Ontario Court Rejects Well Established Rules For Interpreting Insurance Policy Exclusions

In Pembridge Insurance Company of Canada v Chu,1 a judge of Ontario's Superior Court of Justice recently concluded that insurance policies ought to be interpreted differently when multiple insurers are involved. In this problematic decision, the court deviated from the long-standing rule that exclusion clauses should be interpreted "narrowly". Remarkably, the court began with the assumption that one of the insurance policies must respond to the loss. Based on this assumption, the court decided that different rules of contractual interpretation would apply.

This case is problematic because (i) it conflicts with the well-established rules for policy interpretation; (ii) it suggests that a policy can be interpreted by looking outside the contract to its effect on a non-party; and (iii) the assumption that one policy must indemnify the insured was both irrelevant and an improper consideration on a duty to defend application. Absent appellate guidance, this decision may create confusion and unintended consequences on coverage applications involving multiple insurers.

Facts

The case in Pembridge involved allegations that Chu, after a motor vehicle accident, left his vehicle to engage in physical violence and threatening behavior. In a typical "road rage" incident, he allegedly hit the window of another vehicle, while yelling and making other gestures. Because of Chu's conduct, the underlying plaintiffs alleged that they feared for their lives. Chu was insured under a Pembridge homeowner policy which covered "bodily injury or property damages". The policy contained an exclusion for claims "arising from the ownership, use or operation of a motorized vehicle...".2 Dominion, Chu's auto insurer, accepted the duty to defend for allegations arising out of the use, ownership or operation of the vehicle. Dominion argued that that the allegations of Chu's conduct, after he left his vehicle, triggered a duty to defend under the Pembridge policy.3

A False Premise and Errors in Privity

The court began its analysis by correctly articulating the well-settled principles for interpreting insurance policies. The court acknowledged that, generally, coverage terms are to be interpreted broadly and exclusion clauses are to be interpreted narrowly.

However, when it turned to interpreting the exclusion clause in question, the court decided that the narrow interpretation rule need not apply because, in the court's view, the insured would have coverage no matter the outcome of the analysis. The court stated:

In this case, however, regardless of how the exclusion clause is interpreted, one of the insurers will be providing coverage to the insured in relation to the insured's actions after exiting the vehicle, and the other will not. If I were to interpret the exclusion clause more broadly, this would leave Dominion responsible for following through with the coverage. If I were to interpret the provision more narrowly, this would make Pembridge liable for the conduct.

This was a false premise that gave rise to numerous errors in this decision. Here, the court assumes that only one insurer can respond to a loss, when it is entirely possible that both policies could respond. The error in this analysis was further illustrated when the motion judge concluded in the...