By: Noah Hodgson & Thomas Rodgers with special contribution by
Bob Shaw of Rogers Insurance
On February 11, 2021, the Supreme Court of Canada denied Co-operators General Insurance Company’s leave to appeal the Ontario Court of Appeal decision in Le Treport Wedding & Convention Centre Ltd v Co-operators General Insurance Company[1]. As such, the Ontario Court of Appeal decision in Le Treport, rendered on July 29, 2020, stands as good law. While this decision will not be binding precedent in Alberta Courts, it will be very persuasive. The Ontario Courts have long been a well-respected insurance court in Canada, and Alberta has a history of following precedent set by the Ontario judiciary. As such, brokers and insurers in Alberta should be aware of the Le Treport decision and its implications with respect to flood coverage when adjusting claims and advocating all flood claims. The Le Treport case expands the definition of “Flood” to include groundwater infiltration into a building due to a heavy build up of rainwater or other waters outside of natural bodies of water such as lakes, rivers and ponds.
While the Ontario Court of Appeal decision in Le Treport was released several months ago, the recent Supreme Court of Canada decision to deny leave to appeal has solidified this case as a significant insurance law precedent. As such, Scott Venturo Rudakoff LLP has completed a case summary as well as an analysis of the consequences for insurers and brokers across Alberta and Canada.
Facts
As a result of a rainstorm in July 2013, there was widespread flooding across the Greater Toronto Area. The entry of water in the banquet hall facility operated by the appellant, Le Treport Wedding & Convention Centre Ltd. (“Le Treport”), caused significant damages.
Le Treport was insured under an “all-risks” policy by the respondent insurer, Co-operators General Insurance Company (the “Insurer”).
By April 2014, the Insurer paid approximately $124,000 to Le Treport for repairs. In March 2016, an appraisal award was released valuing the damage to the building at a replacement cost of $591,552.00 and the contents/equipment loss was set at a replacement cost of $337,777.18. In November 2018, the Insurer paid the balance up to the $500,000 limit prescribed in the Sewer Back Up Endorsement.
The Insurer denied Le Treport’s claim for indemnity for business interruption under the profits Endorsement Form Coverage of the insurance policy because Le Treport continued to operate after the rainstorm.
Le Treport sued the Insurer for the balance of payments it alleged were owed exceeding the $500,000 limit of the Sewer Back Up Endorsement, including for claims under the Flood Endorsement, for losses associated with business interruption and for extra-contractual damages.
The trial judge found that the Sewer Back Up Endorsement applied; the Insurer had paid out the policy limit of $500,000 and owed nothing more. He dismissed Le Treport’s other claims.
Le Treport appealed the decision of the trial judge and argued that the trial judge erred in finding that a Flood Endorsement did not apply to the facts, and in refusing to require payment under several other coverages.
Issues
Le Treport asserted that the trial judge erred in finding that it was not entitled to:
coverage under the Flood Endorsement Form;
coverage for business losses under the Profits Endorsement Form;
extra-contractual damages on the basis that the Insurer delayed making payments; and
compensation for professional fees incurred to establish the quantum of the business interruption loss under the Commercial Plus Endorsement Form.
These asserted errors formed the issues on appeal.
Summary of Appeal
In allowing the first ground of appeal, the Court was guided by the following interpretive principles:
a. policies and endorsements must be read together;
b. limitations on the apparent coverage in an endorsement that are ambiguous in the sense that they are not clearly apparent should be set out in the endorsement itself;
c. the burden is on the insurer to demonstrate that its interpretation would not essentially nullify the coverage for most risks or run counter to the reasonable expectations of the ordinary person who purchased the coverage; and
d. provisions granting coverage ought to be construed broadly.
In dismissing the second ground of appeal, the Court determined that in the absence of a palpable and overriding error, the trial judge’s factual finding that Le Treport did not prove loss of profits had to be deferred to, and the Court did not find that the trial judge made such an error.
However, the Court clarified that its decision on this issue should not be taken to mean that the Court necessarily agreed with the trial judge that the expression "necessary interruption of business" requires a total cessation of business activity for a period of time for coverage to arise.
In dismissing the third ground of appeal, the Court found that there was no basis for setting aside the trial judge's disposition of claim for extra-contractual damages, which rested on the dual finding that Le Treport had not proven loss of profit and revenue resulting from the event and that it was the author of its own misfortune.
While the delay in payment was not acceptable, the trial judge acceded to Le Treport’s submission that some adjustment should be made to account for the delay in the costs award to the Insurer by reducing the costs award.
In dismissing the last ground of appeal, the Court found that the expert report was not intended to quantify loss, but was for the purpose of providing evidence at trial such that associated professional fees were not recoverable.
Decision
Issue 1: Does the Flood Endorsement apply on the facts
The Court found that the trial judge erred in giving any effect to the definition of “Surface Water” in the Commercial Broad Form policy when he interpreted the Flood Endorsement for two reasons:
The trial judge’s use of the exclusion language misapprehended the relationship between the Commercial Broad Form policy and the Flood endorsement. An endorsement is not a standalone insurance policy. It is linked to the policy to which it is attached and with which it is purchased.[2]
The trial judge erred in importing the exclusion of "Surface Water" flooding into the Flood Endorsement in that doing so would effectively nullify flood coverage, not only in this case but in almost all cases, because few buildings stand right on the edge of a body of water.[3]
The Court of Appeal concluded that the Flood Endorsement should be read as entirely displacing the flood exclusion in the Commercial Broad Form policy.[4] Specifically, the exclusion at issue in the Commercial Broad Form policy was that “flood” including “Surface Water” was an excluded peril (known in the decision as the Surface Water exclusion). This decision was based on the fact that Le Treport had purchased the Flood Endorsement to specifically displace the Surface Water exclusion that existed in the main Commercial Broad Form policy.
The Court then moved on to consider whether the trial judge erred in finding that there was not a flood within the meaning of the Flood Endorsement. The Flood Endorsement provides that the policy includes "loss or damage caused directly by the peril of flood." It defines "flood": "For the purpose of this endorsement, flood shall mean the rising of, the breaking out or the overflow of any body of water, whether natural or man-made and includes waves, tides, tidal waves and tsunamis."[5]
The Court determined that the influx of water into Le Treport’s facility was a flood within the meaning of the Flood Endorsement for the following reasons:
The ordinary meaning of the word “flood” would include the massive, forceful and fast-moving flow of water into the facility.[6]
There was a catastrophic failure of all the water channelling features in the vicinity, both natural and man-made. In Justice Lauwers’ view, this scenario fell well within the words of the Flood Endorsement: "the rising of, the breaking out or the overflow of any body of water, whether natural or man-made."[7]
Support from Cabell v Personal Insurance Co.[8] The Court explained that Cabell turned on two points:
a. The first was whether the endorsement was sufficiently clear. In holding that it was not, Rosenberg J.A. relied on Wigle v Allstate Insurance Co of Canada, where Cory J.A. stated that: "Limitations on the apparent coverage in the endorsement that are ambiguous in the sense that they are not clearly apparent, should be set out in the endorsement itself".[9]
b. The second point on which Cabell turned related to the concept of nullification. Rosenberg J.A. explained that the burden is on the insurer to demonstrate that its interpretation would not essentially nullify the coverage for most risks or run counter to the reasonable expectations of the ordinary person who purchased the coverage.[10]
The Court found that as in Cabell, counsel for the Insurer struggled in oral argument to find a circumstance in which the Flood Endorsement would ever benefit the appellant.[11]
Finally, in construing the Flood Endorsement, the Court of Appeal held that the trial judge departed from the principle that provisions granting coverage ought to be construed broadly. His interpretation effectively nullified coverage for the "obvious risks" identified in the Endorsement and belied the reasonable expectations of the appellant in purchasing that coverage. He also made a palpable and overriding error in failing to find on the evidence that there was a flood within the meaning of the Flood Endorsement.[12]
The Court concluded that it was difficult to imagine a realistic scenario that would constitute a flood within the meaning of the Flood Endorsement if, on the facts, this event did not satisfy that definition. In Justice Lauwers’ view, the Flood Endorsement applied and Le Treport was entitled to compensation on that basis.[13]
Because the Court held that the Flood Endorsement applied to the loss or damage caused by the flood, the limit of covered losses in the Sewer Back Up Endorsement no longer served to limit Le Treport’s claim. The available evidence on that additional loss was the appraisal award.[14] The appraisal award was binding on the parties and Le Treport was accordingly granted judgment in the amount of $429,329.18, being the balance of the actual cash value amount awarded on the appraisal that exceeds the $500,000 Sewer Back Up Endorsement limit.[15]
Issue 2: Is Le Treport entitled to insurance coverage for Business Interruption Losses?
The trial judge dismissed Le Treport’s claim for business interruption losses under Form AB-3, the Profits Endorsement Form, which provides:
The insurer agrees to indemnify the Insured against loss directly resulting from necessary interruption of business, caused by destruction or damage by the perils insured against to property at the "Premises", up to the limit(s) of insurance stated in the "Declarations" for this Form and subject to the provisions, limitations, exclusions, conditions and other terms of this Policy including this Form.[16]
In finding that the Profits Endorsement Form did not cover Le Treport’s business interruption claim, the trial judge stated as follows:
I am not convinced that there were actually lost profits that have been proven. As noted earlier, in the year following the incident, there was no decrease in revenue. I am not convinced that any decrease in revenue thereafter was necessarily anything more than a reflection of the cyclical nature of the business, which appears to have been the case during the period between 2009 and 2012. Assuming, however, that the decrease in revenue can be said to have resulted from the incident, I am not convinced that it was as a result of any fault of the [insurer]. I am persuaded that the [appellant] made its own decision to keep operating, and the lack, or at least delay, of necessary remediation and repair was the more likely cause of any decrease in revenue.[17]
The Court determined that this was a factual finding to which the Court must defer in the absence of a palpable and overriding error. Justice Lauwers was not persuaded that the trial judge made such an error.[18]
Because the claim for business interruption losses was not made out on the evidence as found by the trial judge, the Court did not find that it was appropriate to definitively interpret the meaning of the expression "necessary interruption of business" in the Profits Endorsement Form. However, Justice Lauwers clarified that he did not necessarily agree with the trial judge that the expression requires a total cessation of business activity for a period of time for coverage to arise.[19]
Issue 3: Extra-Contractual Damages
Le Treport argued that the trial judge erred in refusing to award extra-contractual damages because the Insurer delayed making payments under the policy. Justice Lauwers saw no basis on which to set aside the trial judge's disposition of this issue, which rested on the dual finding set out above that Le Treport had not proven a loss of profit and revenue resulting from the event and that it was the author of its own misfortune.[20]
While the delay in payment was not acceptable, the trial judge acceded to Le Treport’s submission that some adjustment should be made to account for the delay in the costs award to the Insurer by reducing the costs award.[21]
Issue 4: Payment of Professional Fees
Le Treport argued that the trial judge erred in not awarding professional fees paid, which related to preparation of a report establishing the quantum of loss under the Commercial Plus Endorsement Form, which provided as follows:
In the event of loss or damage by an insured peril, the Insurer will pay reasonable fees to auditors, accountants, architects, engineers or other professionals, other than public adjusters and the Insured's own employees, for producing and certifying particulars or details of the Insured's business required by the Insurer in order to arrive at the amount of loss payable under this Policy.
This extension applies only to fees incurred in establishing the quantum of a loss, liability for which is otherwise accepted by the Insurer. This extension may also apply to any Business Interruption loss covered under this Policy.[22]
The Court was persuaded by the Insurer's argument that the author of the report was not retained for the purposes of producing and certifying particulars or details of Le Treport’s business in order to arrive at the amount of loss payable under the policy, but for the purposes of providing evidence at trial, as the timing and the content of his report showed. The appeal of this issue was accordingly dismissed.[23]
Disposition
The Court allowed the appeal in part and granted judgment to Le Treport in the amount of $429,329.18, together with prejudgment interest and costs. The rest of the appeal was dismissed.
Implication for the Insurance Industry
The Court’s decision to grant coverage to Le Treport by defining the entry of rainwater into the banquet hall as a “Flood” may have wide implications for the insurance industry as a whole in adjusting and determining coverage for future flood losses. Furthermore, the decision has significant implications for brokers across Alberta and Canada. Brokers will need to be aware of the Le Treport case to ensure that they are properly advising clients as to what coverage they are entitled to under their policies (especially where Flood Endorsements are included). Further, brokers will need to be aware of how they are advocating for their insured clients to ensure that they are not negligent in the delivery of their services.
In the within case, the Court apparently widened the definition of “flood” to allow for coverage to Le Treport under the Flood Endorsement and distinguished Le Treport’s case from previous jurisprudence, including Parker Pad & Printing Ltd v Gore Mutual Insurance Company.[24] The facts in Parker Pad were similar to those of the Le Treport case. In both cases there was a collection of water due to heavy rainstorms which caused water to enter the respective buildings. However, the Court dealt with the apparent similarities between the two cases by finding that in Le Treport, there was a “catastrophic failure of all water channeling features in the vicinity, both natural and man-made.” The Court differentiating between the two cases was questionable, but ultimately, in Le Treport, the Court seemed to be guided by two ramifications of its decision: (i) the fact that in the case before it, not granting coverage to Le Treport under the Flood Endorsement would completely nullify coverage under the Flood Endorsement; and (ii) if a strict interpretation of “flood” was applied, coverage would only ever apply to buildings that stood right on the edge of a body of water and were subjected to the rising of a tide or overflow of a body of water.
Despite these implications, it is important to note that the Insurers’ decision to deny coverage would have been upheld had the Flood Endorsement not been purchased by Le Treport. The Broad Form policy clearly excluded “flood”, including “Surface Water”, meaning that general Broad Form policies that contain language similar to the Insurers’ wording would still not grant coverage in Le Treport’s situation. The turning point in Le Treport related to the additional Flood Endorsement purchased by Le Treport, which specifically granted coverage for “flood”. The language contained in the Flood Endorsement was not restrictive enough to deny coverage due to a flood caused by a temporary body of water formed by intense rainfall. As such, it can be said that a collection of rainwater that enters a building may now be considered a “flood” for the purpose of triggering coverage under the Flood Endorsement. It is likely that for coverage to be triggered, there must also be a “catastrophic failure of all the water channelling features in the vicinity, both natural and man-made” causing a rush of water as opposed to the slow seepage of rainwater into a building.
Insurers and brokers must consider the Court’s more expansive view of “flood” and “surface water” when assessing claims. Given that this decision comes from the Ontario Court of Appeal, it will be persuasive to our own Court of Queen’s Bench. Now, where a temporary body of water is formed by rainwater, and coverage is granted for “flood”, there may be coverage available.
In addition to the Co-operators’ policy at issue in Le Treport, we have reviewed commercial property policies including flood endorsements for several other insurers. Specifically, these policies define flood as the “breakout or overflow of any natural or artificial body of water” and “include surface water.” As such, these policies fall squarely within the Le Treportdecision. It appears that the Court would consider excessive rainwater to be a “body of water” that “includes surface water” to provide coverage.
A further notable aspect of the Le Treport case is that there is no evidence suggesting that Le Treport, in placing its coverage with Co-operators, had any discussions about flood, surface water or the prospect of a claim for loss under either of these perils. As such, the use of the nullification doctrine in this case is interesting. The Court appears to provide coverage, in part, because counsel for Co-operators struggled to provide an example of how the Flood Endorsement could apply in to Le Treport if it did not apply to the present situation. This reasoning and method of analysis is certainly pro-policyholder and not only continues with the standard interpretive method that coverage should be construed broadly, but also seems to feature a situation where the Court searched for coverage for Le Treport. Many brokers will provide a host of coverage extensions that may never deliver any value on all coverage extended.
The Court’s decision with respect to business interruption may also have implications for COVID-related business interruption claims. In Le Treport, the trial judge held that there was no complete cessation of business activities and therefore, there was no interruption of business to allow for coverage to occur under this endorsement. The Court of Appeal did not interfere with this finding in part because there were other evidentiary issues that led to the denial of the business interruption claim. However, Justice Lauwers did not necessarily agree that a complete cessation of operations was required to trigger business interruption coverage, thereby opening the door for businesses to argue that a COVID-related “slow down” in business may be sufficient to trigger coverage.
[1] Le Treport Wedding & Convention Centre Ltd v Co-operators General Insurance Company, 2020 ONCA 487, 151 OR (3d) 663 [Le Treport].
[2] Ibid at para 31 citing Sutherland v Pilot Insurance Co, 2007 ONCA 492, 86 OR (3d) 789.
[3] Supra note 1 at para 34.
[4] Ibid at para 37.
[5] Ibid at para 39.
[6] Ibid at para 49.
[7] Ibid at para 50.
[8] Ibid at para 52 citing Cabell v Personal Insurance Co, 2011 ONCA 105, [2011] OJ No 622 [Cabell].
[9] Supra note 1 at para 52 citing Cabell at para 13 citing Wigle v Allstate Insurance Co of Canada, [1984] OJ No 3422 at para 50, 14 DLR (4th) 404.
[10] Supra note 1 at para 53 citing Cabell at para 28.
[11] Supra note 1 at para 56.
[12] Ibid at para 57.
[13] Ibid at para 58.
[14] Ibid at para 59.
[15] Ibid at para 61.
[16] Ibid at para 62 [emphasis in original].
[17] Ibid at para 64.
[18] Ibid at para 65.
[19] Ibid at para 66.
[20] Ibid at para 73.
[21] Ibid at para 74.
[22] Ibid at para 75.
[23] Ibid at para 78.
[24] Parker Pad & Printing Ltd v Gore Mutual Insurance Company, 2017 ONSC 3894, 138 OR (3d) 620 [Parker Pad].