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“Derangement” is an Odd Word in Insurance
Published in the May 2008 issue of Litigation Notes - View Article
Synopsis: Ontario Court of Appeal considers “changes of temperature” and “mechanical or electrical breakdown or derangement” exclusions in insured’s claim for damages sustained in a power blackout
Caneast Foods Limited (“Caneast”) is a manufacture of pickles. In August of 2003 a regional power blackout interrupted the supply of electricity to Caneast’s refrigeration and pickle processing equipment for a period of 27 hours. Caneast suffered spoilage of a large quantity of pickles and cucumbers and sought indemnification under an all risks insurance policy issued by Lombard General Insurance Company of Canada (“Lombard”).
Lombard denied coverage, relying on two exclusions in the policy. One exclusion related to “changes of temperature” and the other related to “mechanical or electrical breakdown or derangement in or on the premises”.
With respect to the exclusion relating to changes of temperature, the Court concluded that it did not apply by reason of an exception to the exclusion which stated that it would not apply “… to loss or damage caused directly by a peril insured and not otherwise excluded under this form”. The Court concluded that the direct cause of the loss was the blackout which was a peril insured and not otherwise excluded under the policy and consequently decided that the changes of temperature exclusion did not apply.
With respect to the “mechanical or electrical breakdown or derangement” exclusion, the Court concluded firstly that there was not a “mechanical or electrical breakdown”. In the Court’s opinion a breakdown occurs where there is a “failure in the operation of a piece of equipment due to some mechanical or electrical defect in some part or parts of the equipment.” Where a machine ceases to operate because of an interruption in its power supply due to a regional blackout, a mechanical or electrical breakdown of the machine does not occur.
Counsel for Lombard, nevertheless, argued that the blackout constituted a “derangement”. She relied on the dictionary definition which defines derangement” as a “disturbance of the normal state, working, operation, or functioning of” a machine. Counsel for Caneast relied on the same definition. The Court stated that there has been little judicial consideration of the term “derangement” and went on to say that it is a word which is more commonly used in reference to mental health or bodily function and is “an odd word to be used in an exclusion clause in an insurance policy”. The Court considered Lombard’s position that there was a “derangement” if the power supply was not functioning properly and acknowledged that this was probably correct but went on to say:
“However, that is not what happened here... the electrical supply was not disturbed by the blackout. There was no electrical supply… [and]...as a result, the refrigeration equipment failed to operate. It follows that the Motion Judge did not err in giving “derangement” its plain and ordinary meaning and in finding that the electrical derangement exclusion did not apply.”
Caneast Foods Limited v. Lombard General Insurance
Company of Canada 2008 ONCA 368 (CanLII)