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Settlement Exclusion Considered
Published in the February 2010 issue of Litigation Notes - View Article
The Alberta Court of Appeal concludes that a “Settlement” exclusion in an all risks insurance policy applies only to settlement as a result of naturally occurring events.
The Alberta Court of Appeal recently had to consider the application of a “settlement” exclusion in an all risks insurance policy. The Engle Estate owns a commercial building in Calgary, Alberta which was insured by an all risks insurance policy issued by Aviva Insurance Company of Canada (“Aviva”). The building was in good repair until a high-rise condominium project was built next door. The process of excavating for that project caused vibration and shaking which resulted in massive cracks in the floors, walls and ceilings of the Engle building. Damages were estimated to be in the range of $1 million.
Engle sought coverage under the Aviva policy, but Aviva invoked an exclusion which provided that the policy did not insure against loss or damage caused directly or indirectly by “settling, expansion, contraction, moving, shifting or cracking unless concurrently and directly caused by a peril not otherwise excluded…”.
At first instance, the Court found that the settlement exclusion clause applied only to damages caused by natural forces, stating that it “clearly excludes settlement due to natural causes only and does not exclude settlement which results from non-natural causes”. In the alternative, the motions judge found the settlement exclusion clause to be ambiguous and applied the contra proferentem rule to limit its application to naturally occurring events.
Aviva appealed to the Alberta Court of Appeal and cited a number of Canadian cases which purportedly established that settlement exclusion clauses apply to exclude settlement damages, however caused. Engle, on the other hand, claimed that all of those cases could be distinguished because they almost all involved damages which had occurred naturally. Engle relied primarily on American case law in support of its case.
Aviva also argued that most settlement exclusion clauses do not contain the words “caused by” and that consequently the prevailing view is that settlement exclusion clauses exclude coverage for settlement without regard to the cause. However in this case the exclusion clause explicitly included the words “caused by” and was therefore distinct from the exclusion clauses considered in most of the cases referred to by Aviva. From the standpoint of this writer, this point was somewhat irrelevant. The issue was not whether the damages were caused by the settlement but rather whether the settlement was caused by a fortuitous event or a naturally occurring event.
The Court of Appeal applied the rules for the interpretation of insurance contracts, specifically:
“(1) The court must search for an interpretation from the whole of the contract that promotes the parties’ true intent at the time of entering into the contract.
(2) Where words are capable of two or more meanings, the meaning that is more reasonable in promoting the intention of the parties will be selected.
(3) Ambiguities will be construed against the insurer, often by use of the contra proferentem rule.
(4) An interpretation that will result in either a windfall to the insurer or an unanticipated recovery to the insured is to be avoided.
(5) Coverage provisions should be construed broadly and exclusion clauses narrowly.
(6) The desirability, at least where the policy is ambiguous, of giving effect to the reasonable expectations of the parties.”
The Court concluded that the wording of the exclusion clause was instructive as to the parties’ intent. The terms listed, in addition to “settling”, included “expansion, contraction, moving, shifting or cracking” which suggested that the clause was intended to exclude damages for “passive, gradual, naturally occurring events”.
Aviva argued that the use of the words “directly or indirectly” compelled a finding that the exclusion clause applied to both fortuitous and naturally occurring settlement. The Court however pointed to the use of the terms “directly or indirectly” elsewhere in the Policy, including another exclusion for loss or damage caused “directly or indirectly… by flood, including waves, tides, tidal waves, tsunamis or the rising of, the breaking out or the overflow of, any body of water, whether natural or man-made…”. The Court pointed out that the use of the words “directly or indirectly” in the above exclusion clause did not necessarily demonstrate an intent that the exclusion apply to both fortuitous and natural events. Rather, it demonstrated that the drafters “… were able to reflect an intent to exclude both natural and fortuitous events by employing precise language, such as ‘whether natural or man-made’ In contrast, the settlement exclusion clause makes no attempt to specify that damage arising from settling, whether natural or man-made, was intended to be excluded”.
The Court went on to say:
“Indeed, the notion that settlement exclusion clauses should exclude all settlement no matter how it occurred could lead to nonsensical results. To illustrate, suppose that during the excavation process the excavator inadvertently hit a foundation wall, causing extensive settlement-type damage. According to the appellant, the exclusion clause would apply. However, if the same accidental blow to the foundation caused the collapse of a wall of the building, the appellant would extend coverage because the damage was not caused by settling. Yet, the only difference between these scenarios is the type of damage, not whether it was due to a natural or fortuitous occurrence. In my opinion, the insurer’s position that coverage is provided if the building collapses, but not if it merely settles as a result of a fortuitous event, is unsound”
Aviva’s appeal was dismissed.
Engle Estate v. Aviva Insurance Company of Canada, 2010 ABCA 18 (CanLII)