[co-author: Patrick Schembri - Articling Student]
The British Columbia Court of Appeal recently held that a professional liability insurance policy provided potentially unlimited coverage, at least in respect of one area of coverage. In Surespan Structures Ltd. v Lloyds Underwriters, 2021 BCCA 65, the Court of Appeal found that the limits applicable to certain coverages available under the policy did not extend to loss mitigation coverage.
This case arose out of a multi-party construction project concerning hospitals and associated parking structures on Vancouver Island. As part of the project, the Vancouver Island Health Authority contracted with THP Partnership, which then entered into a design services agreement with Graham Design Builders LP. The design services agreement required Graham to obtain professional liability insurance which covered consultants providing services to Graham. The policy in question was issued by members of Lloyds (the insurer). 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.
Graham entered into an agreement with Surespan Structures Ltd. under which Surespan was to design, supply, and install the precast concrete components for the parking structures. Surespan, in turn, contracted with HGS Limited, which provided professional services for the project.
Before the project was completed, load-bearing precast concrete structures supplied by Surespan began to crack. Ultimately, Graham demanded that Surespan correct these defects. Surespan undertook the work and sought indemnity for this loss mitigation work under Graham's professional liability policy.
In Surespan Structures Ltd. v Lloyds Underwriters, 2020 BCSC 27, the British Columbia Supreme Court held in a summary trial that Surespan was entitled to indemnity for the loss mitigation work. The Court also found that there was no limit on the amount of the available loss mitigation coverage.
The Court of Appeal Decision
The Court unanimously dismissed the appeal, upholding the lower court's decision that the policy provided unlimited loss mitigation coverage on a project valued at $400 million.
First, the Court confirmed that the applicable standard of review was palpable and overriding error. In reaching this conclusion, the Court distinguished Ledcor Construction Ltd. v Northbridge Indemnity Insurance Co., 2016 SCC 37, on the basis that the policy at issue in this case was not a standard form contract but the product of negotiation between the parties. In doing so, the Court implicitly acknowledged that its interpretive exercise did not necessarily have precedential value and that the factual matrix might be of assistance in the interpretation process.
Second, the Court concluded the language of the policy was unambiguous, and therefore based its analysis on the wording of the policy with little emphasis on other interpretive considerations.
The policy conferred four distinct coverage grants, including one for loss mitigation. Critically, while the other coverage grants were expressly subject to a limits of liability clause of $10 million, the mitigation of loss coverage did not contain such wording. Similarly, the limits of liability clause referred to each of the other coverages, but not to loss mitigation, which the Court found suggested the limits of liability clause did not apply to that coverage. Further, the Court noted that the limits of liability clause expressly provided that it applied with respect to "CLAIMS made against the INSURED", and reasoned that this did not encompass the loss mitigation coverage, which did not require a third party "claim" to be made, and indeed was intended to avoid such claims entirely.
The insurer argued that other language in the policy declarations, to the effect that insurance was only provided for coverages subject to a specific limit of insurance, implicitly limited the loss mitigation coverage. The Court agreed the declarations had contractual force, but held that the more specific terms found elsewhere in the policy (discussed above), took precedence over this more general language.
In a similar vein, the insurer argued that a limit was imposed by a chart in the declarations which stated that there was a limit on "[a]ny one claim and in the aggregate including costs and expenses." The Court held that "claim" in this provision, while not capitalized, should be interpreted in the same way as the defined term "CLAIM," and so found that this provision did not apply to the loss mitigation coverage for the reasons discussed above. The Court also concluded that the phrase "in the aggregate" modified the noun "claim", and therefore did not extend the aggregate limit to coverage not contingent on a "claim".
The insurer also argued that it was inconsistent with commercial reality to accept that the parties would have intended a policy based on a fixed premium to confer unlimited mitigation of loss coverage for a $400-million construction project. At trial, the insurer had offered evidence from one of its underwriters as to its commercial expectations in support of this argument. The Court of Appeal noted that this evidence had been admitted but given little weight, and went on to question—without deciding the point—whether such evidence was admissible in the absence of ambiguity.
The Court of Appeal rejected this argument in any event, concluding that since the policy language was unambiguous, relying upon commercial context as an interpretive aid would not inform the interpretation of the policy language but would "transform its meaning". The Court also noted that the insurer made no argument of mistake or claim for rectification.
Surespan offers an interesting approach to appropriate contractual interpretation for insurance policies. It also highlights the importance given to policy language in the interpretation of the coverage afforded, and suggests that courts may be receptive to arguments based on the plain reading of a policy, even where such positions lead to results which insurers protest are commercially unrealistic.