When Your Flood Exclusion Doesn't Actually Exclude Loss Caused By A Flood: A Recent Example

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How will a court resolve ambiguity in a policy where an exclusion purports to remove from coverage damage caused by flood but the same policy contains a policy extension covering seepage, leakage...
Canada Insurance
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How will a court resolve ambiguity in a policy where an exclusion purports to remove from coverage damage caused by flood but the same policy contains a policy extension covering seepage, leakage or influx of water from a natural source? A recent Alberta case grappled with this issue in the context of a river that overflowed its banks, causing damage to insured premises. The Court resolved the ambiguity in favour of the insured, finding the loss was covered despite the policy containing a flood exclusion.

In 2102908 Alberta Ltd. v Intact Insurance Company, 2022 ABQB 175, the plaintiff operated a bowling alley on the ground floor of a leased premises. The defendant issued a policy providing the plaintiff first-party property coverage for the leased premises (the "Policy"). During the policy period, water overflowed the Clearwater River in Fort McMurray and inundated the building – surface water entered the property through openings in the walls and doors causing damage to the bowling alley. The plaintiff sought indemnity from the defendant under the Policy for damage to the bowling alley (the "Claim").

In support of the Claim, the plaintiff relied on an extension providing additional coverage for damage caused by seepage, leakage or influx of water derived from natural sources (the "Water Extension"). The plaintiff took the position that the Water Extension was a stand-alone coverage, with no exclusions applying to it. The defendant's position was that the exclusion in the Policy for loss or damage caused directly or indirectly by flood, including surface water (the "Flood Exclusion"), applied and the loss was excluded from coverage.

On the face of it, there appeared to be an inconsistency between the Water Extension and the Flood Exclusion: one providing coverage for water loss and the other excluding coverage for that same loss.

The Court commenced its analysis by succinctly summarizing the general principles of interpretation that apply to insurance policies:

[6] The determination of this question involves the interpretation of the insurance policy. The law on the interpretation of insurance policies is settled. Policies are to be read as a whole, giving effect to clear and unambiguous language. Once the insured establishes coverage, the onus shifts to the insurer to establish that one of the exclusions to coverage applies. Where language in the policy is ambiguous, courts should prefer an interpretation that is consistent with reasonable expectations and in the event of an ambiguity, courts shall construe the policy contra proferentem against the insurer, meaning coverage provisions are interpreted broadly and exclusion clauses are interpreted narrowly: Ledcor Construction Ltd. v Northbridge Indemnity Insurance Co., 2016 SCC 37, para 49-52.

The Court held that there was an ambiguity between the Water Extension and the Flood Exclusion. The parties agreed that the damage was caused by the influx of water into the insured premises as a result of water overflowing a river's banks. While colloquially, this event could be described as a flood, the specific action that resulted in the damage to the premises was the influx of water into the premises through various openings in the walls and doors – the exact type of loss contemplated by the Water Extension.

The Court, interpreting the Policy as a whole, found the Claim was within coverage and not otherwise excluded. The Court determined the Flood Exclusion related to a narrower event than the grant of coverage under the Water Extension, which applied to seepage, leakage and influx of water, with no limit to a natural event. The Court found that the defendant insurer must have intended that distinction. The Court further held that, in the event the ambiguity could not be overcome, the Policy would be interpreted contra proferentem against the defendant insurer who prepared the standard form document, with the Water Extension being interpreted broadly and the Flood Exclusion interpreted narrowly.

When investigating coverage claims where a policy contains inconsistent wording, insurers should carefully review their policies as a whole without focusing on specific exclusions or coverage provisions in arriving at their coverage determination. With respect to drafting policies, if an insurer intends to exclude coverage for a specific peril (such as flood), it should ensure that the wording is clear and specify whether it applies to any extensions or additional coverages included under the policy.

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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