A recent decision by the B.C. Court of Appeal will likely have ripple effects across the world of professional liability insurance coverage. By ruling in favour of the insured party, the court appears to be opening the door to unlimited loss coverage by accepting what legal experts with Bennett Jones LLP call the “plain reading of a policy.”
The design services of Graham Design Builders LP had been contracted by THP Partnership and the Vancouver Island Health Authority through a complex, multi-party agreement for the construction of hospitals and related parking structures. In turn, Graham contracted Surespan Structures Ltd. to design, supply and install concrete components required for the parking structures, who then hired HGS Limited for various professional services.
In keeping with the original agreement, Graham obtained the required professional liability insurance through members of Lloyds Underwriters.
“Amongst other things, this policy provided mitigation of loss coverage, which protects the insured against losses it incurs in fixing defects discovered during construction, which would result in claims against the policy if left unaddressed,” write Christine Viney, Bruce Mellett and Patrick Schembri of Bennett Jones LLP.
When cracks were found in certain load-bearing precast elements provided by Surespan, Graham demanded that Surespan make corrections. They did and looked to Graham’s professional liability policy for indemnity.
What is worth noting is that not only did the B.C. Court of Appeal uphold a lower court ruling to grant coverage but ruled that coverage under this particular portion of the policy was unlimited. Lloyds took exception.
The court examined the four areas of coverage provided by the Lloyds policy: damages, defence costs, mitigation of loss coverage, and supplementary payments.
Lloyds argued the coverage limits expressed in the other elements of the policy should be implicitly applied to portions related to the third party mitigation of loss. However, Viney, Mellett and Schembri note, “The court agreed the declarations had contractual force, but held that the more specific terms found elsewhere in the policy took precedence over this more general language.”
As Denny Chung of Clark Wilson LLP writes, “Each of the coverages in the project policy expressly referred to the limit of liability, except the mitigation of loss coverage. This ‘failure to follow a pattern of express reference’ was significant and the result was that the insurer could not rely on any limit on this coverage.”
The court rejected Lloyds’ argument that the mitigation loss coverage was “zipped together” with the other coverages, Chung explains.
“Loss coverage was distinct from the other coverages, and reflected first party liability for costs to repair defects – i.e. involving reimbursement directly to the insured as opposed to third parties.”
It all came down to the policy wording, write Prachi Shah and Laurent Lacas of law firm Clyde & Co’s London, U.K. office.
“The court found that the language of the loss mitigation clause was unambiguous. The court further noted that even if the clause had been found to be ambiguous, the reasonable expectations of the parties would not have tipped the scales in the insurers’ favour.”
Despite the insurers’ argument that it was beyond reason to expect it to provide unlimited liability loss protection for a fixed price premium, Viney, Mellett and Schembri suggest the case, “highlights the importance given to policy language in the interpretation of the coverage afforded …even where such positions lead to results which insurers protest are commercially unrealistic.”
Likewise, Chung writes that it appears, “the court will not interfere to interpret the parties’ intentions or even bring commercial sense to the transaction.”
As a result, he says, “insurers must take care to ensure their policies are consistent, both internally and externally.”
Although the court decision is under appeal, Shah and Lacas say that the ruling also provides guidance on other key issues surrounding loss mitigation coverage. Without question, Surespan vs. Lloyds Underwriters is certain to send a message that will be heard and digested throughout the insurance industry.
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to email@example.com.