Why this commercial food spoilage claim from ice storm was denied

If your client has coverage for business interruption and spoiled perishable food inventory, does that still kick in if the loss was caused by damage to power transmission lines off the client’s property?

For a Toronto bakery, the answer is no. This is the result of a Court of Appeal for Ontario ruling in favour of Intact Insurance Company released Oct. 25.

La Rose Bakery 2000 Inc. v. Intact Insurance Company arose from a coverage dispute arising from a major Ontario ice storm in December, 2013.

More than 30 mm of freezing rain fell at Toronto International Airport Dec. 21-23, 2013, which left more than 300,000 Toronto Hydro customers in the dark after tree branches came down on local power lines.

One customer that lost power – from Dec. 22 until Christmas Day – was La Rose Bakery. It sought coverage for $75,000 for loss of inventory and stock spoilage, plus $150,000 for business interruption.

Intact denied the claim, in part due to an exclusion for “loss or damage to any electrical transmission lines or their supporting structures, except for those located on the ‘premises.’”

The policy covered spoilage of stock on the premises if the loss or damage was caused by dampness or dryness of atmosphere or change in temperature. This in turn would be covered if the cause was interruption of services to the premises caused by physical loss or damage to the apparatus that supplies those services. But that excludes loss or damage to any electrical transmission lines if they are off premises, Justice Thomas Lederer wrote in his 2018 ruling, which dismissed the lawsuit against Intact on summary judgement.

Intact’s lawyer told Canadian Underwriter the insurer is declining to comment for this story.

The business interruption part of the policy Intact wrote for La Rose covers direct physical loss of or damage to property  located within 25 kilometres of the premises. But that is still subject to an exclusion for loss or damage to any electrical transmission lines or distribution lines, or their supporting structures, except for those located on the premises, Justice Lederer wrote.

Toronto Hydro said the loss was due to the failure of two feeder lines but no statement was made as to where those failures took place, added Justice Lederer.

On appeal, La Rose said Justice Lederer erred in making his ruling without expert evidence and in his interpretation of the policy.

But the Court of Appeal for Ontario sided with the insurer.

The bakery concedes that the loss or damage was to electrical transmission lines or distribution lines or their supporting structures, the appeal court wrote in its unanimous ruling.

Furthermore, the client did not file evidence that showed that the loss or damage occurred on its premises.

“It was incumbent on the appellant to put its best foot forward. The motion judge did not err in interpreting the policy without the benefit of expert evidence,” the Court of Appeal for Ontario found.

So what did La Rose’s policy for stock spoilage cover? Included in coverage was damage that is a direct result of physical loss or damage to supply or transmission lines and pipes and their connections furnishing “services” on the premises. This is only if that damage directly results from an insured peril. The equipment or part that sustains damage must be used for refrigerating, cooling, humidifying, dehumidifying, heating or for generating or converting power. Exclusions include intentional reduction in supply, lack of sufficient capacity and the one Intact relied on in La Rose, which was loss or damage to electrical transmission lines or distribution lines or supporting structures if they are off the premises.