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Making Sense of “Direct Causation” in Insurance Policies

April 14, 2020

Insurance policies can frequently include terms that seem deceptively simple, but can be interpreted in divergently different ways depending on the context.

For example, policies often include clauses which provide for or exclude coverage where a loss is “directly caused” by a peril. Although this language may seem straightforward, courts across Canada have disagreed about how to interpret what exactly “direct cause” means where a loss is caused by a chain of events.

The Manitoba Court of Queen’s Bench recently contributed to this debate in Sher-bett Construction (Manitoba) Inc. v The Co-operators General Insurance Co., 2019 MBQB 148 [Sher-bett], which dealt with the pouring of a concrete slab. After the subcontractor poured the concrete slab in November, the main contractor spread de-icing salt over the slab to ensure the safety of the employees working in the area. The contractor thereafter read the warning on the de-icing salt bag, which cautioned against applying salt to the concrete. At some point thereafter, the contractor noticed that the concrete slab had spalled. The property owner thereafter made a claim under its builders risk broad form policy.

The insurer denied the property owner’s claim pursuant to the policy’s freezing exclusion, which stated that the policy “does not insure against loss or damage caused directly or indirectly by… frost or freezing, or contamination unless caused directly by a peril not otherwise excluded…” The property owner assigned its rights under the policy to the contractor, who commenced a claim against the insurer for coverage under the policy.

One critical issue at trial was the determination of the “direct cause” of the damage to the concrete slab. The insurer argued that freezing was the direct cause of the damage and therefore the loss was subject to the policy exclusion. Conversely, the contractor argued that application of the de-icing salt was the direct cause of the damage, and therefore the loss should be covered under the exception to the exclusion.

The Court determined that the direct cause of the damage was freezing, such that the exclusion clause applied. In arriving at this conclusion, the Court applied the decision of the British Columbia Court of Appeal in Canevada Country Communities Inc. v GAN Canada Insurance Co.,1999 BCCA 339 [Canevada]. In Canevada, water froze in a building’s sprinkler system. The sprinkler pipes subsequently broke and water discharged from the broken pipes causing damage to the building project. The exclusion clause in the all-risk builders’ policy provided an exclusion for “damage, unless directly caused by a peril not otherwise excluded herein, caused directly or indirectly by…freezing”. The Court clarified the applicable test in determining whether a peril is the direct or indirect cause of a loss at para 29:

In my view, the interpretation of “direct cause” advanced by the respondents is clearly preferable. Taken in context, the terms “directly” and “indirectly” are intended to capture the sense in which an event leads straight or immediately to its consequence.

In Canevada, the Court held that the damage to the property was both a direct result of the discharge of water and an indirect result of the freezing temperatures.

Similarly, the Court in Sher-Bett ultimately determined that “direct cause” as it appeared in the policy meant that “the event leads to the consequence”. The application of the de-icing salt did not cause the damage, but instead introduced the freeze-thaw cycle. The direct cause of damage to the concrete slab was freezing, and the exclusion clause applied.

As the Sher-Bett decision is currently under appeal, the ruling of the Manitoba Court of Appeal will be important to review.

It is important to note that each case is fact-specific and must be reviewed in light of the specific provisions of the policy to determine the appropriate interpretation.

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