Ancaster Jewellers Ltd. v. Pafco Insurance Co.

Ancaster Jewellers Ltd. v. Pafco Insurance Co. [Indexed as: Ancaster Jewellers Ltd. v. Pafco Insurance Co.]

66 O.R. (3d) 417

[2003] O.J. No. 3167

Docket No. C38176

Court of Appeal for Ontario

Catzman, Feldman and Gillese JJ.A.

August 8, 2003

Insurance -- Interpretation and construction -- Clause in warranties endorsement in jewellers' block insurance requiring insured to have surveillance cameras connected to concealed VCR in proper working order and operating at all times insofar as it was within insured's control when there were authorized personnel in insured's premises -- Employee of insured inserting tape in VCR on day of robbery but neglecting to ensure that VCR was recording properly -- VCR not recording robbery -- Insured not breaching condition precedent to coverage -- Endorsement applying only to "Named Insured" -- Employee not "Named Insured" -- Insured having instituted reasonably fail-safe procedure to ensure that VCR and recording system were switched on and operating -- Failure of VCR to operate on day of robbery constituting human error by employee to which clause in question did not apply -- Proposition that employer is responsible for acts of its employees not applying where parties to insurance policy have defined their mutual rights and obligations in language which suggests distinction between employer and employee.

The plaintiff carried jewellers' block insurance with the defendant. A warranties endorsement to the insurance policy contained a "Protective Devices" clause which required there to be surveillance cameras in the store, connected to a concealed videocassette recorder, and that they be "in proper working order and . . . operational at all times, insofar as is within the Named Insured's control, when there are authorized personnel in the insured's premises". The plaintiff had in place four video cameras which provided total coverage of the retail space in the jewellery store. The cameras were connected to a VCR located in the basement of the store. Two employees who worked in the basement were instructed to check the VCR from time to time during the day to ensure that it was operating. It was the responsibility of those employees to remove the previous day's videocassette when the store opened, insert a new videocassette and press the "record" button. On December 24, the store's busiest day of the year, one of the employees removed the previous day's tape and replaced it with a new tape. He claimed that he heard the clicking sound made by the VCR when the recording head moved into place. Believing that the VCR was operating, he did not wait to observe the illumination of the blue circle on the VCR display screen. The store was robbed about an hour later by two men with their faces masked by balaclavas. The VCR was not recording at the time. Had it been recording, it would not have been possible to identify the robbers' faces. The plaintiff claimed against the defendant for the amount of the loss. Relying on the terms of the warranties endorsement, the defendant denied coverage. The plaintiff sued. The trial judge held that the plaintiff was precluded from recovering because of the terms of the endorsement and that it could not rely on statutory provisions for relief from forfeiture of its right to indemnity under the policy. The action was dismissed. The plaintiff appealed.

Held, the appeal should be allowed.

The endorsement applied only to the "Named Insured". The employee was not the Named Insured. The endorsement did not apply to the circumstances of the robbery. The plaintiff, the Named Insured, had instituted, insofar as was within its control, a reasonably fail-safe procedure to ensure that the VCR and the recording system were switched on and in operation, and the VCR's failure to [page418] operate on the day in question was a matter of human error by the employee to which the Protective Devices clause did not apply. The reference to both "Named Insured" and "authorized personnel" in the Protective Devices clause recognized the legal distinction between the plaintiff as the Named Insured and persons such as the employee whose function it was to engage and monitor the VCR. The defendant could not rely on every failure of the VCR to be in proper working order and operational at all times to deny liability under the policy. It could rely only on such failures as were within the Named Insured's control. So long as the plaintiff discharged its obligation to install the required protective devices and took all reasonable steps to instruct its authorized personnel in their use and operation, it had satisfied its obligation under the Protective Devices clause and was not foreclosed by the terms of the clause from indemnity for loss sustained in a robbery. The proposition that an employer is responsible in law for acts of its employees does not apply where the parties to a policy of insurance have defined their mutual rights and responsibilities in language which suggests a distinction between employer and employee.

APPEAL by the insured from a judgment of Cavarzan J. (2002), 2002 49428 (ON SC), 59 O.R. (3d) 112, [2002] I.L.R. 1-4108 (S.C.J.) dismissing an action for recovery under an insurance policy.

James R. Turnbull and Ian A. Brisbin, for appellant. Barry A. Percival, Q.C., for respondent.

The judgment of the court was delivered by

CATZMAN J.A.: --

The Appeal

[1] On the busiest retail shopping day of the year, a jewellery store in Ancaster was robbed by two masked men, who made off with close to $170,000 in merchandise. The stolen jewellery was never recovered. The store claimed against its insurer for the amount of its loss. An endorsement to the insurance policy required there to be surveillance cameras in the store, connected to a concealed videocassette recorder. On the day of the robbery, the store's employee had inserted a videocassette into the VCR but either failed to press the record button or, having pressed it, failed to ensure that the machine had engaged and begun to record, with the result that there was no video record of the robbery. Relying on the terms of the endorsement, the insurance company denied coverage.

[2] The store sued. At trial, Cavarzan J. held that the store was precluded from recovering because of the terms of the endorsement, and that it could not rely on statutory provisions for relief from forfeiture of its right to indemnity under the policy. His decision is now reported: (2002), 2002 49428 (ON SC), 59 O.R. (3d) 112, [2002] I.L.R. 1-4108 (S.C.J.). This is an appeal from that decision. [page419]

The Facts [See Note 1 at end of document]

[3] Since 1996, Ancaster Jewellers Limited ("Ancaster") had carried jewellers' block insurance with Pafco Insurance Company ("Pafco"). The Declarations page of the policy in force at the time of the robbery identified the Named Insured as "Ancaster Jewellers Limited (Herein called the Insured or the Named Insured)". Like its predecessors, the policy contained a "Warranties Endorsement", to which reference appears below.

[4] Ancaster had in place four video cameras which provided total coverage of the retail space in the jewellery store. The cameras were connected to a VCR located in the basement of the store. Images seen by the cameras were recorded on videotape when a videocassette was inserted into the VCR and the record button was depressed. When that was done properly, two things confirmed that the VCR was recording: first, the mechanism that advanced the videotape was heard to engage and run; and second, a dimly lit blue circle appeared on the VCR display panel.

[5] Ancaster employed two goldsmiths who had workshops both in the basement and on the main floor. Both were instructed in the proper operation of the VCR and both were told to check the VCR from time to time during the day when they went to the basement work area to ensure that it was operating. Ancaster maintained six videocassettes, one for each day of the week on which the store was open. It was the responsibility of the goldsmith on duty at the time to go to the VCR room, remove the previous day's videocassette, place it in a separate rewinding machine, select the videocassette for the current day, insert it into the VCR and press the "record" button to record that day's activities in the retail sales area of the store.

[6] On Thursday, December 24, 1998, the goldsmith on duty was Harvey Brown. He arrived for work at 9:00 a.m. He went first to the ground floor workshop, then to the basement to attend to the VCR. He removed the Wednesday tape and replaced it with the Thursday tape. He testified that he heard the clicking sound made by the VCR when the recording head moved into place. Believing that the VCR was operating, he did not wait to observe the illumination of the blue circle on the VCR display screen.

[7] About an hour after the store opened for business that day, two men, their faces masked by balaclavas, entered the store and [page420] committed the robbery. The robbery lasted three or four minutes, and the police arrived within one or two minutes after it ended. Brown accompanied one of the investigating officers to the VCR room, where they discovered that the VCR had not recorded the event. The blue circle on the VCR display was not lit, there was no sound emanating from the VCR to indicate that it was engaged and the tape in the machine, when played, contained images from the previous Thursday and none from the day of the robbery.

[8] Ancaster's claim for indemnity for its loss was rejected by Pafco, whose president and chief executive officer wrote, in a letter to Ancaster's insurance broker, that "[t]he insured failed to implement a reasonably fail-safe procedure to assure compliance with the policy conditions, upon which we provided the coverage." No such position was asserted in Pafco's statement of defence or relied upon by Pafco at trial or on the appeal to this court.

The Findings of the Trial Judge

[9] The trial judge made the following findings:

(a) December 24th is Ancaster's busiest sales day of the year;

(b) the store was properly equipped with the alarms, protective devices, safes and vaults required by the warranties endorsement;

(c) the store was equipped with surveillance cameras connected to a concealed VCR, as required by the warranties endorsement;

(d) the VCR was not recording at the time of the robbery;

(e) because the two robbers were wearing balaclavas, it would not have been possible to identify their faces even if the VCR had been recording; and

(f) the reason the VCR was not "switched on and in operation" (the words are taken from the warranties endorsement) was that Brown either failed to press the record button or, having pressed it, failed to ensure that the machine had engaged and had begun to record.

[10] Neither party to this appeal took issue with any of these findings.

The Warranties Endorsement

[11] I set out below the provisions of the warranties endorsement that are relevant to the disposition of the appeal. For convenience, [page421] the full warranties endorsement appears as an appendix at the end of these reasons.

NAME OF INSURED: ANCASTER JEWELLERS LIMITED

It is warranted and the Named Insured acknowledges and agrees that it is a condition precedent to any right to recovery under this policy that:

(C) PROTECTIVE DEVICES. The following described protective devices have been installed at the location(s) insured as stated in section 2 and will be in proper working order and will be operational at all times, insofar as is within the Named Insured's control, when there are authorized personnel in the insured's premises; and will be switched on and in operation: Two hold-up buttons, surveillance cameras connected to concealed VCR recording on film.

The Named Insured warrants with [sic] each of the above conditions, and acknowledges that any failure to comply with any or all of the foregoing conditions shall cause the insured's right to recover indemnity to be forfeited and he shall not be entitled to be paid any monies whatsoever pursuant to this policy.

[12] The trial judge accepted as "correct and unassailable" Pafco's submission that the words in the warranties endorsement that the VCR would "be switched on and in operation" constituted a clear condition precedent to any right of recovery under the policy. In his view, the installation of the protective devices by the insured and the guarantee that they would be switched on and in operation were material to the insurer's assessment of the risk. He found no ambiguity in the wording of the policy and held that the phrase "insofar as is within the insured's [sic] control" modified the words "will be in proper working order and will be operational at all times". He then went on to say, at para. 27:

If the protective devices are not "switched on and in operation", as I have found to be the case, then the risk has been altered by the insured in breach of a condition precedent. Furthermore, it matters naught that the failure was that of an employee of the named insured. The named insured as employer is responsible in law for the failure or neglect of its employee.

(Emphasis added)

And, at para. 30:

It is not open to the insured to assert that it has complied with its undertaking by instituting a procedure which is usually effective, i.e. that it exerted its best efforts to comply when it is within its control to ensure that the equipment is in fact switched on and in operation.

(Emphasis added) [page422]

[13] The words highlighted in these quotations from the trial judge's reasons formed the basis of the principal argument on the appeal.

[14] Ancaster's position was that the endorsement applied only to the Named Insured, that Mr. Brown was not the Named Insured, and that the endorsement did not apply to the circumstances of the robbery. In its submission, the Named Insured -- Ancaster -- had instituted, insofar as was within its control, a reasonably fail-safe procedure to ensure that the VCR and the recording system were switched on and in operation, and the VCR's failure to operate on the day in question was a matter of human error by Mr. Brown to which the Protective Devices clause did not apply.

[15] Pafco acknowledged that the endorsement referred to the "Named Insured" but, in its submission (and as the trial judge held), that phrase included employees like Mr. Brown and the endorsement therefore applied to exclude Pafco's liability to indemnify Ancaster for its loss.

[16] I respectfully agree with the position advanced by Ancaster.

[17] For purposes of analysis, the language of the Protective Devices clause can be broken down into these components:

(1) "The following described protective devices have been installed at the location(s) insured as stated in section 2 . . ."

[18] There is no suggestion that the devices listed in the Protective Devices clause were not installed at the location insured.

(2) ". . . and will be in proper working order and will be operational at all times, insofar as is within the Named Insured's control, when there are authorized personnel in the insured's premises . . ."

[19] The trial judge found that the phrase "insofar as is within the Named Insured's control" modifies the words "will be in proper working order and will be operational at all times". However, immediately following the words "insofar as is within the Named Insured's control", there appear the words "when there are authorized personnel in the insured's premises".

[20] The reference to both "Named Insured" and "authorized personnel" is significant. The juxtaposition of those expressions in the Protective Devices clause recognizes the legal distinction between Ancaster as the Named Insured and persons such as the goldsmith whose function it was to engage and monitor the VCR. [page423]

[21] Pafco cannot rely upon every failure of the VCR to be "in proper working order and . . . operational at all times" to deny liability under the policy. It can rely only on such failures as are within the Named Insured's control.

[22] The trial judge gave as examples of events not within Ancaster's control: a sudden electrical power interruption, an unexpected mechanical breakdown or the jamming of the videotape in the VCR. While I agree with these examples, they do not exhaust the events that are not within the Named Insured's control. Once Ancaster installs a reasonably fail-safe protective system and properly instructs its employees in the operation and use of that system, it has met its obligation as "Named Insured" under the "Protective Devices" provision of the warranties endorsement. To hold Ancaster to a standard of perfection that excludes the possibility of human error turns it into a guarantor and effectively renders meaningless the qualifying phrase "insofar as is within the Named Insured's control".

(3) ". . . and will be switched on and in operation: Two hold- up buttons, surveillance cameras connected to concealed VCR recording on film . . ."

[23] These added words, that follow the phrase "when there are authorized personnel in the insured's premises", are repetitive of the Named Insured's obligation to install and maintain the required protective devices "in proper working order and . . . operational at all times". They do not impose on Ancaster any greater responsibility than the words that precede them. So long as Ancaster discharges its obligation to install the required protective devices and takes all reasonable steps to instruct its authorized personnel in their use and operation, it has satisfied its obligation under the Protective Devices clause and is not foreclosed by the terms of that clause from indemnity for loss sustained in an armed robbery.

[24] It will be recalled that the trial judge found that it did not matter that the VCR's failure to record on the day of the robbery was caused by the failure of an employee of the named insured, because the named insured as employer was responsible in law for the failure or neglect of its employees. The proposition that an employer is responsible in law for acts of its employees is well known. However, it does not apply where the parties to a policy of insurance have defined their mutual rights and responsibilities in language which suggests a distinction between employer and employee.

[25] The expressions "Named Insured" and "authorized personnel" appear specifically and separately in a number of places in [page424] the warranties endorsement. The expression "Named Insured" appears in the introductory words of the endorsement, in each and every one of the four subjects to which the endorsement applies (Inventory; Alarms; Protective Devices; and Safes and Vaults) and in the closing words of the endorsement, by which the Named Insured "warrants with [sic] each of the above conditions, and acknowledges that any failure to comply with any or all of the foregoing conditions shall cause the insured's right to receive indemnity to be forfeited . . .". The expression "Authorized personnel" is found in three of the subjects to which the warranties endorsement refers: Alarms; Protective Devices; and Safes and Vaults; indeed, in the references to Alarms and Protective Devices, the two terms are found together in the same sentence.

[26] I am fortified in my conclusion that the expression "Named Insured" in the warranties endorsement did not extend to Mr. Brown's error by reference to the policy of insurance itself. The policy took care, where Pafco thought it significant, to differentiate between the Named Insured and its employees and agents. The "Perils Excluded" section provides that the policy does not insure loss or damage caused directly or indirectly by misappropriation, secretion, conversion, infidelity or any dishonest act on the part of "the Named Insured or any other party of interest, employees, or agents of the Named Insured or any person(s) to whom the property insured may be entrusted". Similarly, the policy does not insure loss or damage caused by voluntary parting with title "by the Named Insured or its employees or agents". If the expression "Named Insured" extended to agents and employees of Ancaster, there would be no need to identify them separately in these provisions. The inference is that, when Pafco referred in the policy to the "Named Insured", it meant Ancaster alone, not Ancaster's agents and employees. Conversely, the failure of an employee to cause the VCR to engage as he had been instructed to do and as he had done on many prior occasions did not constitute a violation of the Named Insured's obligation under the warranties endorsement.

[27] I therefore conclude that the circumstances attendant upon the theft of Ancaster's merchandise did not constitute a failure to comply with the Protective Devices clause in the warranties endorsement.

[28] Having reached this conclusion, it is unnecessary for me to deal with Ancaster's further submissions in support of its appeal.

Disposition

[29] I would allow the appeal, set aside the trial judgment and in its place grant judgment in favour of Ancaster for $169,900, [page425] prejudgment interest and costs. Ancaster is entitled to its costs of this appeal, which I would fix in the amount of $15,000, plus disbursements and GST.

Appeal allowed.

[Appendix omitted. Please see original source.]

[page426]

Notes

Note 1: The facts were set out in careful and logical detail in the trial judge's reasons, and I have liberally borrowed from them in the paragraphs that follow.