy mean what an impartial bystander would think they mean.

Based on this objective or "reasonable man" test, the judge was unable to find any ambiguity.  There was therefore no basis to bring in evidence outside the contract, or to consider the expectations of the parties.

There was also no reason to invoke the contra proferentem doctrine and construe the policy against the insurance company.  This principle applies where there are two reasonable interpretations of the policy language; the court is to prefer the interpretation that advances the position of the insured over an interpretation that is in the interests of the insurance company.  Although the plaintiffs argued that the exclusion clause could have been written in a way that would make the meaning more clear, the possibility that different  wording might better convey the insurance company's intent didn't mean that there was ambiguity or that there were two possible interpretations.  Justice Veit concluded that she had to give effect to the plain language of the policy and reject the claim for interior damage.

The judge did not analyze the wording of the exclusion closely, but it is easy to see why she thought that the exclusion applied.  Although the loosening of the roof seams and fasteners might be construed as an "opening" in the roof, this damage was clearly caused by the weight of the snowfall in March and not by wind or hail.  Furthermore, the rainwater didn't  enter the building "concurrently" with the damage to the metal roof - the roof seams had been damaged in March, but the water penetrated the building in July.

The decision is in keeping with established insurance law.  Nevertheless, this kind of exclusion, as well as other common exclusions such as the exclusion of damage caused by overland flooding, do not meet the expectations of business and home owners who rely on insurance to protect them against weather-related disasters.

People don't have the time to read their policies and carefully and consider every clause that might limit coverage in the context of every contingency that could arise.  Insurance buyers are not insurance professionals; they lack the background and specialized knowledge to fully understand common policy provisions.  It is anomalous that documents created by insurance specialists are to be interpreted under a "natural and ordinary meaning" standard.   The words used in insurance policies and the way the policies are structured do not really have any equivalent in natural and ordinary communication.

Most business people place their insurance through brokers.  The broker has an obligation to inquire about the business, figure out what assets need to be protected, obtain appropriate coverage, and explain any exclusions or limitations in coverage.  If the insured could have purchased a policy without the exclusion, and the broker failed to recommend this or caution the insured about the effect of the exclusion, the insured may have recourse against his broker.

Contact Richard Hayles at Billington Barristers:
(403) 930-4106

Any legal information provided is general in nature and may not apply to particular situations. It does not constitute legal opinion or advice. Please consult your lawyer regarding your specific legal issue.


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