Broad Exclusions Do Not Apply Simply Because Peril Is In Chain Of Causation

LGT (105x104)

By: Lawrence G. Theall, Partner


The Ontario Court of Appeal recently held that a broad contributing cause exclusion does not apply simply because an excluded peril was included in the chain of causation. In O’Byrne v. Farmers’ Mutual Insurance Co.,[1] negligence of the insured’s tenant set in motion a chain of events ultimately leading to an oil spill after a furnace broke down. The “all risks” policy included an exclusion for “loss or damage directly or indirectly caused by, resulting from, contributed to or aggravated by: …e) centrifugal force, mechanical or electrical breakdown or derangement…” The insurer argued that since the furnace broke down, the loss was due to multiple causes including “mechanical derangement” of the furnace. The Court disagreed and looked at the evidence to determine the real cause of the loss.

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The insured owned a two-story apartment building which was insured pursuant to an “all risks” insurance policy issued by the Farmers’ Mutual Insurance Co. (“Farmers'”). An oil fired furnace was located in one of two residential apartments on the second floor. The tenant there inserted a piece of cardboard into the primary control of the furnace between two sets of contacts in order to bypass the thermostat, “presumably to keep the furnace in constant hot operation while she was away.” While the tenant was absent, there was a significant spill of heating oil from the furnace on to the apartment floor which leaked through the floorboards and saturated the main floor beam and ceiling of the building’s lower commercial units. The insured sought coverage under the policy. The insurer denied coverage for damage caused by the leaked oil. One ground for denial was reliance on the mechanical breakdown or derangement exclusion found in the “Perils Excluded” section of the policy as follows:

This Form does not insure against loss or damage directly or indirectly caused by, resulting from, contributed to or aggravated by:… (e) …mechanical or electrical breakdown or derangement in or on the “premises”…

The trial judge found on the evidence that the cause of the discharge of oil was the tenant inserting a piece of cardboard into the control panel. This, in turn, bypassed the thermostat which forced the furnace to run an excessively high temperature, causing the ignition component to fail [i.e. re-ignite] and oil to be pumped continuously without burning. Consequently coverage was provided under the policy.

Farmers’ agreed that one of the causes (i.e. the tenant’s negligence) was covered by the Policy. It argued that the other cause (i.e. the breakdown of the furnace) was “mechanical derangement” within the exclusion which should have been applied by the trial judge because the loss “was caused indirectly”, “resulted from”, “was contributed to” or “was aggravated by” a failure in the operation of the furnace due to a mechanical defect or derangement. It relied on a decision of the Supreme Court of Canada (Derksen[2]) as authority for the proposition that an exclusion can be worded to apply in case where there are multiple causes of a loss so as to exclude the entire loss.

The Court of Appeal disagreed and held that the oil spill was not a multi-causal loss. The loss in this case was not produced by two independent causes operating together, as was the case in Derksen[3]. It was caused by the tenant’s negligence (i.e. the proximate cause) that in turn led to a chain of events that culminated in the oil spill:

The fact that an element of the furnace ceased to operate does not engage the application of the mechanical exclusion. …it is not sufficient to find that some type of mechanical or electrical breakdown or derangement occurred: it is essential to examine the cause of that occurrence. The failure of a mechanical element of the furnace was not another cause of the oil damage, but rather something that occurred only after the tenant interfered with the proper operation of the furnace. Simply put, the oil damage was the result of external interference, and not a defect in the furnace.

The Court also added that, in any event, the oil damage was not the result of an internal defect in the furnace, but only occurred after the tenant interfered with its proper operation. The “mechanical derangement” exclusion consequently had no application to the facts of the case.

Footnotes

[1] 2014 ONCA 543 (C.A.).

[2] Derksen v. 539938 Ontario Ltd., 2001 SCC 72, [2001] 3 S.C.R. 398 (S.C.C.).

[3] In Derksen one independent cause was the negligent clean-up of the construction site where the operator placed a metal plate on the rear tow hook of a truck and the other independent cause was the negligent operation of the truck from which the plate flew off injuring the plaintiffs. They were independent concurrent causes because, although both needed to happen for the loss to have occurred, the operation of the vehicle was not a natural sequence or consequence of negligent site clean-up.

Lawrence G. Theall is the founding partner of Theall Group LLP. He practices commercial litigation, insurance and product liability (including class proceedings), and has appeared before all levels of the Ontario and Federal courts, as well as the superior courts of Manitoba and Alberta. He is honoured to have been selected as a Lexpert Ranked Lawyer for Product liability and selected by his peers for Best Lawyers 2017  for Insurance, as well as in  Expert Guides in the areas of Litigation, Product Liability, Insurance and Reinsurance. He is an editor for the Insurance chapter to be published in Bullen & Leake & Jacob’s 3rd Edition of Canadian Precedents of Pleadings in 2017 and a co-author of the annually updated loose-leaf text, Product Liability: Canadian Law and Practice (Canada Law Book).

For more information, visit http://www.theallgroup.com/

Photo credit: LOLren via VisualHunt.com / CC BY

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