Insurer’s Denial of Coverage for Water Damage was Misguided but Not Malicious

The insurer denied coverage for water damage to the insured’s basement because it was caused by “continuous or repeated seepage”, which was an excluded risk. The court found that the insurer was incorrect in determining this to have been the cause of the water damage, and held that the exclusion did not apply to the loss. The court did not award punitive damages because the conduct of the insurer in denying the claim was only misguided and could not be descibed as malicious, oppressive or highanded.

Moffat v. Wawanesa Mutual Insurance Co., [2014] O.J. No. 2124, April 25, 2014, Ontario Superior Court of Justice, B. Babcock Deputy J.

The insureds held an all risks homeowner’s insurance policy which provided coverage for losses arising from sewer back up, but excluded losses arising from “continuous or repeated seepage”. A historic rainfall event took place near the insureds’ home, and the insureds’ basement flooded with dirty water. The amount of water in the basement made it difficult for the insureds to determine the point of entry of the water.

Due to the flood, the insureds’ mother-in-law had to move out of the basement. Although she did not pay rent, she did contribute to buying groceries and making meals.

The insurer’s adjuster was not able to visit the property until a few days after the flood. By this time, the insureds had cleaned up the water. The adjuster focused on a drain in the laundry room. Because the drain was dry, the adjuster determined that the damage was not caused by sewage back up. Instead, she found that the damage was due to the excluded risk of “continuous or repeated seepage” because there were cracks in the foundation wall above grade, and moisture to the exterior of the wall in that area. The insurer denied the claim on the basis that the loss was excluded. The insureds challenged the denial. Two more adjusters visited the property but the denial was maintained.

The court accepted the evidence of the insureds that, at least in a material way, the loss was caused by back up or escape from the weeping tile, which was connected to the surcharged sewer system. Therefore, the loss qualified as a sewer back up falling within coverage. The court cited Orlik v. Dominion Canada General Insurance Co.,  [2012] O.J. No. 5106 for the proposition that even if there were concurrent causes for the flood, some insured and some not, coverage should still be found.

The policy provided coverage for “Fair Rental Value”. The mother in law’s contributions in the form of groceries and meals qualified as a form of rent, and this loss was also payable to the insureds.

The insureds’ claim for punitive damages was denied. Although the insurer was misguided in denying coverage, the court accepted that the insurer’s representative was sincere in her efforts. The communication between the insurer and the insureds was business-like and polite. In order for punitive damages to be awarded against the insurer, there must be more than a mere denial which is not upheld—otherwise the scales would be tipped too far against insurers, preventing them from investigating and denying claims. Referencing Whiten v. Pilot Insurance Co., 2002 SCC 18, the court held that the insurer’s conduct did not meet the threshold for malicious, oppressive, and highhanded conduct which offended the court’s sense of decency.

This case was originally summarized by Kora V. Paciorek and originally edited by David W. Pilley of Harper Grey LLP.

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