Broad Exclusions Do Not Apply Simply Because Peril Is In Chain Of Causation

The Ontario Court of Appeal recently held that a broad contributing cause exclusion does not apply simply because an excluded peril was included in the chain of causation. In O'Byrne v. Farmers' Mutual Insurance Co.,1 negligence of the insured's tenant set in motion a chain of events ultimately leading to an oil spill after a furnace broke down. The "all risks" policy included an exclusion 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..." The insurer argued that since the furnace broke down, the loss was due to multiple causes including "mechanical derangement" of the furnace. The Court disagreed and looked at the evidence to determine the real cause of the loss.

The insured owned a two-story apartment building which was insured pursuant to an "all risks" insurance policy issued by the Farmers' Mutual Insurance Co. ("Farmers'"). An oil fired furnace was located in one of two residential apartments on the second floor. The tenant there inserted a piece of cardboard into the primary control of the furnace between two sets of contacts in order to bypass the thermostat, "presumably to keep the furnace in constant hot operation while she was away." While the tenant was absent, there was a significant spill of heating oil from the furnace on to the apartment floor which leaked through the floorboards and saturated the main floor beam and ceiling of the building's lower commercial units. The insured sought coverage under the policy. The insurer denied coverage for damage caused by the leaked oil. One ground for denial was reliance on the mechanical breakdown or derangement exclusion found in the "Perils Excluded" section of the policy as follows:

This Form does not insure against loss or damage directly or indirectly caused by, resulting from, contributed to or aggravated by:... (e) ...mechanical or electrical breakdown or derangement in or on the "premises"...

The trial judge found on the evidence that the cause of the discharge of oil was the tenant inserting a piece of cardboard into the control panel. This, in turn, bypassed the thermostat which forced the furnace to run an excessively high temperature, causing the ignition component to fail [i.e. re-ignite] and oil to be pumped continuously without burning. Consequently coverage was provided under the policy.

Farmers' agreed that one of the causes (i.e. the...