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AAD and CTL
Published in the January 2010 issue of Litigation Notes - View Article
In a claim by an insured against its insurers and broker, the Supreme Court of British Columbia considers the applicability of an Annual Aggregate Deductible to the Constructive Total Loss of a vessel.
The plaintiff in the recent case of More Marine Ltd. v. Axa Pacific Insurance Company is a commercial marine operation that owned a number of vessels. It insured these vessels under Hull & Machinery policies with Axa Pacific Insurance Company and Continental Insurance Company. It also had a long-term relationship with its broker Aon Reed Stenhouse Inc., who was responsible for placing its marine insurance. In June of 2007 one of the plaintiff’s vessels sank and a dispute arose over the applicability of a deductible.
Prior to More Marine being underwritten by Axa and Continental, its Hull & Machinery policy contained a Canadian Hulls (Pacific) clause which indicated that More Marine’s deductible did not apply in certain circumstances. One of these exceptions was when a covered vessel was deemed a constructive total loss. In fact, while this coverage was in place, More Marine did suffer a constructive total loss and was fully indemnified, without the application of any deductible. When it suffered another constructive total loss of a vessel in June of 2007 and More Marine’s president found out that a $250,000 deductible applied, he was shocked.
In 2002 an annual aggregate deductible (“AAD”), as well as a $10,000 per claim deductible had been added to More Marine’s policies. In 2003 and 2004 More Marine, with the assistance of Aon, was in the process of consolidating the different policies covering More Marine’s vessels that were running in tandem. By this time a $100,000 AAD was in place as a mechanism to reduce More Marine’s premiums. In essence, by way of this deductible, More Marine was agreeing to absorb the first $100,000 of its claims each year. In an effort to clarify the existing policy terms, as the policies were being rolled together, More Marine’s broker sought to clarify the wording of the AAD with the underwriters. It appeared from the wording of the earlier clauses that the AAD would apply to constructive total loss claims, although, arguably this was not express in the policy.
The broker, who was less than familiar with AAD wording, relied on a precedent. This precedent wording was sent to the underwriters for their review. This wording excluded the application of the AAD to constructive total loss claims, meaning the $100,000 deductible did not apply to these claims. The underwriters agreed to this new wording. The broker subsequently redrafted the endorsement using a different precedent, without realizing that, not only was the monetary value for the AAD in this precedent $375,000, instead of $100,000, but the wording indicated that the AAD did apply to vessels deemed to be a constructive total loss. As the broker was unfamiliar with these clauses, she did not turn her mind to the difference. The broker sent this latter endorsement to her superior at Aon for approval, which was granted. This endorsement was then sent to the underwriters who agreed to the amendment and signed the endorsement. Sometime later, someone at Aon, other than the broker, noticed that the amount of the AAD should be amended to $100,000 and it was so amended.
In January of 2005, the broker was able to negotiate a reduction in the amount of the AAD, as well as its premiums. Shortly thereafter the endorsement was sent to More Marine. The Court noted that this was, at the latest, when More Marine knew, or ought to have known, the AAD applied to constructive total loss claims.
The following year More Marine’s AAD was reviewed and raised to $150,000, with no other changes being made. Subsequently, given Marine More’s claims history, the broker was required to negotiate this provision further with Axa’s and Continental’s underwriters. Ultimately, the broker drafted an AAD clause to be included in the policy rather than as an endorsement. The provision provided that there would be a $10,000 per claim deductible, and a $250,000 AAD. The wording of the provision specifically excluded sue and labour, salvage charges and general averages from the AAD, but not constructive total losses. The wording that was eventually agreed upon expressly stated that the AAD applied to constructive total losses. This policy was concluded as between Aon and the underwriters in January of 2007. A copy of the signed policy was subsequently sent to More Marine. The Court found that by this time enough attention had been paid to the wording of the AAD, that the parties were well aware of its contents and effect. This was the wording in place when More Marine’s vessel sank in June of 2007.
More Marine first sought to have the insurance contract rectified, to reflect what was purportedly agreed to, namely that the AAD did not apply to constructive total losses. More Marine argued that the first precedent sent to the underwriters in 2004, excluded constructive total losses from the AAD, and the underwriters’ agreement to those terms, constituted offer and acceptance. The Court rejected this argument and held this initial exchange was merely a preliminary step in reaching an agreement. Notwithstanding this, the Court further commented on More Marine’s argument for rectification. The Court accepted that based on More Marine’s claims history, by 2006 the underwriters would not have allowed constructive total losses to remain outside the scope of the AAD. Given this, and the fact that the policy was clear and unambiguous, the Court held that the policy reflected what the parties agreed to and there was nothing to rectify.
More Marine also argued that the inclusion of the AAD, and more specifically inclusion of constructive total losses within the ambit of the AAD, amounted to a unilateral change of the policy for which no consideration flowed to More Marine. As such, the plaintiff suggested, this amendment to More Marine’s coverage should not be valid. The Court held the coverage was not reduced, merely clarified, and that both parties benefited from this increased clarity of terms. As a result, the Court found that the $250,000 deductible did apply to More Marine’s claim.
Having found the deductible applied, More Marine’s alternative claim was considered. More Marine argued that Aon was negligent in the following respects: it failed to obtain the best coverage available; it failed to adequately warn More Marine of the material change in its policy; it failed to advise More Marine that the underwriters agreed to an AAD excluding constructive total losses (in 2004); and it failed to carry forward the terms of that agreement into future policies.
The parties were criticized for focusing on the events of the e-mail exchange between the broker and the underwriters in late 2004, early 2005 when the policies were being consolidated. The Court indicated that the inclusion of the very first AAD clause in 2002 was a material change in coverage that the broker should have discussed with the insured.
The Court indicated that the broker was careless about the content of the wording of the endorsements in 2004 and that she relied too heavily on precedent. The broker’s failure to discuss the consequences of including constructive total losses in the scope of the AAD with the insured in 2004 was also criticized. However, ultimately, the Court held that there was no causal link between the broker’s missteps in 2004 and the insured’s losses in 2007. The decision notes, “Although I accept that Aon should have communicated with More Marine about its negotiation with the underwriters in late 2004 and January 2005, I am not persuaded that More Marine suffered any loss as a result.” This appears to be based on the Court’s belief that as of the 2006 renegotiation of More Marine’s policy, no underwriter would have issued a policy to More Marine where constructive total losses were excluded from the AAD. More Marine did not lead evidence that it could have obtained such a policy elsewhere and as result was unable to prove its loss was related to any lack of disclosure or breach of duty owed by Aon.
More Marine Ltd. v. Axa Pacific Insurance Company, 2010 BCSC 88 (CanLII)