Canadian Underwriter

Exclusion clause for ‘conversion’ in comprehensive auto policy ‘does not come close’ to being easily intelligible: Court

April 24, 2017   by Canadian Underwriter

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An exclusion in an auto insurance policy for loss or damage caused by “conversion,” by someone in lawful possession of a vehicle does not apply to a truck tractor badly damaged by fire, a Supreme Court of British Columbia judge found in a recent ruling against the province’s auto insurer.

Court records indicate that starting in 2010, CIT Financial Ltd. leased a 2011 Volvo VNL64T670 Tractor to Snap Transport Inc. That tractor was damaged by fire in 2013. CIT Financial paid more than $42,000 to repair the tractor and made a claim under a policy written by Insurance Corporation of British Columbia for liability, collision and comprehensive coverage.

In an agreed statement of facts, CIT Financial and ICBC alleged the fire was deliberately set by Snap Transport president Alvin Sharan.

The ICBC policy was purchased by Snap Transport and named CIT Financial as an insured. The policy contained an exclusion for “loss or damage … caused by conversion, theft or concealment of a vehicle by a person in lawful possession of the vehicle under a lease, rental agreement or similar written agreement,” Mr. Justice Nigel Kent wrote in a ruling released April 20, 2017.

A question before the court was whether that clause excluded the fire damage, and Justice Kent ruled that the exclusion did not apply to the fire damage.

ICBC and CIT Financial disagreed over “whether total destruction of the chattel is required or whether substantial but economically repairable damage will suffice” in order to be considered “conversion,” Justice Kent suggested.

ICBC had argued that conversion “has a specific legal meaning and is a well-recognized, clearly-defined tort,” Justice Ken wrote, adding that ICBC contended that the “proper legal definition” of “conversion “is not limited to acts of total destruction of the property in question but includes substantial intentional damage of the sort that exists in the present case.”

But Justice Kent ruled that the meaning of “conversion” was unclear in the exclusion.

“In such circumstances the law requires that the exclusion to be interpreted narrowly and in favour of the insured when more than one reasonable and sensible meaning of the terminology is available,” he wrote.

Quoting a 1931 decision from the Saskatchewan Court of Appeal, Justice Kent noted that one definition of conversion “any act or wilful interference with a chattel, done without lawful justification, where any person entitled thereto is deprived of the use and possession of it.”

Justice Kent cited several rulings, including the Supreme Court of Canada decision issued in 1989 in Scott v. Wawanesa Mutual Insurance Co.

In 1983, a home belonging to Cecil Scott and Femmie Scott was set on fire by their 15-year-old son. Their home insururance excluded “loss or damage caused by a criminal or wilful act or omission of the Insured or of any person whose property is insured hereunder.” A B.C. trial judge ruled that exclusion did not apply to the Scotts’ claim. That ruling was overturned by the B.C. Court of Appeal but restored by the Supreme Court of Canada.

“In construing an insurance policy, the courts must be guided by the reasonable expectation and purpose of an ordinary person in entering such contract, and the language employed in the policy is to be given its ordinary meaning, such as the average policy holder of ordinary intelligence, as well as the insurer, would attach to it,” Mr. Justice Gérard Vincent La Forest of the Supreme Court of Canada wrote in Scott v. Wawanesa in 1989.

The term conversion “has several other meanings in plain English,” Justice Kent wrote in CIT Financial v. ICBC. “It is rather unlikely that the proverbial ‘ordinary insured of ordinary intelligence’ keeps a printed dictionary at home anymore, but a few common uses of the word immediately come to mind without resorting to either a dictionary or Google: changing one’s beliefs (e.g., religion); switching units of measurement (e.g., miles to kilometres); renovating a duplex into a single-family home; or even kicking a ball over some posts on a rugby or American football field.”

In its exclusion clause, ICBC “obviously intended to exclude from coverage certain types of loss or damage to the leased vehicle caused by the lessee or those to whom possession of the vehicle had been permitted by the lessee (e.g., employees, et cetera),” Justice Kent added. “If so, a prudent insurer in such a position should figure out the precise scenarios of loss it wishes to exclude (e.g., theft, deliberate damage, et cetera) and then insert those circumstances in the exclusion using plain English readily understandable by an ordinary person. In this way the lessor will know exactly what is excluded.”

Among the rulings he cited were the Supreme Court of Canada’s decision, issued in 2010, in Progressive Homes v. Lombard General Insurance. Progressive Homes had been sued by the B.C. Housing Commission, which alleged that four condominium developments had water damage due to defects. The Supreme Court of Canada ruled that Lombard had a duty to defend Progressive despite a faulty workmanship exclusion. Writing on behalf of Canada’s highest court in Progressive Homes, Mr. Justice Marshall Rothstein suggested that in an insurance coverage dispute, a court “should prefer interpretations that are consistent with the reasonable expectations of the parties ….. so long as such an interpretation can be supported by the text of the policy.” Where general rules of contract construction “fail to resolve the ambiguity, courts will construe the policy contra proferentem – against the insurer,” Justice Rothstein added at the time.

“The Supreme Court of Canada has repeatedly said the language should be clear, express and easily intelligible,” Justice Kent wrote in CIT Financial v. ICBC. “The ‘conversion exclusion’ in the ICBC policy under consideration in this case does not come close to meeting those criteria.”

Justice Kent also cited Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., released in September, 2016.

Ledcor made a claim after windows were damaged during cleaning on an Edmonton office tower. The claim was denied due to an exclusion for “the cost of making good faulty workmanship, construction materials or design unless physical damage not otherwise excluded by this policy results.”

In restoring a ruling of the Court of Queen’s Bench of Alberta, against Northbridge and the other insurers writing the builder’s risk policy covering the EPCOR Tower in Edmonton, the Supreme Court of Canada found that the “reasonable expectations” of the parties, “informed largely by the purpose of builders’ risk policies, point to the faulty workmanship exclusion serving to exclude from coverage only the cost of redoing the faulty work.”

In CIT Financial v. ICBC, “as in Ledcor, there is nothing in the limited factual matrix put before the court which would assist in ascertaining the parties’ understanding or intent respecting the ‘conversion exclusion’, nor, indeed, any other evidence that would help in determining their reasonable expectations of coverage under the standard form auto policy in question,” Justice Kent added.

“In this case, unlike Ledcor, the court has not been provided with any case law or academic commentary on the purpose and intent of the ‘conversion exclusion’ in this policy,” he added.

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