Extension covering “influx of water” trumps broad form flood exclusion

A commercial property policy extension granting coverage for an “influx of water derived from natural sources” trumps a policy’s broad form flood exclusion, Alberta’s Appeal Court has found in a 2-1 split decision.

A bowling alley in Fort McMurray, Alta., located about 250 metres from the Clearwater River, purchased an insurance policy extension. The extension negated a specific policy exclusion in the broad form, so that any damage caused “by seepage, leakage, or influx of water” through the basement’s walls was not to be excluded from coverage.

The broad form of the policy included a flood exclusion that reads: “This Form does not insure against increased costs, and loss or damage caused directly or indirectly…in whole or in part by flood, including ‘surface water,’ waves, tides, tidal waves, tsunamis, or the breaking out or overflow of any natural or artificial body of water.”

This commercial property policy was in place in February 2020, when Clearwater River flooded its banks and inundated the bowling alley. An influx of surface water entered the building through various openings in walls and doors in the leased premises, as well as from the adjoining unit and underground parkade, causing damage to the insured property. The damage was caused by flood.

Intact Insurance denied the flood claim, saying the flood exclusion in the policy’s broad form trumped the coverage offered under the policy extension for damage caused by an “influx of water.”

As the insurer reasoned, “it is difficult to conceive of circumstances where a flood is not also an influx of water from other openings.” As such, the flood exclusion in the broad form should prevail over the policy extension purchased to cover the influx of water, Intact concluded.

“We agree with [Intact’s statement] and note that it cuts both ways,” Alberta Appeal Court Justices Thomas W. Wakeling and Jolaine Antonio wrote for the majority in a decision released Friday. “If a ‘flood’ necessarily includes an ‘influx’ of water, then an ‘influx’ of water may include water from a ‘flood….’

“From the perspective of commercial reality, what did the insured buy? Paragraph 61 of the extension provides coverage for influx from natural sources, including through above-ground openings. If that coverage excludes flood and rain, sleet and snow under [the broad form policy exclusion], then there is no benefit to the insured from purchasing para 61 of the extension.”

This would bring about a perverse result, the Appeal Court noted, citing a paraphrase of a decision referring to the Supreme Court of Canada decision in Ledcor. “The courts should be loath to support a [policy] construction which would either enable the insurer to pocket the premium without risk, or the insured to achieve a recovery which could neither be sensibly sought nor anticipated at the time of the contract.” Interpreting [the bowling alley’s policy extension] as applying to an influx of water from a flood strikes the appropriate balance.”

In a dissenting opinion, Alberta Appeal Court Justice Jo’Anne Strekaf found no ambiguity between the flood exclusion contained in the main form and the policy coverage purchased in the extension.

“In my view, the policy is clear that exclusions in the broad form are intended to apply unless specifically and directly modified. There is no language in the policy that specifically and directly modifies the flood exclusion…