IN THE SUPREME COURT OF NOVA SCOTIA
Citation: Lunenburg Industrial Foundry and Engineering Ltd. v. Commercial Union Assurance Company, 2005 NSSC 23
Date: 20050211
Docket: S.H. No. 220046
Registry: Halifax
Between:
Lunenburg Industrial Foundry and Engineering Limited,
Royal and Sun Alliance Insurance Company of Canada,
Kingsway General Insurance Company, Sovereign
General Insurance Company and Markel Insurance Company
Plaintiffs
v.
Commercial Union Assurance Company of Canada and AON Reed
Stenhouse Inc.
Defendants
Judge: The Honourable Justice Gregory M. Warner
Heard: November 30 to December 1,2004, in Halifax, Nova Scotia
Counsel: W. Augustus Richardson, counsel for Royal & Sun Alliance Insurance Company of Canada & all other insurance plaintiffs
Hugh Wright & David J. Demirkan, counsel for Commercial Union assurance Company of Canada
Nancy G. Rubin & Colin D. Piercey, counsel for AON Reed Stenhouse Inc.
Peter Kinley, President of Lunenburg Industrial Foundry
& Engineering Ltd.- self-represented
By the Court:
INTRODUCTION
[1] On a cold day in February, 1998, the fishing trawler, Cape Blomidon, was being drydocked at Lunenburg Foundry's shipyard. When the vessel had been hauled out of the sea and almost to the end of the 1600 ton marine railway, the chain hauling the cradle on which the vessel rested suddenly came off its sprocket in the hauling house; the cradle sped out of control back down the railway. Efforts to stop the runaway cradle failed. It ended up out in the harbour with the vessel. The marine railway suffered significant damage and as a result was out of operation for six months.
[2] Lunenburg Industrial Foundry and Engineering Limited (called Lunenburg) through its broker, AON Reed Stenhouse Inc. (called AON) was insured under a Commercial Collective Policy (called Policy). The Policy coverage included:
(a) a broad-form all-risk property cover (called Property Policy)
subscribed to by the defendant, Commercial Union (called CU) to the extent of fifty percent and by Royal Insurance and four other insurers (collectively
called Royal) for the remaining fifty percent;
(b) the Policy included four other coverages for which CU alone was the insurer. Of them the one relevant to this action was the Boiler and Machinery Policy, also called “Machinery Breakdown Policy”,
(called B&M Policy). The B&M Policy was the only policy with business interruption coverage. The other coverages were an Office Contents Policy, a Small Computer or Electronic Data Processing Policy, and a Commercial General Liability Policy.
[3] The insurers paid Lunenburg's property losses of about 1.7 million dollars under the Property Policy . Royal claims that CU under the B&M Policy is liable for part of the loss. CU has denied liability to Royal for the overlapping coverage, and to Lunenburg for the business interruption claim in the B&M Policy.
[4] In 1999 Royal sued CU to recover $386,536.00 of the amount paid by Royal to Lunenburg that Royal claims should have been paid under the B&M Policy. In 2000, Lunenburg sued CU under the B&M Policy for its business interruption loss in the amount of $250,000.00. Alternatively, it claims against AON for negligence if CU’s defence to the claim for business interruption loss is successful.
[5] The actions were consolidated and this portion of the trial is limited to Royal’s action against CU and the portion of Lunenburg’s action against CU (that is, excluding Lunenburg's action for negligence against AON).Its purpose is to interpret the insurance policies and the interplay between them. The issue is whether the loss to the marine railway was covered under the B&M Policy. The answer depends upon answers to the following questions:
1. Is a marine railway an object, and if it is an object, is it excluded as a “hoist” or “conveyor”?
2. Was the incident an “accident” ?
3. Should the B&M Policy be interpreted so as to avoid overlapping coverage with the Property Policy?
POLICY WORDING
Property Policy
[6] The Property Policy includes the following provisions:
(a) It covers four locations:
(i) Location 1 - Foundry buildings at 55 Falkland Street, Lunenburg;
(ii) Location 2 - Industrial buildings and marine railways and related facilities located off and at the end of Montague Street, Lunenburg (which evidence showed is also called Water Street)
(iii) Location 3 - Residence next to foundry at 49 Falkland Street, Lunenburg, and
(iv) Location 4 - Lunenburg dairy building.
(b) Endorsement # 1 reads:
The all property (blanket) limit includes marine railways, wharfs, contractor's and mobile equipment usual to the business of the insured and situate at the following locations: (it lists the above locations).
(c) The indemnity agreement reads in part as follows:
Property Insured - This Policy insures Building(s), Equipment and Stock as herein described and defined but for only those items for which an amount of insurance is specified on the Declarations Page . . .
(d) The “Schedule of Values” includes at Location 2 as Item 4: “1600 Ton Marine Railway No. C181" - at replacement cost - $1,000,000.
(e) Definitions
2. “Building” means the building(s) described on the Declarations Page and includes
a. fixed structures pertaining to the building(s) and located on the premises;
b. additions and extensions communicating and in contact therewith;
c. permanent fittings and fixtures attached to and forming part thereof;
d. materials, equipment and supplies on the premises for maintenance of, and normal repairs and minor alterations to the building or for building services;
e. (Not relevant to this action)
3. “Equipment” means
a. generally all contents usual to the Insured's business including furniture, furnishings, fittings, fixtures, machinery, tools, utensils and appliances other than building or stock as defined herein;
b. similar property belonging to others which the insured is under obligation to keep insured or for which he is legally liable;
c. (Not relevant to this action)
(f) PERILS INSURED
All risks of direct physical loss or damage to the property insured except as herein excluded
B&M Policy
[7] The B&M Policy consists of a Declaration Page and Machinery Breakdown Policy.
(a) The Declaration Page states that coverage is “Standard Comprehensive”. Section I covers physical damage to $2,000,000.00 on a replacement cost basis. The space after the printed words “specified property:” was left blank. Section II of the declaration page provides for Business Interruption coverage; it states that it covers business income - Actual Loss Sustained - to a limit of $250,000.00 per accident.
(b) The Schedule of Locations includes the same locations as the Property Policy.
(c) The Declaration Page refers to the policy as Form # 925(6/95) although the actual policy attached is titled “Machinery Breakdown Policy” and described as Form # 925(4/90). The parties agreed at trial that the terms of Form 925 (4/90) are the same as Form 925(6/95) for all purposes of this trial. Policy 925(4/90) includes an indemnity agreement that reads in part as follows:
In the event of an Accident occurring during the policy period to an insured Object, the Insurer agrees to indemnify the Insured for loss to the property to the Insured . . . directly damaged by such Accident . . .”
(d) Clause 4 of the definitions section defines Object as follows:
Object means any equipment or apparatus described below, subject to the exclusion specified herein . . .
A. (Not relevant to this action),
B. Any mechanical or electrical machine or apparatus which generates, transmits or utilizes mechanical or electrical power, but Object shall not include any:
3. elevator, escalator, conveyor, crane, hoist, power shovel, dragline or excavator, but not excluding any electrical equipment mounted on or forming a party of any such machine or apparatus;
(Exclusions 1, 2 and 4 - 10 inclusive are not relevant to this action).
(e) Clause 5 of the definitions section defines Accident as follows:
accident means a sudden and accidental breakdown of the Object or a part thereof, which manifests itself at the time of its occurrence by physical damage to the Object that necessitates repair or replacement of the Object or part thereof, . . ., but Accident shall not mean:
(a) depletion, deterioration, corrosion, or erosion of materials;
(b) wear and tear;
(f) the breakdown of any structure or foundation supporting the Object or any part thereof;
(The other subsections are not relevant to this action)
(f) Clauses 7 and 8 of the Conditions & Limitations section of the policy read as follows:
7. Other Insurance. Any loss to which both this insurance and other insurance carried by the Insured apply shall be a joint loss and the Insurer shall be liable under this policy only for the proportion of the said joint loss that the amount which would have been payable under this policy on account of such joint loss, had no other insurance existed, bears to the combined total of the said amount and the amount which would have been payable under all other insurance on account of said joint loss, had there been no insurance under this policy.
8. Disputed Loss Agreement. In the event a recoverable loss exists, should a dispute arise between Property and Boiler & Machinery Insurers as to which insurer is liable or as to the proportion of the loss to be paid by each insurer, the IBC Agreement “respecting disputed losses between Property Insurance and Boiler & Machinery Insurance Policies” shall, at the Insured's option, apply, providing the Property Insurers are signatories to the IBC Agreement.
LUNENBURG
[8] Lunenburg originated as a foundry in the 1800s and has continued as a family enterprise to the present. It operates at two sites on Lunenburg Harbour, and primarily serves the fishing industry.
[9] From its premises on Falkland Street it manufactures and distributes a wide variety of industrial and marine equipment including:
(a) sales and service of engines, transmissions, pumps, controls and hydraulics;
(b) manufacture and repair in its machine shop;
(c) making castings in its foundry;
(d) manufacture and repair of propellers.
[10] Lunenburg's website (Exhibit 8) describes succinctly the second facility as follows:
The Shipbuilding & Repair Facility is located on the eastern edge of Lunenburg Harbour. Three marine railways, a mobile boat hoist, and a machine shop are located at this site. . . .
Marine Railways - Capacities:
Length Beam Max. Draft Rated Capacity
Cradle 1 220' 45' 16' 1,600 tons
Cradle 2 180' 40' 14' 1,200 tons
Cradle 3 120' 27' 12' 430 tons
Boat Hoist 85' 25' 12' 75 tons
The yard is serviced with electricity, compressed air, water and phone.
Shipbuilding & Repair Capabilities:
. Hull construction and fabrication;
. Painting and Sandblasting;
. Steel Plate and Structural Alterations;
. Fixed and Controllable Pitch Propeller Repair and Service;
. Engine Repair and Service;
. Diesel Injector Service;
. Electrical Equipment; Service; Installation and Support;
. Hydraulic Systems Repair;
. High Quality Welding;
. Advanced Electric Arc, MIG, TIG, Nonferous Brazing and Welding, Stainless Steel work, Submerged Arc;
. Metalizing and Resurfacing
[11] The ship repair work described above requires that vessels be drydocked.
[12] The capacity of the dry docks is measured by the weight or displacement of vessels that can be safely placed on them; at Lunenburg they were 75 tons (mobile hoist), 430 tons, 1200 tons and 1600 tons.
[13] At the time of the accident the 430 ton marine railway was not in operation. Occasionally a crane or boom truck was used to lift small vessels out of the water but in 1998 the 1200 ton and 1600 ton railways were critical to the operations of the shipyard.
[14] This is in contrast with the Falkland Street Foundry/Office/Sales Facility. Those facilities were not essential to the ship repair operation; if those facilities were damaged, their functions could be carried out from alternate temporary locations without any significant disruption of the business operations of Lunenburg, including ship repairs.
[15] Historically (until the early 1990s) approximately half of Lunenburg's revenue came from its manufacturing and sales operations carried on from the Falkland Street facility and the remaining revenue came from the ship repair facility located about a mile away. This changed in the 1990s with the ship repair becoming much more significant. By the late 1990s and until the present it accounts for approximately 80% of Lunenburg's annual revenues. This factor, combined with the fact that ship repairs could not be carried out without the 1200 and 1600 ton marine railways being operational, explains Lunenburg's desire to have business interruption insurance for the marine railways but not for the Falkland Street premises.
[16] The four principal types of dry docks are described in the Dockmaster’s Manual issued by Crandall Dry Dock Engineers Inc. as: the basin or graving dry dock, the marine railway, the floating dry dock and the vertical lift dry dock. A brief description of each is as follows:
(a) The basin or graving dry dock is essentially a basin cut into land with one end open to the sea; the open end is sealed off by a gate through which a vessel passes into the basin. When the gate is closed, water is drained or pumped out of the basin.
(b) A marine railway consists essentially of an incline track or railway extending from an on-land work area down into the sea. A cradle on rollers sits on the track. A vessel is floated over the cradle to which it is then secured. The cradle is then hauled out of the sea and up to the work area by means of a chain attached to the land end of the cradle, which is in turn operated by a motor and gears situate in a hauling house on land.
(c) A floating dry dock is essentially a floating container or vessel sitting in the water. Through an opening in its stern, a ship is driven into the container or vessel; the stern is closed and water pumped out of the container causing it to float up as a result of which the ship being worked on is out of water. The container (vessel) is stabilized by being secured to a row of pilings.
(d) A vertical lift dry dock consists of a series of hoists or jacks on each side of a platform sitting in water between two wharfs or piers. The vessel is driven over the platform and secured. The platform is raised vertically out of the water by the hoists or jacks attached to chains or cables.
GENERAL PRINCIPLES FOR INTERPRETING INSURANCE CONTRACTS
[17] The general rules of interpretation applying to all contracts apply to insurance contracts. The Supreme Court of Canada in Manulife Bank of Canada v. Conlin [1996] 3 S.C.R. 413 at paragraph 79 says in part:
The cardinal interpretative rule of contract is that the court should give effect to the intention of the parties as expressed in their written document. As Estey, J. said in Consolidated Bathurst “in all contacts effect must be given to the intention of the parties to be gathered from the words they have used”.
The court went on
The court will deviate from the plain meaning of the words only if the literal interpretation of the contractual language would lead either to an absurd result or to a result which is plainly repugnant to the intention of the parties.
[18] In Eli Lilly & Co v. Novopharm Ltd [1998] 2 S.C.R. 129, in paragraphs 54 - 56 the Court said in part:
The contractual intent of the parties is to be determined by reference to the words they used in drafting the document possibly read in light of the surrounding circumstances which were prevalent at the time. Evidence of one party's subjective intention has no independent place in this determination.
Indeed it is unnecessary to consider any extrinsic evidence at all when the document is clear and unambiguous on its face. . . .
When there is no ambiguity in the wording of the document, the notion in Consolidated Bathurst that the interpretation which produces “fair result” or a “sensible commercial result” should be adopted is not determinative. Admittedly, it would be absurd to adopt an interpretation which is clearly inconsistent with the commercial interests of the parties. If the goal is to ascertain that a true contractual intent, however to interpret a plainly worded document in accordance with the true contractual intent of the parties is not difficult if it is presumed that the parties intended the legal consequences of the words.
[19] The pretrial memorandums summarize many of the special rules ( or more accurately aids to interpretation) that have developed respecting insurance contracts. Several texts set out and review the general principles including Insurance Law In Canada (Toronto: Carswell, Looseleaf) by Craig Brown in chapter 8; Annotated Commercial General Liability Policy by M.G. Lichty and M.B. Snowden (Looseleaf, Canada Law Book) in chapter 2; Liability Insurance Law In Canada, 3rd edition, by Gordon Hilliker (2001, Butterworths) in chapter 2; MacGillivray on Insurance Law, 9th edition, by Nicholas Legh-Jones et al (1997, Sweet & Maxwell) in chapter 11; and The Comprehensive General Liability Policy: The Insuring Intent by Heather A. Sanderson (1990, Butterworths) in chapter 2.
[20] To paraphrase from Chapter 8 of Brown’s text, the rules of interpretation are easy to state. A Court should give effect to the intention of the parties - the insurer and the insured. If the words used are not clear enough to disclose what this joint intention is, the words are given a meaning which, if reasonable, favours the insured. This is considered fair either because the language was chosen by the insurer or because the meaning adopted by the court achieves a result which the parties could reasonably expect.
[21] The parties’ intention is the first point of reference. The Supreme Court of Canada in Consolidated Bathurst Export Ltd v. Mutual Boiler & Machinery Insurance Company, [1980] 1 S.C.R. 888 at page 901 says:
. . . the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract.
[22] It is often inaccurate to speak of a common intention in relation to many of the terms of an insurance contract. The insured has one or two conversations with a broker or agent. Usually only the basic terms such as premium and deductibles and a few points of coverage are discussed. The balance of the policy, which the insured usually sees for the first time after the contract has come into force, is the insurer's standard form, the details of which are never in the insured's mind. For this reason there are two broad types of cases: those where the issue turns genuinely on what the parties intended, and those where intention cannot realistically be found. Most fall into the second category and for that reason Courts normally find it easy to conclude that an insured intended that there was some cover and that words in the contract not have the effect of allowing the insurer to avoid paying any claim.
[23] The literal or plain meaning approach may simply be applying the “intention” approach by another name; that is, the words used are so clear that the parties must surely have meant to achieve the meaning they so clearly used. The literal approach is subordinate to the intention of the parties approach in the sense that words in policies should not be given their literal meaning if to do so flies in the face of the parties' intention as gleaned from the document as a whole. In Consolidated Bathurst the Court said:
[The] literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted.
. . . [T]he courts should be loath to support a construction which would either enable the insurer to pocket the premium without risk or the insured to achieve a recovery which can neither be sensibly sought nor anticipated at the time of the contract.
[24] This quote recognizes that in most insurance cases the parties’ actual intention is no more than a fiction, and courts, therefore, when talking about avoiding commercially surprising results, are assuming a meaning that the parties would have intended if they had turned their minds to it. This has led to the general principle that coverage provisions are interpreted broadly while exclusions are interpreted narrowly. See Indemnity Insurance Co. v. Excel Cleaning Service, [1954] S.C.R. 169; Reid Crowther & Partners Ltd v. Simcoe & Erie General Insurance Co. [1993] 1 S.C.R. 252; Sansalone v. Wawanesa Mutual Insurance Co. [2000] 1 S.C.R. 551; Canadian Reform Conservative Alliance v. Western Union Insurance Company 2001 CarswellBC 700 (BCCA); and Pictou County Farmers' Mutual Fire Insurance Co. v. Williams, 2001 NSCA 33.
[25] Brown writes that, when an ambiguity arises, the impasse is usually resolved “by resort to some notion of fairness” and “by and large, resolved in favour of the insured” on the basis of the theories of contra proferentum or “ reasonable expectation”. Ambiguities can arise either where the form of the words used might reasonably bear two meanings, or alternatively, where two or more provisions in the same contract, each clear in themselves, are irreconcilable.
[26] Contra proferentum means the words of a contract are to be construed more strongly against the person offering them. Insurance contracts are drafted almost exclusively by insurers. The sophistication of the insurer with respect to insurance policies and the markedly unequal bargaining power of the parties means that the opportunity for clarifying, by modifying the text, lies almost entirely with the insurer. It is for this reason that most courts find it appropriate that ambiguities be resolved against insurers. This is particularly applicable to words that form part of the printed contract ( as opposed to the typed-in parts). See Consolidated Bathurst, supra; McClelland & Stewart Ltd v. Mutual Life Assurance Co., [1981] 2 S.C.R. 6; and Arnoldin Construction v. Alta Surety Co., 1995 CarswellNS 319 (NSCA).
[27] An addition to the law on insurance contract interpretation is the “reasonable expectation” approach set out by the Ontario Court of Appeal in Wigle v. Allstate Insurance Co. of Canada, 1984 Carswell Ont 26 (Cory J.A.), starting at paragraph 41. The rule is applied in circumstances where there is a standard form contract that was not subject to negotiation. The court found that the definition of “unidentified automobile” in a policy was somewhat artificial and contrary to what a layman might take from the word. The court used the “reasonable expectation” approach to construe what would be ambiguous to an ordinary insured in favour of the insured and against the insurer. Some judges, including Laskin J.A. in Chilton v. Co-operators General Assurance Co. 1997 CarswellOnt 360 (OCA) at paragraphs 28-40, have suggested that the “reasonable expectation” principle enunciated in Wigle does not exist as a separate rule of interpretation, but rather that it is simply another way of expressing the concept that, where ambiguity exists, the deemed intention of the insured is to be preferred over that of the insurer so long as it is commercially reasonable.
[28] The Supreme Court of Canada in Brissette v. Westbury Life Insurance Co. [1991] 3 S.C.R. 87, said at paragraph 4:
In interpreting an insurance contract the rules of construction relating to contracts are to be applied as follows:
(1) the court must search for an interpretation from the whole of the contract which promotes the true intent of the parties at the time of entry 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.
(4) An interpretation which will result in either a windfall to the insurer or an unanticipated recovery to the insured is to be avoided. See Consolidated-Bathurst Export Ltd v. Mutual Boiler & Machinery Insurance Co. (1979), [1980] 1 S.C.R. 888, 32 N.R.488, 112 D.L.R.(3d) 439, [1980] I.L.R. 1-1176.
[29] See also Wellington Insurance Co. v. Lurette 1996 CarswellNB 410 (NBCA) and Hennig v. Clarica Life Insurance Co. 2003 CarswellAlta 269 (ACA) for succinct reviews and applications of these rules.
FIRST QUESTION: IS A MARINE RAILWAY AN OBJECT, AND IF SO, IS IT EXCLUDED AS A “HOIST' OR “CONVEYOR”?
[30] An Object, as defined in the B&M Policy, includes a mechanical apparatus which utilizes mechanical or electrical power but excludes an “elevator, escalator, conveyor, crane, hoist, power shovel, drag line, or excavator”; it does not exclude any electrical equipment forming part of the apparatus.
[31] CU submits that a marine railway is a hoist or conveyor and, therefore, except for the electric motor, it is excluded from coverage under the B&M Policy.
[32] CU acknowledges that since it is relying upon an exclusion clause, it has the onus of proving, on a balance of probability, that the marine railway is a hoist or conveyor. Foundation Co. v. Aetna Casualty Co., 1997 Carswell Alta 168 (A.S.C.).
[33] CU’s first argument, in its simplest form, is that the ordinary dictionary definition of “hoist” and “conveyor” includes a marine railway. The defendant says that the function of a marine railway is to lift, haul or hoist a thing out of the water and it comes within the following dictionary definitions:
Hoist
(a) Oxford Canadian Dictionary (1998):
“v. tr. 2. raise or haul up. 2. raise by means of ropes and pulleys, etc. n. 1. an apparatus for hoisting 1. an act of hoisting, a lift.
(b) Shorter Oxford English Dictionary on Historical Principles, 5th ed. (2002):
“1. An act of hoisting or raising something aloft; a lift (up), a raise . . . .5, a device or mechanism for hoisting; a goods elevator.: 1. verb trans. raise aloft, lift or set up; raise by means of a rope or pulley and tackle, or other mechanical device. . . .”.
(c) The New Encyclopaedia Britannica (1998):
“mechanical device used primarily for raising or lowering heavy loads but occasionally for moving objects horizontally. It usually consists of a block and tackle - a combination of one or more fixed pulleys, a moving pulley with a hook or other similar attachment, and a rope (or cable) between them. Motive power for a hoist may be either manual or electric. Electrically powered hoists, commonly mounted to the floor or wall, are used for varied lifting and hauling operations in factories and warehouses.”
Conveyor
(d) Shorter Oxford English Dictionary on Historical Principles, 5th ed. (2002):
“noun . . . 4. a mechanical contrivance for conveying articles or materials during manufacture or processing; . . .”
(e) Merriam-Webster's Collegiate Dictionary, 11th ed. (2003):
“, , ,: one that conveys; . . . a mechanical apparatus for moving articles or bulk material from place to place (as by an endless moving belt or a chain of receptacles).”
(f) Chambers Dictionary (1998):
“a person or a thing that conveys in any sense; a mechanism for continuous transport of materials, packages, goods in process of manufacture, etc . . . .”
(g) The New Encyclopaedia Britannica (1998):
Any of various devices that provide mechanized movement of material, as in a factory; they are used principally in industrial applications but also on large farms, in warehousing and freight-handling, and in movement of raw materials. Conveyors may be only a few inches in length, or they may be integrated systems several miles long.
[34] The plaintiffs submit alternate dictionary definitions; for example, they note that The Concise Oxford Dictionary of Current English , 7th edition, defines “hoist” as:
1. v.t. to raise (esp. flag) aloft, raise by means of tackle etc... 2. n. hoisting... goods elevator, lift.
and “conveyor” as:
v.t. transport, carry; transmit; impart, communicate; transfer... ns. (esp.) endless belt etc. as mechanical contrivance for conveying articles or materials, esp. during manufacture.
They cite other dictionary definitions to the effect that hoisting refers to lifting vertically (usually with a rope and pulley) as opposed to on an inclined plane, and that conveyors usually involve an endless belt conveying materials in a factory.
[35] CU’s premise is that the terms should be given a functional (they would say ordinary and the plaintiffs would say broad or general) meaning; that is, the Court should define hoist as an apparatus for hoisting, and conveyor as a mechanical apparatus for moving articles or materials from place to place. A marine railway would be included, based, in the case of hoist, on that fact that part of the function of a marine railway is to raise a vessel out of the water, and, in the case of conveyor, on the fact that part of the function is to move the vessel from one place to another.
Analysis
[36] There are several problems with CU’s argument.
[37] A review of the definitions for each of the other six excluded objects shows that they either lift or move ( or both) things or people; that is, they fit within the functional definition of a hoist or conveyor.
[38] If the terms “hoist” and “conveyor” were intended to include a marine railway, then what was the purpose for the list of excluded objects to include an elevator, escalator, crane, power shovel, drag line and excavator ?
[39] To interpret the terms “hoist” and “conveyor” so broadly would force the court to ignore the redundancy created by the listing of eight objects in the exclusion clause when one or two such objects would suffice. It is not logical to presume that the insurer intended to include redundant - or, to be redundant, unnecessary or superfluous - words when it listed the excluded objects. This leads to the clear conclusion that the terms hoist and conveyor were not intended to have the broad functional meaning proposed by CU.
[40] Even without applying the special rules for interpreting insurance contracts, there is no ambiguity when the words “hoist” and “conveyor” are used in their ordinary sense in the context of the entire policy (including the exclusion clause.) A marine railway is an inclined plane over which a vessel on a cradle on rollers on a railway track is hauled out of the water. It would not be identified by an ordinary person as a conveyor or a hoist (lift). He or she would more likely identify hoists with the items shown in Exhibit 12 that are sold by Lunenburg.
[41] Courts and text writers universally state that words must be given their ordinary meaning as opposed to a technical meaning.
[42] The ordinary meaning is not necessarily discovered by parsing the definitions contained in a non-technical dictionary. Rather, it is an exercise of determining what ordinary, presumably reasonable, people would say they understand a word to mean in the context in which it is used.
[43] An insured would not expect this B&M Policy, with the eight excluded objects, to exclude, as a hoist, every apparatus that lifts, or, as a conveyor, every mechanical apparatus that moves people or objects from one location to another. It is difficult to conceive of objects that would be covered under this B&M Policy, if such a broad definition were to apply.
[44] The Court finds that the common understanding of the word hoist (when used as a noun) is an apparatus for lifting an object vertically( or the act of hoisting vertically), and the common understanding of a “conveyor” is an endless or continuous belt normally found in a factory and used in conveying articles or bulk materials during manufacture. A marine railway is neither of these. Its engineering or scientific basis is the use of an inclined plane and wheels on rails to minimize the energy to move a vessel to an on-land shipyard . Whether defined by its function or its physical characteristics it is not a hoist or a conveyor, even if some portion of its function and physical characteristics may overlap those of a hoist, or are similar to some of those functions or characteristics of a conveyor.
[45] CU submitted in support of the broader functional definition the Supreme Court of Canada decision in Hudson Bay Company v. Wyrzykowski [1938] S.C.R. 278. In this case the Supreme Court found that the Manitoba Elevator and Hoist Act applied to an escalator even though that term was not specifically mentioned in the Act. The Act specifically applied to “elevators, hoists, dumb-waiters and all other hoisting appliances”. The Court held that an escalator was of the character of those items specifically mentioned in the Act. This decision does not help CU’s position for two reasons.
[46] First, the Court noted at page 291:
The Act itself, is part of a group of Acts such as The Manitoba Factories Act, The Shops Regulation Act and The Public Buildings Act, making general provision for the safety of persons rightly resorting to places where large numbers of the public are likely to be, and I think that, as such, the Act in question is entitled to a liberal construction.
A liberal construction is not a recognized approach for interpreting exclusion clauses in the insurance policies.
[47] Second, the clause setting out what was covered by that Act included the words: “and all other hoisting appliances”; this clause brought into play the ejusdem generis rule or the “limited class rule” as described in Sullivan and Dredger on the Construction of Statutes, 4th edition, by Ruth Sullivan (2002, Butterworths) at pages 175 - 186. No such words exist in the exclusion clause in this case.
[48] CU’s second argument is a slight variation of the first. It is that:
(a) the eight excluded objects all have in common the purpose of moving people and heavy objects from one location to another;
(b) they form a class or group based on their underlying physical characteristics and purpose (that is, to move people or heavy objects from one location to another);
(c) the physical characteristics and purpose of a marine railway is the same as the eight excluded objects;
(d) therefore a marine railway should be interpreted so as to be excluded from coverage; and
(e) the fact that a marine railway is not called by the name of one of the excluded objects is not material.
[49] There are several problems with this argument.
[50] First, the cardinal rule for interpretation of ambiguous insurance contracts is that exclusions are construed narrowly against the insurer.
[51] Second, their argument is in effect an ejusdem generis argument. G.H.L. Fridman in The Law of Contract in Canada, 4th Edition (1999, Carswell) writes at page 498:
“It is a general rule of construction.” said Pollock C.B. in 1857, “that, where a particular class is spoken of, and general words follow, the class first mentioned is to be taken as the most comprehensive and the general words treated as referring to matters ejusdem generis with such class.” The basis of the rule is made clear in the following passage from a more recent judgment by Devlin J., in a case concerning a charter-party.
The ejusdem generis rule means that there is implied into the language which the parties have used words for restriction which are not there . . . . The so-called rule is, in short, really only a recognition of the fact that parties with their minds concerned with the particular objects which they are contracting are apt to use words, phrases, or clauses which, taken literally, are wider than they intended. (Chandris v. Isbrandtsen-Mollar Co., [1951] 1 K.B. 240 (C.A.))
Such a construction can only be employed however, if: (I) the specific words have some common characteristic which constitute them as a genus, (ii) the specific words do not exhaust a whole genus; or (iii) there is no clear indication that the opposite was intended by the parties.
[52] See also MacGillivray on Insurance Law, supra, at Chapter 11.18.
[53] The exclusion clause in the B&M Policy in this case does not include the terminology that triggers the application of the ejusdem generis rule.
[54] Third, a marine railway does not share unique physical characteristics with the eight excluded objects.
[55] Fourth, if defined solely by their function so as to include all items that have the purpose of lifting or moving people or heavy objects from one location to another, the class or group would, by logical extension of CU's argument, include every form of motorized transportation - an interpretation this court finds unreasonable and not consistent with the intention or “reasonable expectation” of any ordinary insured.
[56] CU referred this court to the decision of the United States Court of Appeals for the Seventh Circuit, Stone Container Corporation v. Hartford Steam Blower Inspection and Insurance Company (1999) 165 F.3d 1157. It cited from that decision a statement that a boiler and machinery policy gives to the user of a narrow range of industrial equipment additional protection for specifically enumerated items.
[57] In Stone Container, the plaintiff had an all-risk property policy that covered the loss caused by the explosion of a large steel tank into which heat and steam were introduced to decompose wood chips into pulp (called “pulp digesters”). The plaintiff also had a boiler and machinery policy which limited coverage to accidents to “enumerated objects”. The B&M policy excluded losses caused by, or resulting from, an explosion except of “an object of a kind described below . . . (1) steam boiler. . . [and 6 other objects]”
[58] The plaintiff argued that a pulp digester, though not a listed object, was “of a kind” with steam boilers since both used steam under pressure. The Court held: (in the 11th paragraph)
Even if the essential commonality of the objects embraced by the exception to the exclusion (setting aside the last and most clearly irrelevant type of object, moving machinery) is the use of steam, does this mean that an espresso machine, the radiator of a motor vehicle, a Sauna bath, a dishwasher, a steam iron, a humidifier, and a teapot are all “of a kind” with a steam boiler? We think not. Stone's error is its refusal to read “of a kind” contextually. The term introduces a list of kinds of object. “Steam boiler” denotes a class of objects, not a single object. A class is a kind; the phrase “of a kind” introduces the various kinds or classes of object subject to the explosion exclusion. Steam boilers are one kind; steam pipes another; and so on. Pulp digesters are a kind of object, but not one of the kinds in the list. The distinction between fired and unfired pressure vessels helps to show this. These are two different kinds of pressure vessel. One includes steam boilers but not pulp digesters; the other includes pulp digesters but not steam boilers. One is covered by the boiler and machinery insurance policy; the other is not.
[59] Stone Container supports the position of the plaintiffs in the case at bar. In the B&M Policy in the case at bar, the words “of a kind”, which words might in some circumstances import the ejusdem generis principle, are not present. Furthermore, the Court in Stone Container held against expanding the definition of a steam boiler and the six other included objects even though such an interpretation would have assisted the insured (when one expects the rules of interpretation to favour the insured) as opposed to the case at bar, where the insurer seeks to expand the definition of words that constitute an exclusion.
[60] If the terms are ambiguous, the application of the rules for interpretation of insurance contracts (to the effect that grants of coverage are construed broadly and exclusions are construed narrowly, and the principles of contra proferentum and “reasonable expectation”) give additional support to the plaintiffs' position.
[61] When one applies the “reasonable expectations” approach set out in Wigle, an ordinary person in the position of an insured would not expect the terms “hoist” or “conveyor” - used in the context of the B&M Policy - to include an elevator, escalator, crane, power shovel, drag line or excavator - all of which involve lifting or conveying things or people. Nor would an ordinary insured expect those terms to include all forms of motorized transportation such as subways, railways, helicopters or trucks - which a broad functional definition would logically entail. Nor would an ordinary insured expect a hoist or conveyor to include a marine railway, which functions as an inclined plane, and not as a hoist or conveyor.
SECOND QUESTION: WAS THE INCIDENT AN ACCIDENT?
[62] The B&M Policy only covers loss resulting from an Accident which is defined as meaning “a sudden and accidental breakdown of the Object or a part thereof which manifests itself at the time of its occurrence by physical damage to the Object . . .”.
[63] Dr. Leslie Russell, a professional engineer, investigated the cause of the incident for the plaintiff insurers and the defendant insurer under the Property Policy. He was qualified by the Court to give opinion evidence for CU. He concluded that the initiating event that led to the loss occurred when the hauling chain came off the sprocket or chain wheel. This caused the cradle (with the vessel on it) to start back down the railway; severe loading on the loose flailing chain caused one of the chain links (which link had already been weakened by a fatigue crack) to break. The runaway cradle tore up the railway as it sped back into the sea.
[64] Dr. Russell in his report stated that:
The cause of the chain coming off the sprocket is speculation but may have been the result of a poor fitting link, debris lodged in the chain as it went over the sprocket or an unnoticed loose backing chain or perhaps a combination of these conditions.
[65] The defendant's first argument was that, because the only object not excluded under the B&M Policy was the electric motor in the hauling house that powered the reduction gear that in turn powered the sprocket, and because there was no damage to, or caused by, the electric motor, there was no sudden and accidental breakdown to an insured object.
[66] This Court has determined that the marine railway and not just the electric motor was an insured object. The uncontradicted evidence is that the breakdown occurred to a part of the marine railway and for that reason this argument is rejected.
[67] The defendant's alternative argument, made orally at the end of the trial, was that it is unknown why the chain came off the sprocket; because the onus is on the plaintiff to prove that the loss was caused by a sudden and accidental breakdown of the object that manifested itself at the time of the occurrence of the physical damage, the absence of evidence as to why the chain came off the sprocket leaves the Court without proof that the loss resulted from a sudden and accidental breakdown.
[68] In response to this argument AON refers the Court to four cases.
[69] First, Consolidated Bathurst (SCC). While acknowledging that property insurance generally grants no cover for loss from natural deterioration, when natural deterioration is combined with a fortuitous event, it is an accident. The Supreme Court interpreted an “accident” so as to include the unexpected consequences of wear and tear; the reasoning at paragraph 26 and 27 is relevant to this case.
[70] Second, 592716 Ontario Inc. v. Commercial Union Assurance Co., 1988 CarswellOnt 714 (OCA). This decision involved the defendant CU and an identical definition for the word “ accident ”. The Court of Appeal overturned a trial judge who held that the breakdown of a refrigeration system caused by corrosion was not sudden and accidental but the result of a gradual process.
[71] Third, Edmonton (City) v. Protection Mutual Insurance Co. 1997 CarswellAlta 141 (ASC), confirmed without comment by the Court of Appeal, 1999 CarswellAlta 560. In a thorough analysis the court held that “sudden and accidental” meant an unexpected and unforseen event to the subjective knowledge of the insured.
[72] Fourth, Regina Cold Storage Ltd v. Gerling Global General Insurance Co., 1979 Carswell Sask. 225 (SCA). The court defined “ accident ” in its ordinary and popular sense as an unlooked-for occurance which is not expected or designed.
Analysis
[73] The evidence at trial proved that the breakdown was sudden and accidental and the chain and sprocket were not loose or lacking in service or giving signs that they might malfunction. The damage to the railway manifest itself at the time that the chain came off the sprocket. This event was an accident as explained in the decisions cited by AON. The breakdown was, in fact, the chain coming off the sprocket; that is, the chain coming off the sprocket was the “occurrence” and the physical damage manifested itself at that time.
[74] Having said that, the Court is also of the view that the evidence before it did establish on a preponderance of evidence the cause of the chain coming off the sprocket.
[75] The evidence was that eight spacer plates had been added to the sprocket or chain wheel to correct the wear in the chain links. This wear had reduced the “pitch length” of the links and resulted in the chain links not fitting properly over the four teeth or cogs on the sprocket. The addition of the spacer plates to the sprocket (one on each side of each of the four teeth or cogs) increased the diameter of the sprocket and corrected the misfit.
[76] Photograph 2 of Tab 6 of Exhibit 3 shows a spacer plate on the sprocket.
[77] Lunenburg's shipyard foreman, Danny Himmelman, was operating the marine railway in the hauling house at the time of the accident. When the cradle stopped and started back towards the sea and the chain (which was still attached to the cradle) started to payout, he turned off the power to the motor. He noted that the chain which was off the sprocket was flailing around between the sprocket and a much larger wheel, called a “bull wheel”, that was beside the sprocket. After the accident he found one of the spacer plates in a damaged condition in the well underneath the sprocket. Although the event had occurred almost seven years before his testimony, he believed the missing plate was from the side of the sprocket adjacent to the bull wheel. His memory was not clear in respect of where the spacer plate was missing from.
[78] Photo 1 of Exhibit 19, one of the photographs taken by Dr. Russell during his investigation, shows that the spacer plate that was missing was a spacer plate from the side of the sprocket that was not adjacent to the bull wheel. In other words it was not from the space between the sprocket and the bull wheel where the loose flailing chain rattled and jumped around after it had come off the sprocket.
[79] Both Dr. Russell, and Peter Kinley (the President of Lunenburg and an engineer by training and trade), stated that the “pitch length” or fit of the chain was important to prevent a malfunction. Even a minor misfit, because of the tremendous torque and the weight being hauled, was significant.
[80] While Dr. Russell came to no conclusion as to whether the spacer plate came off the sprocket before or after the chain came off the sprocket, it is logical and in the Court's view most likely that the spacer plate, which was found in the well under the sprocket after the accident and was missing from the side of the sprocket or chain wheel, and which was not in the area where the flailing chain was banging around, caused the accident.
[81] There is no evidence to suggest that the incident occurred as a result of wear and tear, corrosion, depletion, deterioration, or any of the other causes that are specifically excluded from the definition of an “ Accident ” in the B&M Policy.
[82] The court adopts the reasoning in the AON cases. The evidence is clear that the accident commenced with the chain coming off the sprocket on the date of the loss. The chain coming off the sprocket is a sudden and accidental breakdown and discharges the plaintiff's obligation under the policy.
THIRD QUESTION: SHOULD THE B&M POLICY BE INTERPRETED SO AS TO AVOID OVERLAPPING COVERAGE WITH THE PROPERTY POLICY?
[83] The defendant refers the Court to:
(a) a statement from Brown and Menezes in Insurance Law In Canada, 2nd Edition, (Thomson,1991) in which the writers point out a concern in cases of overlapping cover of the possibility of overcompensation and the need for a mechanism to prevent it,
(b) Stelco Inc. v. Royal Insurance Company of Canada et al [1997] O.J. 2440 (O.C.A) at paragraph 35 for the proposition that in interpreting words of two policies, consideration should be given to an interpretation that avoids overlapping coverage, and
(c) Seagate Hotel Ltd. v. Simcoe Erie General Insurance Co., 1980 Carswell BC 230 (B.C.S.C.), for the proposition that where overlapping coverage occurs the intention of the parties prevails.
[84] Counsel for CU argues that the Court should presume that the parties intended a commercially reasonable result; that is, that an insured would not intend to pay twice for the same coverage. He further directs the court to the wording of the Property Policy where the marine railway is explicitly included in the coverage under a broad form all-risk coverage as against the B&M Policy where the marine railway is not explicitly mentioned, except by reference to the location where the marine railway is situate, (and in which policy the cover is “standard comprehensive” and only includes enumerated items). Finally he directs the Court's attention to the fact that, because both policies are included under the umbrella of a single Commercial Collective Policy, the presumption against overlapping coverage is even stronger.
[85] Counsel for Royal makes three points. First, it is not fair or reasonable to interpret the standard wording of a standard B&M Policy differently depending on whether another policy exists or no other policy exists. Second, Stelco does not support CU's position. While the Court in Stelco stated that overlapping coverage is to be avoided, this principle does not apply where the parties contemplate overlapping coverage. The Court in that case held the “other insurance” clauses clearly showed an intent for overlapping cover, and applied two other rules of interpretation - contra proferentum and the rule supporting a narrow construction of exclusion clauses, to find that overlapping coverage did exist. Third, the Supreme Court of Canada in Family Insurance Corporation v. Lombard Canada Ltd. [2002] 2 S.C.R. 690 dealt with a dispute between two insurers where each insurer's policy claimed to be “excess insurance” and the other to be the primary insurer. The Supreme Court held:
(a) the proper approach to interpretation was to determine the parties' intention (paragraph 17);
(b) the intention is to be determined in the words of the policies themselves (paragraph 19);
(c) the so-called “Minnesota Approach” which asks the Court to identify which of the policies more clearly or more closely insured the risk, leads to exercises in semantics and hair-splitting and does not respect the intentions in the policies that each of the respective insurers had with their insured; and
(d) to quote from paragraph 28 of that decision: “principles of equitable contribution demand that parties under a coordinate obligation to make good the loss must share that burden equally.”
[86] Royal argues that there is nothing wrong with overlapping cover.
[87] AON argues that overlapping coverage was contemplated between the insurers and the insured. It argues that Lunenburg was not seeking to recover under the two policies more than the value of the loss sustained to the marine railway. They pointed out that Lunenburg was, however, seeking the ability to recover under the Business Interruption Cover contained only in the B&M Policy (and not in the Property Policy); it argued that the insured’s need for business interruption insurance for its marine railway ( but not for its other premises) explained why the cover under both of the policies was not the same, and coverage for the marine railway was contemplated in the B&M Policy .
Analysis
[88] The Ontario Court of Appeal recognized, as a valid aid to interpretation, that overlapping coverage is to be avoided if possible.
[89] Without determining whether this rule overrides or trumps the other aids to interpretation of insurance contracts that might lead to an opposite conclusion, the Court finds that the inclusion of paragraph 7 and 8 of the Conditions and Limitations portion of Section 1 of the B&M Policy (which is copied in paragraph 12 of this decision) is an explicit recognition by the defendant that overlapping coverage may exist.
[90] The sentence following the defendant’s quote at paragraph 35 of Stelco referred to clauses in that policy dealing with disputes between insurers arising out of overlapping coverages as evidence of a clear intent of overlapping cover; clauses 7 and 8 of our B&M Policy are similar..
[91] This case is unlike Evans v. Maritime Medical Care Inc. 1991 CarswellNS 106 (NSCA) wherein Chipman J.A. held that the auto policy had an unqualified exclusion of cover, but not dissimilar to Guardian Insurance of Canada v. New Hampshire Insurance Co. 1999 CarswellNB 54 (NBCA).
[92] The Policy included an Office Contents Policy. This policy covered office contents which were defined as including all materials and supplies usual to the business of the insured including “. . . fittings, fixtures and machinery . . .”. The “Other Insurance” clause in this policy (section 12 in the Conditions and Limitations section) differed from the B&M Policy “Other Insurance” clause. Section 12 of the Office Contents Policy provided that if an insured had insurance which covered in the absence of this policy, this policy applied only as excess insurance.
[93] The existence of this “Other Insurance” clause specifying it to be excess coverage only, in contrast to the B&M Policy clause, which states its coverage shall be considered joint and shared proportionately, acknowledges an intention as between Lunenburg and CU to share with any other insurer any loss covered by the B&M Policy.
[94] Separate and apart from the above determination, the Court has found that the Marine Railway was an insured Object as defined in the B&M Policy, and that there was no ambiguity with respect to the intentions of Lunenburg and CU in this regard. The Court found that if there was an ambiguity, the cardinal rules of interpretation (including contra proferentum) lead to the same conclusion. In the Court's view these aids or rules of interpretation are more directly applicable and determinative in this case than the statement in Stelco with respect to avoiding overlapping coverage.
[95] The fact that the only Business Interruption coverage is contained in the B&M Policy, and the circumstances that explain the need for such cover in relation to the marine railway, reinforce the Court's view that overlapping coverage was intended.
CONCLUSION
[96] The Court finds that a marine railway is an insured object and is not excluded as a hoist or conveyor.
[97] The Court finds that the occurrence that led to the loss was the chain coming off the sprocket and the loss manifest itself at the time of the breakdown, and that it was sudden and accidental.
[98] While it may be that overlapping coverage is to be avoided if possible, this aid to interpretation does not trump the clear intention of the parties as contained in the B&M Policy; the fact that the only Business Interruption insurance was contained in the B&M Policy reinforces the view that the marine railway was intended to be covered by that Policy.
[99] The parties advised that, upon determination of the issues herein, Royal and CU would resolve issues of the quantum of their claim and prejudgment interest and that the quantum of Lunenburg’s claim under the business interruption cover would be set down for a separate trial. If there are any outstanding issues in that +6regard, the court will hear the parties.
[100] The Court will also hear the parties as to costs if they cannot agree.
Warner J.