Interpretation of the Insurance Contract – Back to the Basics

In Sam’s Auto Wrecking Co. (c.o.b. Wentworth Metal) v. Lombard General Insurance Co. of Canada (S.C.J.), the Operations Manager of Sam’s Auto, Mr. Farber, was injured on the job when he was run over by a crane being operated by an employee, resulting in the severance of his right leg between the ankle and knee and a serious cut to his left heel.

Mr. Farber was not an owner but was considered to be a part of the management team at Sam’s Auto. Prior to the incident, the owners had decided to opt out of WSIB insurance for themselves and Mr. Farber, for economic reasons. They purchased alternative disability insurance. However, they were left with a gap in coverage for which they were unaware.

When they approached the broker for Lombard to acquire a comprehensive business policy, they did not advise him that not everyone at their company had WSIB coverage. They obtained a comprehensive business insurance policy through Lombard which included commercial general liability. Because no one was aware of the gap in coverage, an employer’s liability endorsement was not requested.

Following the incident, Mr. Farber sued Sam’s Auto. Lombard took an off coverage position and consequently would not provide a
defence. As a result, this action was commenced.

The issue before the court was whether the personal injury experienced by Mr. Farber, due to the actions of an employee at Sam’s Auto, operating within the scope of his employment, was or should have been covered by the insurance policy Sam’s Auto had through Lombard.

Justice Whitten used basic contract interpretation principles in his interpretation of the insurance policy:
1) The contra proferentem rule;
2) The principle that coverage provisions should be construed broadly and exclusion clauses narrowly; and
3) The desirability, at least where the policy is ambiguous, of giving effect to the reasonable expectation of the parties.

Justice Whitten cited the principle from Bathurst Ltd. V. Mutual Boiler and Machinery Insurance Company [1980] 1SCR 888 that the “objective is to search for an interpretation which from the whole of the contract would appear to promote or advance the true intent of the parties at the time of entry into the contract.”

Justice Whitten listed factors to consider, in an insurance context, to determine the intent of the parties at the time of entry into the contract:
1) What was the nature of the business operated by the potential insured?
2) Was there an independent insurance contractor involved? Or was the insurance solicited direct from the insurance company?
3) If a broker was involved, what was requested or communicated to the broker?
4) What was the broker’s understanding of what was communicated to him or her that guided the request for coverage from the insurer?
5) What was the broker’s understanding or knowledge as to the appropriate insurance coverage?

The policy stated: "We will pay those sums that the insured becomes legally obligated to pay as compensatory damages because of “bodily injury” to which this insurance applies...This insurance does not apply to … (d) “Bodily Injury” to an employee of the insured arising out of and in the course of employment by the insured".

Justice Whitten held that there was no ambiguity with respect to these sections and it was clear that personal injury to the public was covered but personal injury to an employee working in the course of his or her employment was exempt. Given the nature and size of the business, the broker was reasonable in assuming that all employees were covered by WSIB, and was not told any different. Therefore, the broker would not have been aware of the gap in coverage.

There were arguments advanced with respect to whether Mr. Farber would be considered an “employee” because of the management position he held. Justice Whitten held that the distinction between the terms “employee” and “executive officer” is purely “academic”, and had no bearing in this context.

It was held that there was a clear lack of coverage and therefore no duty to defend existed.

- Kristen Dearlove, Student-at-Law