Coverage under an all risk policy of property insurance for damage caused by ground movement and expansion, cracking, and shifting of the insured building which resulted from freezing of leaking water was excluded by exclusions for damage caused directly or indirectly by expansion and freezing, but not by an exclusion for damage caused by earth movement

Insurance law – All-risk insurance – Property insurance – Soil movement – Earth settlement – Exclusions – Interpretation of policy

Wynward Insurance Group v. MS Developments Inc., [2015] B.C.J. No. 561, 2015 BCSC 324, British Columbia Supreme Court, March 4, 2015, P. Rogers J.

The insureds were the owners and operators of a restaurant and pub in a commercial building which was insured under an all risk insurance policy. The insurer denied coverage for a claim under the policy and filed a petition proceeding seeking a declaration that the loss was caused by excluded perils.

The cause of the loss was freezing and expansion of water from condensation from a large commercial walk‑in freezer in the restaurant. Water from condensation was normally collected via a copper pipe that was routed through an outside wall and drained into an alleyway behind the premises. To keep the pipe from freezing it was wrapped in a special tape which warmed up when power was applied. Sometime around early December 2013, the tape failed and water in the pipe froze either as a result of temperatures inside the freezer itself or due to the outside temperature. The water inside the pipe expanded as it froze, causing at least five tears along the length of the pipe. The freezer continued to operate and condensation continued to accumulate and enter the pipe and then escaped onto the floor of the cooler, into the walls of the building, and into the soil under the concrete floor of the building. Much of the water froze in the places where it had leaked, resulting in a thick layer of ice on the floor of the freezer, cracks in the walls of the building and lifting of the ground underneath the building. The lifting of the ground under the building shifted portions of the floors of the premises and caused damage to tiles, interior walls, and the ceilings in the affected areas. There was no dispute that the loss fell within the coverage grant of the policy. However, the insurer maintained that the loss was caused by perils that were excluded under the policy.

Before considering the applicability of three exclusion clauses, the judge considered whether coverage would be excluded if the loss was the result of a chain of events and coverage was excluded for only one of those events. It was held that, as per Pavlovic v. Economical Mutual Insurance Co. (1994), 99 B.C.L.R. (2d) 298 (C.A.), an exclusion clause that clearly states that coverage is excluded for loss or damage caused directly or indirectly by a certain event will operate to exclude coverage for a loss caused by chain of events that includes such an event.

The policy contained an exclusion stating that it did not insure against loss or damage caused directly or indirectly by changes in or extremes of temperature, heating or freezing. A number of exceptions to that exclusion were not applicable. It was held that there was no doubt that the physical act of freezing was an indirect cause of the damage to the structure of the building and the exclusion clause applied.

The policy also contained an exclusion for loss or damage caused directly or indirectly by snow slide, landslide, subsidence or other earth movement. The insurer’s position was that the chain of events that led to the damage to the building included upheaval of the ground soil and that this was “other earth movement” as contemplated by the exclusion. Because the exclusion only addressed the causal relationship between the “earth movement” and the loss or damage, and not what may have initially precipitated the earth movement regardless of whether it was a naturally or unnaturally occurring phenomenon, the exclusion arguably applied. However, other cases had interpreted this type of exclusion clause regarding “earth movement” as referring to only naturally occurring phenomenon. Because the clause could reasonably be interpreted both ways, this indicated the clause was ambiguous and should be interpreted narrowly and against the insurer. Therefore, the exclusion was read as excluding only naturally occurring earth movement and did not operate to exclude coverage for the loss in this case.

The third exclusion considered was for loss or damage caused directly or indirectly by settling, expansion, contraction, moving, shifting or cracking. The chain of events that led to the loss in this case included expansion of the ground. The insureds argued that the clause was ambiguous because it did not stipulate what material was meant to settle or expand. It was held that it was clear on the face of the clause that it was meant to apply to the ground. This was the interpretation given to the same clause in Strata Plan NW2580 v. Canadian Northern Shield Insurance Co., 2006 BCSC 330, where it had also been held that the clause applied to both natural and unnatural events. It was noted that NW2580 had been mentioned but not followed by the Alberta Court of Appeal in Engle Estate v. Aviva Insurance Company of Canada, 2010 ABCA 18. The judge held that the principle of comity and stare decisis required that NW2580 be followed. In the result, it was held that the exclusion clause for damage caused directly or indirectly by expansion of the earth applied to exclude coverage in this case.

In the result, the insurer was entitled to a declaration that it was not obliged to indemnify the insureds for the damage resulting from the failure of the condensation drainage pipe.

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