A window on interpreting insurance contracts: Top 10 points from Ledcor Construction
Thanks to some dirty windows, insurance lawyers have a new go-to Supreme Court case on issues of policy interpretation: Ledcor Construction Ltd v Northbridge Indemnity Insurance Co, 2016 SCC 37.
The insurers in Ledcor Construction had denied coverage for the cost of replacing windows on a building under construction, after the contractor hired to clean the windows ended up scratching and damaging them.
The particular interpretation issue arose from the (terribly worded) exclusion clause in the standard form builders’ risk policy that “denies coverage for the ‘cost of making good faulty workmanship’ but, as an exception to that exclusion, nonetheless covers ‘physical damage’ that ‘results’ from the faulty workmanship.”1
According to Justice Wagner for the majority, the cost of re-cleaning the windows was excluded from coverage, but the cost of replacing the windows was covered.2 The replacement cost was estimated to be $2.5 million3 so the interpretive issue was not just a matter of pocket change.
This post takes a broader look at Ledcor Construction, and highlights the top 10 points for interpreting insurance contracts more generally (the first 3 relate to standard of review, because the Supreme Court can’t seem to get enough of that topic).
Standard of review
- The standard of review of correctness applies to the interpretation of standard form insurance contracts. The Supreme Court hinted at this in Sattva,4 but confirmed it in Ledcor Construction.5 A rule of thumb for characterizing the interpretation question, and thus determining the applicable standard of review on appeal, is whether the decision on interpretation is likely to have precedential value beyond the particular parties to the dispute.6 If so, consistency in interpretation is more important, and the interpretation question should be reviewed for correctness.7 If, instead, the interpretation won’t have much “impact beyond the parties” then it likely doesn’t have to be reviewed on that stricter standard, and the trial judge should be given more deference.8
- The “factual matrix” is a not a Keanu Reeves movie – it’s a key part of determining the applicable standard of review. According to the majority, if there is a “meaningful factual matrix that is specific to the parties to assist the interpretation process” then the interpretation question is probably one of mixed fact and law, “subject to deferential review on appeal.”9
There was actually a (sort of philosophical?) dispute between the majority and Justice Cromwell, concurring, about whether all contracts have a factual matrix – aka a broader context for the court to consider – or not. So expect future litigation over the exact content and role of the “matrix.”10
- When in doubt about standard of review in contract interpretation cases, apply the “take it or leave it” test. Did the parties (or their lawyers) negotiate and draft the contract themselves, or was the contract “offered on a ‘take it or leave it’ basis”?11 The answer to the “take it or leave it” question will be “yes” for many, if not most, insurance contracts. Insurers send the applicable policy to the prospective insured, and the insured can purchase coverage or not. There’s no real room to negotiate the terms of the contract.12 This indicates it’s a standard form contract that should be reviewed for correctness, because the interpretation will have precedential value.
- The analytical approach from Progressive Homes still applies.13The court must first determine whether there’s coverage (burden on insured); move on to examine any applicable exclusion clause(s) that could oust coverage (burden shifts to insurer); and, finally, determine whether there’s an applicable exception to the exclusion (burden shifts back to insured). We also know from Progressive Homes “that coverage provisions in insurance policies are interpreted broadly, and exclusion clauses narrowly.”
- If the language of the clause is clear and unambiguous, the court should give effect to it.15 This point falls into the “easier said than done” category, as lawyers are experts at pointing out alleged ambiguities in language (hence the varied jurisprudence on the faulty workmanship exclusion at issue in Ledcor Construction, and even the interpretive differences between Justice Wagner and Justice Cromwell).
- If the language is found to be ambiguous, then other “rules of contract construction” can come into play “to resolve that ambiguity.”16 Three such rules were reviewed, and are listed below as items 7-9.
- The parties’ reasonable expectations can be considered to resolve an ambiguity.17 If it’s a contract that the parties negotiated and drafted themselves, then the context may reveal their expectations.18 To be “reasonable,” their expected interpretation must be “supported by the language of the policy” (which is a bit circular because, if this rule is being applied, it’s already been determined that the language is ambiguous…).
If it’s a standard form contract, however, the court will take a broader, more purposive approach, to consider the “purpose behind” the type of policy and the particular coverage at issue, and to determine what the parties must have expected.19 If the insurer’s suggested interpretation would effectively gut or void the coverage that the insured thought they were purchasing, then the insured is more likely to succeed (at least when this interpretive rule is applied).20
- “Commercial reality” can also be considered to resolve an ambiguity.21 Unfortunately, this term is not defined. But essentially, an interpretation consistent with commercial reality will mean that neither party receives a windfall as a result. As Justice Estey stated in the classic case of Consolidated-Bathurst: “…the courts should be loath to support a 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.”22
- A court interpreting an ambiguous clause should adopt the interpretation most consistent with the case law.23 This seems like a basic point of stare decisis, but it was emphasized in Ledcor Construction (even though the Supreme Court didn’t have to follow the lower courts…and even though the majority and concurring reasons disagreed on what the prior cases even said).
- The contra proferentem rule only applies if these rules of construction fail to untangle the ambiguity.24 The court will not arrive automatically at the interpretation that favours the insured, but must jump through several hoops first. (Or maybe that’s just the cynical view, through the windows of Ledcor Construction.)
1 Para 1.
2 Paras 5, 95.
3 Para 8.
4 Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53.
5 Paras 4, 19-32.
6 Para 39.
7 Paras 40-42.
8 Para 37.
9 Para 24, 27, 30-32. See also paras 46, 48.
10 See e.g. para 116, Cromwell J, concurring.
11 Paras 20, 25, 28.
12 Para 29.
13 Para 52, citing Progressive Homes Ltd v Lombard General Insurance Co of Canada, 2010 SCC 33.
14 Para 51, citing Progressive Homes.
15 Para 49.
16 Para 50.
17 Para 50.
18 Although note Justice Wagner’s reluctance (at para 74, as part of the “reasonable expectations” discussion) to consider the service contract between the project owner and the window cleaning contractor as relevant to interpreting the exclusion clause.
19 Paras 65-66.
20 Paras 67-70.
21 Para 78.
22 Para 79, citing Consolidated Bathurst Export Ltd v Mutual Boiler and Machinery Insurance Co,  1 S.C.R. 888, 1979 CanLII 10 (SCC).
23 Para 84.
24 Paras 51, 96.
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