Home Insurance Policy Exclusions

Homeowner Insurance Policies:

Exclusions…Exclusions…Exclusions…

Prepared for the Litigator  Magazine  Winter 2006

By Matt Lalande

“Insurance contracts… are sold by the insurance industry and purchased by members of the public for peace of mind. The more devastating the loss, the more the insured may be at the financial mercy of the insurer, and the more difficult it may be to challenge a wrongful refusal to pay the claim.”  

While on vacation last winter I remember reading an article in the New York Times that concerned a man that got caught in the opening of a house that is usually reserved for Santa Clause. The man found himself stuck inside the chimney for hours while firefighters used chainsaws to rip and cut through the siding of the building, then cut through the chimney’s masonry to release him.  From what I remember reading, the emergency crews tore up a good part of the house. Obviously, the sawing into the side of the house and eventually into the chimney must have done more than just damage to the walls. I am assuming that this mission must have significantly damaged the chimney masonry, leading to chimney reconstruction; inside wall repairs or at least painting; carpet replacement or cleaning, etc. This would cost at least several thousand dollars.  So who would pay for the damages caused by such an “intentional act”?  If the person trying to get into the house was a resident of the home, and was charged with vandalism, the home insurer might refuse to cover the loss based on the fact that their policyholder was criminally negligent (assuming that Santa is convicted of the charges).  Standard home policies generally do not cover damages which are caused by intentional or criminal acts.

What are the important considerations with respect to the interpretation homeowner insurance policy exclusions?  The general consensus from the case law in these types of matters seems to be that insurance contracts are construed so as to find coverage, and if the policy wording in an insurance contract is ambiguous and causes doubt, this is normally resolved in favor of the insured.  Further, our courts will generally honor the “reasonable expectations” of the policyholder[1] which, at a minimum, is that the insurance plan will provide coverage for legitimate claims on an ongoing basis.  A court should, after considering the entirety of policy, attempt to give effect to the expectations of the parties, providing those expectations are reasonable and can be discerned. The interpretation given should always advance the intention of the parties.[2]

This is premised on the assumption that insurers, being in the business of promoting, selling and underwriting risk coverage, know a great deal of what people expect from their insurance contracts, and it would be wrong to permit insurers to reap the rewards (premiums) while subtly eliminating by denial the very coverage the policyholder thinks he or she is buying. 

These concepts are not, however, wands that will magically point to “natural sympathy” insurance coverage.  Coverage cases may be difficult to win, and the arguments that plaintiff’s counsel brings to the table will almost invariably be technical in nature.

The following brief review of a sampling of the case law should assist the reader’s understanding of the way in which specific acts are approached by standard homeowner insurance policies and the courts as they interpret them.  

1)         Intentional or Criminal Acts

Snaak (Litigation Guardian of) v. Dominion of Canada General Insurance Co.[3]

Snaak dealt with an alleged ambiguity in the insurance policy.  The appeal involved an insurer’s duty to defend under a homeowner's policy. The central issue was whether a clause in a policy which excluded coverage for injuries caused by intentional or criminal acts by an insured, also excluded coverage for the alleged negligence of another insured in failing to supervise the person who caused the injuries.   On a motion for summary judgment, MacKinnon J. interpreted the policy in favour of the policy holder. It is from that disposition that the appeal was taken. The facts were as follows:  Kenneth Fleming was a 9 year old student at an elementary school in the County of Simcoe when he fell from playground equipment and broke his back. His parents warned the school administrators and teachers that precautions were necessary to prevent aggravation of the existing injury and re-injury through sports or contact with fellow students. The parents claimed that they warned school officials about Jeffrey Snaak, a fellow student who had demonstrated aggression towards Kenneth on school property.  Two years later, Snaak and a group of boys attacked Kenneth on school property. Snaak’s parent claimed that this attack caused serious and permanent injury to their son’s back.  The Flemings sued Snaak, his parents, the school and the district school board for failure to supervise. The action against Snaak’s parents was framed in negligence. The Snaaks asked Dominion Insurance[4] to defend the action and to permit them to choose their own counsel to conduct the defence.  In a section of their homeowner’s policy dealing with personal liability, one of the exclusions was with respect to “intentional or criminal acts, meaning bodily injury or property damage resulting from an intentional or criminal act by any person or any named insured who is insured by this policy”.   Dominion refused to defend on the basis that the intentional act by the son precluded coverage to all under the policy. The court agreed insofar as intentional or criminal acts were concerned.   However, Dominion was held to have had a duty to defend the Snaaks in respect of the negligence claims against them.  It was within their reasonable expectation that coverage would be extended to them for claims against them sounding in negligence, even if arising from a deliberate act of their son.  The Court found that the term “any insured” was ambiguous and capable of more than one meaning.  As one possibility precluded coverage only for the person committing the intentional act, that interpretation ought to be favored, with coverage being afforded to the remaining insureds.  Therefore, the insurer was obligated to defend the husband and wife in respect of the negligence claims against them. 

R.E. v. Wawanesa Mutual Insurance Co.[5]

In 1998, 15-year-old R.P. shot and seriously injured his 13-year-old friend, R.E., while the two boys were playing with guns in the unoccupied home of R.P.'s father.  At the time of the shooting, R.P. had been living temporarily with his aunt and uncle, C.P. and J.P for ten days. Prior to the shooting, R.P. had been living at his father’s home. He had not lived with his mother for at least six months.

R.P.'s father was not insured against this loss. The plaintiffs sued R.P.'s mother's insurer, Commercial Union, and the insurer of R.P.'s aunt and uncle, Wawanesa, for indemnification on the judgment, under s. 132 of the Insurance Act. A motion was brought by the plaintiffs, the E. family, for a determination of a question of law regarding whether R.P. was insured under the home insurance policies of his mother and/or aunt and uncle.

The court considered three issues.

1)         Was R.P. "in" or "of" the household of the insureds? The court found that when R.P. was living with his aunt and uncle, he was not part of any other functioning household. He was connected to his aunt and uncle by familial bonds and they provided guidance, encouragement and supervision. Accordingly, R.P. was a member of the household of his aunt and uncle and fell within the definition of a member of the household of the insured.

2)         Was R.P. part of his mother’s household? The evidence demonstrated the boy was estranged from his mother at the time he elected to stay with his father. For this reason, R.P. was not a member of the mother’s household at the time of the plaintiff’s injuries and he was therefore not insured under her policy.

3)         Was R.P. excluded from coverage by virtue of having engaged in an intentional or criminal act? Both insurance policies excluded coverage for any "intentional or criminal act" that produced bodily injury or property damage. The court found that R.P.’s conviction for criminal negligence was not with respect to a criminal act that is caught by the exclusion. Criminal negligence is a subset of negligence. According to the test in Non-Marine Underwriters, Lloyds of London v. Scalera, [2000] 1 S.C.R. 551 (S.C.C.), the insurer must demonstrate an intentional act plus an intent to injure in order to trigger the exclusion clause.

The court found that while pointing the firearm at the plaintiff was intentional, the discharge of the gun was accidental. Accordingly, coverage for R.P. was not excluded under the policy of the aunt and uncle.

2)         ARSON

Torchia v. Royal Sun Alliance[6]

This case addressed the doctrines of reasonable expectations and ambiguity.  Tochia represents an impressive challenge at deconstructing the ambiguities found in an insurance policy. 

Arson is an obvious exclusion in any homeowner insurance policy.  However the issue in this case was whether an innocent spouse can recover under a homeowner's policy when the loss has been caused by the other spouse's criminal act.  Mrs. Torchia was the sole owner of her family home and was the sole named insured under the homeowner's policy. Both she and her husband lived in the home.  After it burned down in February 1997, Mr. Torchia was convicted of arson.  Royal Insurance refused to pay Mrs. Torchia's claim.  Mrs. Torchia sued, alleging that the policy should be interpreted with regard to the “reasonable expectations” of the parties.  She argued that as a named insured under the policy, she could reasonably expect protection to the extent of her interest. The policy clearly provided protection against losses, including damage to her dwelling by fire. While she would expect to lose her right to recover as a result of her own criminal activity, she would not reasonably expect this result if her house were destroyed deliberately by someone else without her knowledge or involvement.[7]  It is important to note that no evidence was put forward to suggest that the wife had anything to do with her husband’s actions. The court interpreted the wording of the policy, which defined the terms "you" and "your", to mean "the person named as insured, and, while living in the same household, his or her wife or husband".  Loss or damage resulting from the intentional or criminal acts of "any person" insured by the policy was excluded from coverage.  The court interpreted the clause to exclude coverage for all persons living in the household with respect to damage resulting from criminal acts.  The court refused to find that the "reasonable expectations doctrine" has application where there was no ambiguity in the insurance contract.

3)         NEGLIGENT SUPERVISION

Hartup v. BCAA Insurance Corp[8]

This action concerned an application by the plaintiffs for a declaration that the insurer had a duty to defend them in the damage action, as well as for an order for indemnification for costs and disbursements.  Raymond New alleged that he suffered an eye injury when the Hartups' 21-year-old son Nathan negligently discharged a pellet firearm.  Raymond brought an action against the Hartups for damages based on negligence under the Occupiers Liability Act.  Nathan was charged with three firearms-related offences under the Criminal Code and pleaded guilty to a charge of contravening the storage regulations for firearms under the Firearms Act.  The insurer argued that the claim fell within the clause in the policy that excluded coverage for intentional acts. Specifically, the insurer argued that the exclusion clause was applicable for two reasons: (1)  Nathan Hartup, as an insured under his parents' policy, was convicted of a criminal offence, and (2) alternatively, that the act committed by Nathan Hartup was an intentional tort.    The Court found that the exclusion clause was not applicable because the criminal offence did not cause the injury.  The offence of which Nathan was convicted was the careless storage of a firearm, not the careless or intentional use of a firearm. Further, the evidence relating to the exclusion clause was not clear and therefore any ambiguity had to be resolved in favour of the Hartups.  Notwithstanding the reference to intentional torts in the pleadings, the insurer was required to defend the action since the negligence claim was within coverage.

4)         PROPERTY EXCLUSIONS

4081471 Canada Inc. v. Dadswell Forster Insurance Services Ltd. [9]

In 4081471 Canada Inc., the Alberta provincial court dealt with the issue of whether the insurer was entitled to rely on a clause in a policy which excluded coverage for damage caused by vandalism while the dwelling was under construction or vacant.  The plaintiffs purchased the property with a possession date of August 29. Home insurance was purchased effective the date of possession. After taking possession, the plaintiffs arranged to renovate the premises for occupancy by tenants. Vandalism on October 21 caused a fire in the premises. From the date of possession to the date of the fire on October 21, either a representative of the plaintiffs or workers were in the house everyday. The plaintiffs did not receive a copy of the policy until mid-September, and did not receive a copy of the application or policy booklet until after the date of the fire. A representative of the plaintiffs had telephoned their insurer in September to confirm coverage. She claimed not to have received notice of coverage issues regarding vandalism to vacant property.  The insurer denied coverage based on the property being vacant, relying upon an exclusion. It maintained that the plaintiff was insured against all risks of direct physical loss or damage to the property except vandalism or malicious acts or glass breakage occurring while the dwelling was under construction or vacant.  The plaintiffs argued their representative’s or their workers' daily presence on the premises satisfied the occupancy requirement of the policy.

The court referred to numerous decisions which considered the definition of "vacant" in the context of exclusion clauses. The court found that the plaintiffs clearly occupied and maintained control over the premises on a daily basis from the date of purchase of the insurance through to the date of the fire. The court noted that the insurer's risk had not in any way increased from what it would have been had the Plaintiffs or their tenants been resident in the dwelling. The court was satisfied that the property was not vacant and that the plaintiffs were entitled to recover the damages they had sustained.

5)         HOMEOWNER INSURANCE POLICIES AND MOTOR VEHICLES

Meadowview Heights Ltd. v. Revivo[10] 

In Revivo, the court considered whether Revivo’s homeowner’s insurer was obligated to defend him in an action brought by Meadowview Heights Limited Eli Auto Service arising from a fire started while he was building a “kit car”.[11]  On October 6, 1996, Revivo purchased a 1984 Pontiac Fiero to convert it into a replica of a Lamborghini. Revivo moved the vehicle to a garage known as Eli's Auto Service to complete the conversion. On December 20, 1996, Revivo purchased a 1985 Fiero motor vehicle which he intended to use for parts in the conversion of other car. The following March, he had each of the two cars on a hoist and while removing the radiator from the “parts car”, sparks from the torch ignited gasoline which caused a fire  extensive enough to damage the building and some of its contents. When the fire occurred, the parts car was nearly stripped (no electrical or engine), and the kit car did not yet have an engine installed and was accordingly incapable of being driven.  Revivo was insured under a homeowner's policy issued by State Farm which contained an exclusion for claims arising from the ownership, use or operation of any motorized land vehicle. State Farm denied coverage to Revivo with respect to any claims against Revivo arising out of the fire.

Referring to the Supreme Court’s interpretation of the provision "arising out of the use or operation of a motor vehicle” in Derkson[12], the court found that the policy did not exclude coverage in all the presenting circumstances, and the insurer was required to respond to the claim.  The insurer’s position was that a narrow interpretation should be given to the phrase "arising out of". The court noted that coverage provisions should be construed broadly and exclusion clauses narrowly. The court also noted that a person in Revivo's position would reasonably have considered it unnecessary to purchase automobile insurance to insure either the kit car or the parts car, as neither of these vehicles was useable or operable as an automobile at the time of the fire. When the fire started, the defendant was not engaged in ordinary maintenance of his car. He was working on the parts car, a vehicle that was never intended to be used again as an operating vehicle. The replica was no more than a collection of parts that would eventually become an operating motor vehicle. A reasonable person would have considered it unnecessary to purchase automobile insurance to insure against claims arising out of its use or operation as a motor vehicle. 

6)         CONCLUSION

The cases dealing with interpretation of standard homeowner insurance policies are almost countless.  The areas of challenge are never-ending[13].  Consider these few other quick summaries as additional examples:

Stolen tools from a cottage break-in

In Gebert v. HSBC Canadian Direct Insurance Inc[14], the plaintiff was a homeowner who sued his home insurer for the value of tools stolen during a cottage break-in.  The action was dismissed upon a finding that the tools were "business tools" within the meaning of an exclusion in the policy.

All Terrain Vehicles and Negligent Supervision

In Fitzgerald v. Co-Operators Insurance Co.[15] the insured homeowners applied for an order compelling their insurer to defend them in an action for personal injury. The action arose out of a collision between two all-terrain vehicles – one operated by the insured’s 12-year-old son and the other by an adult. The insurer refused to defend the insured parents against claims of negligent supervision of their son and negligent maintenance of the ATV.  The court compelled the insurer to defendant.

In considering whether to take on the interpretation of a particular home insurance policy exclusion, a starting point for your research (or at least the common consensus of case law) can be summarized as follows:

1)                  Insurance policies are drafted by insurers, not by the insured. The insurer must therefore draft the policy in clear language, highlighting any exclusions. The purpose of the clause must be considered by the court in determining its meaning. The interpretation of a clause must not strain the meaning, but it must be interpreted in light of the jurisprudence.[16] 

2)                  The onus is on the insurer seeking to exclude coverage to show that the event concerned falls within the exclusion.[17] 

3)                  Exceptions inserted in a policy for the purpose of exempting insurers from liability are construed against the insurer with the utmost strictness[18]

4)                  In construing an insurance policy, the courts must be guided by the reasonable expectations and motivations of an ordinary person in entering such contract, and the language employed in the policy is to be given its ordinary meaning, such as the average policy holder of ordinary intelligence, as well as the insurer, would attach to it;[19]

5)                  Coverage is to be construed broadly, exclusions narrowly;[20]

6)                  If the contract is drawn in an ambiguous fashion, the court should, after considering the whole policy, attempt to give effect to the expectations of the parties, if they can be discerned. The interpretation given should advance the intention of the parties. Ambiguities are to be construed against the insurer;[21]

7)                  One must always be alert to the unequal bargaining power at work in insurance contracts, and interpret such policies accordingly.