The Quebec Court of Appeal in Zurich, Compagnie d’assurances SA c. CRT Construction inc., recently overturned the Superior Court’s decision on the interpretation of a construction insurance policy.
Facts
CRT Construction Inc. (“CRT”) was retained by the City of Montreal (“City”) to perform major construction work at the Atwater water treatment plant. At the City’s request, CRT obtained a construction insurance policy for this project with Zurich Insurance Company of Canada (“Zurich”). Given the project’s proximity to a water source and the nature of the work involved, CRT secured an additional endorsement covering flood-related damages that would otherwise have been excluded (“Endorsement”).
On November 12, 2017, a flood struck the job site. Cleanup and repairs ran from November 12, 2017, to March 28, 2018, causing significant project delays. Zurich agreed to cover site cleanup and repair costs in accordance with the Endorsement but refused to pay for indirect losses resulting from delays between November 12, 2017, and July 15, 2018, including additional salaries, per diems, and costs associated with extra work required.
Superior Court Decision
Zurich argued that the policy’s intent is to compensate for damages caused directly to the insured property because of its destruction or damage by one of the specified risks. Zurich added that the policy’s coverage is not meant to extend to economic losses such as loss of profits.
The Superior Court rejected this position. The Court determined that Zurich had to demonstrate that the additional amounts that it refused to pay were captured by an exclusion, which was not done. The Court further held that the Endorsement’s definition of “Loss” encompasses damages and losses caused directly or indirectly by a single event or a series of similar or connected events. In this case, the cause being the flood, both direct and indirect damages would be covered. As such, given Zurich’s agreement to compensate for direct damages to the insured property caused by the flood, CRT had a reasonable expectation that all resulting losses have been covered.
Court of Appeal Decision
The Court of Appeal applied the standard three step framework for interpreting insurance policies: (1) the insured must establish that the loss falls within the scope of coverage; (2) the insurer must then demonstrate that an exclusion applies; (3) the burden shifts again to the insured who must prove they are entitled to an exception to that exclusion.
The Court of Appeal found that the Superior Court erred at step one by failing to properly evaluate the scope of coverage provided by the flood Endorsement. The Endorsement is the instrument that granted coverage to the insured following the flood and should therefore be evaluated to assess the extent of coverage provided. In this case, the Endorsement explicitly limited coverage to losses and property damage cause directly to the insured property. The flood coverage therefore extended only to direct physical damage, not to all losses affecting the construction site itself, its profitability, or delays.
The Court also rejected the argument that the Endorsement’s definition of “Loss” expanded the scope of coverage. Definitions serve to apply specific policy provisions, such as those governing deductibles and limits of insurance. They do not define or extend the scope of coverage itself.
Take Away
The decision reinforces a critical principle, which is to analyze the scope of coverage first before turning to other policy provisions, definitions or exclusions. When a policy is designed to cover direct physical damage to insured property, indirect economic losses flowing from that damage are not automatically included. Further, policy definitions can clarify how certain provisions operate, but they cannot stretch coverage beyond its intended scope.
