Reasonable Preventative Measures by Insured May not be Recoverable

Reasonable preventative measures taken by an insured to prevent probable future damages may not be recoverable where the policy excludes coverage for any defect or fault in material or design. This was the case even where an insured loss occurred in an identical piece of machinery as a result of the same defect for which the insured then took preventative steps. The insured’s costs to repair and business losses were a result of its own precautionary measures, and not an accidental or fortuitous event.

Mississippi River Power Corp. v. Municipal Electric Assn. Reciprocal Insurance Exchange [2014] O.J. No. 3007, June 23, 2014, Ontario Superior Court of Justice, M.Z. Charbonneau J.

The issue in this case was whether the insured was entitled to coverage and indemnity for the cost of preventative repairs and business losses associated with those repairs.

The insured constructed and operated a power station. Part of the station consisted of two “Penstocks” which were large diameter concrete encased steel pipes designed to channel water to hydraulic turbines. One of the Penstocks failed due to faulty construction. An investigation determined that the other Penstock suffered from the same defects and might fail in the future. The insured shut down the second Penstock and performed preventative repairs. The insurer indemnified the insured for the cost of repairing and the business losses associated with the first Penstock, but refused to indemnify the insured for the repairs and business losses of the second. The insured brought a motion for summary judgment seeking a declaration of coverage. The insured counterclaimed for summary judgment dismissing the insured’s action.

The policy excluded coverage for any defect or fault in material, workmanship or design. The insurer argued that the insured’s losses with respect to the second Penstock were not the result of an accidental or fortuitous event, but rather deliberately caused by the insured’s decision to shut down the second Penstock as a precautionary measure. The insured argued that the need to shut down the second Penstock flowed directly from the failure of the first. Further, the insured argued that the policy required the insured to take all reasonable steps to prevent further damage not only to damaged property but also to prevent damage to other insured property.

The court found in favour of the insurer despite the insured’s actions having been reasonable in the circumstances. The policy specifically excluded the cost of repairing defects. With respect to the obligation to prevent future damage, while the insured was under an obligation to minimize a loss, there was no obligation to minimize a risk that had yet to materialize. Finally, this was not a situation of imminent peril, thereby allowing recovery for business interruption losses. According to the court, at best it was foreseeable that the second Penstock could fail sometime in the future, and although it was more probable than not that it would fail, it did not constitute an inevitable peril.

This case was originally summarized by Michael J. Robinson and originally edited by David W. Pilley of Harper Grey LLP.

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