Thought leadership from our experts

The Settlement Exclusion In Western Canada

Consider the following: The insurer has issued a standard homeowner's policy to the insured. A developer is engaged in building a new house on adjacent property. In the course of so doing, a large amount of earth and rock is placed on the adjacent property. As is often the case, this volume of material results in settlement and earth movement on the insured property resulting in substantial property damage. Is there coverage for this claim?

Historically, the answer in Canada was that such damage would be excluded from coverage pursuant to the standard "settlement" or "earth movement" exclusions found in most property and casualty policies. Now, one might have to be more cautious in offering any bold opinions on coverage in such claims as the law may be shifting in some jurisdictions, such as Alberta.

The standard "settlement" or "earth movement" exclusion excludes certain causes of damage such as earthquake, landslide, mudflow, shifting, and erosion. Many policies will not only exclude the specified perils, but also the type of damage caused by the settling, cracking, shrinking, bulging, or expansion of certain listed property.

Further, if the insuring intent was not clear enough, many insurers would also include what has become known as "anti-concurrent causation" language. Such language would exclude the perils specified "regardless of any other cause or event that contributes concurrently or in any sequence to the loss."

In British Columbia, there is a long line of cases that have held that there is no coverage for the hypothetical damage presented here. Both the cause of loss and the type of damage sustained are excluded. One of the leading cases is Owners of SP NW2580 v. CNS, 2006 BCSC 330. Excessive pre-load on adjacent property caused settlement damage to the insured property. The policy contained the standard "settlement" and "earth movement" exclusions. Justice Martinson held that the policy excluded the damages claimed. Although complex arguments can be presented on issues of causation, it was held that even if the settlement was an independent and concurrent cause, the exclusions specifically excluded damage "caused directly or indirectly" by settlement.

She summarized her findings as follows:

[53] Even if settlement were an indirect or concurrent cause of the Damage, the Damage would still not be covered by the Policy.

[54] Exclusion CC included the words "caused directly or indirectly", which suggests that whether the settlement was a direct or indirect, proximate, concurrent or contributing cause, coverage would not be extended. In Pavlovic, Finch J.A. suggested that if an insurer wished an exclusion to apply to every contributing cause of a loss or damage, such as every cause in a chain of causation, it could use appropriate language, such as the term "cause directly or indirectly", and this conclusion was approved of by Major J. in Derksen at 47. See also: Catalano v. Trail (City) (2000), 74 B.C.L.R. (3d) 207 at 16, 18 C.C.L.I. (3d) 279, 2000 BCCA 133; Canevada at 31-32; and B & B Optical Management Ltd. v. Bast (2003), 235 Sask. R. 141 at 52, 2003 SKQB 242.

[55] Therefore, the use of the phrase "caused directly or indirectly" in this exclusion clause excludes coverage, even when other non-excluded causes (concurrent or indirect) also contribute to the loss (subject only to any exceptions to the exclusion clause).

See also: Buchanan v. Wawanesa Mutual Insurance Company, 2009 BCSC 470.

This decision has been criticized and not followed in some jurisdictions, specifically Alberta. In Engle Estate v. Aviva, 2008 ABQB 645, Justice Hawco of the Court of Queen's Bench reviewed both the Canadian and American authorities regarding the subject exclusions in relation to natural and non-natural causes of settlement. He stated the following in part:

[13] Numerous American authorities tie the meaning of exclusion clauses such as the Settlement Exclusion to natural and habitual instances of settlement which occur without the intervention of some abnormal, unexpected precipitating event. These decisions ground their analyses on the natural meaning of words such as "setting, expansion, contraction, moving, shifting or cracking" and the reasonable expectations and intentions of the parties to the insurance contract.

With respect to the Canadian authorities, Justice Hawco summarized them as follows:

[17] Canadian caselaw has generally been consistent in finding that, when the exclusion clause excludes settling as a type of damage, the damage is excluded regardless of the cause. See: Leahy v. Canadian Northern Shield Insurance Co., 2000 BCCA 408 (CanLII), 2000 BCCA 408, 77 B.C.L.R. (3d) 44 where the provision read "We do not cover: ... settling..."; and Jordon v. CGU Insurance Co. of Canada, 2004 BCSC 402 (CanLII), 2004 BCSC 402, and Ryl v. Wawanesa Mutual Insurance Co. 1988 CanLII 3487 (AB QB), (1988), 91 A.R. 163, 60 Alta. L.R. (2d) 281 (Q.B.) where the provisions read "We do not insure ... settling...". The wording of the provisions in Shepard v. Wawanesa Mutual Insurance Co., 1998 ABQB 1040 (CanLII), 1998 ABQB 1040, 236 A.R. 28, rev'd on other grounds 2000 ABCA 287 (CanLII), 2000 ABCA 287, 266 A.R. 259 and Tomko v. Wawanesa Mutual Insurance Co., 2006 MBQB 144 (CanLII), 2006 MBQB 144, 204 Man. R. (2d) 175, aff'd 2007 MBCA 8 (CanLII), 2007 MBCA 8, 212 Man. R. (2d) 155 also excluded settling as a type of damage.

He noted the case of Owners of SP NW2580 which contained identical wordings to the ones in issue and which came to the conclusion of excluded coverage. Having said this, he preferred the reasoning of the American cases "which limits 'settlement' to settlement which results from natural causes. I am of the view that the reasoning is fairer, more logical, and more in line with the nature of the insurance obtained." Thus, he specifically declined to follow Owners of SP NW2580 as being wrong in law. The exclusion did not clearly exclude settlement resulting from non-natural causes.

The Court of Appeal of Alberta upheld the trial decision: 2010 ABCA 18. They held that Owners of SP NW2580 was not binding on them and that the reasoning was not persuasive. They concluded as follows:

[21] These provisions indicate that the words "directly or indirectly" in the exclusion clause do not necessarily demonstrate an intent that the settlement exclusion apply to both fortuitous and natural events. They show that the drafters were able to reflect an intent to exclude both natural and fortuitous events by employing precise language, such as "whether natural or man-made." In contrast, the settlement exclusion clause makes no attempt to specify that damage arising from settling, whether natural or man-made, was intended to be excluded.

[22] In my opinion, the reasonable intention of the parties to a policy such as this is that the settlement exclusion clause applies to naturally occurring settlement, but not settlement that occurs otherwise. This interpretation is reflected by the language of the insurance policy, and is consistent with the underlying purpose of an "all risk" insurance policy to protect against fortuitous events. Given the almost inevitable nature of settlement, it is understandable that an insurer would intend to exclude it and that an insured would not expect such naturally occurring settlement to be covered.

[23] But the same cannot be said about settlement resulting from an unexpected, fortuitous event. One might reasonably ask: why would the parties intend that damage resulting from an unnatural or fortuitous settlement be excluded under an "all risk" policy? Not only does an "all risk" insurance contract anticipate coverage for fortuitous events, an insurer may potentially recover any payment through the exercise of its subrogation rights under the insurance contract.

The Engle Estate case has not been accepted or applied in British Columbia to date. It was distinguished and not followed in Buchanan v. Wawanesa Mutual Insurance Company, 2009 BCSC 470. Should there be a distinction between natural and non-natural causes of settlement in view of the policy wordings? Given the distinctions between British Columbia and Alberta, it is likely that the issue will eventually find its way to the Supreme Court of Canada. Until then, insurers would be well advised to consider both lines of authority in their analysis of such claims. It is my view that the BC authorities should be preferred as more analytically sound and more consistent with principles of policy interpretation.

Harmon C Hayden
Barrister & Solicitor
301-186 Victoria Street
Kamloops, BC V2C 5R3

Tel: 778.471.4350 x. 212
Fax: 778.471.4351
Email: hhayden@bilkeylaw.ca