First party insurer owes more than crumbs in production facility fire

13. October 2020 0

Insurer could not rely on oven exclusion in equipment breakdown policy endorsement to deny coverage for a crouton and bread crumb production dryer fire

Insurance law – Property insurance – Breach of policy – Exclusions – Business activities – Faulty design – Wear and tear

Bowness Real Estate Corp. v. AXA Pacific Insurance Co., [2020] A.J. No. 597, 2020 ABQB 327, Alberta Court of Queen’s Bench, May 20, 2020, L.B. Ho J.

The insured’s crouton and bread crumb production dryer caught fire on two occasions, a few months apart, causing damage. After the first fire, the insured attempted to repair the dryer. After the second fire, the dryer could not be repaired. The insured sought coverage under its property and equipment breakdown insurance policy, which the insurer denied. The insured then brought an action against the insurer for coverage, bad faith, and punitive damages.

In order for the insurer to rely on the “faulty material exclusion” to deny coverage, the insurer had to show that the materials fell below a realistic standard, and did not comply with the “state of the art” at the time the crouton dryer was constructed. The court found the insurer did prove this, and could rely on this exclusion to exclude part of the claim. The insurer could not rely on the “wear and tear” exclusion, because there was nothing gradual about the issues within the heat exchanger portions of the crouton dryer. The dryer was only in operation for four months before it broke down.

The insured also sought coverage under the equipment breakdown policy endorsement. Here the insurer relied on the clause excluding coverage for ovens. Taking a narrow interpretation of the meaning of the word “oven”, and having regard to the reasonable expectations of the parties, the court found that the dryer did not qualify as an oven. The loss therefore fell within coverage under this endorsement.

The court held that the insurer was liable to the insured for the replacement cost of the dryer, the costs of effecting temporary repairs, the costs of professional fees involved with creating the insured’s proof of loss, as well as business interruption losses. The insured’s bad faith and punitive damages claims were denied, in part because the insurer’s reliance on the oven exclusion was arguable, and therefore reasonable.

This case was digested by Kora V. Paciorek, and first published in the LexisNexis® Harper Grey Insurance Law Netletter and the Harper Grey Insurance Law Newsletter. If you would like to discuss this case further, please contact Kora V. Paciorek at

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