June 21, 2022
This is the second article in our Insurance Coverage series. Other articles in this series include:
1. "The Interpretation of Exclusion Clauses in Insurance Contracts - Post Ledcor" by Carsten Jensen QC, FCIArb
3. "Insurance Contracts and Promissory Estoppel" by Robyn Graham
4. "Interpretation of the "Resulting Damage" Exception to Coverage Exclusions" by Ryan Phillips
Insurance is a contractual arrangement to ensure payment to the insured in the event of loss pursuant to a specific event (for example, a professional negligence policy) or, alternatively, with respect to any risk not specifically excluded (an “all-risk” policy). In either case, insurance policies typically only respond I the event of “fortuitous” losses.
Fortuity
The necessity of fortuity is based on the recognition that insurance contracts are commercial transactions, and it is presumed that both the insurer and insured would intend to conclude a commercially sensible arrangement. The insured cannot reasonably expect that every loss is insured, however caused, as that could result in a windfall. Similarly, the insurer cannot restrict coverage to the point where every recovery is impossible. Balance is achieved by requiring that the loss be accidental or fortuitous - meaning, that it be out of the reasonable control and expectations of both the insurer and the insured.[1]
A loss is not fortuitous if it is certain to happen; is inherent in the nature of the subject matter of insurance; is comprised of ordinary wear and tear or inherent defects; or if it is deliberately engineered by the insured.[2] To establish that a loss is fortuitous, the insured must demonstrate an accident caused by the intervention of negligence, or adverse or unusual conditions without which the loss would not have occurred.[3]
CCR Fishing Ltd v British Reserve Insurance Co.
For example, in CCR Fishing Ltd v British Reserve Insurance Co., (1990), [1990] 1 S.C.R. 814 (SCC) ["CCR"], the fishing vessel “LaPointe” sank when she was laid up at a safe berth in Vancouver Harbour from April 1981 to July 1982. The sinking occurred suddenly as a result of the ingress of sea water due to two causes: (1) the failure of cap screws due to corrosion which permitted sea water to enter the engine room; and (2) the failure to close a valve which would have stopped the ingress of the water. The policy at the time provided coverage for “perils of the sea” which was defined as referring “only to fortuitous accidents or casualties of the sea. It does not include the ordinary action of the winds and waves”.[4] In this case, it was found that the proximate cause of the sinking was the negligent installation of the cap screws which caused water to enter the ship. The Court held that several factors combined to result in a loss at sea. The decision also noted that establishing whether any one of the factors is fortuitous is to show that it was an accident caused by the intervention of negligence, or adverse or unusual conditions without which the loss would not have occurred.[5]
The Supreme Court summarized the decision in stating:
…in determining whether a loss falls within the policy, the cause of the loss should be determined by looking at all the events which gave rise to it and asking whether it is fortuitous in the sense that the accident would not have occurred “but for” or without an act or event which is fortuitous in the sense that it was not to be expected in the ordinary course of things. This approach is preferable, in my view, to the artificial exercise of segregating the causes of the loss with a view to labelling one as proximate and the others as remote, an exercise on which the best of minds may differ.[6]
Triple Five Corporation Ltd v Simco & Erie Group
In Triple Five Corporation Ltd v Simco & Erie Group, 1997 ABCA 92 ["Triple Five"], interpreted the decision in CCR on the basis that McLachlin J (as she then was) had not changed the law in Canada such that an insurer is prevented from denying coverage if one event in the chain of causation was fortuitous, but an exclusion otherwise operates.[7] The Court noted that “[w]e understand her merely to say that, for the purpose of that policy, the term “inherent vice”, whatever it means, does not include the results of identifiably negligent acts”.[8]
The Court elaborated further with respect to CCR’s emphasis on the final negligence as being fortuitous, to state “[a]lthough [McLachlin J] did not explicitly state a definition, this observation suggests that the test for fortuitousness may include a question about what the insured knew, or perhaps what a reasonably prudent insured ought to know, as well as a question about the inevitability of the loss. After all, one can fairly say that a result is not inevitable if someone knows of the peril, or ought to know of it, and takes steps to prevent the result”.[9]
To give greater context to the above cases, there has been a shift in Canadian case law towards a subjective test for fortuity. Specifically, if the insured was actually not aware of the defect or inherent vice in the insured property, or if the damage was actually unanticipated or unforeseen, the loss was fortuitous from the standpoint of the insured and, therefore, within coverage.
In Progressive Homes, the Supreme Court of Canada stated:
Fortuity is built into the definition of “accident” itself as the insured is required to show that the damage was “neither expected nor intended from the standpoint of the Insured”. This definition is consistent with this Court’s core understanding of “accident”: “an unlooked-for mishap or an untoward event which is not expected or designed”. When an event is unlooked for, unexpected or not intended by the insured, it is fortuitous. This is a requirement of coverage; therefore, it cannot be said that this offends any basic assumption of insurance law.[10] [authorities omitted]
By requiring fortuity, insurers will not be obliged to pay and the insured will not be paid other than in cases in which damages are a virtual certainty to occur at any moment, unless averting action is taken.[11] Without more, there is no coverage for intentional actions of an insured.[12]
Robyn Graham is an associate at JSS Barristers. Click here for Robyn's bio.
[1] Brennan v Economical Mutual Insurance Co., [2000] OJ No 4531 (QL), 51 OR (3d) 326 (ON SC), at para 16; 1422253 Ontario Limited v. Coachman Insurance Co., 2013 ONSC 5740; Inland Concrete Limited v. Commonwealth Insurance Company, 2010, 2010 ABQB 600.
[2] Non-Marine Underwriters, Lloyd's London v Scalera (2000), [2000] 1 SCR 551 (SCC); CCR Fishing Ltd. v Tomenson Inc. (1990), [1990] 1 SCR 814 (SCC) ["CCR"].
[3] CCR.
[4] CCR at paras 1-4.
[5] CCR at para 26.
[6] CCR at para 33.
[7] Note: the case of Derksen v 539938 Ontario Ltd, 2001 SCC 72 states that if an insurer wishes to exclude coverage for concurrent losses (one of which is covered and the other which is excluded), it can use appropriate language under the policy to do so. One such phrase would include “caused directly or indirectly”.
[8] Triple Five Corporation Ltd v Simco & Erie Group, 1997 ABCA 92 at para 23 ["Triple Five"].
[9] Triple Five at para 21 (emphasis added).
[10] Progressive Homes Ltd v Lombard General Insurance Co. of Canada, 2010 SCC 33, at para 47 ["Progressive Homes"].
[11] Portage at para 34.
[12] Non-Marine Underwriters, Lloyds London v. Scalera, 2000 SCC 24 ["Scalera"] at para. 68.
Please note that JSS Barristers insights are provided for informational purposes only. They are not intended as legal advice or a legal opinion. Please contact authors or JSS Barristers if you would like to obtain legal advice on this or other legal issues.