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Insurance - Interpretation (2). 202135 Ontario Inc. v. Northbridge General Insurance Corporation
In 202135 Ontario Inc. v. Northbridge General Insurance Corporation (Ont CA, 2022) the Court of Appeal approved basic principles of insurance policy interpretation relied upon by the lower Superior court:[12] The application judge first summarized the principles of insurance contract interpretation articulated by the Supreme Court of Canada in its decisions in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, Consolidated-Bathurst v. Mutual Boiler, 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., 1993 CanLII 150 (SCC), [1993] 1 S.C.R. 252, and Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245. She then turned to the provisions of the policy and determined that the limit of liability clause under the extended coverage for pandemic loss is ambiguous, and could apply either to each location separately, or as an aggregate for all locations. Reading the contract as a whole and referring to other clauses in the contract, the application judge resolved the ambiguity in favour of the respondent insured. She also added that if she was incorrect, then the contra proferentem rule should be applied against the appellant insurer. In the result, she found that the $50,000 limit of liability for pandemic business losses applied to each business location separately.
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[15] The appellant acknowledges that the application judge identified and applied the correct legal principles of insurance contract interpretation from the case law.
[16] The application judge summarized the rules of interpretation of insurance policies from the case law in the following way:a) The court must first determine whether the language of the insurance policy is unambiguous, within the contract as a whole. If there is no ambiguity, effect must be given to that clear language.
b) However, if the policy language at issue is ambiguous, the court must apply the general principles of contractual interpretation to resolve that ambiguity. This framework includes the principles that: the interpretation should be consistent with the reasonable expectations of the parties so long as that interpretation is supported by the language of the policy; the interpretation should not give rise to results that are unrealistic or that the parties would not have contemplated in the commercial atmosphere in which the insurance policy was entered into; and the interpretation should be consistent with the interpretation of similar insurance policies;
c) If the ambiguity is unresolved after the application of the general principles of contractual interpretation, then the court should apply the doctrine of contra proferentem to construe the policy against the insurer. This is a course of last resort. The corollary of this rule is that coverage provisions in insurance policies are to be interpreted broadly, whereas exclusion or limiting clauses are to be interpreted narrowly. [17] She also added that: 1) the interpretive principles should not be used to create an ambiguity; 2) some imprecise language does not necessarily mean there is ambiguity when the contract is read as a whole; and 3) an ambiguity requires two reasonable meanings that each make sense within the policy read as a whole: Progressive Homes, at paras. 22-23; Surespan Structures Ltd. v. Lloyds Underwriters, 2021 BCCA 65, at para. 88; Sabean v. Portage La Prairie Mutual Insurance Co., 2017 SCC 7, [2017] 1 S.C.R. 121, at para. 42. . Panasonic Eco Solutions Canada Inc. v. XL Specialty Insurance Company
In Panasonic Eco Solutions Canada Inc. v. XL Specialty Insurance Company (Ont CA, 2021) the Court of Appeal considered interpretation principles applicable to insurance contracts:[23] The Supreme Court reviewed and summarized the general principles of policy interpretation that had been set out in previous Supreme Court case law[1] in its decision in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at paras. 22-24:22 The primary interpretive principle is that when the language of the policy is unambiguous, the court should give effect to clear language, reading the contract as a whole.
23 Where the language of the insurance policy is ambiguous, the courts rely on general rules of contract construction. For example, courts should prefer interpretations that are consistent with the reasonable expectations of the parties, so long as such an interpretation can be supported by the text of the policy. Courts should avoid interpretations that would give rise to an unrealistic result or that would not have been in the contemplation of the parties at the time the policy was concluded. Courts should also strive to ensure that similar insurance policies are construed consistently. These rules of construction are applied to resolve ambiguity. They do not operate to create ambiguity where there is none in the first place.
24 When these rules of construction fail to resolve the ambiguity, courts will construe the policy contra proferentem — against the insurer. One corollary of the contra proferentem rule is that coverage provisions are interpreted broadly, and exclusion clauses narrowly. [Citations omitted.] . MDS Inc. v. Factory Mutual Insurance Company
In MDS Inc. v. Factory Mutual Insurance Company (Ont CA, 2021) the Court of Appeal considered the appellate standard of review that applied to a standard form insurance contract:The standard of review when interpreting insurance agreements
[14] Typically, the interpretation of a contract attracts a deferential standard of appellate review. The trial judge’s interpretation of the agreement is reviewed for palpable and overriding error, as the contract is to be construed in light of the factual matrix and the trial judge is better placed to answer questions of mixed fact and law. Correctness review only applies to extricable errors of law in the trial court’s interpretation: see Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 50-55.
[15] However, standard form contracts, such as FM Global’s “Global Advantage” insurance policy, are an exception to the usual rule. As the Supreme Court explained in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, at para. 24:[W]here an appeal involves the interpretation of a standard form contract, the interpretation at issue is of precedential value, and there is no meaningful factual matrix that is specific to the parties to assist the interpretation process, this interpretation is better characterized as a question of law subject to correctness review. [16] The factual matrix is less relevant in standard form contracts, such as insurance policies, because, as Wagner J. (as he then was) explained, “the parties do not negotiate terms and the contract is put to the receiving party as a take-it-or-leave-it proposition”: Ledcor, at para. 28, citing MacDonald v. Chicago Title Insurance Company of Canada, 2015 ONCA 842, 127 O.R. (3d) 663, at para. 33, leave to appeal refused, [2016] S.C.C.A. No. 39. Moreover, “factors such as the purpose of the contract, the nature of the relationship it creates, and the market or industry in which it operates” are usually the same for all parties to a particular standard form contract, which “underscores the need for standard form contracts to be interpreted consistently”: Ledcor, at para. 31.
[17] The interpretation of a contract may be a question of mixed fact and law, subject to deferential review on appeal, if the parties negotiated and modified what was initially a standard form contract. In these circumstances, the interpretation will likely be of little or no precedential value. The question is whether the dispute is over a general proposition or a particular set of circumstances of little or no precedential value: Ledcor, at para. 48.
[18] MDS concedes that the standard of review for the interpretation of a standard form policy that is not subject to negotiations is correctness, but argues that, as there are questions of mixed fact and law in dispute, the trial judge’s interpretation should be reviewed for palpable and overriding error. According to MDS’ written submissions, the trial judge’s interpretation was based on numerous findings of mixed fact and law, including:[T]he structure of the policy, that the leak was fortuitous, that the corrosion exclusion was listed along with other gradual physical processes, that the insurer chose not to define the term “corrosion” and that the reasonable expectations of the insurer was that this exclusion would not exclude all corrosion. And finally and importantly, that the all risk policy covers all fortuitous events, unless clearly excluded. It would also include the fact that the appellant, at trial and on discovery, categorically stated that the “corrosion exclusion” did not apply to all corrosion. [Emphasis in original.] [19] I disagree. The structure of the Policy, the fact that the leak was fortuitous, and the placement of the word corrosion with other gradual physical processes in the wording of the Policy are not in dispute. The only issues in dispute are the interpretation of (i) the “corrosion” exclusion, and (ii) the “physical damage” exception to the corrosion exclusion in the Policy.
[20] This is a standard form policy, there was no negotiation of the terms of the Policy by the parties, and the issues are of general importance to all insurers and insured parties who use this Policy. This court’s interpretation of the Policy is of precedential value given that it is issued to many both within and beyond Canada.
[21] As such, the standard of review is correctness.
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HOW CONTRACTS OF INSURANCE SHOULD BE INTERPRETED GENERALLY
(a) The interpretation of contracts generally
[36] In Sattva, the Supreme Court addressed the interpretation of a commercial arbitration award concerning the construction of a finder’s fee agreement. Rothstein J. stated, at paras. 57-60, that:While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement.
The nature of the evidence that can be relied upon under the rubric of “surrounding circumstances”.… should consist only of objective evidence of the background facts at the time of the execution of the contract.… Subject to these requirements and the parol evidence rule discussed below, this includes, in the words of Lord Hoffmann, “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man”.… Whether something was or reasonably ought to have been within the common knowledge of the parties at the time of execution of the contract is a question of fact.
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The surrounding circumstances are facts known or facts that reasonably ought to have been known to both parties at or before the date of contracting; therefore, the concern of unreliability does not arise. [Citations omitted.] [37] In Eli Lilly & Co. v. Novopharm Ltd., 1998 CanLII 791 (SCC), [1998] 2 S.C.R. 129, at para. 54, Iacobucci J. clarified that the focus in interpreting contracts is determining parties’ contractual intent “by reference to the words [the parties] used in drafting the document.… Evidence of one party’s subjective intention has no independent place in this determination.”
[38] Emphasis on the subjective intentions of the parties “denudes the contractual arrangement of the certainty that reducing an arrangement to writing was intended to achieve”: Dumbrell v. The Regional Group of Companies Inc., 2007 ONCA 59, 85 O.R. (3d) 616, at para. 50.
(b) The interpretation of standard form contracts of insurance
[39] Standard form contracts of insurance should be interpreted consistently: Ledcor, at paras. 28-31.
[40] Where the language of the disputed clause is unambiguous, effect should be given to the clear language of the policy read in the context of the policy as a whole: Sabean v. Portage La Prairie Mutual Insurance Co., 2017 SCC 7, [2017] 1 S.C.R. 121, at paras. 12-13; Ledcor, at para. 49; and Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at para. 22. It is unnecessary to consider extrinsic evidence in order to interpret its terms: Eli Lilly, at para. 55; Dunn v. Chubb Insurance Company of Canada, 2009 ONCA 538, 97 O.R. (3d) 701, at para. 33. However, like all contracts, the policy is examined in light of the surrounding circumstances: Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at para. 27; Dunn, at para. 33.
[41] As above, the surrounding circumstances include “anything which would have affected the way in which the language of the document would have been understood by a reasonable man” at the time the parties made their agreement: Sattva, at para. 58, citing Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98, [1998] 1 W.L.R 896, at p. 114. The identity and sophistication of the parties, the jurisdictions in which the contract is in effect, and the commercial context of the contract are all elements of the “surrounding circumstances”.
[42] The words of the contract are given their ordinary meaning, not the meaning they might be given by persons versed in insurance law: Co-operators Life Insurance Co. v. Gibbens, 2009 SCC 59, [2009] 3 S.C.R. 605, at para. 21; see also Ledcor, at para. 27.
[43] However, where a policy provision is ambiguous, the rules of contract construction may be employed to resolve the ambiguity. A contractual provision is ambiguous if it is reasonably susceptible of more than one meaning: Dunn, at para. 34; Hi-Tech Group Inc. v. Sears Canada Inc. (2001), 2001 CanLII 24049 (ON CA), 52 O.R. (3d) 97 (C.A.), at para. 18. The goal is to reach a sensible commercial result that reflects the intentions of the parties at the time the agreement was entered into. As explained by Estey J. in Consolidated-Bathurst v. Mutual Boiler, 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, at pp. 901-2:[L]iteral meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties. Similarly, an interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result. It is trite to observe that an interpretation of an ambiguous contractual provision which would render the endeavour on the part of the insured to obtain insurance protection nugatory, should be avoided. Said another way, the courts should be loath to support a construction which would either enable the insurer to pocket the premium without risk or the insured to achieve a recovery which could neither be sensibly sought nor anticipated at the time of the contract. [44] Extrinsic or parol evidence may be admitted to resolve ambiguity: United Brotherhood of Carpenters and Joiners of America, Local 579 v. Bradco Construction Ltd., 1993 CanLII 88 (SCC), [1993] 2 S.C.R. 316, at p. 342; see also Eli Lilly, at para. 55; Canadian Premier Holdings Ltd. v. Winterthur Canada Financial Corp. (2000), 2000 CanLII 5724 (ON CA), 132 O.A.C. 172 (C.A.), at para. 15; and SimEx Inc. v. IMAX Corp. (2005), 2005 CanLII 46629 (ON CA), 206 O.A.C. 3 (C.A.), at para. 23.
[45] If the general rules of construction fail to resolve the ambiguity, courts will construe the contract contra proferentem, and interpret coverage provisions broadly and exclusion clauses narrowly: Sabean, at para. 12; Ledcor, at paras. 50-51. However, courts should not impute ambiguity where none exists, as noted in Consolidated-Bathurst, at p. 901, citing Cornish v. Accident Insurance Co. (1889), 23 Q.B. 453 (C.A.) at p. 456: “[T]his principle [of contra proferentem] ought only to be applied for the purpose of removing a doubt, not for the purpose of creating a doubt, or magnifying an ambiguity, when the circumstances of the case raise no real difficulty.” . Family and Children’s Services of Lanark, Leeds and Grenville v. Co-operators General Insurance Company
In Family and Children’s Services of Lanark, Leeds and Grenville v. Co-operators General Insurance Company (Ont CA, 2021) the Court of Appeal set out some basics of interpretation of an insurance policy:The role of the insurance policy and its interpretation
[54] The relationship between an insured and an insurer is a contractual one governed primarily by the terms of the insurance policy.
[55] The language of the policy is construed in accordance with the usual rules of construction, rather than inferred expectations unapparent on a fair reading of the document. This is particularly so in the case of commercial insurance policies involving sophisticated parties. The insurer must explicitly state the basis on which coverage may be limited: Hanis v. Teaven, 2008 ONCA 678, 92 O.R. (3d) 594, leave to appeal refused, [2008] S.C.C.A. No. 504, at para. 2.
[56] Where the language of the insurance policy is ambiguous, the courts rely on general rules of contract construction and should prefer interpretations of the policy that are consistent with the reasonable expectations of the parties. Courts should avoid interpretations that would give rise to an unrealistic result or one that would not have been in the contemplation of the parties at the time the policy was concluded. However, these rules of construction do not operate to create ambiguity where there is none: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at para. 23.
[57] In interpreting a policy to determine possible coverage, the process is as follows:a) When the policy language is unambiguous, the court should give effect to that language, reading the policy as a whole;
b) Where the language of the policy is ambiguous, general rules of contract construction apply and the court should prefer interpretations of the policy that are consistent with the reasonable expectations of the parties. Courts should avoid interpretations that would give rise to a result that is unrealistic; and,
c) Only when the rules of contract construction fail to resolve the ambiguity, courts will construe the policy against the insurer who drafted the policy. This means that coverage provisions are interpreted broadly, and exclusion clauses narrowly: Progressive Homes Ltd., at paras. 22-24; Simpson Wigle Law LLP v. Lawyers’ Professional Indemnity Co., 2014 ONCA 492, 120 O.R. (3d) 655, at para. 54. ....
[65] The application judge did not engage in an analysis of the policy provisions nor did she state whether the policy provision or the exclusion clause was ambiguous. She cited Tedford for the proposition that “the usual principles governing the construction of insurance contracts apply” to the interpretation of insurance polices, including the contra proferentem rule: see Tedford, at para. 14. However, the contra proferentem rule applies to resolve ambiguities: see Non-Marine Underwriters, Lloyd's London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, at para. 71. It does not apply where, as in this case, the insurance policy is clear and unambiguous on its face.
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[69] Because these policy provisions are clear and unambiguous, the court need not consider the reasonable expectations of the parties in interpreting the exclusion provision in the policy, nor does the court need to make recourse to extraneous sources: Allstate Insurance Co. of Canada v. Aftab, 2015 ONCA 349, 335 O.A.C. 172, at para. 19. . Beaudin v. Travelers Insurance Company of Canada
In Beaudin v. Travelers Insurance Company of Canada (Div Ct, 2021) the Divisional Court considers the interpretation of an insurance policy:[30] Travelers submits that in reaching his decision, the Associate Chair erred in placing the onus on it to establish the exemption contrary to the order of interpretation set out by the Supreme Court of Canada in Ledcor Construction Ltd. V. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23.
[31] Ledcor at para. 52, sets out the order of interpretation in analyzing an insurance policy and an exclusion clause as follows: the insured has the initial onus of establishing that the damage or loss claimed comes within the policy. Once that is established, the onus shifts to the insurer to establish that one of the exclusions to coverage applies. If the insurer is successful, the onus shifts back to the insured to prove that an exception to the exclusion applies.
[32] Ledcor concerns onus in analyzing an insurance policy. While the analysis in issue concerned provisions of a statute, both the Adjudicator and the Associate Chair were correct in our view, in following its direction. They both acknowledged the first step in Ledcor. At para. 40 of the Reconsideration Decision, the Associate Chair identified the real dispute between the parties:While his insurer disputes Mr. Beaudin is afforded coverage, that argument is based on the fact the insurer says that dirt bike was being driven at a particular type of event.… To my mind, this is an argument about exclusion from the policy rather than about coverage. . Sky Clean Energy Ltd. (Sky Solar (Canada) Ltd.) v. Economical Mutual Insurance Company
In Sky Clean Energy Ltd. (Sky Solar (Canada) Ltd.) v. Economical Mutual Insurance Company (Ont CA, 2020) the Court of Appeal sets out the basics of interpreting insurance contracts:[54] The principles of interpretation applicable to insurance policies are well settled. The primary principle is that when the language of the policy is unambiguous, the court should give effect to its clear language, reading the policy as a whole: Progressive Homes, at para. 22, referring to Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, at para. 71.
[55] Where the policy language is ambiguous, the general rules of contract interpretation provide guidance, including the rule that effect should be given to the reasonable expectations of the parties, as long as the interpretation is supported by the text of the policy: Progressive Homes, at para. 23. Similar insurance policies should be construed consistently. These rules should be applied to resolve an ambiguity, not to create one.
[56] Where ambiguity remains after the application of these rules, the contra proferentem rule applies to construe the policy against the maker, the insurer. This gives rise to the precept that coverage provisions are interpreted broadly and exclusion clauses narrowly: Progressive Homes, at para. 24. A specific interpretation issue related to the contractual phrase "arising out of":(i) Interpreting “arising out of”
[78] Finch C.J.B.C. considered several leading Supreme Court decisions that interpreted the words “arising out of” and “arising from”, including: Amos v. Insurance Corp. of British Columbia, 1995 CanLII 66 (SCC), [1995] 3 S.C.R. 405; Lumbermens Mutual Casualty Co. v. Herbison, 2007 SCC 47, [2007] 3 S.C.R. 393; and Citadel General Assurance Co. v. Vytlingam, 2007 SCC 46, [2007] 3 S.C.R. 373. In those cases, the Supreme Court consistently interpreted “arising from” and “arising out of” to require more than a “but for” connection between the liability of the additional insured and the operations of the named insured. While a “but for” test is necessary, it is not sufficient. Specifically, there must be "an unbroken chain of causation” and a connection that is more than “merely incidental or fortuitous”. While those cases involved automobile insurance legislation, Finch C.J.B.C. determined that the words “arising from” and “arising out of” should be interpreted the same way when they appear in the context of insurance contracts, such as additional insured endorsements.
[79] To be clear, while the language of “but for” and “causation” originally emerged from the law of negligence, these concepts have since developed separately in the context of interpreting insurance coverage. In the field of negligence, the “but for” test of causation is used to determine whether the loss suffered occurred as a result of the wrongdoing of the defendant: Clements v. Clements, 2012 SCC 32, [2012] 2 S.C.R. 181. But in the insurance interpretation context, fault is not required for coverage to be engaged, unless specified in the policy. In fact, many insurance policies provide coverage for losses even when no party is identified as being at fault, as is the case here.
[80] I will now explain how these principles were developed and how they came to be applied in the context of interpreting insurance contracts.
[81] In Amos, the Supreme Court interpreted the scope of coverage provided by no-fault motor vehicle insurance, as set out in British Columbia’s insurance legislation. The legislation stipulated that insurance benefits would be paid for death or injury “caused by an accident that arises out of the ownership, use or operation of a vehicle” (emphasis added). The Supreme Court set out a two-part test for interpreting that provision, at para. 17:1. Did the accident result from the ordinary and well-known activities to which automobiles are put?
2. Is there some nexus or causal relationship (not necessarily a direct or proximate causal relationship) between the appellant's injuries and the ownership, use or operation of his vehicle, or is the connection between the injuries and the ownership, use or operation of the vehicle merely incidental or fortuitous? [Underlining in original; italics added.] [82] The Supreme Court then extended the principles set out in Amos to two subsequent companion cases involving automobile liability insurance: Herbison and Citadel. In these cases, the Supreme Court interpreted s. 239(1)(a) of the Ontario Insurance Act, R.S.O. 1990, c. I.8, which stipulates that motor vehicle insurance policies will cover loss or damage “arising from the ownership or directly or indirectly from the use or operation of any such automobile” (emphasis added).
[83] Again, the Supreme Court interpreted “arising from” to mean an unbroken chain of causation, which is more than merely incidental or fortuitous: Citadel, at para. 12; Herbison, at para. 12. In Citadel, the insured used his vehicle to transport a boulder onto a highway overpass, he then dropped the boulder onto oncoming traffic. The claimant was struck and injured. In Herbison, the insured drove his truck to a hunting site. On the way, he got out of the truck to shoot what he thought was a deer. Unfortunately, he shot another hunter, who sought indemnity from the driver’s insurer.
[84] In both cases, the Supreme Court found that the injuries did not arise from the operation of the vehicles. While the vehicles were necessary in the “but for” sense – neither insured would otherwise have been at the location of the accident – the injuries arose from other distinct acts. In Citadel, the injury arose from the insured throwing the boulder, and in Herbison, the injury resulted from the insured shooting into the distance.
[85] Given the Supreme Court’s consistent interpretation of “arising from” and “arising out of” in this line of authority, Finch C.J.B.C. concluded that these words should carry the same meaning, regardless of whether they appear in a statute or in a contract. He explained that “it would not further the objectives of certainty and consistency in the law if the terms ‘arising from’ or ‘arising out of’ were to carry different meanings in analogous circumstances”: at para. 42.
[86] Finch C.J.B.C. went on to consider the diverging authorities in the United States, noting that some states found a “but for” link between the liability in question and the named insured’s operations to be sufficient, while others required a greater connection.
[87] Having considered both Canadian and American authorities, Finch C.J.B.C. concluded that the phrase “arising out of” imposes a greater requirement than a “but for” test; it “should be construed as requiring ‘an unbroken chain of causation’ and a connection that is more than ‘merely incidental or fortuitous’”: at para. 52.
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