Canada: Preventative Action To Avoid Future Loss Not An "Occurrence" Or "Accident"

Last Updated: September 24 2014
Article by James Norton

The insured, Mississippi River Power Corporation (the "Company") operated a power generation station on the Mississippi River in Almonte, Ontario. The station was expanded starting in 2008. The new station began operations in 2010 and featured two new large diameter pipes, encased in concrete, called "penstocks". The penstocks were designed to channel water to the station's hydraulic turbines.

In April 2012, Penstock #2 failed and collapsed on itself, severely restricting the flow of water to the turbines. The cause of failure was found to have been defective welding.

As a precautionary measure, the Company decided to inspect Penstock #1, which had not yet failed, as it was of identical design and construction. The inspection revealed that the quality of the welding in Penstock #1 was not acceptable in many locations and that there was a risk that Penstock #1 could collapse in the future.

The Company decided to shut down Penstock #1 in June 2012, pending completion of the inspections. The recommended repairs to Penstock #1 were commenced in December 2012 and completed two months later.

The Company then filed claims under a policy it had with the defendant reciprocal insurance exchange with respect to the costs of repairs to both Penstocks, as well as business interruption losses caused by the failures.

The defendant agreed to indemnify the Company for the costs of repairs to Penstock #2 and for the business interruption losses caused by its failure. However, it refused to provide any coverage for the costs of the repairs or business interruption brought about by the shutdown of and repairs to Penstock #1.

The matter proceeded to a summary judgment motion in the Ontario Superior Court of Justice.1 The parties agreed to the following facts: (a) it was foreseeable that Penstock #1 would sometime in the future fail in the same way and for the same reasons that Penstock #2 had failed; (b) the plaintiff made the decision to idle Penstock #1 and proceed to repair the welds before putting Penstock #1 on-line; (c) at that time, Penstock #1 was not damaged and operational; and (d) if Penstock #1 failed as a result of poor quality welding, the policy would have covered the losses and/or damage resulting directly therefrom.

The Insurer argued that the costs of repairs claimed by the Company were not the result of an accidental or fortuitous event. Rather, they were deliberately caused by the Company's decision to shut down Penstock #1 as a precautionary measure. There was therefore no loss caused by an "occurrence" covered by the Policy. Similarly, the Insurer argued that the Policy only covered business interruption losses "directly resulting from the necessary interruption of Business" and "resulting from direct physical loss or damage to Property Insured against." Here, there was no such loss. Alternatively, the Insurer relied on a Policy exclusion that excluded repairs for "any defect or fault in material, workmanship or design", arguing that the defective welding fell under this exclusion. Finally, the Insurer argued that the Company did not have to shut down Penstock #1 until the repairs to Penstock #2 had been completed, in which case there would have been no business interruption losses at all.

For its part, the Company argued that the "occurrence" required by the Policy was the failure of Penstock #2 itself. It argued that the resulting peril and obligation to shut down Penstock #1 directly flowed from that occurrence, and caused the resulting loss because both Penstocks had an identical design, construction and operation. The Company also relied on a statutory condition 9, contained in the Policy that provided as follows:

The Insured, in the event of any loss or damage to any property insured under the contract, shall take all reasonable steps to prevent further damage to such property so damaged and to prevent damage to other property insured hereunder.

It argued that the Policy required it to "protect the property" from further damage, and that it acted prudently and reasonably in the circumstances to do so. The point was made that it would be odd for the Insurer to be only obliged to pay a much larger sum if the Company had not acted as it did in order to avoid the foreseeable collapse of Penstock #1.

The Court granted summary judgment in the Insurer's favour and dismissed the Company's claim with respect to Penstock #1. In this case, the Company had chosen to repair the defects to Penstock #1 before any loss.

In rejecting the Company's reliance on statutory condition 9, the Court observed that "The issue here is as to whether the obligation stipulated in sub-para. 1 of Statutory condition No. 9 is limited "to prevent damage" that would otherwise normally result from the peril that has already come into operation or whether it also extends to averting the occurrence of another peril so as to prevent the damage that would normally result from such other peril..... The distinction essentially is as between the obligation to minimize a loss and the obligation to minimize the risk that has yet to materialize." Relying upon the Supreme Court of Canada's decision in Hartford,2 the Court concluded that sub-para. 1 of statutory condition No. 9 arose "in the event of any loss or damage", i.e. if one of the perils insured against had come into operation. The damage to be mitigated must result from the contingency that has occurred as opposed to being the consequence of another contingency that has yet to occur. Consequently, the obligation under statutory condition No. 9 had not arisen.

The Court also held that the costs of repairing the defects were not covered because they were specifically excluded by a policy exclusion for defect or fault in material, workmanship or design.

The Company also submitted that it was entitled to be indemnified for business interruption losses on the basis of the principle of "imminent peril". The principle behind this is that a danger must be present in the sense that unless something is done, damage will ensue due to an operating peril described in the insurance policy. The Court found that while it was foreseeable that Penstock #1 could fail at some time in the future, that it was more probable than not that it would fail, this did not constitute an inevitable peril.

In the end, even though the Company's actions were reasonable in all the circumstances, there was no coverage under the Policy.


1 Mississippi River Power Corp. v. Municipal Electric Assn. Reciprocal Insurance Exchange 2014 CarswellOnt 8570, 2014 ONSC 3784, 241 A.C.W.S. (3d) 938.

2 Hartford Fire Insurance Co. v. Benson & Hedges (Canada) Ltd. (1978), 1978 CarswellOnt 604, [1978] I.L.R. 1-995, 85 D.L.R. (3d) 467, 1978 CarswellOnt 604F, [1978] 2 S.C.R. 1088, 21 N.R. 279 (S.C.C.)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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James Norton
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