Wording interpretation is key to cover for large PD losses

 

Property damage (PD) losses can be every bit as large and complex as the bodily injury (BI) stories we usually cover in News Board. PD claims arising from complex construction failures or from products and completed operations exposures are also subject to specific exclusions that may be difficult to interpret. It sometimes happens in large PD losses that the parties to the policy find themselves in profound disagreement as to coverage, and these differences cannot be resolved without reference to the courts.

Here are some recent examples of such disputes.

Insurer must pay $7 million for repairs to condominium

 

The Ontario Court of Appeal has rejected Lombard Canada's appeal of a lower court ruling on coverage. Lombard's insured, Bradsil Leaseholds Ltd., was the general contractor for a condominium project built in Richmond Hill, Ontario between 1988 and 1990.

 

During construction, Bradsil failed to follow the recommendations of geo-technical consultants that the foundation excavation not breach the aquitard, a clay layer which acts as a natural barrier between the water aquifer and the building foundation.

 

To correct the problem, Bradsil engaged subcontractors to install a dewatering system, but it worked inadequately. For the next six years, the system pumped away silt and sand, leaving a large void in the foundation. The entire building had to be evacuated to repair the foundation, at an estimated cost of $7 million.

 

The condominium obtained a default judgment against Bradsil. Because the contractor was not able to satisfy the judgment, the condominium sought an order against Lombard to pay. Lombard denied coverage to the contractor, so the condominium owners sued Lombard. In February 2007, the motions judge found that the owners' claim was covered by the Lombard policy and awarded summary judgment against the insurer.

 

Lombard appealed the motions judge's ruling and asked the appeal court to determine:

 

• Whether the damages awarded against Bradsil constituted compensation for property damage suffered by third parties of the type covered under Bradsil's general liability (GL) policy, or merely the cost of remediating defects in Bradsil's own work product
  
   
• Whether the damages arose from an "accident", and therefore from an "occurrence", within the meaning of Bradsil's GL policy.

In October 2007, the appeal court upheld the lower court ruling. You can read the appeal court verdict at http://www.canlii.org/en/on/onca/doc/2008/2008onca272/2008onca272.html .

AXA must pay $15 million for defective concrete

 

The Court of Appeal for Ontario has dismissed an application by AXA Insurance to limit the scope of its duty to indemnify a foundation contractor.

 

During 2002, Ani-Wall Concrete Forming Inc. built the concrete foundations in 60 homes in the greater Toronto area. The concrete Ani-Wall used was found to be defective, and the building foundations had to be repaired at cost of $15 million, or about $250,000 per home.

 

Ani-Wall's insurer, AXA, maintained that several standard and non-standard policy exclusions - the "your work" exclusion, the "your product" exclusion and a "rip and tear" exclusion - should limit the scope of coverage.

 

Ani-Wall disagreed, so AXA sought a declaratory order defining and limiting the scope of its duty to indemnify Ani-Wall. The applications judge found in favour of Ani-Wall that none of the three exclusions to the coverage applied.

 

AXA appealed the trial court ruling, but in July 2008, the appeal court unanimously upheld the trial court verdict in favour of Ani-Wall.

 

You can read this appeal court verdict at http://www.canlii.org/en/on/onca/doc/2008/2008onca563/2008onca563.html .

Aviva need not pay for damage to industrial boiler

 

In June 2004, B.C. Master Blasters (MB) Inc. was engaged to remove "smelt", a buildup of residue, in a massive recovery boiler at the Weyerhaeuser Kamloops mill. MB had performed this work for Weyerhaeuser for many years. This time they tried a new technique, which turned out to be less successful at removing the smelt. So they removed the rest of the residue with a mechanical device and inadvertently damaged some of the piping. Weyerhaeuser sued MB for the cost of repairing the boiler and plant downtime, totalling about $1 million.

 

MB's general liability insurer, Aviva, denied coverage, so MB sought a summary trial application on the issue of coverage. Aviva asked the court to examine whether the damage was an "accident" and whether the "work performed" and/or "business risk" exclusions ruled out cover for this loss.

 

The court held that the exclusions applied to the damage claimed, so the plaintiff's action was dismissed. You can read this verdict at

http://www.courts.gov.bc.ca/jdb-txt/sc/06/14/2006bcsc1488.htm .

"Realistic chance" is enough to order excess insurer to share in defence costs

 

The Ontario Superior Court has handed down an important interpretation of coverage provided by an umbrella liability policy with respect to defence expenses.

 

St Marys Cement Company is a defendant in 18 court actions arising from the supply of allegedly defective cement, which resulted in extensive property damage to residential homes with costs totalling more than $27 million. St Marys' liability for these claims has not yet been quantified. Coverage issues, including the application of a "rip and tear" exclusion, are also yet to be resolved.

 

ACE/INA provided a $25-million umbrella policy over a $2-million GL cover. St Marys applied to the court for a ruling that its umbrella insurer, ACE/INA, should contribute with the primary GL carrier to the considerable ongoing defence expenses associated with these claims.

 

The court ruled that although it is not certain that St Marys will be held liable for any or all of the claims, "there is a plain and realistic risk to St Marys that it may be liable for damages in excess of $4 million" (the primary GL limit at $2 million for each of two years). Therefore, ACE/INA has an obligation to share the ongoing defence costs with the GL insurer on a 50-50 basis.

 

You can read more on this verdict at

http://www.canlii.org/en/on/onsc/doc/2008/2008canlii32307/2008canlii32307.html .

 

Be very cautious with this kind of loss

 

High-value property damage losses are rare but are often the subject of coverage disagreements. A few cases go to trial but many more are resolved privately.

 

The facts in each case may be unique, so relevant precedents may be hard to find. Whenever coverage is in dispute or when you believe the insurer has engaged coverage counsel, avoid offering your own opinion on coverage. Instead, recommend that your client also promptly seek the advice of counsel.

 

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"Boat boy" not liable for $285,000 cottage fire

 

The Court of Appeal for Ontario has upheld a trial court decision that found a 13-year-old local boy hired as a "boat boy" not liable for the loss of a $285,000 cottage in a fire he started accidentally.

Bryce Douglas hired Mitchell Kinger to perform menial chores at his cottage. Kinger's tasks included lawn mowing, raking, removing weeds, clearing brush and the like. He would work for three days a week and receive $8 per hour for his efforts. He was left unattended for the most part but had to adhere to certain rules set out by Douglas. One of the rules was not to use power tools unless an adult was present.

Kinger broke that rule in June 2000 by trying to refuel Douglas's gas-powered mower. Unsure of how much gas was in the mower, he lit a match and held it to the mouth of the can to check the level. The match ignited the fumes, and the resulting fire destroyed the cottage.

The central question raised in the appeal was whether Douglas, by way of a subrogated claim brought by the insurer, could recover damages from the boy.

The appeal court upheld the view of the trial court that it would be unfair to impose the loss on the child. The court ruled that when Douglas hired Kinger, he knew that Kinger's negligence could cause harm and, accordingly, imposed rules to protect his safety. Douglas should have been aware that it was unlikely that Kinger would have the financial resources to compensate for any loss, such as the $285,000 one that actually occurred. The expectation that the 13-year-old would be able to compensate for loss, through insurance or otherwise, was not articulated at the time of his employment and, in any event, would be unreasonable given his age and the wage of $8 per hour. Furthermore, Douglas did have his own insurance to guard against such losses.

Douglas has been ordered to pay costs of $15,000 to Kinger.

You can read this verdict at http://www.ontariocourts.on.ca/decisions/2008/june/2008ONCA0452.htm .

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Suncor completes $980-million business interruption claim

 

Suncor Energy Inc. announced that it has reached agreement with its property insurers for a $980-million settlement for its business interruption claim relating to a January 2005 fire at the company's oil sands facility. The blaze began around 9:15 a.m. on January 4 in the facility's Upgrader 2 coker fractionator tower, a portion of the plant that converts bitumen into crude oil products. An eyewitness said two explosions several minutes apart rocked the company's Millennium Upgrader and sent a fireball six storeys high into the air.

With temperatures in the Fort McMurray region dipping below -35°C, reports said the facility was damaged by both fire and ice from the water used to put out the blaze. This reduced the plant's oil production to roughly 110,000 barrels a day from its usual rate of 225,000. According to the Canadian Press, the cut in production was costing Suncor approximately $5 million a day in lost oil revenues.

Suncor expects combined property and business interruption losses to total approximately $1.2 billion, making it the largest property loss in Canadian history.

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Appeal court reapportions blame for $5-million apartment fire

 

The Appeal Court of Ontario has reapportioned the blame for a fire in a Toronto apartment building in January 1995. The trial court verdict was reported in the Winter 2003 edition of News Board.

Zari Bakhtiari suffered serious permanent injuries as a result of smoke inhalation when she was trapped in a stairwell in her apartment building while attempting to escape the fire. She was one of several tenants to suffer smoke inhalation and other injuries during the fire.

The fire started on the fifth floor, and smoke quickly spread through the building. This occurred largely because the apartment door was not equipped with a self-acting door closer and was left open by the panicked tenant, and because the fifth-floor fire door opening into the stairwell did not close properly. The owners of the apartment building, the Axes Group, were sued for inadequate maintenance causing fire doors to fail to close, failure to keep the building reasonably safe by installing the missing door closers, and other similar matters. The City of Toronto, as successor to the former North York, was sued for approving the building plans, some 20 years earlier, without self-acting door closers on the apartment suites — in breach of its own bylaw.

On January 24, 2003, Justice Lane of the Ontario Superior Court of Justice awarded the plaintiff damages of $2,785,963. Her son Pedram, who was with her, was awarded damages of $396,046 for his injuries and damages of $50,000 under the Family Law Act.

Justice Lane also ordered the defendants to pay $1,470,000 for the plaintiff's legal fees, including a $350,000 "premium for risk and result" for plaintiff's counsel, praising the lawyer's determination and accomplishment over eight years of litigation and a 39-day trial.

The appeal court declined to reconsider the damages award, but reapportioned blame in the following way. The share apportioned to the Axes Group was reduced to 45 per cent from 70 per cent, the city's share was increased to 35 per cent from 20 per cent, and the tenant's share was increased to 20 per cent from 10 per cent.

Justice Lane also noted that this was just one of eight actions arising out of this fire. We estimate that with costs and pre- and post-judgment interest, this case will cost more than $5 million.

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Woman and son win $3.2-million for apartment fire

 

Zari Bakhtiari suffered serious permanent injuries as a result of smoke inhalation when she was trapped in her apartment building stairwell by a fire. She was one of several tenants to suffer smoke inhalation and other injuries.

The January 1995 fire started on the fifth floor and quickly spread smoke through the building. This occurred largely because the apartment door, which was not equipped with a self-acting door closer, was left open by the panicked tenant and because the fifth-floor stairwell fire door did not close properly.

Bakhtiari sued the apartment building owners for inadequate maintenance, causing fire doors to fail to close; failure to keep the building reasonably safe by installing the missing door closers; and other similar matters. She also sued the City of Toronto, as successor to the former North York, for breaching its own bylaw by approving the building plans without self-acting door closers on the apartments some 20 years earlier, and for inadequate firefighting.

In 2003, Justice Lane of the Ontario Superior Court of Justice awarded the plaintiff damages of $2,785,963. Her son Pedram, who was with her, was awarded damages of $396,046 for his injuries and damages of $50,000 under the Family Law Act.

Liability was apportioned 70 per cent to the Axes Group, 20 per cent to the city and 10 per cent to the tenant.

Justice Lane also ordered the defendants to pay $1,470,000 for the plaintiff's legal fees, including a $350,000 "premium for risk and result" for plaintiff's counsel. The judge praised counsel's determination and accomplishment over eight years of litigation and a 39-day trial. Justice Lane also noted that this was just one of eight actions arising out of this fire.

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Appeal court upholds $58-million award for highrise fire

 

A Quebec appeal court has upheld a multimillion-dollar trial court verdict that a building owner and city firefighters must share the blame for a huge fire in a Montreal highrise office tower.

The October 1986 fire at the Alexis Nihon Plaza was the most serious highrise fire ever in Canada. The $32.2-million lawsuit was launched by insurance companies who wanted to recover some of the claims they paid out.

The fire, which broke out on a Sunday evening, raged for 13 hours because firefighters were unable to get enough water up to the 10th floor of the building. They couldn't find the outside connection to the standpipe system, which was incorrectly labeled "sprinkler system." Unable to find the right pipe, firefighters put so much pressure on another connection that it broke, according to a lawyer involved in the case. The upper floors from 10 to 16 were burning while the stores in the retail concourse were being flooded.

The trial court ruled that Alexis Nihon Plaza staff should have remedied the problem and should have routinely checked the system. Accordingly, the building owner was held liable for 75 per cent of the damages.

Because the City of Montreal's fire department had known for more than three years that the sprinkler connection was mislabelled, they were held liable for 25 per cent of the damages.

The trial court fixed total damages to the building and its occupants at $22.2 million. The appeal court found no fault with t he ruling of the trial court judge and upheld the findings of the lower court. With legal bills and 16 years of pre- and postjudgment interest, damages now exceed $58 million.

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$2.5-million fire at Mississauga recycling depot

 

A June 1995 fire destroyed a Mississauga, Ontario plastic recycling plant and its contents. The fire marshal estimated the damage at $2.5 million.

The sprinkler system had been disabled in violation of the fire protection warranty in the fire insurance policy, so the insurer denied the policyholder's claim. Because of the provisions of the mortgage clause, the insurer was unable to enforce the breach of the warranty against the mortgagee, and the insurer paid about $800,000 to satisfy the mortgagee's claim.

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$14-million award for Yukon hangar fire

 

The Yukon Supreme Court has awarded damages of just over $14 million in the case of a fire that destroyed the historic Trans North hangar at Whitehorse Airport in 1999.

The court ruled that workers using cutting torches on the roof of the hangar were responsible for the fire. While there is no scientific proof of the cause, the judge said that there was no other possible explanation for the fire. It erupted just a few hours after the two men finished welding work on the roof of the old wooden hangar. They were removing a "North 60" oil company sign.

The judgment awarded just over $12 million to Trans North Helicopters for the loss of aircraft and the hangar, and lost business. Two smaller companies that lost aircraft were awarded $1 million each.

Trans North president Al Kapty said he's pleased with the ruling, but wants to make sure he can get the money. "I feel badly that this had to be dragged through the courts the way it did, but even at trial there's no way of knowing if they had insurance," he said. "So we're entitled to register the court judgment against their assets and we'll be doing that in the near future."

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$4-million settlement for 1994 recycling plant fire

 

Several Quebec property insurers have settled a lawsuit arising from a huge warehouse fire in Saint-Bruno, Quebec. The cost of the settlement, including defence expenses, will exceed $4 million.

An agricultural co-operative owned the warehouse and leased it to a company that collected waste newsprint for recyclers. The newsprint was baled and stacked until shipment. An adjacent building was occupied as a cold-storage warehouse.

In June 1994, the building owner agreed to install a steel guard rail inside the building to reduce damage from the operation of the recycler's fork-lift trucks. Rather than purchase a prefabricated unit, the building owner permitted two employees to install a guard rail from stock steel.

The work required the use of welding equipment, although neither employee was a licensed welder. They had little training and took insufficient provisions to watch for or prevent a fire. Sparks from their welding torch ignited a fire in a nearby bale of newsprint. Because of construction deficiencies, the fire quickly spread past the firewall to the adjacent property.

The local fire department could do little to control the fire, which caused extensive damage to the structures and contents. The cold-storage warehouse contained frozen blueberries worth about $2 million, from which no salvage was secured. Property insurers for the tenants and nearby businesses commenced legal actions to recover almost $7 million in losses.

In January 2000, shortly before the trial date, the main parties to the lawsuits agreed to settle by compromise for about $3.4 million. With legal expenses, the cost of this claim will likely be more than $4 million.

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Appeal court splits blame for $1.5-million waterfront welding fire

 

B.C.'s Court of Appeal has ruled in a case that arose from a serious fire in August 1994, apportioning damages equally between the property owner and a contractor. The fire caused substantial damages to a wooden wharf that formed part of the Alberta Wheat Pool's grain-handling facility in Vancouver harbour.

At the time of the fire, a contractor was performing a major repair and restoration project on the wharf. The work included the use of welding torches to cut the large metal pins that held the structure together.

The fire was detected in the early evening, about three hours after the contractor's employees had left the site. The fire spread quickly under the deck of the wharf, and the fire department struggled to control the fire for more than 16 hours.

The lower court determined damages at $1,525,520. The court ruled that the contractor's welding operations and poor safety practices were the likely cause of the fire, but the plaintiff's automatic fire protection system was poorly designed and was largely ineffective in retarding the progress of the fire. the lower court ruled that the contractor was 75-percent to blame and the plaintiff, 25 percent responsible.

The appeal court was unwilling to find either party more blameworthy than the other. Accordingly, the court reapportioned damages and ruled that blame should be shared equally between both parties. The appeal court was not asked to rule on damages, but we estimate that the cost of the two trials and interest on the judgment will exceed $500,000, in addition to the damages determined by the lower court.

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Waste plant fire results in $3.9-million class action settlement

 

A class action lawsuit arising from a fire at a Hamilton, Ontario recycling plant has been settled for $3.9 million. The plaintiffs alleged that people living nearby were exposed to toxic smoke when the Plastimet recycling plant was destroyed by fire in July 1997.

Defendants in the suit included the Province of Ontario, the former Region of Hamilton-Wentworth, the former City of Hamilton, landowner Frank Levy, Plastimet, Plastimet's owner Jack Lieberman and various tenants and former tenants of the Wellington Street North plant.

Superior Court Justice David Crane approved the settlement in May 2001, following several months of negotiation among the parties involved. The 9,400 individual claims were capped at $200 per person. The settlement also provides a contingency fund for individuals with extraordinary claims and sets aside money for business losses, according to the June edition of Swiss Re Review.

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$30-million award for "star" T-Rex

 

An Australian tradesman who built a huge robot dinosaur, only to see it destroyed by fire at an exhibition, has been awarded damages of A$31 million (Cdn$30 million).

The judge of the South Australian Supreme Court in Adelaide said the 16-tonne (l8-ton) moving Tyrannosaurus Rex robot could have become a film star, with an earning potential of $100 million in Hollywood and on the exhibition circuit.

But the dinosaur's prospects for stardom were ended in September 1985 at the Royal Adelaide Show, where it had been the main attraction. As its enclosure was being dismantled, steel scaffolding fell onto the robot, causing an electrical fire in which the robot was destroyed.

The robot was 30 metres (100 feet) long, 12 metres (40 feet) high and made up of thousands of parts. Activated by hydraulics and controlled by mini-computers, it took its creator Allan Limb four years to build. Mr. Limb sued four men involved in the incident and the show's organizers. He said the compensation would enable him to rebuild the robot. The decision will likely be appealed.

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Building owner and firefighters share $52-million tab for highrise fire

 

A Quebec court has ruled that a building owner and city firefighters must share the blame for a huge fire in a Montreal highrise office tower. The October 1986 fire at the Alexis Nihon Plaza was the most serious highrise fire ever in Canada. The $32.2-million lawsuit was launched by insurance companies who wanted to recover some of the claims they paid out.

The fire, which broke out on a Sunday evening, raged for 13 hours because firefighters were unable to get enough water up to the 10th floor of the building. They couldn t find the outside connection to the standpipe system, which was incorrectly labelled "sprinkler system." Unable to find the right pipe, firefighters put so much pressure on another connection that it broke, according to a lawyer involved in the case. The upper floors from 10 to 16 were burning while the stores in the retail concourse were being flooded.

The court ruled that Alexis Nihon Plaza staff should have remedied the problem and should have routinely checked the system. Accordingly, the building owner was held liable for 75 per cent of the damages.

Because the City of Montreal's fire department had known that the sprinkler connection was mislabelled for more than three years, they were held liable for 25 per cent of the damages. The court fixed total damages to the building and its occupants at $22.2 million. With legal bills and accumulated interest, damages will exceed $52 million.

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Fire at recycling depot

 

A March 1996 fire at a Calgary, Alberta recycling depot occurred because plastic bags containing flammable material were stored too close to an overhead heater. The company, which recycled used automotive and industrial oil filters, operated in rented premises.

The principal claim was for damage to the wall and roof of the rented premises. It was settled for $50,831 and $2,485 in expenses under the Tenants Legal Liability section of the COL policy.

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Tank implodes - $50,000

 

A stainless steel tanker trailer valued at $75,000 was severely damaged in a freak accident in March 1995. A waste transfer station, which separates and treats oily water, was pumping out the liquid contents of the tank. The driver left the site to get a cup of coffee. While the rig was unattended, the vent on the top of the tank was blown shut, probably by the high winds blowing that day.

Once the vent was closed, the pump created a powerful vacuum, which literally crushed the tank. The rig operator sued the transfer station for the damage to the trailer. Although the trailer was valued at nearly $75,000, the owner agreed to settle for repairs costing $38,500 plus expenses of $8,168.

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$2.5-million fire at recycling depot

 

A June 1995 fire destroyed a Mississauga, Ontario recycling plant and its contents. The fire marshal estimated the damage at $2.5 million.

The sprinkler system had been disabled in violation of the fire protection warranty contained in the insurance policy, so the insurer denied the policyholder's claim. Because of the provisions of the mortgage clause, the insurer was unable to enforce the breach of the warranty against the mortgagee and the insurer paid about $800,000 to satisfy the mortgagee's claim.

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Hamilton plastics recycling depot destroyed by fire

 

It took three days for firefighters to control a huge blaze at a Hamilton, Ontario plastics recycling depot in July 1997. The damage to the building exceeded $2 million. The cost of disposing of the debris and the cleanup will be more than $10 million.

Local residents, fearing adverse health effects from the smoke and particulate produced by the fire, have commenced a class action against the property owners. The City of Hamilton is also named in the class action for failing to enforce the fire code, in spite of repeated fire code violations; for failing to handle the fire correctly; and for failing to evacuate the community from the area until the fire was extinguished.

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