Caneast Foods Ltd. v. Lombard General Insurance Co. of Canada, 2008 ONCA 368

Caneast Foods Ltd. v. Lombard General Insurance Co. of Canada et al. [Indexed as: Caneast Foods Ltd. v. Lombard General Insurance Co. of Canada]

91 O.R. (3d) 438

Court of Appeal for Ontario,

Rosenberg, Borins and Epstein JJ.A.

May 9, 2008

Insurance -- Exclusions -- All-risks policy excluding loss or damage caused by "mechanical or electrical breakdown or derangement" -- Insured sustaining substantial spoilage at its pickle processing plant [page439] when supply of electricity to refrigeration and pickle processing equipment was interrupted by regional blackout -- Losses not falling within mechanical breakdown exclusion -- "Breakdown" and "derangement" referring to internal problem or defect in machine and not to machine's failure to operate due to interruption in its power supply caused by regional blackout -- Electrical derangement exclusion not applying as there was no electrical supply to be disturbed.

The insured manufactured pickles. Due to a regional blackout that totally interrupted the supply of electricity to its refrigeration and pickle processing equipment for 27 hours, the insured sustained substantial spoilage of a large number of pickles and cucumbers. The insurer refused to indemnify the insured for its losses under an all-risks policy, relying on an exclusion clause for loss or damage caused by "mechanical or electrical breakdown or derangement". On the insured's summary judgment motion, the motion judge held that the exclusion did not apply. The insurer appealed.

Held, the appeal should be dismissed.

The mechanical breakdown or derangement exclusion did not apply. The words "breakdown" and "derangement" refer to an internal problem or defect in a machine, and not to the machine's failure to operate due to an interruption to its power supply caused by a regional blackout. The electrical derangement exclusion did not apply. Both parties relied on the same dictionary meaning of "derange": "to disturb the normal state, working, operation or functioning of". The electricity supply in this case was not disturbed by the blackout. Because of the blackout, there was no electrical supply to be disturbed.

APPEAL from the judgment of D.M Brown J., 2007 24074 (ON SC), [2007] O.J. No. 2556, 55 C.C.L.I. (4th) 53 (S.C.J.), for the plaintiff in an action against the insurer.

Cases referred to 942325 Ontario Inc. v. Commonwealth Insurance Co. (2006), 2006 7015 (ON CA), 81 O.R. (3d) 399, [2006] O.J. No. 908, 207 O.A.C. 382, 32 C.C.L.I. (4th) 163, 146 A.C.W.S. (3d) 356 (C.A.); Fresh Taste Produce Ltd. v. Sovereign General Insurance Co., 2005 34559 (ON CA), [2005] O.J. No. 4076, 27 C.C.L.I. (4th) 7, [2005] I.L.R. I-4451, 142 A.C.W.S. (3d) 717 (C.A.); Leo Deluca Enterprises Inc. v. Lombard General Insurance Co. of Canada, 2008 13790 (ON SC), [2008] O.J. No. 1230, [2008] I.L.R. I-4690, 60 C.C.L.I. (4th) 276, 166 A.C.W.S. (3d) 54 (S.C.J.), consd Other cases referred to 607697 Ontario Ltd. v. Anglo Canada General Insurance Co., 1989 10430 (ON SC), [1989] O.J. No. 6, 37 C.C.L.I. 302, 13 A.C.W.S. (3d) 226 (Dist. Ct.); Brown Fraser & Co. v. Indemnity Marine Assurance Co., 1958 225 (BC CA), [1958] B.C.J. No. 145, 16 D.L.R. (2d) 263, 27 W.W.R. 31, [1959] I.L.R. Â1-309 at 484 (C.A.); Cominco Ltd. v. Commonwealth Insurance Co., 1985 6499 (BC SC), [1985] B.C.J. No. 174, 13 C.C.L.I. 51, 34 A.C.W.S. (2d) 240 (S.C.); Triple Five Corp. v. Simcoe & Erie Group, 1997 ABCA 92, [1997] A.J. No. 248, 145 D.L.R. (4th) 236, [1997] 5 W.W.R. 1, 47 Alta. L.R. (3d) 310, 196 A.R. 29, 42 C.C.L.I. (2d) 132, [1997] I.L.R. I-3457, 69 A.C.W.S. (3d) 1118 (C.A.), affg 1994 9186 (AB KB), [1994] A.J. No. 760, 159 A.R. 1, 29 C.C.L.I. (2d) 219, 50 A.C.W.S. (3d) 1307 (Q.B.) [Leave to appeal to S.C.C. refused [1997] S.C.C.A. No. 263]

Mirilyn Sharp, for appellant. Kenneth Dekker, for respondent. [page440]

The judgment of the court was delivered by

BORINS J.A.: -- I

[1] Caneast Foods Limited ("Caneast") manufactures pickles. Lombard General Insurance Company of Canada insures Caneast under an "all risks" insurance policy. On August 14, 2003, due to a regional blackout, or power outage, that totally interrupted the supply of electricity to Caneast's refrigeration and pickle processing equipment for 27 hours, Caneast sustained substantial spoilage of a large quantity of pickles and cucumbers. Lombard refused to indemnify Caneast for its loss, relying on two exclusion clauses that precluded recovery because of "change of temperature" and "mechanical or electrical breakdown or derangement". On Caneast's motion for summary judgment, the motion judge held that the exclusion clauses were not engaged. Lombard appeals on the narrow ground that the motion judge erred in his interpretation of the term "derangement".

[2] Before reviewing the reasons of the motion judge, it is helpful to set out the relevant provisions of the insurance policy:

6. PERILS INSURED

This form insures against all risks of direct physical loss of or damage to the property insured except as herein excluded.

7. EXCLUSIONS . . . . . b. Perils Excluded

This form does not insure against loss or damage caused directly or indirectly: . . . . . (4) by centrifugal force, mechanical or electrical breakdown or derangement in or on the premises, but this exclusion does not apply to loss or damage from any ensuing fire or "accident to an object" as defined and limited in Section 20.i. of this form; (5) by dampness or dryness of atmosphere, changes of temperature, freezing (except with respect to insured water pipes), heating, shrinkage, evaporation, loss of weight, leakage of contents, exposure to light, contamination, pollution, change in colour or texture or finish, rust or corrosion, marring, scratching or crushing, but this exclusion does not apply to loss or damage caused directly by a peril insured and not otherwise excluded under this form; (Emphasis added) [page441] At trial, the s. 7.b(4) exclusion was referred to as the "Mechanical Breakdown Exclusion". II

[3] After reviewing the undisputed facts and setting out the relevant provisions of the insurance policy, the motion judge referred to the positions of the parties. Although Lombard conceded that Caneast's claim came within s. 6 of the policy and that the blackout was a cause of Caneast's loss, its position was that an excluded peril -- "mechanical or electrical breakdown or derangement" -- was also a cause of the loss. Accordingly, Lombard was not required to indemnify Caneast. Caneast contended that the Mechanical Breakdown Exclusion had no application in the circumstances of this case.

[4] The motion judge began by referring to two decisions of this court that considered coverage under all-risk policies for losses sustained during the same blackout -- Fresh Taste Produce Ltd. v. Sovereign General Insurance Co., 2005 34559 (ON CA), [2005] O.J. No. 4076, 27 C.C.L.I. (4th) 7 (C.A.) and 942325 Ontario Inc. v. Commonwealth Insurance Co. (2006), 2006 7015 (ON CA), 81 O.R. (3d) 399, [2006] O.J. No. 908 (C.A.).

[5] The insurance policy in Fresh Taste included exclusions identical to those in this case. The insured, a fresh-fruit distributor, lost stored produce when its refrigeration stopped operating as a result of the blackout. The motion judge in a brief endorsement granted the insurer's motion for summary judgment on the ground that both exclusions applied. An appeal to this court was dismissed. In a brief oral endorsement, this court stated, in para. 9 [at para. 20 of 2007 24074 (ON SC), [2007] O.J. No. 2556]:

On the question of whether the exculpatory clauses were clear and unambiguous, even if an argument can be made that an electrical derangement "in or on the premises" did not include a power failure from outside the premises, the language of the clause excluding changes in temperature, other than from perils named, is clear and unambiguous. The clause is not concerned with how the change in temperature is caused nor does it distinguish between losses due to natural and unnatural causes as the appellant suggests. Thus, we see no basis for interfering with the motion judge's decision.

[6] In Commonwealth, the blackout caused the loss of electric power at all of the plaintiff's 14 supermarkets, leading to loss of refrigeration which caused the spoilage of food. The application judge held that the power outage was a direct and proximate cause of the spoilage, which she found was covered by the broad terms of the policy. The policy contained a "changes of temperature" exclusion identical to the exclusion in this case. The application judge held that the exclusion did not apply because of the exception within the s. 7.b(5) exclusion, which I have highlighted above. [page442]

[7] In dismissing the insurer's appeal, in a brief endorsement, this court agreed with the application judge that the blackout was the proximate cause of the loss. The court added, at para. 3:

The respondent's stock would not have been discarded had the unusual and unexpected blackout not occurred. "Proximate" does not mean "closest in time"; the blackout was an effective cause of the loss.

[8] In respect to the "changes of temperature" exclusion, this court held, at para. 5:

Third, the appellants rely on the prior decision of this court in Fresh Taste Ltd. v. Sovereign General Insurance Co., 2005 34559 (ON CA), [2005] O.J. 4076, 27 C.C.L.I. (4th) 7 (C.A.) where, pursuant to a policy containing somewhat similar wording, the court held that the exclusion clause applied. In our opinion, the wording of the Fresh Taste policy is distinguishable from that in the present policy. Under both policies, coverage is excluded if the change of temperature was a direct or indirect cause of the loss. However, under the policy in the case before us, the exclusion is stated to not apply to "loss or damage caused directly by a peril otherwise insured and not otherwise excluded under this Section". The loss was caused by the power outage, "a peril otherwise insured", which was not "otherwise excluded" under the Section.

[9] Based on the Commonwealth case, counsel for Lombard conceded that she could not argue that the blackout was not the proximate cause of Caneast's loss and that the "changes of temperature" exclusion applied. As a result, Lombard relied on the Mechanical Breakdown Exclusion to deny coverage.

[10] In considering whether a breakdown had occurred in Caneast's refrigeration system, the motion judge considered Brown Fraser & Co. v. Indemnity Marine Assurance Co., 1958 225 (BC CA), [1958] B.C.J. No. 145, 16 D.L.R. (2d) 263 (C.A.), Triple Five Corp. v. Simcoe & Erie Group, 1994 9186 (AB KB), [1994] A.J. No. 760, 159 A.R. 1 (Q.B.), affd 1997 ABCA 92, [1997] A.J. No. 248, 196 A.R. 29 (C.A.) and 607697 Ontario Ltd. v. Anglo Canada General Insurance Co., 1989 10430 (ON SC), [1989] O.J. No. 6, 37 C.C.L.I. 302 (Dist. Ct.). At para. 37, the motion judge concluded:

In my view these cases support the conclusion that the phrase "mechanical or electrical breakdown" denotes a failure in the operation of a piece of equipment due to some mechanical or electrical defect in some part or parts of the equipment. It follows that where a machine ceases to operate because of an interruption in its power supply due to a regional blackout on the electricity grid, a mechanical or electrical breakdown of the machine does not occur. (Emphasis added)

[11] The motion judge did not accept Lombard's interpretation of "mechanical and electrical breakdown" for the following reasons:

(1) The sense of the word "breakdown" proposed by Lombard ignores the examples in the New Oxford Dictionary on how the word is used [at para. 30]: [page443]

Break down: (of a machine or motor vehicle) suddenly cease to function: his van broke down; (of a person) experience a sudden failure of function in the vehicle they are driving: she broke down on the motorway. (Emphasis in original)

The motion judge observed that both examples suggest that the motor vehicle ceased functioning because of some internal problem or defect.

(2) The meaning advanced by Lombard does not accord with the common understanding of "breakdown". In the motion judge's view, a "breakdown" normally refers to a situation where some part of a machine has broken, thereby preventing the machine from operating. He said that a machine does not "break" when its source of power is interrupted; although, the machine is operating because it has not its source of power.

(3) The case law strongly suggests that "breakdown" refers to an internal problem or defect in a machine.

[12] The motion judge then turned to the other part of the Mechanical Breakdown Exclusion -- "mechanical or electrical . . . derangement in or on the premises", noting that "derangement" has received little judicial attention. It was Lombard's position that if the power supply is functioning properly, no derangement is present; but if the power supply is not functioning properly, a derangement is present.

[13] The motion judge referred to Cominco Ltd. v. Commonwealth Insurance Co., 1985 6499 (BC SC), [1985] B.C.J. No. 174, 13 C.C.L.I. 51 (S.C.), in which "derangement" had been interpreted in a clause in an all risks policy providing coverage for "a derangement of any object". As part of the process of manufacturing area fertilizer, Cominco passed carbamate, a highly corrosive gas, through a condenser. Over the course of a year, serious corrosion occurred in one of the internal plates of the condenser. The trial judge, Lysyk J., held that a derangement of the condenser had occurred. At paras. 20-21 of his reasons for judgment, he wrote:

Counsel could cite no case in which the term "derangement" had been judicially considered. Counsel for Cominco relied on the ordinary dictionary meaning of the verb "derange" in the sense of "to disturb the normal state, working, or functions of" (Shorter Oxford English Dictionary, 3rd ed.) or "to disturb the operation or functioning of" (Websters Third New International Dictionary), with a corresponding meaning to be given "derangement". Counsel for Commonwealth did not take issue with a definition of the term along these lines.

I have no difficulty reaching the conclusion that there was in fact a disturbance of the normal state, operation and functioning of the condenser. [page444] Accordingly, I accept Cominco's primary submission to the effect that there was a "derangement" of the condenser within the scope and meaning of paragraph (ii) of clause 1.

[14] In addition, at para. 39, the motion judge referred to the trial judgment in Triple Five Corp., supra, in which the trial judge, Wilson J., wrote [at para. 210]:

I take comfort from the use of the word "derangement" in the exclusion clause I am considering. The definition of it in standard texts on words and phrases judicially considered indicate that it is defined most often in terms of mental health, but the dictionary definitions are such that in my view they support the conclusion that the exclusion defined here is one which includes design error. The word may connote either the act or the fact of being disordered or confused.

[15] Relying on Fresh Taste, Commonwealth, Cominco and Triple Five, the motion judge concluded, at para. 37:

In my view these cases support the conclusion that the phrase "mechanical or electrical breakdown" denotes a failure in the operation of a piece of equipment due to some mechanical or electrical defect in some part or parts of the equipment. It follows that where a machine ceases to operate because of an interruption in its power supply due to a regional blackout on the electricity grid, a mechanical or electrical breakdown of the machine does not occur. (Emphasis added) III

[16] As causation and the change of temperature exclusion were off the table in this court because of this court's decision in Commonwealth, counsel for Lombard limited her submissions to arguing that an electrical derangement had occurred when Caneast's refrigeration equipment could not operate because the blackout deprived it of electricity. She contended that the motion judge erred in failing to give "derangement" its plain and ordinary meaning and in failing to give proper weight to decisions that have considered similar losses arising from the same blackout.

[17] Counsel for Lombard relied on several dictionary definitions to argue that the plain meaning of "derange" is to "disturb the normal state, working, operation or functioning of" something, and, hence, the meaning of "derangement" is a disturbance of the normal state, working, operation, or functioning of "or a disturbance of the condition, action or functioning of". Counsel for Caneast relied on the same definitions. Counsel for Lombard argued that because there was an electrical disturbance of the normal state, operation or functioning of Caneast's refrigeration and processing equipment, there was an "electrical derangement" on Caneast's premises that engaged the exclusion. [page445]

[18] Counsel for Lombard suggests that Fresh Taste and Commonwealth, decisions of this court, support her position that the electric derangement exclusion applies. She suggested that in Fresh Taste, the court "appears to have accepted" that the power failure was an electrical derangement by raising, without deciding, whether an electrical derangement "in or on the premises" included a power failure from outside the premises. She further suggested that in Commonwealth this court "appears to have accepted" that but for the exception to the exclusion, the electrical derangement in or on the premises exclusion would apply to a loss of perishable food caused by a loss of power to the refrigeration equipment resulting from the blackout.

[19] Counsel for Lombard also relied on Leo Deluca Enterprises Inc. v. Lombard General Insurance Co. of Canada, 2008 13790 (ON SC), [2008] O.J. No. 1230, 60 C.C.L.I. (4th) 276 (S.C.J.), released about three weeks before this appeal was argued. In Deluca, the plaintiff, which operated a restaurant, sustained damages when its refrigeration did not function because of the blackout. It sued its insurer, Lombard, for indemnity under an all-risks policy that contained the identical mechanical derangement and change of temperature exclusions as the policy in this case. Lombard moved successfully to strike out the plaintiff's claim on the ground that the exclusions precluded recovery.

[20] The motion judge, Patterson J., found that the blackout was the proximate cause of the plaintiff's loss, and, therefore was covered by its all-risks policy. He also found that the all-risks policy covered all of the losses claimed by the plaintiff. The motion judge found that both the change of temperature and mechanical derangement exclusions applied. He did not follow the trial judgment in this case. Rather, he held, at para. 35, that "the derangement exclusion will apply regardless of the cause, internal or external". He was also of the view that Brown J. misinterpreted Cominco.

[21] Counsel for Caneast submitted that Lombard is wrong in its contention that an electrical derangement occurs when an electrically operated machine stops working because its source of electricity is cut off due to a blackout. He argued that it is contrary to case law, as well as to common sense, to find that an electrically operated machine breaks down or becomes deranged because it stops working when there is no electricity. IV

[22] In my view, the motion judge reached the correct result. He applied the proper principles of interpreting an insurance contract [page446] in construing the Mechanical Breakdown Exclusion. For the sake of completeness, I will briefly summarize these principles.

[23] The insurance policy is a contract. The ordinary rules applicable to the interpretation of contracts apply. The wording of the insurance contract must be given its plain and ordinary meaning. The insurer has received consideration for the coverage of stipulated risks. The promised coverage creates reasonable expectations on the part of the insured. If a loss falls within the ambit of the risks covered, the insurer must indemnify the insured for its loss, subject to the application of any exclusion clause. Coverage clauses should be construed broadly and exclusion clauses narrowly. Since insurance policies are essentially adhesionary, the standard practice is to construe ambiguities against the insurer.

[24] In my view, the motion judge was correct in finding that Caneast's loss was not caused directly or indirectly by "mechanical or electrical breakdown or derangement". I agree with his finding, based on the authorities to which he referred, that "breakdown" and "derangement" refer to an internal problem or defect in a machine, and not to the machine's failure to operate due to an interruption to its power supply caused by a regional blackout. Caneast's refrigeration did not stop because of some internal defect; it stopped because the power to it was cut off. Moreover, I agree with the motion judge that had Lombard intended to exclude blackouts from the perils covered by the policy, it would have been a simple matter to do so.

[25] The trial judge correctly observed that "mechanical or electrical derangement in or on the premises" has received little judicial consideration. "Derangement" is an odd word to be used in an exclusion clause in an insurance policy. It is generally used in respect to mental health and is synonymous for the impairment of bodily function. This is confirmed by a Quicklaw search of about 500 Canadian, American and English cases in which the word "derangement" is found. In virtually all of the cases, the word was used in respect to mental health or bodily function. Indeed, the only instances in which "deranged" is considered are those referred to in these reasons.

[26] Both Caneast and Lombard relied on the same dictionary definition of "derange" -- "to disturb the normal state, working, operation or functioning of". However, each party differed on the application of the definition to the power outage. In essence, Lombard's position was that there is a derangement if the power supply is not functioning properly. This is probably correct, and accords with the definition of "derangement". However, that is not what happened here. As the trial judge held, the electrical supply was not disturbed by the blackout. There was no electrical [page447] supply to be disturbed; because of the blackout there was no electrical supply. What happened was more than a disturbance of the electrical supply to Caneast's refrigeration equipment. There was no electrical supply, and, as a result, the refrigeration equipment failed to operate. It follows that the motion judge did not err in giving "derangement" its plain and ordinary meaning and in finding that the electrical derangement exclusion did not apply.

[27] As I have indicated, Lombard relied on the decision of this court in Fresh Taste and the recently decided Deluca case to support its interpretation of "derangement". Both cases appear to hold that the derangement exclusion applied in circumstances similar to those in this case. In my view, neither case is of any assistance to this court.

[28] While the motion judge in Fresh Taste held that both the temperature and derangement exclusions applied, the motion judge did not provide reasons for the holding relating to the derangement exclusion and this court dismissed the appeal solely on the basis of the temperature exclusion. As for Deluca, in my view, Patterson J. erred in his interpretation of the derangement exclusion in holding, in effect, that a machine dependent on electricity that "operates" as expected when the electricity is cut off is deranged. A further problem with Deluca is that the motion judge appeared to find that the temperature exclusion also applied. It is unclear from his reasons whether he was referred to this court's decision in Commonwealth. V

[29] For all of the foregoing reasons I would dismiss the appeal with costs to Caneast fixed in the amount of $15,000 inclusive of disbursements and GST.

Appeal dismissed.