July 19, 2011 by Canadian Underwriter
The Ontario Court of Appeal’s decision in Caneast Foods Limited v. Lombard General Insurance Company of Canada demonstrates the limitations on insurers that attempt to use catch-all exclusions in insurance policies, according to Hartley Lefton of McMillan LLP.
In a paper published by the International Law Office, Lefton suggests reconsidering the drafting of exclusions intended to apply to mechanical and/or machinery failures due to power blackouts.
Specifically, he suggested insurers consider “including a blackout provision as an excluded peril, since the ceased operations of machinery caused by an external power failure does not constitute a mechanical breakdown or a derangement.”
Also, he wrote, insurers, insureds and brokers should “revisit the obligations of insureds to mitigate potential losses caused by power failures, such as the use of back-up generators during peak mechanical operation periods and how premiums would adjust for insureds that build in such redundancies.”
Lefton’s suggestions follow his analysis of the 2008 Caneast case.
Caneast is based on an electrical transmission problem on Aug. 14, 2003 that created a power blackout in much of Ontario and a large portion of the northeastern United States. The power outage caused a large degree of spoilage at a pickle processing plant in Holland Landing, Ontario.
Caneast Foods Limited made a claim of more than $160,000 under its all-risks insurance policy for lost raw materials, clean-up expenses and the cost of equipment repair arising out of the blackout.
The insurer, Lombard General Insurance Company of Canada, denied the claim on the basis that the losses incurred fell under the excluded peril provisions for “change of temperature” or “mechanical or electrical breakdown or derangement in or on the premises.”
The court noted the “change of temperature” provision was qualified and accompanied by language to provide coverage for “loss or damage caused directly by a peril otherwise insured and not otherwise excluded.”
“A blackout, being otherwise insured and a direct or proximate cause of the spoilage, would negate the ‘change of temperature’ provision,” Lefton noted.
The court also ruled the “breakdown” had to be an internal breakdown of machinery, or else the exclusion wouldn’t make sense. Since the blackout was the source of the equipment breakdown, the exclusion for the mechanical failure did not apply.
“The ruling suggests that insurers should ferment a little longer when drafting exclusions in their insurance policies to avoid costly payouts,” Lefton writes.