ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: 13-57330

DATE: 2014/06/23

BETWEEN:

Mississippi River Power Corporation for Plaintiff

and –

Municipal Electric Association Reciprocal Insurance Exchange for Defendant

Helmut R. Brodmann for Plaintiff

Mitchell K. Kitagawa for Defendant

HEARD: April 10, 2014

REASONS FOR JUDGMENT

M. Z. Charbonneau

[1] The plaintiff, Mississippi River Power Corporation (“MRPC”) brings a motion for summary judgment for a declaration that policy of insurance No. P2012M1R12 issued by the defendant, Municipal Electric Association Reciprocal Insurance Exchange (“MEARIE”) to the plaintiff was in full force and effect between January 1st , 2012 and January 1st , 2013 and for a declaration that the policy covers and indemnifies MRPC in respect of property damage and business interruption associated with the idling of Penstock # 1 located at MRPC’s hydroelectric generating facility at Almonte, Ontario.

[2] The defendant brings a cross-motion for summary judgment dismissing the plaintiff’s action.

[3] The relevant facts are not in dispute and both parties submit that this is a proper case for a final determination of all issues in this case without the need for a trial. I agree. I am satisfied that the essentially uncontradicted evidence is amply sufficient to allow me to make the necessary findings of facts, to apply the law to the facts and provide a proportionate, more expeditious and less expensive means to achieve a just result. ( Hryniak v. Mauldin et.al.2014 SCC 17.)

THE EVIDENCE

[4] The plaintiff constructed a power generation station on the Mississippi River located at 246 Almonte Street, Almonte. The existing power station was expanded commencing in 2008. Part of the station consisted of two “Penstocks” which are large diameter concrete encased steel pipes designed to channel water to hydraulic turbines. They are part of the newly expanded station. The new station began operations in April 2010.

[5] On April 13th, 2012 Penstock # 1 failed and collapsed upon itself severely restricting the flow of water to the turbines. The cause of the failure was later found to have been caused by faulty construction of Penstock # 2. The likely defect causing the failure of the liner of the Penstock was defective welds at the joint between the draft tube and the transition piece.

[6] Inspections of Penstock # 1 revealed that the quality of the welding was not acceptable at many locations and that there was a risk that the liner in Penstock # 1 could collapse in the future. The plaintiff received an engineering report recommending that all existing welds should be reviewed and any deficient welds re-welded to industry specifications.

[7] The plaintiff shut down Penstock # 1 on June 15, 2012 pending completion of the inspections. The repairs for Penstock # 1 were commenced in December 2012. Penstock # 1 was idle until February 23, 2013 at which date it was brought back on line.

[8] The defendant has indemnified the plaintiff for the costs of repairs to Penstock # 2 and for the business interruption losses caused by its failure. The defendant has refused to provide any coverage for the costs of the repairs and/or business interruption occasioned by the shut down and repairs of Penstock # 1.

THE POLICY

[9] The policy contains the following relevant provisions:

“SECTION A

PROPERTY DAMAGE

Words or phrases that appear in quotation marks have special meaning. Refer to Definitions in SECTION F.

1. PERILS INSURED

This Policy insures against all risks of direct physical loss or damage to the Property Insured from perils not otherwise excluded, subject to the terms and conditions of this Policy.

In the event of direct damage to any Property Insured on the described premises insured by this Policy and such damage, without the intervention of any other independent cause, results in a sequence of events which cause physical damage to other Property Insured by this Policy, then this Policy will cover such resulting loss or damage. Nothing in this clause shall be deemed to extend this insurance to property which is otherwise specifically excluded from coverage by the terms of this Policy.

2. PROPERTY INSURED

A. Property Insured

This Policy covers real and personal property, including improvements, betterments and equipment, owned, leased, operated or controlled by the Insured and for which the Insured is legally liable, unless otherwise excluded, at the Locations specified in Schedule of Locations attached to and forming part of this Policy.

SECTION B

BUSINESS INTERRUPTION (“GROSS PROFIT”)

Words or phrases that appear in quotation marks have special meaning. Refer to Definitions in Clause B of this section.

1. INSURING AGREEMENT

The Company agrees to pay the amount of loss of “gross Profit” directly resulting from the necessary interruption of Business at a Location specified in Schedule of Locations attached to and forming part of this Policy as being insured by this Coverage, resulting from direct physical loss or damage to Property Insured by a Peril Insured against, by the Policy. Such Property Insured must be on the premises of a Location specified in Schedule of Locations as being insured by the Policy, and is subject to the terms, conditions and provisions of the Policy.

3. ADDITIONAL EXCLUSIONS

The Company shall not be liable for payment for any interruption or interference with Business:

A. For any time during which Business would not, or could not, have been carried on if loss of damage had not occurred;

B. Resulting from the failure of the Insured to use due diligence and dispatch and all reasonable means in order to resume Business;

C. Resulting from loss or damage to property in transit or property in the course of construction; nor

D. Resulting from loss or damage for breach of contract, for late or non-completion of order or for any penalties of whatever nature.

5. ADDITIONAL CONDITIONS

E. Reduction of Payment

As soon as possible after an “occurrence”, the Insured shall continue or resume Business, in whole or in part, and make up lost business within a reasonable period of time (not to be limited to the period during which the Business is interrupted) through the use of every available means, which may be owned or controlled by the Insured or obtainable by the Insured from other sources and through working extra time or overtime at the specified location or at such other Locations acquired for the purpose of making up lost business, all to the extent that the amount for which the Company would otherwise be liable under the Coverage is reduced. The Company may take such means as will, in the opinion of the Company, reduce or avert prevention of Business at the Location or supply the functions of the Location in some other way.

SECTION D

EXCLUSIONS

2. PERILS EXCLUDED

Part III This Policy does not insure against:

A. Any defect or fault in material, workmanship, or design. However, if insured loss or damage directly results as a consequence of the defect or fault in material, workmanship, or design excluded above, the Company shall be liable for said consequences. The Company shall be liable for only those costs which are in addition to the costs of rectifying such defects or fault had the loss of damage not occurred.

B. (i) wear and tear, deterioration, rust, corrosion or erosion;

(ii) gradual cracking, settling, shrinkage, bulging, expansion or other gradually developing defects;

All unless loss by a peril otherwise insured against hereunder ensues and then the Company shall be liable only for such ensuing loss;

SECTION F

DEFINITIONS

1. “OCCURRENCE”

The term “Occurrence” shall mean any loss or series of losses arising out of one event.

However, as respects the periods of “Wind”, “Earth Movement”, “Flood” and “Terrorism”, the term “Occurrence” shall mean the sum total of all the losses sustained by the Insured as the result of damage from these perils which arise during a continuous period of seventy-two (72) hours. The Insured may elect the moment from which each of the aforesaid periods of seventy-two (72) hours shall commence, but no two such seventy-two (72) hours periods shall overlap.

7. “ACCIDENT”

As used in this Policy, “Accident” shall mean a sudden and accidental breakdown of the “object”, or a part thereof, which manifests itself at the time of its “Occurrence” by physical damage to the “Object” that necessitates repair or replacement of the “Object” or part thereof.”

SECTION G

CONDITIONS

13. REQUIREMENTS IN CASE OF LOSS

When insured loss or damage occurs, written notice shall be given by or on behalf of the insured to the Company as soon as practicable. The Insured shall protect the property from further damage. The Company shall have reasonable time and opportunity to examine the property and the premises of the Insured before repairs are undertaken or physical evidence of the loss or damage is removed, except for protection or salvage.

STATUTORY CONDITIONS

9. SALVAGE

The Insured, in the event of any loss of damage to any property insured under the contract, shall take all reasonable steps to prevent further damage to such property so damaged and to prevent damage to other property insured hereunder.

THE POSITION OF THE DEFENDANT

[10] The defendant submits that the policy does not cover the losses suffered by the plaintiff because the losses were not the result of an accidental or fortuitous event but rather deliberatively caused by the insured’s decision to shut down Penstock #1 as a precautionary measure. There was no loss directly or proximately resulting from physical damage to the property” caused by an Occurrence covered by the policy.

[11] Similarly, the policy only covers business interruption losses “directly resulting from the necessary interruption of Business” and “resulting from direct physical loss or damage to Property Insured against.” The defendant submits there was no “direct physical loss or damage to the Property.”

[12] Alternatively, the defendant submits that the policy explicitly excludes repairs for “any defect or fault in material, workmanship or design”. It is the position of the defendant that the defective welding falls under this exclusion.

[13] The defendant relies on the exclusion for “wear and tear, deterioration, rust, corrosion or erosion” and for “gradual cracking, settling, shrinkage, bulging expansion or other gradually developing defects”.

[14] The defendant submits that the decision of the plaintiff to shut down Penstock #1 was a precautionary measure not covered by the policy because there was no accidental or fortuitous event. Shutting down a penstock to inspect for wear and tear is not covered under the policy.

[15] Finally, the defendant submits the plaintiff is not entitled to be indemnified for business interruption losses since the plaintiff did not have to idle Penstock #1 for repairs until Penstock #2 was repaired. There would have been no business interruption if the plaintiff had proceeded in this fashion.

THE PLAINTIFF’S POSITION

[16] The plaintiff submits that the “Occurrence” covered the policy was the failure of Penstock #2. The resulting peril and obligation to shut down Penstock #1 directly flowed from that occurrence and caused the resulting loss because both Penstocks had the identical design, construction and operation. The plaintiff relies on condition 9 of the policy which requires the insured to “take all reasonable steps to prevent further damage “ not only to the damaged property but also “to prevent damage to other properly insured”.

[17] The policy required the plaintiff to “protect the property” from further damage.

The plaintiff acted prudently and reasonably in the circumstances to protect the property. It is unusual that the defendant would have be obliged to pay a much larger sum if the plaintiff had not acted as it did in order to avoid the foreseeable event. The defendant covered the loss associated to Penstock #2 resulting from the defective welding. It is reasonable to conclude that the foreseeable future failure of Penstock #1 was covered by the same policy. In the circumstances of this case, the peril of the collapse of Penstock #1 had actually arisen and the preventive measures taken by the plaintiff are recoverable under the policy.

FINDINGS OF FACT

[18] On the evidence which is in large measure uncontradicted, I make the following findings of facts:

1. Penstock #1 and Penstock#2 were built as part of the same expansion of the electric station. They were similarly designed, constructed and perform in the same function.

2. The cause of the collapse of the liner in Penstock#2 was poor quality welding at the joint between the transition piece and the draft tube. The transition piece in Penstock #1 was of similar construction and geometry as the transition piece in Penstock #2.

3. The welding performed in Penstock #1 was of poor quality. The experts who examined Penstock # 1 recommended that the transition piece should be re-welded before bringing Penstock #1 back on-line.

4. It was foreseeable that Penstock #1 would sometime in the future fail in the same way and for the same reasons that Penstock #2 had failed.

5. The plaintiff made the decision to idle Penstock #1 and proceeds to repair the welds before putting Penstock #1 on-line. At that time, Penstock #1 was not damaged and operational.

6. If Penstock #1 failed as a result of poor quality welding, the policy would have covered the losses and/or damage resulting directly therefrom. The defendant would have indemnified the plaintiff in the similar way that they have indemnified the plaintiff for damages and losses when Penstock #2 failed.

ISSUE

[19] Are the losses suffered by the plaintiff as a result of the plaintiff’s decision to idle Penstock #1 and immediately proceed to repair the welds covered by the terms of the policy?

ANALYSIS

[20] The policy provides coverage for all risks except specifically excluded. The Superior Court of Canada sets out the principles which govern the interpretation of an all-risk policy:

a) The primary interpretive principle is that when the policy is unambiguous, the court should give effect to the clear language of the policy, reading the policy as a whole. The focus of the exercise is on the language of the policy;

b) where the language of the policy is ambiguous, the general rules of contract construction are to be employed. These include preferring constructions that are consistent with “the reasonable expectations” of the parties, avoiding constructions that would not have been in the contemplation of the parties, and ensuring that similar policies are interpreted in a consistent fashion;

c) where these rules of construction fail to resolve an ambiguity, the principle of contra proferentem is applied against the insurer. One corollary of this rule is that coverage provisions are to be construed broadly and exclusion clauses are to be given a narrow interpretation”.

[21] The policy does not insure against:

Any defect or fault in material, workmanship, or design. However, if insured loss or damage directly results as a consequence of the defect or fault in material, workmanship, or design excluded above, the Company shall be liable for said consequences. The Company shall be liable for only those costs which are in addition to the costs of rectifying such defects or fault had the loss of damage not occurred.

(i) wear and tear, deterioration, rust, corrosion or erosion;

(ii) gradual cracking, settling, shrinkage, bulging, expansion or other gradually developing defects;

All unless loss by a peril otherwise insured against hereunder ensues and then the Company shall be liable only for such ensuing loss.

[22] In this case the plaintiff chose to rectify the defects before any loss. The cost of repairing the defects are not covered because they are specifically excluded by the above- noted paragraph. It is clear the parties intended the costs of repairing the defects not to be covered whether before or after damage to the property. In view of the plaintiff’s decision to repair and correct the faulty workmanship there is no loss recoverable for the costs of the repairs.

[23] The plaintiff relies on the obligation imposed on it by statutory condition 9, namely an obligation “to prevent damage to other property”.

[24] The defendant submits that statutory conditions did not require the plaintiff to idle Penstock #1 and immediately proceed to repairs of the faulty welds. The defendant relies on a case having very similar facts. The majority decision in Hartford v. Benson &Hedges found that the insured could not recover the costs of correcting faulty welding in tanks which had not yet exploded. The insured had relied on statutory condition 9 to make that claim as the Plaintiff is doing in this case at pp1101-1102, Justice Pratte writes:

The inspection of the unruptured tanks was intended to show whether the

welding on these tanks was also defective and the risk of rupture real. These

Inspections and tests did not reduce or extinguish such risk any more than it was created or increased by them. The risk of some of the other tanks exploding because of faulty workmanship in their construction always existed; the work of Warnock and Independent served to surface the risk, to make its existence known to Insured and Insurers alike.

The work of the second category did not per se prevent any damage or further damage to any property insured under the policies. The risk of an explosion was not reduced by the inspection but by the re-welding that was done following the tests. However, this inspection was a necessary prerequisite to the correction of the defective workmanship in some of the unruptured tanks and as such the cost would be recoverable from the appellants if and to the extent that respondent was obligated by sub-para. 1 of statutory condition No. 9 to correct the faulty workmanship in the tanks that had not exploded.

The issue here is as to whether the obligation stipulated in sub-para. 1 of

Statutory condition No. 9 is limited “to prevent damage” that would

otherwise normally result from the peril that has already come into operation

or whether it also extends to averting the occurrence of another peril so as to prevent the damage that would normally result from such other peril.

The distinction essentially is as between the obligation to minimize a loss and the obligation to minimize the risk that has yet to materialise. At common law, the Insured has a duty to mitigate his loss, but he is however under no obligation to minimize the risk, indeed the negligence of the Insured which is not so gross as to amount to a wilful act would not be a good defence to an otherwise valid claim of the Insured.

The obligation set out in sub-para. 1 of statutory condition No. 9 arises “in the event of any loss or damage”, i.e. if one of the perils insured against come into operation. This indicates that the damage to be mitigated must result from the contingency that has occurred as opposed to being the consequence of another contingency that has yet to occur.

Confirmation for this view may be found in the fact that the right of the Insured to recover a loss is by statutory condition No. 6 made conditional upon sub-para. 1 of statutory condition No. 9 being complied with. In the absence of clear and unambiguous language, I cannot accept that sub-para. 1 of statutory condition No. 9 be constructed so as to make the right of the Insured to recover an actual loss resulting from a peril that has come into operation conditional upon the Insured preventing the occurrence of another peril.

Furthermore, there does not seem to be any reason why the insured, who

Has become aware of the probability of the operation of a risk following a loss, should be under any greater obligation than if he had acquired the same information prior to any loss.

[25] The plaintiff submits that it is entitled to be indemnified for the business interruption losses notwithstanding that there was not yet any damage to Penstock #1 on the basis of the principle of imminent peril. The principle is set out as follows by the Supreme Court of Canada in Canadian General Electric Company v. Liverpool and London & Global Insurance Co. 1981 50 (SCC), [1981] 1 SCR 600 at para. 33:

Essential to an understanding of the rule and its application is the condition that before liability arises there must be an operating peril of the type or category described in the insurance contract. The danger must be present in the sense that unless something is done, damage will ensue. It may be that in the vagaries of nature, actual damage may not have been suffered (as in the Maine case, supra), but if the peril has actually arisen and damage can be reasonably anticipated from the peril (assuming it to be in the contract an enumerated risk), then damage suffered as a result of the preventive measures taken by the insured will be recoverable. (The Knight of St. Michael, supra).

Returning to the circumstances in this appeal, the critical question at this stage of the proceedings is not whether or not the insured event has occurred but whether or not the damage occasioned by the insured arose by reason of preventive action

taken to avoid the imminent risk covered by the contract, namely an explosion. Here the exothermic reaction had begun and had reached an irreversible stage. This, however, did not on the evidence lead inevitably to an explosion and the evidence adduced by the plaintiff falls short of a demonstration of anything approaching inevitability.

[26] The plaintiff points out that the damages to Penstock #2, namely the collapse of the liner event due to faulty welding was a peril covered by the policy since the defendant indemnified the plaintiff. Therefore, the plaintiff submits there was clear evidence of an eminent peril of damage to Penstock #1 that it was reasonable to correct the situation. The resulting losses namely the business interruption losses flow directly from the preventive measures taken.

[27] I am of the view that the terms of the policy do not cover the costs of the repairs to Penstock #1 nor the business interruption losses resulting from the repairs to Penstock #1. There was no imminent peril in the sense that the peril had been engaged at the time the plaintiff took its decision and that it was “inevitable”. At best, it was foreseeable that Penstock #1 could fail sometime in the future. Although it was more probable than not that it would fail, it did not constitute an inevitable peril. Nothing in the policy provides for the course of action chosen by the plaintiff notwithstanding that the plaintiff’s actions in correcting the faulty welds was reasonable in all the circumstances. There is no ambiguity in the wording of the policy which requires the court to find liability on the part of the insurer in these facts.

[28] For all these reasons the plaintiff’s motion is dismissed. The defendant’s motion is allowed and the action is dismissed. If necessary, counsel for the defendant may submit written submissions on costs within 20 days and the plaintiff’s counsel may respond within 15 days thereafter.

Justice M.Z. Charbonneau

Released: June 23, 2014

Mississippi River Power Corporation v. Municipal Electric Association Reciprocal Insurance Exchange, 2014 ONSC 3784

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Mississippi River Power Corporation for Plaintiff

And

Municipal Electric Association Reciprocal Insurance Exchange for Defendant

REASONS FOR JUDGMENT

Justice M.Z. Charbonneau

Released: June 23, 2014