Unrealistic Coverage: Insurer Tripped Up By Loose Policy Language Case Study: Surespan Structures Ltd. V Lloyds Underwriters

• Published date: 22 June 2021
• Subject Matter: Insurance, Insurance Laws and Products
• Law Firm: McCague Borlack LLP
• Author: Mr Hillel David and Howard Borlack

The recent decision in Surespan Structures Ltd. v Lloyds Underwriters¹ showcases the critical importance of careful draftsmanship of policy wording, particularly in situations where the policy provides unusual or novel types of coverage, leaving little if any case law to guide the interpretation of the policy language.²

Factual Background

The action arose from a large construction project having a total value of approximately $400 million. Given the size of the project, there were numerous layers of subcontractors, one of which was the plaintiff in the action. Surespan was a sub-subcontractor which designed, supplied, and installed precast concrete components. Cracks were ultimately discovered in some of those components and, at the time of this action, Surespan had already incurred close to $10 million in remedial expenses. A professional liability policy for the project had been issued by the defendant. The insurer initially denied coverage for the claim for indemnity for those expenses on the ground that Surespan was not a named insured. However, a finding had been made in a prior proceeding that all contractors, consultants, subcontractors, and subconsultants who provided professional services for the project, including Surespan, were insured under the policy. The dispute in this action involved the issue of whether or not the limits of liability clause in the policy applied to the coverage under which Surespan claimed indemnity.

The policy provided four separate types of coverage:

1. Coverage for damages awarded in a claim against the insured arising out of the performance of professional services for the project;
   
2. Indemnity against the costs and expenses of remedying defects in the works resulting from an error, omission, or negligent act in the performance of professional services by the insured or those for whom it was legally liable;
3. Defence costs; and
4. Supplementary payments relating to claim expenses, costs, and interest payable by the insured.

The court referred to those coverages as Damage Coverage, Mitigation of Loss Coverage, Defence Costs Coverage, and Supplementary Payments Coverage respectively.

The policy contained a Limits of Liability clause which provided as follows:

THE INSURER'S LIMITS OF LIABILITY

The maximum amount the INSURER will pay for each CLAIM and in the aggregate for all CLAIMS are...as shown in the Schedule Page of this POLICY as the Limits of Liability per CLAIM and in the aggregate for the POLICY PERIOD.

The INSURER'S obligations to defend and make supplementary payments are included in the INSURER'S Limits of Liability.

The Schedule Page of the policy contained the following:

Limit of Indemnity: CAD $10,000,000 any one claim and in the aggregate including costs and expenses

Uninsured Excess: CAD $500,000 each and every claim
including costs and expenses

The finding of no monetary limit for one of the coverages

Before turning (in an informal manner, as will be outlined below) to the issue that warranted serious attention and consideration, and which is the central subject of this paper, the court (unsurprisingly) found that the policy did not make the monetary limits of liability applicable to the Mitigation of Loss ("MoL") coverage, with the result that there was, in fact, no monetary limit for that coverage. The grounds for that finding, stated briefly, were:

• Unlike the three other (significantly different) coverages, the MoL coverage, which was a separate and independent coverage, did not have an explicit limit of liability, was not expressly referenced in the Limits of Liability clause, and did not arise out of, nor was it triggered by, a claim made by another person against the insured. The MoL coverage involved first party coverage for indemnity for the costs of remedying defects in the works. It did not arise in the context of a claim, or of compensable damages being payable by the insured to a claimant.

• The Schedule provided that "the Limit of Indemnity [was] $10,000,000 any one claim and in the aggregate". This showed that the limit did not apply to a coverage which was not based on "claims". The words "in the aggregate" in the limits of liability clause similarly applied to "claims" The MoL coverage was not a claims-based coverage. The words "costs and expenses" in the declarations referred to the defence costs and supplementary payments coverages, not to the MoL coverage.

• While the interpretation of a contested provision must be consistent with the policy as a whole, specific policy language tends to govern over more general language. Thus, the fact that the other coverages were explicitly subject to the limits of liability clause, while the MoL coverage was not, tended to show that it had been the intention of the parties that there be no monetary limit for the MoL coverage.

The limits of liability clause therefore clearly and unambiguously applied only to the three other coverages, despite the admission by the insured that aspects of the policy language appeared to have been "cut-and-pasted together". Not only did the limits of liability clause not apply to the MoL coverage, nor did the deductible, or "excess", provisions in the policy.

The policy contained the following statement: INSURANCE IS PROVIDED ONLY FOR THOSE COVERAGES FOR WHICH A SPECIFIC LIMIT OF INSURANCE IS SHOWN - ON TERMS AND CONDITIONS CONTAINED IN THE FORMS INDICATED. While that statement, read literally, might indicate that the MoL coverage was effectively nullified in the absence of a specific limit of insurance shown as applicable to it, the insurer (wisely) did not adopt that draconian approach, and instead accepted that the provision was more in the nature of an interpretive aid than a precondition of coverage. It was held, in any event, that the issue of whether or not the MoL coverage could exist in the absence of a monetary limit was governed by more detailed and specific language in the policy.

The court made reference to the suspicion voiced by the trial judge that the failure to include a monetary limit for the MoL coverage was an oversight on the part of the insurer, but stated that this was not a matter for consideration in the absence of a plea of mistake and a request for rectification of the insurance policy.

The Consolidated Bathurst principle: Rejecting coverage for a recovery that would not have been contemplated, anticipated, or sought in the commercial atmosphere in which the insurance was contracted, or for a result that would not be sensible or realistic.

The more interesting issue, and one which the court declined to formally address,³ although it nevertheless considered the issue by way of obiter dicta, was the position advanced by the insurer that a finding of no monetary limit for the MoL coverage, particularly in the context of a project valued at $400 million, was inconsistent with commercial reality. For obvious reasons, insurance policies that do not expressly provide for monetary limits are few and far between. The insurer relied upon the well-known and oft-applied comments in Consolidated Bathurst...