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Time to Close Up Shop But Forgot to Tell Your Insurer? The Implications of the “Shut Down” Exclusion in Property Coverage

April 2017 Fillmore Riley LLP, Mantioba

Whether or not a property is considered vacant under both residential and commercial property policies so as to be excluded from coverage has received ample consideration by the court.  Yet, many standard policy wordings, particularly in a commercial broad form, have exclusions that go beyond vacant buildings to also include premises which are “unoccupied or shut down”:

This policy does not insure:

property at locations which, to the knowledge of the Insured, are vacant, unoccupied or shut down for more than 30 consecutive days

While the word “vacant” may be a defined term within the policy, definitions for “unoccupied” and “shut down” do not appear to be commonplace when contained in policies. The latter phrase is particularly intriguing when it comes to mixed-use premises. Its limited judicial consideration will be examined here.

“Unoccupied”

The term “unoccupied” applies when premises are no longer being used for their ordinary purpose and there is no intention to return to the premises permanently (528852 Ontario Inc v Royal Insurance Co1). It refers to human presence at a property. To be occupied does not require absolute or uninterrupted occupancy but the premises must be a place of usual return and habitual stoppage.

“Shut Down”

The court in 528852 Ontario Inc, supra, considered if business premises were “shut down”. For a definition, the court looked to Black’s Law Dictionary, which simply defined the term as “to stop work; usually said of a factory, etc.,. with the court finding it applied equally to a place of business. The business was closed down and the insured actually sold it, having only attended the premises once since doing so. As the insured stopped work at the property as their place of business, being its usual use, the court found the premises were clearly “shut down” as well as “unoccupied” given there was no continued use of any part of the premises.

528852 Ontario Inc, supra, yields a fairly obvious result and, unfortunately, Canadian courts have not given the phrase much further consideration. What happens when a location remains occupied to some extent but the insured business is no longer operating?

In Pereira v Hamilton Township Farmers’ Mutual Fire Insurance Co2, a commercial building was destroyed in a fire. The building housed two residential units and a lunchroom upstairs and a mushroom growing facility on the main level. The mushroom facility was not operating for several years due to financial difficulties. In May 1992, the premises were inspected for the purpose of obtaining insurance and the insurer was led to believe that the mushroom facility was shut down for renovations but was expected to start production within 30 days. In February 1993, a full nine-months later, the insurer was contacted to say that the facility was finally back in business and insurance was placed based on the May 1992 representations.

No mushroom production had taken place when the premises were destroyed by fire in August 1993. The standard commercial loss policy contained an exclusion if the property was “vacant, unoccupied or shut down for more than 30 consecutive days”.

The insurance claim was denied for several reasons, including evidence of arson, misrepresentation (that the facility was back in business), that the facility was “shut down”, that there had been a material change in risk and fraudulent statements in the Proof of Loss.

The owners alleged the facility was “being prepared to grow mushrooms” and therefore “in business”. They pointed to renovation work done to the property and had an expert testify as to the steps taken that would have seen them producing mushrooms by the end of the year.

The insurer said the lack of activity showed the facility was completely shut down as there was no compost yet ordered to grow mushrooms, no employees, and no operating records for the relevant months.

The action was tried by judge and jury. The jury rejected each of the insurer’s bases for denial and awarded significant damages, including punitive damages. The Ontario Court of Appeal found the awards ordered unsupportable but also found the insurer unreasonably maintained some defences through to trial without a factual foundation. 

A new trial was ordered because the trial judge misdirected the jury on numerous points, including stating an insurer had a duty to inform an applicant what information was considered relevant and material in applying for insurance. The Court of Appeal also found error in that the jury was not instructed that any statement by the owner’s insurance broker, as his agent, was attributable to him as a matter of law. The Court of Appeal said that there was no doubt that the status of the business was material given the “shut down” exclusion contained in the policy.

The trial judge had also left it to the jury to determine whether “shut down” was ambiguous in determining whether the exclusion should be interpreted against the insurer. The Court of Appeal said the judge should have interpreted the phrase as a matter of law and instructed the jury on that interpretation and that they were to decide on the evidence if the facility was, in fact, “shut down”3.

Unfortunately for judicial interpretation of the phrase, there are no further reported decisions on the matter.

In Olie Enterprises Ltd v Sovereign General Insurance Co4, after unsuccessful hearings before both a small claims officer and a Queen’s Bench judge, an insured sought leave to appeal the denial of its claim for recovery under its insurance policy for property damage. The premises was a one-storey building with a restaurant, beauty salon, music studio and laundromat. The laundromat area was damaged by a water escape. At the time of the loss, the laundromat was no longer open to the public but machines were used for the limited purpose of laundering restaurant linens.  

On the initial appeal, based on a fresh hearing, the judge concluded there was no coverage because of a “vacant, unoccupied or shut down” exclusion, finding the laundromat area was unoccupied and shut down. The insured argued that the property, taken as a whole, was not unoccupied and shut down because it continued to be used for other purposes. The Manitoba Court of Appeal found that a question of law arose as to whether the exclusion clause was properly interpreted, and granted leave to appeal, however, there is no appeal judgment. 

Considerations

The question that this limited case law leaves unanswered is whether, if a business is not operating but someone continues to attend at the property for other reasons, can it be said to be “shut down” to invoke an exclusion? Both Pereira and Olie Enterprises, supra, could have provided needed direction if further decisions were rendered.

If the definition of “shut down” required that the location not be used for any purpose whatsoever, the term would arguably be rendered meaningless alongside “vacant” and “unoccupied”. The holding in Periera, supra, that the state of the business was clearly material to the risk for the insurer because of existence of the “shut down” exclusion, supports this reasoning. This coincides with the reasonable expectations of the parties in securing insurance over a commercial property where it is assumed there is a business in operation.

This exclusion is likely to considered alongside the statutory condition requiring a material change to the risk to be disclosed to the insurer. Given that the cessation of operations can benefit the insurer where full premiums are being received yet certain risks associated with operations are lessened, it could be questioned whether such a change is indeed material. In 528852 Ontario Inc, supra, the change in occupation was also found material to the risk and in breach of the condition, but on clear facts that the insurer would have changed the policy and doubled premiums. This will not be further explored here but a decision to deny coverage based on an unoccupied or shut down exclusion should consider this intersection on the facts of the case.


[1] 528852 Ontario Inc v Royal Insurance Co (2000), 51 OR (3d) 470 (available on CanLII) (Ont Sup Ct). See also Ken Murphy Enterprises Ltd v Commercial Union Assurance Co of Canada, 2004 CarswellNS 629 (NS SC), aff’d 2005 NSCA 53. The insured’s claim was denied because the property was vacant. The insured was also ordered to reimburse the insurer for the amount paid out under the standard mortgage clause.

[2] Pereira v Hamilton Township Farmers’ Mutual Fire Insurance Co (2006) 267 DLR (4th) 690 (available on CanLII) (Ont CA).

[3] Supra at para 89.

[4] Olie Enterprises Ltd v Sovereign General Insurance Co (1995), 32 CCLI (2d) 1, 1995 CarswellMan 431 (Man CA).

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