Canadian Underwriter

What the court said when “surface water” appeared in the policy exclusion, but not in the flood endorsement

July 31, 2020   by Greg Meckbach

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The Co-operators has to pay a Mississauga banquet hall facility nearly $1 million – about double the amount it originally paid on a sewer backup policy – for losses arising from an historic 2013 rain storm, the Court of Appeal for Ontario has ruled.

In a decision released July 28, the court overturned a 2019 Superior Court of Justice finding that Le Treport Wedding & Convention Centre Ltd. is only covered for sewer backup and does not also have coverage under a flood endorsement on its commercial policy.

The language “surface water” appears in The Co-operators’ policy exclusion for flood coverage, the court observed, but it does not appear in the flood endorsement on the policy. In the endorsement, a flood is defined as “the rising of, the breaking out or the overflow of any body of water, whether natural or man-made and includes waves, tides, tidal waves and tsunamis.” The discrepancy in the language used to define a “flood” featured prominently is the debate about whether The Co-operators’ flood endorsement applied in addition to the $500,000 policy limit it paid for sewer back-up.

Le Treport was one of many Greater Toronto Area (GTA) properties affected by a huge rainstorm early in the evening July 8, 2013. The western GTA got about 90 mm of rain in an hour, costing the industry about $1 billion in insured damage.

Le Treport is in a plaza on the northwest corner of The Queensway and Stanfield Rd., about 20 kilometres west of downtown Toronto. The property is 600 metres west of a small watercourse known as Tonelli Creek, which flows south towards The Queensway and then underground south of The Queensway.

About half an hour after the rain started, water started flowing west along Queensway, into the plaza parking lot and into the banquet hall through the doors. It was also coming in through the ceiling and up through floor drains.

Several disputes ensued between the client and The Co-operators, which made a grand total of $500,000 in several payments over the next five years – which was  the limit on the sewer backup policy. The total appraised value (as determined during an arbitration in 2016) of the damage to building and the value of contents was $815,307.29 when using actual cash value or $929,329.18 when using replacement cost.

The Co-operators took the position that since none of the water that entered the building came from the overflow of a natural or man-made body of water, such as a lake or river, therefore the policy’s flood endorsement does not apply. Witnesses for the client said water overflowed from Tonelli Creek on to Queensway and then west to the parking lot.

A lawsuit by Le Treport was initially dismissed by Justice Douglas Gray of the Ontario Superior Court of Justice in Treport Wedding & Convention Centre Ltd. v. Co-operators General Insurance Company, released in 2019.

Le Treport was partly successful on appeal. In its decision released July 28, 2020, the Court of Appeal for Ontario awarded Le Treport $429,329.18 plus interest, legal costs of $20,000 and legal disbursements of $7,500. A finding by Justice Gray that the Co-operators does not owe business interruption still stands.

In the initial trial, Justice Gray was not convinced on a balance of probabilities that water from Tonelli Creek “meaningfully contributed” to any of the water that flowed into the client’s premises.  There was no expert evidence called to that effect and no evidence that any other body of water was nearby that could have contributed to the flow of water, he ruled in 2019.

Also key to his original decision was the difference between the flood exclusion in the underlying property policy and the wording of the flood endorsement added to the policy.

The exclusion in the underlying policy is for surface water, waves, tides, tidal waves, tsunamis, or the breaking out or overflow of any natural or artificial body of water.  The endorsement covers  “the rising of, the breaking out or the overflow of any body of water, whether natural or man-made and includes waves, tides, tidal waves and tsunamis.” The word “surface water” is missing from the endorsement, Justice Gray noted, ruling that the exclusion therefore applied.

But Justice Gray erred in importing the exclusion of “surface water” flooding into the flood endorsement, Justice Peter Lauwers wrote for the Court of Appeal for Ontario in its unanimous ruling. Instead, the flood endorsement should be taken to entirely displace the flood exclusion in the underlying policy.

The appeal court  also took issue with Justice Gray’s reliance on the Ontario Superior Court of Justice ruling in Parker Pad & Printing Ltd. v. Gore Mutual Insurance Company, released in 2017. That also arose from a dispute over a flood endorsement on a commercial property policy.

Parker Pad resulted from an incident in 2014 in which water entered a Haliburton business after a rain storm caused large pools of water to collect outside of the corner of the building.

In that case, the parties disagreed on exactly how the water entered the building. Gore Mutual Insurance argued that a gap in the waterproof wrapping, where two walls met at an inside corner  allowed for water to enter the building below the ground, through the foundation.  The policy had an exclusion for leakage or seepage of water below ground level.

In Parker Pad, the court found that the water entered above the ground (disagreeing with the insurer on that point) but still found that the flood endorsement did not apply. This is because the judge in that case found that the ordinary meaning of the phrase “the rising of, the breaking out or the overflow of any body of water” is limited to pre-existing bodies of water (such as a lake, river or reservoir) and does not include pooling of rain water in a location where no body of water previously existed.

Justice Gray said the reasoning in Parker Pad applies to the 2013 water damage affecting Le Treport in Mississauga.

But the appeal court suggested the differences between Parker Pad and Le Treport are significant.

“There was a catastrophic failure of all the water channelling features in the vicinity, both natural and man-made,” Justice Lauwers wrote for the appeal court in its July 28, 2020 ruling in  Le Treport. “Had the creeks and the stormwater management system been able to handle the volume of water, there would be no case, but they were not. Tonelli Creek contributed its water from upstream to the flood instead of channelling it away.”

If the flood endorsement does not apply to the circumstances affecting Le Treport, then this would nullify coverage, the appeal court found.

“Few buildings stand right on the edge of a body of water,” Justice Lauwers wrote.

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