COURT FILE NO.: CV-15-530714

DATE: 2020-12-11

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Cooke Aquaculture Inc. and True North Salmon Company, Plaintiffs

AND:

Continental Casualty Company carrying on business as CNA Canada, Defendant

BEFORE: Pinto J.

COUNSEL: James Manson, for the Plaintiffs Marc D. Isaacs and Michelle L. Staples, for the defendant

HEARD: September 21, 2020

REASONS FOR DECISION

Overview

[1] This is an insurance coverage dispute.

[2] The plaintiffs are engaged in the business of fish farming and fish processing in the Atlantic Provinces. On June 21, 2013, a large quantity of fish was contaminated at the plaintiffs' processing plant in Harbour Breton, Newfoundland and 35,801 pounds of fish had to be destroyed. The source of the contamination was oil that entered the water supply of the plant's ice-making machines. The plaintiffs filed an insurance claim worth $298,876.11. The defendant insurer denied the claim, relying on the "process clause" or the "fault in preparation" clause in the insurance policy. The plaintiffs commenced an action but, instead of proceeding to trial, the defendant brought a summary judgment motion to dismiss the claim on the basis that its denial decision was correct.

[3] I find that the action can be disposed of by way of summary judgment but that judgment should be granted in favour of the plaintiffs, not the defendant.

[4] The parties agree that the fish were being processed when the loss occurred. While ice is an integral part of fish processing, the use of contaminated ice is not. The unintentional and unexpected entry of oil into the water supply and ice that was used to cool the fish was the type of fortuitous event for which insurance was meant to cover. The addition of oil-contaminated ice to the salmon was not part of the plaintiffs' intended method, process or preparation for converting the fish from a natural product into a marketable product, therefore the exclusion clauses do not apply. Coverage should be extended to indemnify the plaintiffs' loss.

The Facts

[5] The plaintiffs, Cooke Aquaculture Inc. and its subsidiary, True North Salmon Company (hereinafter "Cooke"), commenced this action on June 18, 2015.

[6] The moving defendant, Continental Casualty Company carrying on business as CNA Canada ("CNA"), maintains that it correctly denied the claim based on certain exclusions in the policy.

[7] The facts are not in dispute. In its factum, the moving defendant described the relevant facts:

(1) Salmon fish processing involves, inter alia, the process of gutting and filleting fish in order to turn a salmon into a fish fillet for consumption.

(2) Cooke was an insured under a marine insurance policy bearing number 2837945 (the "Policy") issued to it by CNA. The Policy provides coverage for all risks of physical loss or damage from any external cause to property owned by Cooke. The Policy incorporates the Institute Frozen Food Clauses (A) and the Institute Cargo Clauses (All Risks) and (C).

(3) Cooke was the owner of 240,000 pounds of fish that it had harvested in the Atlantic Ocean.

(4) The fish were harvested from sea pens and transported by vessel in refrigerated holds to Cooke's facilities in Harbour Breton, Newfoundland for further processing.

(5) The harvesting process of the fish is conducted as follows:

(a) The fish pens are owned by Kelly Cove Salmon, a subsidiary of Cooke;

(b) The fish are processed at the True North Salmon Company's fish processing plant in Harbour Breton, Newfoundland. This plant has a fish processing license;

(c) The fish are stocked in the pens. At some point, a vessel goes out to the pens and removes the grown fish from the pens and puts them into a vessel. The fish are sucked up in a vacuum pipe from the ocean onto the vessel;

(d) As the fish come out of the vacuum pipe they end up on a table on the vessel's deck where the fish are stunned (by way of a machine) and their gills are cut, which causes the fish to bleed and die;

(e) The dead fish are then placed into the hold on the vessel and into and ice/sea water slurry mixture;

(f) The ice on the vessel is supplied at the Harbour Breton processing plant. The ice is loaded onto the vessel just before the vessel leaves on a journey to harvest the fish;

(g) The ice is used to keep the fish cool until they get to the plant. This is done to maintain quality and keep the fish from deteriorating;

(h) From this point, nothing else happens to the fish on board the vessel. The vessel then returns to the processing plant at Harbour Breton;

(i) Once the vessel arrives at Harbour Breton, the fish are then similarly sucked out of the vessel's hold and into the plant;

(j) Once at the plant, the fish are gutted and then placed in a tub. The tub contains ice flakes and a sea water slurry mixture;

(k) Ice is added to the water in the tub to keep the fish cold. This is done for quality purposes, so that the fish do not deteriorate and also to ward off bacterial growth;

(l) The tub is then moved to the "fillet line", where employees will cut the heads off the fish and feed the rest of the fish into a filleting machine, where the fish are filleted and boned, etc.

(6) The ice used for flakes noted above is manufactured at the True North Salmon Company facility in Harbour Breton, Newfoundland.

(7) The ice used on the vessel in the aforementioned process is loaded onto the vessel while it is preparing to leave to collect the fish from the pens.

(8) The fish was delivered to the gutting area of the processing plant on the evening of Thursday, June 21, 2013. The fish then sat in the tubs overnight until the employees of Cooke came in to work the morning of Friday, June 22, 2013.

(9) Once the fish are in the processing plant, individual employees use knives to gut the fish. Once gutted, the fish are placed into tubs which also contain ice and salt water.

(10) The purpose of adding the ice to the water in the tubs is to keep the fish cold for quality purposes. It is important to maintain the temperature of the fish to keep it cold until the final pack. This is so the fish does not deteriorate or develop bacterial growth.

(11) These tubs hold approximately 1,000 pounds of salmon and are specifically used to hold the fish prior to it entering the fillet line.

(12) The plant manager, Bill Carter, informed Cooke of a petroleum smell present in one of the fish tubs, which was first noticed at the processing plant in Harbour Breton, Newfoundland on the morning of Friday, June 22, 2013.

(13) The oily smell was first detected from a tub in the fillet area after the fish were gutted but before the fish went to the fillet line.

(14) At this point, there was no concern about oil or petroleum smells in the hold of the vessel used to transport the fish to the plant, nor was there a concern about the fish having an oily smell when coming off the vessel.

(15) Following the investigations carried out by Cooke, it was found that the oil was from a malfunctioning ice-making machine that produced the ice.

(16) The ice used in the tubs in which the oily smell was detected was manufactured at the Harbour Breton facility and the odour was a result of the aforementioned ice flakes being contaminated by oil.

(17) Due to the contamination of the fish, the claim being made by Cooke to CNA is for 35,801 pounds of fish that was destroyed due to the oil contamination.

(18) The quantum of the claim has been agreed at $288,761.33 if the loss is covered by the policy.

Analysis

[8] The parties agree that, as there are no issues requiring a trial, the action can be resolved by way of summary judgment. The parties disagree over which party should succeed and receive judgment on the insurance coverage issue.

[9] I find that the action can be disposed of by way of summary judgment: Rule 20 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194; Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87.

[10] The moving defendant relies on two exclusion clauses in the Policy to deny the plaintiffs' claim: the "Process Clause", found at paragraph 19 of the Policy; and the "Fault in Preparation" clause, found in the Frozen Food Extension Clauses to the Policy.

The "Process Clause"

19. Process Clause

This insurance remains in full force while the subject matter insured is under any process but in no case shall extend to cover loss and/or damage thereto solely caused by such process or resulting directly therefrom.

Exclusion 4.4

Frozen Food Extension Clauses

(for use only with the Institute Frozen Food Clauses (A) 1/1/86)

Clause 1 and Clauses 4.4 and 4.5 of the attached Institute Frozen Food Clauses (A) 1/1/86 are deemed to be deleted and replaced by:

1. Subject always to the goods being in sound condition at the time of attachment, this insurance covers, except as provided in Clauses 4, 5, 6 and 7 below, loss of, deterioration of, or damage to the subject-matter insured which shall arise during the currency of this insurance.

2. In no case shall this insurance cover …

4.4 loss, damage or expense arising from bone taint, salmonella, infection prior to attachment of this insurance, fault in preparation, dressing, cooling, freezing, wrapping or packing. …

Process Clause

[11] CNA submits that the loss was solely caused by the "processing" of fish, or resulted directly from the processing of the fish such that the Process Clause exclusion is applicable.

[12] CNA argues that from the moment the fish were taken from the pens in the ocean, processing was underway. Relying on the broad definition of "processing" in Ontario, Newfoundland and other provinces’ fish inspection Acts, which speak of "preparing fish for market", CNA maintains that the fish had entered the processing stage prior to its contact with the contaminated ice and, as such, the ice was part of the processing of the fish: Fish Inspection Act, R.S.N. 1990, c. F-12, s. 2 (“Newfoundland Fish Inspection Act”); Fish Inspection Act, RSO 1990, c F.18, s. 1 (“Ontario Fish Inspection Act”).

[13] CNA also points to case law which supports a broad definition of processing related to any of the steps that make a natural product more marketable: Mersey Seafoods Ltd. v. Minister of National Revenue, 1985 CarswellNat 439; R. v. Leader Cold Storage Ltd., 2005 BCSC 192.

[14] In Tenneco Canada Inc. v. R., 1987 CanLII 9000 (FC), [1988] 2 F.C. 3, "processing" is described as follows:

There are two criteria to define "processing". First, that the treatment must make the goods more marketable, and second, that there must be some change in the appearance or nature of the goods.

[15] The Tenneco definition of processing was cited with approval by the Ontario Superior Court of Justice in Union Gas Limited v. Municipal Property Assessment Corporation, 2016 ONSC 7128, at para. 13.

[16] CNA submits, in its factum, that:

[50] The fish owned by Cooke at issue here were clearly being processed as they were on a vessel where the process of readying them for export began, and their gills were sliced in order to make them more marketable and changed their nature from being live fish to a potential fillet. Further, had the ice not been used during processing the fish would have deteriorated and/or developed bacterial growth rendering them unmarketable.

[51] The loss suffered by Cooke resulted directly from the contaminated ice used in the tubs following the gutting of the fish and prior to its insertion into the filleting machine. If the fish had not been in contact with the ice, then the fish would not have been contaminated with the oil.

[17] Accordingly, CNA considers the plaintiffs' loss to be solely caused by the process, or resulting directly from the process that the plaintiffs used on or around June 21, 2013. In other words, CNA locates the loss within the regular processing of the fish and therefore excluded from coverage due to the "Process Clause" exclusion.

[18] Cooke disagrees and argues that the principles of interpretation applicable to insurance policies strongly support its position that coverage should be extended for its loss.

[19] Cooke argues that the "process clause" is a clause including both coverage and exclusionary language; and that coverage provisions in insurance policies are to be interpreted broadly, and exclusion clauses narrowly: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23; Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245.

[20] Cooke also submits that the "fortuity" principle must be borne in mind in this matter. Cooke relies on the Court of Appeal's decision in Sanofi Pasteur Ltd. v. UPS SCS, Inc., 2015 ONCA 88, 124 O.R. (3d) 81 at paragraphs 27-28:

To be covered by an all-risk policy, the damage must be due to some fortuitous circumstance or casualty. The insured is not required to prove the exact nature of the accident or casualty: see Goderich Elevators Ltd. v. Royal Insurance Co. (1999), 1999 CanLII 3196 (ON CA), 42 O.R. (3d) 577 (Ont. C.A.), at para. 15.

[21] In Stelco Inc. v. Royal Insurance Co. of Canada, 1997 CanLII 4435 (ON CA), 34 O.R. (3d) 263, the Court of Appeal also observed at paragraph 21:

It is important to begin with an understanding of what is meant by an "all risks" coverage and, also, by the expression "more specifically insured". According to Couch on Insurance, 2d Rev ed. (1982), at 48: 141: ..."[R]ecovery under an "all-risk" policy will, as a rule, be allowed for all fortuitous losses not resulting from misconduct or fraud, unless the policy contains a specific provision expressly excluding the loss from coverage." To the same effect is the definition approved by the House of Lords in British & Foreign Marine Insurance Co. v. Gaunt, [1921] 2 A.C. 41 (U.K. H.L.), at 47 and 51-52: "all risks ... were intended to cover all losses by any accidental cause of any kind" (referring to Schloss Brothers v. Stevens, [1906] 2 K.B. 665 (Eng. C.A.) at 673). See also Keeton and Widiss, Insurance Law (1988), at p. 19: "The term 'all-risk' insurance is generally used to refer to a method of defining insured events as all fortuitous losses.

[22] Regarding the definition of "fortuitous", the Supreme Court of Canada noted in Progressive Homes at paragraph 47:

Fortuity is built into the definition of "accident" itself as the insured is required to show that the damage was "neither expected nor intended from the standpoint of the Insured". This definition is consistent with this Court's core understanding of "accident": "an unlooked-for mishap or an untoward event which is not expected or designed" (Gibbens, at para. 22; Martin v. American International Assurance Life Co., 2003 SCC 16, [2003] 1 S.C.R. 158 (S.C.C.), at para. 20; Straits Towing, at pp.315-16; originating in Fenton v. J. Thorley & Co., [1903] A.C. 443 (U.K. H.L.), at p. 448). When an event is unlooked for, unexpected or not intended by the insured, it is fortuitous. This is a requirement of coverage; therefore, it cannot be said that this offends any basic assumption of insurance law.

[23] Cooke submits that the first part of the "Process Clause" - "This insurance remains in full force while the subject matter insured is under any process" - means that coverage is extended broadly while the fish are being processed, subject to the second part of the clause. And that the exclusionary part of the clause - "but in no case shall extend to cover loss and/or damage thereto solely caused by such process or resulting directly therefrom" - must be interpreted narrowly.

[24] Cooke argues that, for the "Process Clause" to have a reasonable commercial meaning, the exclusionary words must relate to the ordinary system of processing that has been devised by a particular insured with respect to the fish, and which happens in the ordinary course of an insured's processing operation. The exclusionary words do not include situations where external, fortuitous events arise that give rise to a loss - for example, the inadvertent ingress of oil into the ice used in the fish. Only damage solely caused by (or resulting directly from) the nature of the process itself is excluded. However, damage caused by external factors must be covered.

[25] In the law of insurance, coverage clauses should be interpreted broadly and exclusion clauses narrowly: Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., 1993 CanLII 150 (SCC), [1993] 1 S.C.R. 252, at para. 37. Also, an interpretation of the Policy that makes reasonable commercial sense is to be preferred over one that does not: Goodman v. AIG Commercial Insurance Co. of Canada, 2010 ONCA 391, 101 O.R. (3D) 714, at para. 26; Fruitbelt Trucking Inc. v. Markel Insurance Co. of Canada, 1982 CarswellOnt 1542, at para. 8.

[26] Here, Cooke's interpretation of the "Process Clause" aligns with the purposes for which any business takes out insurance - to prepare for the unexpected - whereas CNA's interpretation would mean that virtually all losses that occur during processing would be denied, which makes no commercial sense.

[27] Both parties agree that the loss occurred while the fish were being processed and that ice contaminated by the unintentional introduction of oil into the plant's water supply was the problem. However, Cooke's processing of the fish obviously contemplated the use of clean ice, not ice contaminated by oil. The contamination of oil was "unlooked for, unexpected or not intended by the insured" and therefore fortuitous. Any losses arising from the fortuitous event should be covered by the "all-perils" policy.

[28] At the hearing of the motion, the loss here was contrasted with a loss arising from an intentional processing decision that causes damage or loss, such as a process that involves the fish, after coming off the boats, sitting in the hot sun for 6 hours before being further processed. Obviously, that would constitute a process design flaw where the insurer would be entitled to deny coverage under the Policy since the loss (i.e. rotten fish) would be caused by the intended process or would result directly from it.

[29] As Cooke points out, CNA's position does not make commercial sense, because if its position is correct, then any fortuity whatsoever occurring during the processing phase would be sufficient to trigger the exclusion, which would render the coverage grant meaningless.

[30] I find therefore that CNA's decision to deny coverage based on the "Process Clause" in the Policy must fail.

Fault In Preparation Clause

[31] CNA also relies on the "fault in preparation" exclusion clause which is found in the Frozen Food Extension Clauses:

4. In no case shall this insurance cover …

4.4 loss, damage or expense arising from bone taint, salmonella, infection prior to attachment of this insurance, fault in preparation, dressing, cooling, freezing, wrapping or packing. …

[32] CNA, in its factum, submits that:

19. As the ice was used specifically for the purpose of keeping the fish cool during processing, and the contaminated ice caused the loss, it is clear that the loss occurred due to the cooling or freezing of the fish while it was being prepared for sale.

20. The loss is therefore a result of a fault in the preparation of the fish, namely the cooling of the fish by ice, used in order to maintain its quality and marketability.

[33] Cooke disagrees and makes the following arguments for why the "fault in preparation" exclusion cannot result in denial of coverage:

(a) Coverage emanates from the "Process Clause" which is part of the General Conditions of the Policy. However, the "fault in preparation" exclusion, being part of clause 4.4 of the "Frozen Food Extension Clauses" belongs to the Institute Conditions which are distinct from the General Conditions of the Policy. According to Conditions #59(a) of the Policy, in the event of an inconsistency between the printed (Institute) Conditions and the General Conditions of the Policy, the General Conditions will prevail to the extent of the inconsistency; and the insured shall, in all cases, have the benefit of any ambiguity in the Policy. Accordingly, the "fault in preparation" clause cannot be used to override coverage.

(b) The "fault in preparation" clause relates to cargo movements and, accordingly, does not touch on the facts of this case and cannot be used to deny coverage. This is because Cooke interprets section 8 of the Institute Frozen Food Clauses (A) entitled "Duration" as applying only while the subject matter is in transit from one facility to another. Here, the loss did not occur when the fish were in transit.

(c) The same logic used above with respect to the "Process Clause" applies to the "fault in preparation" clause, namely, the entry of contaminated ice was not part of the intended preparation or processing of the fish; therefore, coverage cannot be denied on the basis that Cooke's method of preparation was intentionally faulty. To interpret the "fault in preparation" clause the way CNA suggests would invariably result in denial of coverage and would make no commercial sense.

[34] As I agree with Cooke on each of the above three points, I find that coverage cannot be denied on the basis of the "fault in preparation clause." A careful reading of the Policy suggests that the "fault in preparation" clause pertains to goods in transit. I cannot see how it applies to the facts of this case. In any event, "fault in preparation" cannot mean a fault in preparation that is caused by an accident or that is distinct from the regular or expected preparation of the product. As was stated with respect to the "Process Clause", while ice was used in the preparation of the fish, contaminated ice was not.

[35] I find therefore that CNA's decision to deny coverage based on the "Fault in Preparation" clause must fail.

The Two Prior Claims

[36] Cooke submits that, with respect to two prior claims based on the same Policy, CNA paid out the claims in circumstances where fish were contaminated by oil from an external source, therefore, CNA is not justified in denying this claim.

[37] CNA submits that the evidence regarding two prior claims is irrelevant to this case and, in any event, Cooke has not met the legal criteria to present the external evidence that would be necessary to admit the evidence of these prior claims.

[38] I decline to rule on the relevance of the two prior claims to the within proceeding as I do not believe the parties sufficiently addressed this point in their facta or oral argument. I am reluctant to rule on an issue that may be important in the law of insurance without proper submissions. As well, as my ruling would make no difference to the disposition of the coverage issue, it would be obiter.

Conclusion

[39] As CNA's two reasons for denying coverage are not justified, CNA must extend coverage to cover Cooke's loss.

[40] The parties agreed that, in the event that coverage was extended, the deductible of $10,000 would apply, hence CNA shall cover Cooke's loss in the amount of $288,761.33.

[41] The plaintiffs are awarded their costs for the motion and the action. If the parties are unable to agree on costs, they shall make written submissions as to costs within 10 days of the release of these Reasons. Such written submissions shall not exceed three double-spaced pages, exclusive of Costs Outlines, Bills of Costs, Offers to Settle and authorities and are to be forwarded to me via my judicial assistant. If no submissions are received within this timeframe, the parties will be deemed to have settled the issue of costs.

Pinto J.

Date: December 11, 2020