Alberta Court of Appeal resolves policy ambiguity in favour of insured

Introduction

In 2102908 Alberta Ltd v Intact Insurance Company, 2023 ABCA 34, the Alberta Court of Appeal resolved an issue pertaining to ambiguous policy provisions in favour of the insured party. This decision highlights the importance for insurers to avoid ambiguous language in insurance policies, as such language will most likely be construed against the insurer’s interests.

Brief facts

2102908 Alberta (the “Insured”) operated a bowling alley on the ground floor of a building in Fort McMurray, Alberta (the “Premises”). The Insured held a commercial insurance policy (the “Policy”) with Intact Insurance Company (the “Insurer”), which provided coverage for the Premises.

The Policy included a broad form for property coverage (the “Broad Form”), which insured against “all risks of direct physical loss or damage to the insured property.” However, multiple provisions of the Broad Form contained specific exclusions pertaining to water damage. Section 2.2 provided that coverage would not apply to damage caused, either wholly or partially, by flood, including “surface water,” or the overflow of any natural or artificial body of water (the “Flood Exclusion”). Section 2.3.2 excluded coverage for damage resulting from the backup or overflow of water from sewers, sumps, septic tanks, or drains, while Section 2.3.3 excluded coverage for damage caused by the entry of rain, sleet, or snow into the Premises.

The Policy, however, also included an extension of coverage form, which supplemented the Broad Form (the “Extension”). The Extension provided additional coverage for damage that was “caused by seepage, leakage or influx of water derived from natural sources.” This led to an apparent inconsistency in the Policy as between the Extension and the Flood Exclusion.

In April 2020, an influx of surface water caused damage to the Premises after a nearby river overflowed. The Insured claimed coverage under the Policy, which the Insurer denied. The Insured subsequently made a claim against the Insurer for indemnification.

Parties’ positions

The Insured took the position that damage to the Premises was covered by the Extension. The Insurer argued that the damage was caused by flood, which was specifically excluded from coverage as per the Flood Exclusion.

The parties entered into a statement of agreed facts, which described how a “flood” caused an “influx of surface water” to enter the Premises which caused subsequent damage. They submitted a question to be resolved by desk application, asking the chambers judge whether the Insured was covered for the damage by the Extension, or if the damage was excluded from coverage by the Flood Exclusion.

Decision under appeal

The chambers judge found that the Policy was ambiguous and applied the principle of contra proferentem to resolve the ambiguity. This principle was considered by the Supreme Court of Canada in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37 (Ledcor) and requires that, when the court is interpreting ambiguous agreements, the ambiguity ought to be interpreted against the interests of whoever drafted the agreement, which, in this case, was the Insurer. The chambers judge ruled that when interpreting the Policy as a whole, the water damage was covered under the Extension and, therefore, the Insured was entitled to indemnification.

The Insurer appealed the chambers decision, submitting that the chambers judge erred in finding the Policy was ambiguous and in resolving that ambiguity in favour of the Insured.

Analysis

The Court of Appeal considered whether “flood” or “influx” were mutually exclusive causes of damage, as submitted by the Insurer on appeal, or whether the Policy was ambiguous, as was ruled by the lower court.

The majority of the Court of Appeal determined that the Policy was ambiguous, since it excluded coverage for damage from “flood” on the Broad Form but provided coverage for damage from “an influx of water derived from natural sources” through the Extension. This ambiguity arose primarily because it is difficult to envision scenarios where damage from a flood cannot also be said to have arisen from an influx of water.

While there was no direct evidence regarding the parties’ intentions when agreeing to the Policy terms, the Court of Appeal determined it was obvious the Insured aimed to extend coverage to seepages, leakages, or influxes of water. It was reasonable for the Insured to expect this purchase to provide coverage for “influx” of water from a flood.

The Court of Appeal found further support for this interpretation when considering the commercial reality of purchasing insurance policies. They questioned what an Insured actually purchases when extending their coverage to protect from an “influx of water derived from natural sources,” if that coverage then excludes water damage resulting from flood, rain, sleet, or snow, etc. The Insured, according to the Court of Appeal, would derive no practical benefit from purchasing the Extension under this interpretation. The Court of Appeal found that interpreting the Extension as applying to an influx of water deriving from a flood struck an appropriate balance.

Considering the reasonable expectations of the Insured, as well as the commercial reality of purchasing a policy of insurance, the Court of Appeal concluded that the Policy provided coverage for damage from an influx of floodwater from natural sources. Accordingly, the Insurer’s appeal was dismissed and the Insured was entitled to indemnification for the damage. Even if the general rules provided in Ledcor did not resolve this ambiguity, the Court of Appeal agreed with the chambers judge that applying the contra proferentum principle would lead to the same outcome.

Takeaways

This ruling underlines the importance of eliminating ambiguity in insurance policies, particularly when the insured party has purchased an extension of coverage. When drafting policies, insurers should be mindful of using language that creates possible inconsistencies in coverage between excluded damages and coverage extensions.

Should you have any questions or concerns, please feel free to reach out to a member of Miller Thomson’s Insurance Defence team.