Insurers: Guard your Limits

Is it possible to have unlimited coverage in an insurance policy? Does unlimited coverage accord with the reasonable commercial expectations of parties to an insurance contract? How will insurers provide mitigation coverage in the future?

In the recent decision of Surespan Structures Ltd. v. Llyods Underwriters, 2021 BCCA 65, a three judge panel of the British Columbia Court of Appeal grappled with these issues in an appeal of the interpretation of an insurance policy in place on a $400 million project. In particular, the Courts considered the applicability of coverage limits in respect of mitigation of loss coverage.  In upholding the decision of the trial judge, the Court of Appeal found that the applicable coverage was not subject to the policy limits.

The brief facts of this case are that Surespan Structures Ltd. (“Surespan”) incurred on the order of $10 million in costs to correct a defect in the design of a parking garage. The Insurer had bound project specific professional liability insurance covering all parties that provided professional services to the project. The policy had an aggregate limit of $10 million.

The policy language in question is not common in Canadian insurance policies, and in this case the policy was individually negotiated and drafted. At issue was the wording of coverage from damages associated with mitigation:

MITIGATION OF LOSS

The INSURERS will additionally indemnify the INSURED against the costs of remedying defects in the WORKS in order to fulfil contracts undertaken for others where such costs are necessarily incurred prior to SUBSTANTIAL COMPLETION with the prior written consent of THE INSURER (such consent not to be unreasonably withheld).

Provided that such defect in the WORKS must result from an error, omission or negligent act in the performance of PROFESSIONAL SERVICES by the INSURED or those employees or sub‑consultants for whom the INSURED is legally liable and the onus of satisfying this provision rests with the INSURED.

(the “Mitigation Coverage”)

In finding that the Mitigation Coverage was not subject to the $10 million policy limit, the Court considered the coverage afforded under the policy as a whole, and in particular the language of the other categories of coverage.

The Court noted that the three other coverages under the policy, Damages, Defence, and Supplement Payment Coverages, included specific language limiting coverage to the policy limits.

The Trial Judge found this to be of particular significance and found that there were no grammatical or textural reasons why the Mitigation Coverage would not also require an express reference to the policy limit if it indeed had been a proper expression of the parties’ intent. The court rejected arguments that the language was omitted because the Mitigation Coverage was somehow subsidiary to other heads of coverage.

The Trial Judge also considered the language of the policy limits and noted the limit was applicable to “Claims Made against the Insured”. The purpose of the Mitigation Coverage was “to avoid the prospect of a claim being advanced” against the Insured “by allowing defects to be corrected before the situation necessarily develops into a Claim.” [Emphasis in original.] A Claim was not a pre-requisite to coverage.

The Court of Appeal was satisfied with the Trial Judge’s analysis which established, among other things, that on the language of the policy:

• there was an explicit limit of liability for each of the other three heads of coverage;
• each of the other heads of coverage arise out of or are triggered by a claim (as defined by the policy);
• the Mitigation Coverage was “additional” to other forms of coverage, it was not triggered by a claim (as defined), it was not based on damages (as defined) arising out of a claim, and it did not make any reference to a “Limit of Liability”;
• the limit of liability was not explicitly referenced in the Mitigation Coverage, though it is expressly referenced in each of the other coverage forms in the Policy; and
• the limits of liability did not make any reference to the Mitigation Coverage, though it expressly did so in relation to each of the other forms of coverage in the Policy.

One might think it is unreasonable for any party to an insurance contract to think that coverage was unlimited – how can an insurer underwrite unlimited liability? The Insurer argued that it was commercially unreasonable for Surespan to think that on a $400 million project that the Mitigation Coverage was unlimited.  In rejecting the Insurer’s arguments, the Court of Appeal found that the Insurer was seeking to transform the meaning of the policy, rather than inform its wording and that the reasonable commercial expectations of the parties must necessarily be objective, not subjective, which requires an examination of the “general commercial atmosphere” rather than the “subjective belief” of either party or “concerns” that an insurer alone might have, the latter form of evidence being inadmissible.

Failing to include limits language in the Mitigation Coverage may have been an oversight and the underwriter may have made an error granting the Mitigation Coverage in a situation where all professionals providing services were covered under the policy; however, the potential remedy for drafting mistakes is rectification. Absent a plea of mistake or rectification, the Court of Appeal agreed with the Trial Judge that the unambiguous words of the policy govern.

This ruling begs the question of how, or whether, insurers will provide mitigation coverage in the future. The impact of this decision may simply be that insurers adjust policy language, but given the risks with drafting insurance policies, insurers may simply opt to all together avoid risks which need to be individually negotiated and drafted.

If you have any questions about the article, please contact Daniel Thompson.