Policy exclusion? Watch your exceptions in multiple-cause losses

Underwriters must pay close attention to the policy wording they use in their exceptions to exclusions, lest insurers find themselves on the hook for covering losses with two or more suspected causes.

That’s a key takeaway from Brock Stock Farm Ltd. v. Economical Mutual Insurance Company, a decision released by the Saskatchewan Court of King’s Bench in mid-June.

Marie Ong of Alexander Holburn Beaudin + Lang LLP sounded the cautionary note in a blog piece she wrote for Mondaq Oct. 6.

“This decision in Brock serves as a reminder that it is necessary for a policy to have clear exculpatory language if an insurer is to deny coverage in situations involving a loss with two or more independent concurrent causes,” Ong wrote.

Brock Stock Farm Ltd. owns and operates a hog farm near Brock, Saskatchewan. Its assets include a large agricultural complex housing hogs. Constructed around 1999, the barn roof is made up of a truss system.

The barn roof partially collapsed in December 2015. The ceiling area of the partial collapse was “shored up,” and no insurance claim was made. However, on Feb. 10, 2016, a Brock employee discovered a portion of the roof of the Barn had collapsed. Brock submitted an insurance claim for this February collapse.

In the days leading up to the collapse, Brock’s director, Robert Hamilton, said he observed significant windstorms in the area. In evidence presented to court, Hamilton testified that on Feb. 6 and 7, 2016, wind gusts reached 87 km/h and 75 km/h, respectively, at the Environment Canada Weather Station closest to the barn.

Following the February barn roof collapse, an engineering firm commissioned by Brock found the “top chord truss metal connection plates were found to be significantly corroded in the Grower/Finisher barn area.” Added the report:

“The roof very likely failed as a result of a significant wind load event. The failures appear to have originated at the truss connection #7. The corrosion of metal truss connection plates is believed to be a contributing cause of the roof failure.”

Brock carried insurance under a subscription policy with four insurers. The policy provided insurance for Brock’s farm buildings, including the barn. The coverage limit for the barn and its contents was just over $4.8 million.

Brock sought coverage for damage for the roof collapse partially caused by the wind event. But the insurer denied the claim.

“We have determined that there was not a significant wind load event and that the cause was attributed to deterioration and corrosion of metal plates on the roof trusses,” the insurers’ adjuster wrote to Brock. “This allowed a weakness in the roof system and caused the collapse.

“After our review and subsequent review by your insurer(s), we have been instructed to deny your claim. This denial is based on the exclusion of your policy which notes that “wear and tear and deterioration is excluded from coverage.’”

Contrary to the insurers’ position, Saskatchewan’s Court of the King’s Bench found the wind load was a factor in the barn’s collapse.

“Given the evidence of the wind at the relevant time, coupled with the expert evidence and testing of the surviving truss plates, I am satisfied that for the collapse to have occurred at this particular time, it was due to a combination of wind and corrosion,” the court ruled.

The court thus found the policy covered the damage due to the wind factor. That said, the court also ruled the insurance policy exclusion for “wear and tear” applied.

“Under the specific terms of the policy, there is no coverage where the associated loss is directly or indirectly caused by rust, corrosion, wear and tear or gradual deterioration, unless an exception applies,” the court ruled.

There lay the rub: the court then looked at the specific wording of the exception to the exclusion. It states:

“This form does not insure loss or damage caused directly or indirectly…

(6)   By dampness or dryness of atmosphere, changes of temperature, freezing, heating, shrinkage, evaporation, loss of weight, leakage of contents, exposure to light, contamination, pollution, change in colour or texture or finish, rust or corrosion, marring, scratching or crushing, but this exclusion does not apply to loss or damage caused directly by rupture of pipes or breakage of apparatus not otherwise excluded… [Emphasis added].”

The court found the roof’s truss fell under the policy’s exception to the exclusion because it is an ‘apparatus.’

“Reading the policy as a whole, there is ambiguity in the language used,” the court ruled. “If it was the insurers’ intention to limit the meaning of an ‘apparatus,’ it was open to them to include a similar limitation in the policy.

“The truss is a framework of structural elements that rely on the combination of parts for the function of carrying and supporting the load of the roof. This meets the definition of an apparatus. When this apparatus failed, the loss fell within the exception under the exclusion clause.”

As a result, the court ordered the insurers to pay Brock $328,196.91 to cover the loss.

Feature image courtesy of iStock.com/MsNancy