Most insurance coverage disputes involve policy language that fails to define clearly the respective rights and obligations of the parties. In a recent case, however, the British Columbia Supreme Court needed to take an additional step—it first had to determine which documents comprised the insuring agreement before it could interpret the policy's language. This case, Sunburst Skylights Ltd. v. Lloyd's Underwriters, highlights the importance of establishing that the policy wording is clear and that the insurance contract is properly formed at the outset.
In this case the Court heard that the plaintiff insured three separate business locations under one property insurance policy. The cost of the premium was based on the aggregate or combined value of those three locations. The broker and the insured jointly established values for each of the three locations of insured property. Once these were set, and after the one-year term of the policy started, a previously issued "Confirmation of Insurance" or cover note was replaced by conventional policy wording. The policy was accompanied by a Statement of Values certifying the value of each insured property. This was signed and returned by the insured.
After a fire at one of the locations, the adjuster determined that the property was underinsured. The insurer, Lloyd's, applied a coinsurance penalty and made a reduced indemnity payment. In response, the insured demanded indemnity for the actual amount of its loss up to the aggregate value of all three insured locations. But Lloyd's insisted that it only had to indemnify the insured to the amount certified in the Statement of Values for that particular location.
To determine if the insured had maintained the level of insurance demanded by the coinsurance clause, the Court had to closely examine the circumstances around the Statement of Values. If that document formed part of the policy, or could be used to interpret it, the insured's recovery could properly be limited to the certified value of the single location. Conversely, if the Court found that the Statement of Values was irrelevant to its interpretative task, it could require Lloyd's to indemnify its insured up to the policy's aggregate limits for all three locations.
The policy's wording provided that the indemnity limits for each location was determined by combining the limits "per each individual location". It was unclear whether that combination only applied to the limits ascribed to individual locations or whether the policy required a combination across locations to form a single limit at each location. While the policy itself did not refer to the Statement of Values, Lloyd's took the position that the "per location" language made no sense unless the Statement of Values could be referenced. The plaintiff took the contrary position and maintained that the Statement of Values did not have the force of contract and was irrelevant to the interpretative task at hand.
The matter came before Mr. Justice Peter Voith. Noting that the
policy became valid prior to its delivery, he concluded that the
subsequently prepared Statement of Values could not have formed
part of the insurance contract. To be effective, the Statement
should have preceded the policy and been expressly incorporated.
The documents comprising the policy that were delivered to the
insured did not refer to the Statement.
In reaching this conclusion, the Court noted that Section 12 of British Columbia's Insurance Act provides that a term or condition not fully stated in an issued policy is invalid or inadmissible in evidence to the prejudice of the insured. In this instance, the original cover note identified the separate locations of insured property and disclosed the applicable limits of insurance for each. However, the cover note expired when it was replaced by the policy which did not state the limits for each location. Lloyd's could not supplement the terms and conditions of the policy after issuing it.
Nor did the Court accept that the subsequently executed Statement of Values was incorporated by reference. The policy did not allude to it explicitly and failed to state that that there were any further documents with additional terms and conditions. Therefore, the Court determined that the insured would conclude that the policy it received was complete.
After finding that the Statement was not part of the policy, the Court construed the ambiguity created by the policy's "per insured location" language against Lloyds and ordered a level of indemnity beyond the certified value of the damaged location. While some might consider the result to have been unfair to the insurer, the Court held Lloyd's to the bargain it made as reflected in the policy documents at the time the insurance contract was entered into. This case demonstrates that formulating the contract is as important as ensuring that the policy language is clear.
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