In a Garage Policy, coverage for damages caused by accidentally reversing the polarity of a battery in a motor vehicle is excluded under the exclusion for loss or damage “consisting of, or caused by, mechanical fracture, failure or breakdown of any part of a motor vehicle”

18. August 2016 0

Insurance law – Automobile insurance – Policies and insurance contracts – Interpretation of policy – Exclusions – Mechanical failure or breakdown

Kal Tire Ltd. v. Insurance Corp. of British Columbia, [2016] B.C.J. No. 1138, 2016 BCSC 982, British Columbia Supreme Court, June 2, 2016, D.A. Betton J.

This was an appeal from a Provincial Court decision which found that there was no coverage pursuant to the insured’s Garage Policy for damages caused by accidentally reversing the polarity of batteries in two vehicles.

The insured operates a number of retail automotive service facilities in British Columbia. In order to operate, the insured must have a level of insurance coverage for collision coverage, in addition to comprehensive or specified perils. The insurer is obliged to make such policies of insurance available and the insurer provides this coverage in a Garage Policy. The Garage Policy provides coverage as follows:

5.4     Indemnity – With respect to the type of coverage for which a premium is indicated on the garage vehicle certificate or special coverage certificate or policy, the Corporation shall, subject to the terms of this Division, indemnify an insured, to the extent of the insured’s insurable interest, in respect of direct and accidental loss or damage to a vehicle or its equipment or both insured under section 2 or 3 of the garage vehicle certificate that

(a)     occurs in Canada or the United States of America or on a vessel travelling between Canada and the United States of America, and

(b)     is caused by one of the perils for which the own damage coverage is provided.

The Garage Policy contains the following exclusion on indemnity:

5.9     Restrictions on Indemnity –

(a)     The Corporation is not liable to indemnify any person under comprehensive or collision coverage for loss or damage

(ii)   consisting of, or caused by, mechanical fracture, failure or breakdown of any part of a motor vehicle, or….

The insured submitted two claims to the insurer for damages that occurred when an employee of the insured reversed the polarity of batteries in motor vehicles and caused damage to the motor vehicle’s electrical systems. The insurer denied coverage for the claims on the basis the loss or damage consisted of, or was caused by, mechanical fracture, failure or breakdown.

The Provincial Court judge concluded the damage to the two vehicles in question was excluded by s. 5.9(a)(ii) of the Garage Policy. The Provincial Court judge referred to ICBC v. Pfleger, 2006 BCSC 1328, where the Court accepted the dictionary definition of “mechanical” as “having to do with machinery or tools” and “produced or operated by machinery or a mechanism”. The Provincial Court judge went on to say, “[t]he electronic parts in question are clearly part of the machine. As such their failure constitutes a, ‘mechanical fracture, failure or breakdown’. The exclusionary language of the policy squarely applies.”

The insured appealed and argued the Provincial Court judge was not bound to apply the definition of “mechanical” referred to in ICBC v. Pfleger. The insured took the position that applying the definition of mechanical from ICBC v. Pfleger would lead to the result that any vehicle damage would be excluded from coverage. In addition, the insured took the position the exclusion clause was ambiguous and should be narrowly construed contra proferentem.

On appeal, the Court noted the obligation to indemnify was “in respect of direct and accidental loss or damage to a vehicle or its equipment….” The exclusion for loss or damage “consisting of, or caused by, mechanical fracture, failure or breakdown of any part of a motor vehicle” must necessarily be a subset of “damage to a vehicle or its equipment” in the context of the definitions of the coverage provided.

The Court noted that the exclusion clause must be considered in the context of the broader policy language and much of the language used in the Garage Policy incorporated causation directly into the scope of the coverage. However, the exclusion at issue in this case, which included the words “consisting of”, was a notable exception. The Court found that the question that arose was whether the exclusion should be limited to stereotypical mechanical fracture, failure or breakdown or whether the exclusion included the electronic parts in the insured’s claims. Considering the language, the contract provisions as a whole and the existing jurisprudence (ICBC v. Pfleger, 2006 BCSC 1328, Dawson Truck Repairs Ltd. v. Insurance Corporation of British Columbia, 2008 BCCA 209, and Dhadwal v. ICBC, 2014 BCSC 449, varied on other grounds 2015 BCCA 112), the Court concluded that the exclusion should be given a broad definition and should not be limited to stereotypical mechanical fracture, failure, or breakdown. The Court noted that if it concluded otherwise, inconsistencies would emerge. For example, if the definition of “mechanical” were limited as the insured argued, a garage operator or owner who installed a battery incorrectly, destroying computer components, would have comprehensive coverage; however, that same person who put water in the fuel tank causing damage, as occurred in ICBC v. Pfleger, would not.

In the result, the Court found that the appellant insured had not demonstrated that the Provincial Court judge made a palpable and overriding error and the appeal was dismissed.

This case was digested by Aaron D. Atkinson and edited by David W. Pilley of Harper Grey LLP. If you would like to discuss this case further, please feel free to contact them directly at aatkinson@harpergrey.com or dpilley@harpergrey.com or review their biographies at http://www.harpergrey.com.

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