In a recent decision, the Saskatchewan Court of Queen's Bench held that an exclusionary clause in a landlord's home insurance policy, which excluded coverage to property used for the production of drugs, was not unjust or unreasonable.
Background:
On March 31, 2009, an explosion and fire destroyed a rental property owned by the Plaintiffs, Mr. and Mrs. Carteri. The explosion was caused by their tenants who were attempting to produce cannabis resin. The Carteris were denied coverage by their insurer, Saskatchewan Mutual Insurance (SMI) who pointed to an exclusionary clause in their policy which read:
The Carteris brought two actions, one for coverage under their fire insurance policy with SMI, and a second for damages against the tenants for using the property in an unlawful manner. SMI applied for Summary Judgment, dismissing the Carteri's action against them and the Carteris sought Summary Judgment against the tenants.
Issues:
The primary issues in this case were:
- Whether the exclusion was improperly added into the policy and whether its operation was unjust or unreasonable.
- Whether the tenants were liable for the damage.
Was the Exclusion Unjust or Unreasonable?
The Court held that the exclusion was properly added to the policy. It was not "buried" and was identified with the words "Important Message" on the front page of a two-page renewal form. The Court deemed this sufficient notice, which would indicate to a reasonable observer that something substantial had been added to the policy.
Section 131 of The Saskatchewan Insurance Act, RSS 1978, c S-26 states that exclusions or conditions are not binding if they are unjust or unreasonable. The Carteris argued that the exclusion was unjust and unreasonable on the basis that even if they were aware of the exclusion, there was nothing they could have done to prevent their property from being used in a manner contrary to the exclusion.
The Carteris argued that the Court should be bound by Marche v Halifax Insurance Co, 2005 SCC 6. In Marche, the insured landlords were denied coverage after their rental property was destroyed by a fire. They were denied coverage because they failed to notify their insurer of a "change material to the risk" when their apartment sat vacant for three months. The Supreme Court held that it was unjust and unreasonable for an insured to be bound by an unclearly worded condition that was unrelated to the loss claimed.
The Court distinguished Marche on that basis that it involved an unclearly worded exclusion, whereas in this case, the exclusion was clearly worded. Instead, the Court relied on Pietrangelo v Gore Mutual Insurance Company, 2010 ONSC 568, a case involving circumstances nearly identical to those in this case. In Pietrangelo, the Court held that the exclusion which denied coverage for drug related damage was not unjust or unreasonable. It further clarified that the issue focuses not on "...whether the clause creates unfairness to the insured, but whether there is a rational basis for its existence".
Based on Pietrangelo, the Court ruled in favour of SMI, and upheld the exclusion. It was frank in stating that "landlords are not forced to remain in the business of renting out residential property. If they are not able or willing to bear the risk, they may need to reconsider their investment".
Are the Tenants Liable for the Damage?
The Carteris claimed for damages based on Sections 49(5) and (6) of the Residential Tenancy Act, 2006, SS 2006, c R-22.0001 where it states that tenants must maintain and repair the property.
The Court held that the tenants were in breach of their obligations to guard against damage and to repair extraordinary damage. The Court awarded the Carteris damages in the amount of $171,705.
Final Remarks:
This decision is a reminder of the risks involved in owning rental properties. Drug exclusions (like the one in SMI's policy) are not uncommon in other insurance policies across the country. While most provinces' insurance legislation contain provisions prohibiting exclusions that are unreasonable or unjust, they are unlikely to assist landlords who find themselves in the same unfortunate circumstances as the Carteris.
This case reinforces the importance for homeowners, especially landlords, to review their insurance policies and to be aware of any changes that are made to them. Most importantly, this decision underpins the burden placed on landlords to ensure their tenants are not participating in activities that may exclude them from coverage under their home insurance policy.
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