At appeal, the court upheld the trial judge’s decision that a tenant’s insertion of cardboard into furnace controls which caused the furnace to run continually until failure, did not fall within the mechanical breakdown or pollution exclusion under the insured landlord’s all-risk insurance policy. The court also upheld the lower court’s decision that the letter from the adjuster advising no proof of loss was required constituted waiver of the insured’s requirement to file the proof of loss.
O’Byrne v. Farmers’ Mutual Insurance Co.,  O.J. No. 3303, July 11, 2014, Ontario Court of Appeal, G.J. Epstein, S.E. Pepall and K.M. van Rensburg JJ.A.
The insureds, the O’Byrnes, owned a building. An oil-fired furnace was located in one of the units. The tenant of that unit inserted a piece of cardboard into the primary control of the furnace in order to bypass the thermostat. This damaged the furnace’s ignition. The oil continued to be purged but because it was not burned, it overflowed, causing damage to surrounding units in the building. The insurer, Farmer’s Mutual Insurance Company (Lindsay), denied coverage on the basis that the loss was excluded by the mechanical breakdown and pollution exclusions. The mechanical breakdown exclusion excluded coverage for “loss or damage directly or indirectly caused by, resulting from, contributed to or aggravated by: e) centrifugal force, mechanical or electrical breakdown or derangement in or on the ‘premises’”. The pollution exclusion excluded coverage for “loss or damage caused… by any actual… spill… of ‘pollutants’”, except “if the discharge… of pollutants is the direct result of a peril not otherwise excluded under this policy.”
The insureds promptly reported the damage to the insurer. An independent adjuster was appointed and wrote to the insureds that the loss was not covered because of exclusions in the policy. The letter also enclosed a proof of loss form, and expressly stated that “in this case coverage is not applicable and therefore completion of same would not be required”. The insureds did not deliver a proof of loss.
The trial judge found that the insurer waived the proof of loss requirement through the letter to the adjuster as required by Section 136 and Section 131 of the Insurance Act, R.S.O. 1990, c. I-8. The lower court also held that neither the mechanical exclusion nor the pollution exclusion applied to the loss. The insurer brought an appeal on these issues.
The Court of Appeal dismissed the appeal. The court unanimously held that the adjuster’s letter was written communication on behalf of and binding upon the insurer, and constituted a waiver of the proof of loss requirement.
The court also upheld the trial judge’s decision that the mechanical breakdown exclusion did not apply to the loss. Van Rensburg J.A. distinguished Derksen v. 539938 Ontario Ltd.,  S.C.J. No. 27, on the basis that, unlike Derksen, the loss at bar was not a multi-causal loss. Rather, this was a chain of events set in motion by the tenant’s insertion of a piece of cardboard into the furnace’s control system. Instead, the court followed the Caneast Foods Limited v. Lombard General Insurance Company,  O.J. No. 1811 decision, which stands for the proposition that it is not sufficient to find that some type of mechanical or electrical breakdown or derangement occurred: it is essential to examine the cause of that occurrence. In this case, the furnace broke down because of external interference.
For different reasons than the lower court, the appellate court also denied that the insurer could rely on the pollution exclusion in the policy to exclude coverage. The plain language of the exclusion required there to be another operative exclusion before the pollution exclusion applied. The only other exclusion relied upon by the insurer is the exclusion for “mechanical breakdown or derangement”, which was already held to not apply to the loss.
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