In its decision in Engle Estate v. Aviva Insurance Company of Canada, the Alberta Court of Appeal addressed the interpretation of an insurance contract purporting to exclude damage to buildings caused by settlement.
The Court focused on finding an interpretation from the whole of the contract that promoted the parties’ true intent at the time of entering into the contract. On this basis, the Court held that the settlement exclusion clause was interpreted only to exclude damage to buildings caused by natural settlement forces and not damage to buildings caused by fortuitous causes, as the parties’ reasonable intention in entering into the all-risk insurance policy was to insure against fortuitous circumstances.
The respondent, Engle Estate, owned a commercial building and leased the premises to a number of commercial tenants. The respondent secured an all-risk insurance policy with the appellant, Aviva Insurance Company of Canada.
After lot excavation commenced on a high-rise condominium adjacent to the respondent’s building, the respondent’s tenants began to notice cracks developing in the floors, walls and ceilings of the building. The building had been in good condition prior to the commencement of the excavation activity on the adjacent lot. The respondent’s expert opined that the settlement damage to the respondent’s building was caused by the excavation activity on the adjacent lot, and specifically by inadequate underpinnings and shoring together with vibrations, shaking and the destabilizing effects of the deep excavation.
The respondent reported the matter to the appellant insurer. The insurer denied the respondent’s claim on the basis that the all-risk insurance policy excluded loss or damage caused by settlement:
5. PERILS INSURED
This form, except as herein provided, insures against all risks of direct physical loss of or damage to the property insured.
6. EXCLUSIONS ...
B) PERILS EXCLUDED
This form does not insure against loss or damage caused directly or indirectly: ...
1) to “buildings” by: ...
(iii) settling, expansion, contraction, moving, shifting or cracking unless concurrently and directly caused by a peril not otherwise excluded in Clause 6.B. hereof;
The trial judge concluded that the exclusion clause did not apply. The trial judge interpreted the settlement exclusion clause to apply only to settlement-related damages caused by natural forces and not to settlement which results from non-natural causes.
Interpretation of Settlement Exclusion Clause
The Court of Appeal framed the question on appeal as follows: Does the exclusion clause exclude coverage for damages or loss from settlement no matter the cause, or only damage or loss that occurred naturally?
The insurer argued that the exclusion clause was not restricted only to settlement from natural forces and cited a number of Canadian cases that have interpreted settlement exclusion clauses to exclude settlement damages however caused. The insured sought to distinguish the Canadian cases on the basis of the different wording of the settlement exclusion clauses at issue in those cases, and urged the Court to follow the American interpretation of similar provisions. The Court noted that the Canadian cases relied upon by the insurer were distinguishable in that the exclusion clauses excluded settlement as a type of damage, whereas the exclusion clause at issue explicitly included the words “caused by”.
The Court of Appeal cited the applicable principles governing the interpretation of insurance contracts, but focused almost exclusively on finding an interpretation from the whole of the contract that promoted the parties’ true intent at the time of entering into the contract.
The Court agreed with the trial judge that “settling” is commonly understood to mean that which is expected and occurs naturally. The Court found the wording of the settlement exclusion clause to be instructive as to the parties’ intent in this regard, as the specific terms, namely “expansion, contraction, moving, shifting or cracking”, suggested to the Court that the clause was meant to exclude damages for passive, gradual, or naturally occurring events.
The insurer argued that the language used, particularly the words “directly or indirectly”, evidenced the parties’ intent that the exclusion clause apply to both naturally occurring and fortuitous settlement. However, the Court found that the words “directly or indirectly” were used elsewhere in the contract and, in a number of instances, qualified by words such as “whether natural or man-made”. Therefore, the Court held that the words “directly or indirectly” did not necessarily evidence the intent as argued for by the insurer, and the drafters could have employed more precise language to include fortuitous causes as was done elsewhere in the contract.
Finally, the Court concluded that the reasonable intention of the parties to such an all-risk insurance policy is that the settlement exclusion clause applies to naturally occurring settlement, but not settlement that occurs otherwise. The Court found this interpretation to be consistent with the underlying purpose of all-risk insurance policies as understood by the parties to protect against fortuitous events. If the parties had intended the anomalous result that the excavation activity on the adjacent lot causing damage to the respondent’s building would be covered with the exception of settlement-type damage, then the parties should have expressly said so in the contract.