





CITATION: Cabell v. The
          Personal Insurance Company, 2011 ONCA 105



DATE: 20110208



DOCKET: C52026



COURT OF APPEAL FOR ONTARIO



Rosenberg, MacPherson and LaForme JJ.A.



BETWEEN



Barbara Janet Cabell and Leslie John Gerald Cabell



Applicants (Appellants)



and



The Personal Insurance Company



Respondent (Respondent)



Hillel David, for the applicants (appellants)



Loris Carlesi, for the respondent (respondent)



Heard: November 5, 2010



On appeal from the judgment of
          Justice Michael A. Penny of the Superior Court of Justice, dated March 30,
          2010.



ROSENBERG J.A.:

[1]

The appellants appeal from the judgment of Penny J.
    dismissing their application for a declaration that they have coverage under an
    insurance policy for a loss relating to their outdoor in-ground swimming pool.  The issue is whether one of the common
    exclusions in the policy applies to an endorsement that the appellants
    purchased for loss or damage to their pool.  The application judge held that the exclusion applied, and therefore,
    the appellants loss was not covered. The appellants submit that the policy,
    including the endorsement, is ambiguous, and in accordance with well-known
    principles of interpretation, the policy should be interpreted in favour of the
    insured.  Alternatively, the appellants
    submit that the interpretation urged by the respondent would virtually nullify
    coverage or render coverage illusory and therefore the exclusion cannot be
    enforced against the appellants.

[2]

I agree with that latter submission.  Accordingly, I would allow the appeal and
    grant a declaration that the appellants do have coverage for the loss relating
    to their pool.

THE FACTS

[3]

There is no dispute concerning the underlying facts
    that gave rise to the loss suffered by the appellants.  The appellants outdoor in-ground swimming
    pool was damaged as a result of hydrostatic uplift pressure.  The increase of this pressure was due to the
    build up of groundwater, which caused the pool to lift out of the ground.  This displacement of the pool, among other
    things, caused the pool to crack resulting in significant damage.

THE POLICY

[4]

The appellants had purchased property insurance from
    the respondent.  Part 1 of the policy is
    headed Coverages and includes:

Permanently installed outdoor equipment on the
    premises, including outdoor antennae, fences, retaining walls and driveways.

[5]

Part 3 of the policy is headed Common Exclusions and
    provides as follows:

We do not insure:



(11) settling, expansion, contraction, moving,
    bulging, buckling or cracking of any insured property,
except
resulting
    damage to building glass.



(18)  loss or
    damage:

-           to outdoor radio, T.V. and
    communications antennae (including satellite receivers) and their attachments
    caused by windstorm, hail or collapse;

-          to outdoor swimming pools, hot tubs,
    spas, saunas and their equipment, their specific fittings and decks or patios
    attached to the swimming pools, hot tubs, spas or saunas but detached from the
    building;

-

caused by vermin,
    insects, rodents, raccoons or birds
except
loss or damage to building
    glass.

[6]

The appellants, however, purchased Endorsement 33b,
    which amends the policy and provides as follows:

Outdoor
    Inground Swimming Pool, Hot Tub, Spa and Sauna Coverage (Endorsement 33b)

Property
    Coverages

Perils
    Insured

We insure your outdoor inground swimming pool, hot
    tub, spa and sauna, their equipment and specific fittings and decks or patios
    attached to the swimming pool, hot tub, spa or sauna but detached from the
    building, against all risks of direct physical loss or damage, including damage
    caused by freezing or the weight of ice, snow or wet snow. We will also pay for
    the cost incurred to repair or replace the damaged property.

All other
    terms conditions and exclusions of this policy remain unchanged, including the
    exclusions regarding
:

-
loss
    or damage:

- occurring before during or after flood waters
    reach the premises. "Flood" includes waves, tides, tidal wave:, and
    the rising or overflow of any stream of water or body of water, whether natural
    or manmade;

- caused by impact by water-borne objects.

- loss or damage caused by wear and tear,
    deterioration, defect or mechanical, electrical or electronic breakdown or
    disturbance, rust or corrosion, dampness of atmosphere, extremes of
    temperature, wet or dry rot, fungi or spores,
but
resulting damage to
    other property caused by a peril not otherwise excluded is insured.

- the cost of making good faulty material or
    workmanship.

- loss or damage caused by vermin, insects,
    rodents, raccoons or birds.

[7]

To understand the interaction between the Common
    Exclusions in the policy and Endorsements, it may be helpful to consider
    another endorsement. For that purpose, I am setting out Endorsement 22b, which
    provides as follows:

Fire,
    Explosion and Smoke Damage Resulting from an Earthquake (Endorsement 22b)

Property
    Coverages

Perils
    Insured

You are insured against direct physical loss or
    damage to the property caused by fire, explosion or smoke which results from an
    earthquake shock, subject to the exclusions and conditions of your policy.

Loss or
    Damage not Insured

The following exclusions are additional to those
    contained in the Property Coverages section of your policy.

We do not insure loss or damage caused:

- directly or indirectly by floods, surface waters,
    ice, waterborne objects, waves or tides, whether or not attributable to an
    earthquake shock;

- by your failure to use all reasonable means to
    save and preserve the property;

- by earthquake shocks occurring before this
    endorsement is effective or after its expiration.

All other
    terms and conditions of the policy remain unchanged.

REASONS OF THE APPLICATION JUDGE

[8]

The application judge held that Endorsement 33b is not
    an independent part of the policy.  Accordingly, the Common Exclusions in the policy apply to Endorsement
    33b, except to the extent those exclusions are amended by the Endorsement.  In particular, Common Exclusion 11 applied
    and excluded coverage for the damage to the swimming pool since that damage
    fell within the words settling, expansion, contraction, moving, bulging,
    buckling or cracking of any insured property.  The application judge rejected the submission that only the exclusions
    expressly referred to in Endorsement 33b applied.

[9]

The application judge also rejected the argument that
    the scope of Common Exclusion 11 as applied to Endorsement 33b was so broad as
    to nullify coverage under that endorsement to permit the appellants to rely
    upon the principle in
Weston Ornamental
    Ironworks Ltd. v. Continental Insurance Company
, [1981] I.L.R. 477.  The application judge held that there was no
    evidence as to the universe of possible damage to which an outdoor pool might
    be exposed or how often an exclusion for settling, expansion, contraction,
    moving, bulging or cracking might be engaged in the context of outdoor pool
    claims.  On this record he was therefore
    unable to conclude whether Common Exclusion 11 virtually nullifies the coverage
    under Endorsement 33b so as to engage the principle in
Weston Ornamental
.

[10]

The application judge looked at the nullification of
    coverage argument as involving a question of reasonable expectations, which
    required objective evidence.  The type of
    evidence that would be helpful could include objective evidence of surrounding
    circumstances that might inform the expectations of reasonable outdoor pool
    owners regarding the risks of outdoor pool ownership and where hydrostatic lift
    and, more generally, settling, expansion, contraction, moving, bulging or
    cracking, fit into the hierarch of those risks.  Only if there was such evidence could a court
    assess whether Common Exclusion 11 was inconsistent with the main purpose of
    the insurance coverage so that enforcement of that exclusion would virtually
    nullify coverage.

ANALYSIS

Principles of Interpretation

[11]

The general principles of interpretation that apply to
    insurance policies are well-established.  A clause in the policy providing coverage will be broadly interpreted in
    favour of the insured.  An exclusion
    clause limiting coverage will be strictly interpreted.  Since insurance contracts are contracts of
    adhesion, any ambiguity in the policy will be construed against the insurer,
    applying the
contra proferentem
doctrine:
Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance
    Co.,
[1993] 1 S.C.R. 252 at 268-69;
Consolidated
    Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co.,
[1980] 1
    S.C.R. 888.  However, these principles of
    interpretation cannot create ambiguities; if the exclusion clause is clear, it
    is to be applied according to its terms, subject to the nullification of
    coverage doctrine discussed below.

[12]

As to interpretation of endorsements, such as
    Endorsement 33b, generally speaking the endorsement does not operate
    independently of the policy.  As Lang J.A.
    put it in
Pilot Insurance Company v.
    Sutherland
(2007), 86 O.R. (3d) 789 (C.A.) at para. 21:

An endorsement changes or varies or amends the
    underlying policy. While it may be comprehensive on the subject of the
    particular coverage provided in the endorsement, it is built on the foundation
    of the policy and does not have an independent existence.

[13]

However, if limitation of apparent coverage in an
    endorsement is ambiguous, the limitation should be set out in the endorsement
    itself.  As Cory J.A. said in
Wigle v. Allstate Insurance Co. of Canada
(1984), 49 O.R. (2d) 101 (C.A.) at p. 120  in relation to underinsured motorist coverage:

Limitations on the apparent coverage in the
    endorsement that are ambiguous in the sense that they are not clearly apparent,
    should be set out in the endorsement itself.  If it was the intention of the insurer that the endorsement was not to
    cover an unidentified vehicle, it would have been a simple matter to say so
    in the explanatory note.

Nullification of Coverage

[14]

This case involves the doctrine of nullification of
    coverage.  In Canada, this doctrine appears
    to originate in the reasons of Estey J. speaking only for himself in
Indemnity Insurance Co. of North America v.
    Excel Cleaning Service
, [1954] 1 S.C.R. 169 at pp. 177  80:

Such a construction would largely, if not
    completely, nullify the purpose for which the insurance was sold  a
    circumstance to be avoided, so far as the language used will permit.
Cornish v. The Accident Insurance Co.
[(1889) 23 Q.B.D. 453.], where at p. 456 Lindley L.J. stated:

The object of the
    contract is to insure against accidental death and injuries, and the contract
    must not be construed so as to defeat that object, nor so as to render it
    practically illusory.



When regard is had to the possible meanings of the
    words "care," "custody" and "control" as they are
    here used as part of general provisions prepared without reference to the
    particular coverage purchased by the respondent, together with what is perhaps
    the more important consideration that, if construed as the appellant submits,
    these words would largely, if not entirely, nullify the usefulness of the
    insurance purchased, it is difficult to determine the precise meaning that
    ought to be attributed to these words.

It is, in such a
    case, a general rule to construe that language used in a manner favourable to
    the insured. The basis for such being that the insurer, by such clauses, seeks
    to impose exceptions and limitations to the coverage he has already described
    and, therefore, should use language that clearly expresses the extent and scope
    of these exceptions and limitations and, in so far as he fails to do so, the
    language of the coverage should obtain. Lord Justice Lindley stated:

In a case on the
    line, in a case of real doubt, the policy ought to be construed most strongly
    against the insurers; they frame the policy and insert the exceptions.
Cornish v. The Accident Insurance Co., supra
,
    at p. 456.

[15]

These passages appear to indicate that the nullification
    of coverage is simply a particular application of the broader rule of
    interpretation that in case of an ambiguity in an exclusion clause, the
    ambiguity is to be construed against the insurer.  The subsequent decision of the Supreme Court
    of Canada in
Consolidated Bathurst
also
    created some ambiguity as to how the doctrine applied.  In a passage that has been repeatedly applied
    in interpreting insurance contracts, Estey J., speaking for the majority of the
    court, held as follows at pp. 901 - 902 :

Even apart from the doctrine of
contra proferentem
as it may be applied
    in the construction of contracts, 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.
Consequently,
    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. Where words may
    bear two constructions, the more reasonable one, that which produces a fair
    result, must certainly be taken as the interpretation which would promote the
    intention of the parties.
Similarly, an interpretation which defeats the
    intentions of the parties and their objective in entering into the commercial
    transaction in the first place should be discarded in favour of an
    interpretation of the policy which promotes a sensible commercial result. It is
    trite to
observe that an interpretation
    of an ambiguous contractual provision which would render the endeavour on the
    part of the insured to obtain insurance protection nugatory, should be avoided.
Said another way, the 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 could neither be sensibly sought nor
    anticipated at the time of the contract.  [Emphasis added.]

[16]

To a similar effect is
Amos v. Insurance Corp. of British Columbia
, [1995] 3 S.C.R. 405
    per Major J. speaking for the court at paras. 16 - 17 concerning a statutory
    no-fault benefits scheme:

Traditionally, the provisions providing coverage in
    private policies of insurance have been interpreted broadly in favour of the
    insured, and exclusions interpreted strictly and narrowly against the insurer
    (Brown and Menezes, at p. 131). In
Indemnity
    Insurance Co. v. Excel Cleaning Service
,
[1954] S.C.R.
    169
, it was held that
the
    construction given to a policy

of

insurance must not nullify the purpose
    for which the insurance was sold.

In the same way, while s. 79(1) must not be
    stretched beyond its plain and ordinary meaning, it ought not to be given a
    technical construction that defeats the object and insuring intent of the
    legislation providing coverage.  [Emphasis added.]

[17]

These passages suggest a different way of looking at
    the nullification of coverage doctrine; namely, that it is an independent
    doctrine that applies even in the absence of an ambiguity.  This court has adopted this interpretation of
    the doctrine in a number of cases including
Weston
    Ornamental
and more recently in
Zurich Insurance Co. v. 686234 Ontario Ltd.
(2002), 62 O.R. (3d) 447 (C.A.) at para. 28
    (leave to appeal to S.C.C. refused, [2003] S.C.C.A. No. 33):

From
Weston
    Ornamental Iron Works
it is clear that this court has concluded that
even though an exclusion clause may be clear
    and unambiguous, it will not be applied where
: (1) it is inconsistent with
    the main purpose of the insurance coverage and where
the result would be to virtually nullify

the coverage
provided by the policy; and (2) where to apply it
    would be contrary to the reasonable expectations of the ordinary person as to
    the coverage purchased.  [Emphasis
    added.]

[18]

I will return to the application of the nullification
    of coverage doctrine after interpreting the policy and the endorsement.

Interpreting the Policy and the Endorsement

[19]

Whether or not loss as a result of damage to the
    appellants outdoor in-ground pool falls within the Coverage part of the
    policy, such a loss is clearly excluded by Common Exclusion 18, the exclusion
    for, among other things, outdoor swimming pools.  The only reasonable interpretation of
    Endorsement 33b is that it at least amends the policy so that the part of Common
    Exclusion 18 referring to outdoor swimming pools does not apply.  The appellants submit that the Endorsement is
    ambiguous as to whether any of the other Common Exclusions apply.  The appellants point to the specific
    reference to some of the Common Exclusions in the endorsement itself.  For convenience, I repeat that part of the Endorsement
    and have added the clause numbers that correspond to the Common Exclusions in
    the policy:

All other
    terms conditions and exclusions of this policy remain unchanged, including the
    exclusions regarding
:

-(5)
loss or damage:

-           occurring
    before during or after flood waters reach the premises. "Flood"
    includes waves, tides, tidal wave:, and the rising or overflow of any stream of
    water or body of water, whether natural or manmade;

-           caused
    by impact by water-borne objects.

-
(8)
loss or damage caused by wear and tear,
    deterioration, defect or mechanical, electrical or electronic breakdown or
    disturbance, rust or corrosion, dampness of atmosphere, extremes of
    temperature, wet or dry rot, fungi or spores,
but
resulting damage to
    other property caused by a peril not otherwise excluded is insured.

-
(10)
the cost of making good faulty material or
    workmanship.

-
(18)
loss or damage caused by vermin, insects,
    rodents, raccoons or birds.

[20]

Counsel for the appellants points out that Endorsement 33b
    exactly duplicates clauses 5, 8, 10 and part of 18.  He submits that if the introductory language
    to this part of the endorsement  All other terms conditions and exclusions of
    this policy remain unchanged, including the exclusions regarding  was intended
    to incorporate all of the Common Exclusions there would be no need for
    reference to these specific exclusions.  If the respondent intended to have Common Exclusion 11 apply to the
    endorsement, it should have said so explicitly as it has with Common Exclusions
    5, 8, 10 and part of 18.  This submission
    finds support in the decision of this court in
Wigle
in the excerpt set out earlier, which is as follows:

Limitations on the apparent coverage in the endorsement
    that are ambiguous in the sense that they are not clearly apparent, should be
    set out in the endorsement itself.  If it
    was the intention of the insurer that the endorsement was not to cover an
    unidentified vehicle, it would have been a simple matter to say so in the
    explanatory note.

[21]

The appellants submit that by including certain
    exclusions in the Endorsement but intending nevertheless to include all the
    other Common Exclusions, Endorsement 33b has become a trap for the unwary.  The homeowners would read the Endorsement and
    understand that it covers all risks of direct physical loss or damage to their
    swimming pool, except the express exclusions; but unbeknownst to them all the
    other Common Exclusions apply including Exclusion 11, which, it seems, would be
    the most likely and obvious source of loss or damage to a swimming pool.

[22]

The appellants submit that if the insurer is correct in
    its interpretation, the inclusion of particular Common Exclusions in the Endorsement
    was redundant.  True, if the appellants
    are correct then the term exclusions is redundant in the phrase: All other
    terms conditions and exclusions of this policy remain unchanged.  However, since it is the respondent that
    drafted the policy it is for it to explain the redundancy.  At the very least, the endorsement is
    ambiguous and the ambiguity should be interpreted against the insurer.

[23]

In that respect, the appellants point to Endorsement
    22b, which is clear in terms of the exclusions that are meant to apply.  That endorsement states simply that it
    insures against loss from fire, explosion or smoke from earthquake shock
    subject to the exclusions and conditions of your policy.  It then refers to additional
    exclusions.  The homeowners looking at
    Endorsement 22b would know that they must look to the Common Exclusions in the
    policy and the other additional exclusions in the endorsement.  There is no trap for the unwary in
    Endorsement 22b, unlike Endorsement 33b.  There is much to be said for the appellants submission as to ambiguity
    of the Endorsement.  However, in my view,
    this case can be resolved by resort to the nullification of coverage doctrine
    to which I now turn.

Nullification of Coverage

[24]

The application judge found against the appellants on
    the nullification of coverage issue because there was no evidence that the
    effect of Common Exclusion 11 was to nullify coverage and no objective evidence
    as to the reasonable expectations of the parties.  In reaching that conclusion the application
    judge referred to
Zurich Insurance, Excel
    Cleaning
, and
Western Ornamental
.  The application judge considered that in all
    of those cases there was an evidentiary record upon which to form the judgment
    that coverage had been virtually nullified by the scope of the exclusion. But,
    there was no such record in this case.

[25]

It may well be that there was some evidence in those
    cases from which a determination could be made about nullification of coverage
    and reasonable expectations of the parties, but there is no case that holds
    such evidence is essential.  Thus, in one
    of the recent cases from the Supreme Court of Canada concerning reasonable
    expectations,
Reid Crowther &
    Partners Ltd. v. Simcoe & Erie General Insurance Co.,
it is not
    apparent that the court relied upon evidence in determining the reasonable
    expectations of the parties.

[26]

Another example is
Foodpro
    National Inc. v. General Accident Assurance Co. of Canada et al.
(1986), 57
    O.R. (2d) 489 (H.C.J.), where the trial judge was required to interpret a
    so-called sistership exclusion in an insurance policy.  The trial judge, making no reference to the
    nullification of coverage doctrine, interpreted the provision as covering the
    loss.  On appeal to this court at 63 O.R.
    (2d) 288 (leave to appeal to S.C.C. refused, [1988] S.C.C.A. No. 707), the
    court held as follows:

In our opinion the interpretation of the
    exclusionary clause by the weekly court judge was the interpretation placed on
    it by the American authorities where it has been considered. That interpretation
    is one which the clause can properly bear and conforms with the acknowledged
    purpose for which the clause was created.
To
    give the clause the interpretation urged by the appellant insurers would be to
    render nugatory the coverage for the most obvious risks for which the policies
    were issued.
[Emphasis added.]

[27]

It is not apparent that this court referred to any
    evidence in reaching the conclusion that the clause would not cover the most
    obvious risks for which such policies are issued.  There is certainly no indication that there
    was any burden on the insured to lead evidence to that effect.

[28]

I agree that in some cases evidence may be needed,
    especially if the case concerns some particularly arcane set of circumstances.  It seems to me that a court is in a good
    position to determine what are the most obvious risks for which an ordinary
    homeowners policy is issued.  If the
    court is able to determine on an objective basis that the insurers
    interpretation would render nugatory coverage for the most obvious risks for
    which the endorsement is issued, a tactical burden shifts to the insurer.  It will be for the insurer to show that the
    effect of its interpretation would not virtually nullify the coverage and would
    not be contrary to the reasonable expectations of the ordinary person as to the
    coverage purchased.  This is a reasonable
    approach given that the insurer is in an ideal position to show that, contrary
    to what appears to be the case, the endorsement does in fact provide coverage.  For example, the insurer would have access to
    its records and the experience in the industry and would be able to show that
    claims have been paid for loss or damage not falling within the exclusion.

[29]

I have no difficulty in finding that Common Exclusion
    11 would, to use the words of
Foodpro,
render nugatory the coverage for the most obvious risks for which the endorsement
    was issued.  Common Exclusion 11 excludes
    coverage for settling, expansion, contraction, moving, bulging, buckling or
    cracking of any insured property,
except
resulting damage to building
    glass.  The most common causes of loss
    or damage for a homeowners policy such as theft or fire have no obvious
    application to an outdoor in-ground swimming pool.  It is difficult to conceive of any damage or
    loss to an in-ground swimming pool that would not come within that exclusion,
    especially the word cracking.  When
    counsel for the respondent insurer was pressed for an example that would not
    come within Common Exclusion 11, he was unable to do so.  In fact, the only loss that I can think of
    that might be covered by Endorsement 33b and not excluded by the Common
    Exclusions is that covered by Common Exclusion 12, which reads as follows:

We do not insure:



(12) marring or scratching of any property
unless
caused by impact by land vehicle, aircraft, satellite or spacecraft, riot,
    vandalism, hail, windstorm, theft or attempted theft or transportation as
    defined in exclusion (7) above.

[30]

It hardly seems likely that the appellants would have
    purchased the Endorsement if they knew it only covered marring or scratching given
    the $500 deductible; or that it was limited to marring and scratching from the
    impact of a land vehicle, aircraft, satellite, spacecraft, riot, vandalism,
    hail, windstorm and theft, none of which seem very likely candidates for damage
    to an in-ground outdoor pool.   Even less likely if they knew that if the
    impact resulted in cracking of the pool it would not be covered because of
    Common Exclusion 11.

[31]

In my view, application of Common Exclusion 11 to
    Endorsement 33b would virtually nullify coverage.  Such a result could not have been within the
    reasonable expectation of the parties.

DISPOSITION

[32]

Accordingly, I would allow the appeal, set aside the
    judgment and grant a declaration that the appellants have coverage for the loss
    relating to their outdoor in-ground swimming pool.  The appellants are entitled to their costs of
    the application and the appeal which I would fix at $7,500 and $5,000
    respectively inclusive of disbursements and applicable taxes.

Signed:           M. Rosenberg J.A.

I
    agree J. C. MacPherson J.A.

I
    agree H. S. LaForme J.A.

RELEASED: MR February 8, 2011


