The flooding losses, which came to a significant amount, were paid under the property coverage section of the policy, with the only dispute being a claim for the $600,000 cost of replacement of the standpipe system. Although only one of the four standpipes was actually damaged, the insured replaced, and made a claim under the policy for, all four standpipes. This was based on the position that the system as a whole was damaged and the unsupported allegation that it was a reasonable and responsible step to replace it in its entirety.
The first issue considered by the court was whether the loss involving the standpipes was "fortuitous". That question was answered in the negative with the flowing remarks:
There is nothing fortuitous about what occurred... The system failed to do what it was designed to do... because it was improperly designed and/or installed. Properly designed and installed, the system would have contained the water during the water hammer incident...[T]here was no ‘unusual event not ordinarily to be expected in the normal course of things’...In short, the water hammer was not a fortuitous event... Neither the corrosive effect of moisture on the galvanized steel pins, nor the impact of the water hammer on the standpipes can be considered ‘fortuitous’".
Just as the death of a person through murder is an "accident" from the standpoint of the insured, the failure of the standpipe system, unless the insured itself was involved in its design or installation, should have been considered a "fortuitous event" from its standpoint. This was the very type of "accident" or "fortuity" for which protection through insurance would be purchased. Unless the insured was aware of, or involved in, the improper design or installation, it is difficult to see how the loss could be described as something other than "fortuitous" from its standpoint.
The court then considered the question of coverage for a risk that was in existence prior to the commencement of the policy. The court held that there was no coverage for such risks, saying:
[The policy] does not warrant the building to be free from damage; rather it insured against the risk of future damage... The real cause of the loss—the faulty workmanship and/or design of the standpipe system—occurred prior to ING coming on risk. Consistent with the fundamental tenets of insurance law, the policy did not contemplate coverage... to remedy the situation that existed at the time ING came on risk.
While the risk was in existence both before and after the commencement date of the policy, the risk did not materialize into physical damage to one of the standpipes until after the water hammer event, which occurred during the policy period2. Property coverage is normally dependent on the time when the loss occurs, not the time when the risk that gave rise to the loss came into existence. In a liability policy, the analogy would be claims-made coverage for claims made during the policy period for losses caused by events occurring prior to the commencement date of the policy.
Coverage in the circumstances of this case should not be treated as a warranty that the building was free of damage at the commencement of the policy, but rather as the implementation of one of the purposes for which insurance is purchased, that being coverage for a loss occurring during the policy period regardless of the time when the risk that gave rise to the loss came into existence. The insurer has the ability to insert limitations on coverage in the insuring agreement and by way of exclusions3.
The imposition of a condition that the risk that gave rise to the loss must have come into existence after the commencement of the policy amounts to the read-in of a new condition, and therefore an amendment of the policy. It furthermore contravenes the well-established principles of interpretation of insurance policies, one of which is that coverage provisions are to be construed broadly. The fact that the risk which led to the loss was already in existence at the time when the policy commenced should not have been a basis per se for denial of coverage.
The third major issue considered by the court was the question whether, assuming there was coverage, the insured was entitled to recover the cost of replacing the entire standpipe system rather than the cost of replacing only the single standpipe that had been physically damaged in the water hammer incident. Part of that consideration involved s. 99(7) of the Condominium Act, which is not relevant for our purposes. The important point made by the court was that "The policy is one of indemnity and the insured under any circumstance is not entitled to recover more than the actual loss." No mention was made, however, of forms of coverage that are exceptions to that general rule, such as replacement cost and designated values, which can in fact provide entitlement to recovery of more than the actual loss.
1 2011 ONCA 904.
2 Although there is case law that indicates that property that cannot function as it should can be considered "damaged".
3 There was, in fact, a "faulty workmanship/design" exclusion in the policy and it was appropriately held that coverage was excluded by that clause. That, however, should have been the sole basis for absence of coverage.
