Landlords Denied Insurance Coverage after Tenant Drug Operation Burns Down Home: Carteri v Saskatchewan Mutual Insurance Co, 2018 SKQB 150

In a recent decision, the Saskatchewan Court of Queen's Bench held that an exclusionary clause in a landlord's home insurance policy, which excluded coverage to property used for the production of drugs, was not unjust or unreasonable.

Background:

On March 31, 2009, an explosion and fire destroyed a rental property owned by the Plaintiffs, Mr. and Mrs. Carteri. The explosion was caused by their tenants who were attempting to produce cannabis resin. The Carteris were denied coverage by their insurer, Saskatchewan Mutual Insurance (SMI) who pointed to an exclusionary clause in their policy which read:

IMPORTANT: YOUR POLICY HAS BEEN AMENDED, THE FOLLOWING PROPERTY IS NOT INSURED: WE DO NOT INSURE PROPERTY USED FOR THE ILLEGAL CULTIVATING, HARVESTING, PROCESSING, MANUFACTURING, DISTRIBUTING OR SELLING OF MARIJUANA, OR ANY OTHER ILLEGAL SUBSTANCE FALLING UNDER THE CONTROLLED DRUGS AND SUBSTANCES ACT. The Carteris brought two actions, one for coverage under their fire insurance policy with SMI, and a second for damages against the tenants for using the property in an unlawful manner. SMI applied for Summary Judgment, dismissing the Carteri's action against them and the Carteris sought Summary Judgment against the tenants.

Issues:

The primary issues in this case were:

Whether the exclusion was improperly added into the policy and whether its operation was unjust or unreasonable. Whether the tenants were liable for the damage. Was the Exclusion Unjust or Unreasonable?

The Court held that the exclusion was properly added to the policy. It was not "buried" and was identified with the words "Important Message" on the front page of a two-page renewal form. The Court deemed this sufficient notice, which would indicate to a reasonable observer that something substantial had been added to the policy.

Section 131 of The Saskatchewan Insurance Act, RSS 1978, c S-26 states that exclusions or conditions are not binding if they are unjust or unreasonable. The Carteris argued that the exclusion was unjust and unreasonable on the basis that even if they were aware of the exclusion, there was nothing they could have done to prevent their property from being used in a manner contrary to the exclusion.

The Carteris argued that the Court should be bound by Marche v Halifax Insurance Co, 2005 SCC 6. In Marche, the insured landlords were denied coverage after their rental property was destroyed by a fire. They were denied coverage because they failed to notify their...