Court of Appeal Decision of the Week

Insurance – Proof of Loss and Exclusion Clauses

O’Byrne v. Farmers’ Mutual Insurance Company (Lindsay), 2014 ONCA 543

Keywords: Insurance; proof of loss; mechanical breakdown; derangement; pollution; exclusion clauses; agents; apparent and actual authority.

Synopsis: The Respondents owed a building and the Appellants (Farmers’ Mutual Insurance Co.) insured the building pursuant to an “all-risks” insurance policy. One of the Respondent’s tenants inserted a piece of cardboard into the primary control of the oil furnace to bypass the thermostat which was intended “to keep the furnace in constant ‘hot’ operation.” During the tenant’s absence a significant furnace oil spill occurred which leaked through the floorboards and saturated the main floor beam and ceiling of units below. The Appellants denied coverage for the damages. At trial the judge found in favour of the Respondents concluding there was no internal defect or problem in the otherwise “well-maintained” furnace which would have continued

to properly operate but for the unexpected actions of the tenant. Farmers’ Insurance appealed arguing the Respondents had failed to adequately provide “proof of loss” and the trial judge had erred by failing to apply the “mechanical breakdown or derangement” and “pollution” exclusion clauses included in the policy. Appeal dismissed.

Importance: The C.A. found that a letter sent by the insurance adjuster which was relied upon by the Respondents constituted a waiver of the proof of loss requirement under s.136 of the Insurance Act, R.S.O. 1990, c. I.8. The adjuster had both actual and apparent authority to communicate with the Respondents on the Appellant’s behalf. The Appellant never disavowed the adjuster’s letter but rather specifically referred to it in communications with the Respondent’s legal counsel. The C.A. held when examining mechanical breakdown or derangement it is essential to examine the cause of the occurrence. It is not sufficient merely to find that some type of mechanical breakdown or derangement occurred (Caneast Foods Ltd. v. Lombard General Insurance Co., 2008 ONCA 368). The damage in this case was the result of external interference and not a defect of the furnace. For breakdown or derangement to preclude coverage there must first be an internal problem or defect in the machine. The insurance policy included an exception to the pollution exclusion clause “if the discharge…of pollutants is the direct result of a peril not otherwise excluded under this policy” (at para. 49). For the pollution exclusion to apply there must first be another operative exclusion. Since the mechanical exclusion did not apply the pollution exclusion was unavailable to be relied on. Although arriving at the same result, the C.A. rejected the analysis of the trial judge concerning the pollution exclusion clause as applied to Zurich Insurance v. 686234 Ontario Inc. 2002 CanLII 33365 (ONCA). The Court concluded:

“I do not necessarily agree with some of the trial judge’s other conclusions regarding the policy that are premised on the Zurich case. For example, he found that the pollution exclusion should be read as applying only to ‘traditional environmental contamination’ and that the exclusion would not operate because the oil spill was contained within the building and had not spread to the natural environment outside the building. The extent to which the policy provides coverage for pollution damage depends on a reading of the pollution exclusion as well as the indemnity and exclusion provisions contained in ‘Additional Agreements of the Insurer’ at clause 4, entitled ‘Pollution Damage – Insured Premises’. It is sufficient for our purposes to note that the damage that occurred here was not excluded” (at para. 53). Per Van Rensburg J.A.

Counsel for Appellant: Martin Forget & Erin Reynolds (Forget, Smith, Morel, Toronto)

Counsel for Respondent: Robert Kostyniuk Q.C. & Galyna Pribytkova (Kostyniuk & Bruggeman, Toronto)

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Posted: Wednesday, July 23, 2014