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.

Smith v. Wawanesa Mutual Insurance Company, 2013 ABQB 369, http://www.albertacourts.ab.ca/jdb_new/public/qb/2003-NewTemplate/qb/Civil/2013/2013abqb0369.pdf

Contact Richard Hayles at Billington Barristers:

(403) 930-4106

RHayles@BillingtonBarristers.com

Visit our website: http://billingtonbarristers.com/index.php?id=59

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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.



Insurance for Flood Damage to Your Home

    Pumping flood water back into the river

Standard homeowner's policies issued by Canadian insurance companies contain an exclusion for damage caused by flood.  Here is a typical flood damage exclusion:

"This policy does not insure … loss or damage caused directly or indirectly by flood, and the word "flood" means waves, tides, tidal waves, and the rising of, the breaking out or the overflow of, any body of water, whether natural or man-made…"

The exclusion clause is carefully drafted so as to provide the insurance company with the widest possible protection against this type of claim.

The language employed is quite comprehensive.  Damage arising "directly or indirectly" from flood is excluded from coverage, and the word "flood" is defined broadly so as to include things that people would not normally think of as flooding, such as tides and waves.  Flooding from any body of water, including man-made sources such as reservoirs, is excluded.

Courts in a number of Canadian provinces have upheld this form of exclusion clause.  In Catalano v. Canadian Northern Shield Insurance Company, 2000 BCCA 133, municipal workers diverted water from overflowing culverts so that it inundated the plaintiff's business.  The B.C. Court of Appeal held that the diversion was not a separate intervening cause of the damage, and that since the original source of the water was overflow arising from heavy rainfall and melting snow pack, the loss came within the policy definition of "flood" and was excluded.

In the recent emergency in Alberta, work crews in certain locations have erected berms and other barriers to divert overflow from rivers.  Although these actions are intended to protect residential areas from flooding, some property owners have probably found that the diverted water increased the flow over their land.  Assuming that the Alberta courts adopt the B.C. interpretation, the ensuing flood damage would be excluded under the typical home insurance policy.

In an Alberta case, the Court of Queen's Bench also accepted the insurer's interpretation of this clause.  In MacNichol v. Insurance Unlimited (Calgary) Ltd., 1992 CanLII 6185 rising water in the Peace River breached a dam, causing blocks of ice to go over the dam and crash into a pump-house that was under construction.  Although the immediate cause of the damage to the pump-house was the action of the ice blocks pounding against it, the court concluded that the direct cause was the rise and overflow of the river, which triggered the exclusion clause.

In another B.C. case, however, the Court of Appeal adopted an interpretation more favourable to the insured.  In B.C. Ferry Corp. v. Commonwealth Insurance Co. (1987), 40 D.L.R.(4th)  766, the insured owned a ferry terminal which was damaged by heavy waves during a severe storm.  Since the evidence showed no abnormal rise in the water levels, however, the appellate court concluded that the event did not come within the extended definition of "flood" in the policy, which encompasses waves, tides, and tidal waves.  Although it was wave action that damaged the terminal, there was no rising of, breaking out, or overflow of any  body of water - the flood exclusion did not apply.

Although the Insurance Bureau of Canada has said that there is no coverage for "overland flooding" in Canadian home insurance policies, there is an alternative point of view.  If the original source of the water is overflow from a river, the damage comes within the standard flood exclusion and is not covered.  The exclusion does not use the word "overland", however, so the wording does not extend to any water that enters a home from outside regardless of the source.

There has been heavy rainfall in many areas of the province over the last week, and water that seeps or leaks into a home due to excess precipitation, and that does not originate in an overflowing river, stream, or reservoir, would not trigger the flood exclusion.  Such water damage would come within the coverage provided in an "all risks" policy, and would likely be covered as "storm" damage in a specified perils policy.

Here are some other kinds of losses that might be covered, even if the home policy contains a standard flood exclusion:

• Sewer backup - many home insurers provide sewer backup coverage as an add on for an extra premium.  If your home policy has a sewer backup endorsement, you are covered where waste water from storm or sanitary sewers has entered the basement through floor drains, tubs, shower stalls, or toilets.  You may also have coverage where some of the water entering your home is backup from sewers and some is overland flow from river flooding.
• Electrical disruption - electrical failure or interruption that is not caused by flood damage could be covered.  It seems that municipal authorities decided to cut power to certain areas once an evacuation order had been issued.  The spoiled contents of a fridge or freezer could be covered in this situation.  If the power loss was due to flood damage to a transformer, however, it would likely come within the flood exclusion.  The contrary argument is that the authorities cut power as a precautionary measure in areas that might be flooded, so the power disruption is analogous to the water diversion in the Catalano case.
• Evacuation costs - if you were evacuated, but your property was not in fact flooded, it is arguable that your accommodation costs such as hotel, restaurants, and parking could be covered.  Such losses would likely not be covered under a specified perils policy, but they should fall within the coverage of an all risks policy in the absence of an exclusion for government orders or actions.  Losses due to electrical disruption could be covered under the same argument.
• Theft, vandalism, arson - whether your property was flooded or not, damage caused by third parties while you were ordered to evacuate and unable to protect your home should be covered.
• Vehicle damage - cars are insured separately, and flood damage to a vehicle should be paid if the insured purchased comprehensive coverage.

All of the above applies to insurance for residential premises.  Business insurance is in an entirely different category.

Although standard business policies contain a flood exclusion similar to the one in home policies, business owners can purchase flood coverage for an extra premium.  This option is not available to home owners.

Even if a business policy does not have a flood endorsement, the flood exclusion often contains language stating that the exclusion does not apply to "resulting damage".  Under this exclusion to the exclusion, direct flood damage is not covered, but if building systems such as fire alarm and suppression, refrigeration, or security are damaged by flood waters, and then there is additional damage caused by the failure of one of those systems, this is "resulting damage" and it is covered.  An example might be the loss of the contents of an industrial freezer to spoilage where water shorts out electrical systems, causing the freezer to shut down.

If you are a business owner you should look at the specific terms of your policy and consult your broker, public adjuster, or legal counsel for assistance in determining what is and is not covered.

Contact Richard Hayles at Billington Barristers:

(403) 930-4106

RHayles@BillingtonBarristers.com

Visit our website: http://billingtonbarristers.com/index.php?id=59

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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.

How To Make a Home or Business Insurance Claim

    Bow River Near Prince's Island, June 21, 2013

Early yesterday morning my wife and I were evacuated from our home along with thousands of other Calgary residents. My office is closed after the City issued an order for the controlled evacuation of the downtown area.

Although people living near the Elbow River are starting to return home this morning, it looks like the evacuation order for areas along the Bow River will remain in place for the time being. Power may not be restored in downtown for a few days, so many offices and businesses will remain closed.

Watching Global TV yesterday we saw incredible scenes of devastation, with many residential streets  covered in water. There was muddy water flowing around numerous warehouses and commercial buildings, as well as trucks and other vehicles half submerged.

Thousands of Alberta homeowners and tenants will be looking to their insurers to cover the damage to their houses, gardens, and possessions. Many business owners will have claims for property damage and business interruption. Insurance company claims departments will be inundated with new claims, and it will be difficult for people to get answers to their questions about what is covered, how to document a claim, and how much (if anything) the insurance company will pay.

The most important thing right now is to give your insurer written notice of your claim right away. Delay in giving notice won't just delay the resolution of your claim; it can provide grounds to deny the claim altogether. The insurance company has the right to inspect the damage as soon as possible (even if it doesn't have enough adjusters available to handle all the claims right now).

Send your notice by fax or email, as these methods provide a record of the date and time notice was received.

The initial notice should be short and sweet. You don't need to provide any details about what happened or what was damaged - that can come later. All you need to do is provide the name of the insured, the policy number, and the address of the insured premises. For date of loss, you should say "June 21, 2013 and continuing", as the damage may be ongoing.

Avoid using terms like "flood" or "water damage", as flooding from water sources outside the building is excluded from many policies. At this point, all you need to do is provide notice of a "loss" or "property damage" at the insured address.

If you know that your property is in an affected area but you can't inspect the damage because an evacuation order is still in place, you should send notice of claim anyway. It is very important to provide notice as soon as possible, and you don't need to state any details or estimate the amount of your claim yet.

The Insurance Bureau of Canada has stated publicly that there is no insurance coverage for "overland flooding" in Canada. This may or may not apply to your claim - coverage always depends on the wording of the policy, and insurance policies are subject to interpretation. Legal principles of interpretation generally favour the insured. You should not give up on a potentially substantial claim based on a general statement from an insurance industry organisation that may not apply to your policy and your situation.

Many policies do include coverage for back up from storm or sanitary sewers. If water entered your home from floor drains, showers, tubs, or toilets, at least part of the damage could be covered.

There may be other provisions in your policy that bring parts of the damage into coverage, even if your insurer is telling you it is excluded. You should still send the insurer notice of claim, photograph the damage thoroughly, and keep all your receipts.

Contact Richard Hayles at Billington Barristers:

(403) 930-4106

RHayles@BillingtonBarristers.com

Visit our website: http://billingtonbarristers.com/index.php?id=59

View my profile on LinkedIn: http://www.linkedin.com/profile/view?id=50396098&trk=nav_responsive_tab_profile




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.