2012 ONSC 468, 2012 ONSC 468

CITATION : O’Byrne v. Farmers’ Mutual Insurance Company, 2012 ONSC 468 COURT FILE NO.: CV-06-2589-00 DATE: 2012 05 08 ONTARIO SUPERIOR COURT OF JUSTICE B E T W E E N: ) ) BLAKE O’BYRNE and COLLEEN O’BYRNE ) ) )) Robert N. Kostyniuk Q.C., for the Plaintiffs Plaintiffs ) )) - and - ) )) FARMERS’ MUTUAL INSURANCE COMPANY (LINDSAY) ) ) )) Martin P. Forget and Brianne Simionati, for the Defendants Defendants ) ) ) ) HEARD: January 10-13, 16, 17 and 31, and February 24, 2012 REASONS FOR JUDGMENT Sproat J. INTRODUCTION [ 1 ] The plaintiffs’, Blake O’Byrne and Colleen O’Byrne, own a commercial building in Minden.

On March 13, 2005 oil leaked from a second floor furnace causing damage to the building. The defendant, Farmers’ Mutual Insurance Company (Lindsay) (“Farmers’”), insured the building but denied coverage initially on the basis of a pollution exclusion and later on other provisions of the insurance policy (“the Policy”). [ 2 ] Many of the facts are admitted or are not seriously contested. Therefore, I begin with an overview of these facts as I find them. I then discuss in general terms the credibility and reliability of the evidence given by the O’Byrnes.

Finally, I turn to the various grounds on which Farmers’ has denied coverage and the damages suffered by the O’Byrnes. In discussing these issues I will, as necessary, analyze the evidence and make further findings of fact. OVERVIEW – THE FACTS [ 3 ] The plaintiffs purchased a commercial building in Minden in 1998. The main floor had commercial space. As of 2005, two apartments (“apartment 1” and “apartment 2”) were located on the second floor. Apart from the 100 square foot space on the main floor, leased to H&R Block, the plaintiffs had difficulty in leasing the main floor.

The plaintiffs, therefore, started a make-your-own wine store utilizing the balance of the main floor. The entire building was insured by Farmers’. [ 4 ] In the late evening of Sunday, March 13, 2005 Mr. Rowden, one of the tenants of apartment 2, returned home and noticed an extremely strong oil smell. He telephoned Anita Hayes, who worked for the plaintiffs at the wine store, to report the problem. She in turn called the plaintiffs at their home in Mississauga late that night. Ms. Hayes also arranged for the company that regularly serviced the furnace to come to the building.

[ 5 ] Grant Shaw was the only qualified furnace technician who testified. Mr. Shaw attended the premises first thing Monday morning. He discovered that the cover of the furnace, and a further cover over a control panel, had been removed. Cardboard paper had been inserted between a set of contacts the result of which was to by-pass the thermostat which would ordinarily turn the furnace on and off.

His evidence was not seriously challenged in cross-examination and I accept it as to the cause of the oil spill. [ 6 ] With the thermostat by-passed, the furnace temperature was only monitored by a fan limit control which would turn off at 200 degrees. As soon as the furnace fell below 200 degrees it would turn back on. Forcing the furnace to run, more or less continually, at this excessively high temperature would cause the ignition component to fail. This could be, for example, as a result of the high heat warping the nozzles or carbon accumulating in the nozzle.

Whatever the specific reason, on a balance of probabilities it was the by-pass and high heat which caused the ignition to fail to re-ignite. When this occurred the oil continued to be pumped but was not burned and so overflowed. Mr. Shaw testified that the furnace had received annual maintenance. [ 7 ] The tenant of apartment 1 was in receipt of some form of social assistance and, therefore, apartment 1 had been leased to, and was paid for by, Haliburton Highlands Mental Health Services Corporation (“Haliburton”).

Haliburton had been a defendant but the plaintiffs settled with Haliburton on the eve of trial. [ 8 ] The plaintiffs immediately reported the incident to their local insurance broker who notified Farmers’. The plaintiffs also notified Haliburton. [ 9 ] Farmers’ assigned an independent adjuster, Brent Clarkson, to investigate the loss. By letter dated March 28, 2005 he advised the plaintiffs that the loss was not covered due to the fact the Policy had a pollution exclusion. [ 10 ] While nothing turns on it, I find that Mr. Clarkson did not forward the Proof of Loss form. Mr.

O’Byrne testified that it was not enclosed with the letter. The letter as produced in Farmers’ affidavit of documents does not contain a copy. Mr. Clarkson acknowledged the possibility of an error in his office. [ 11 ] Mr. Clarkson did, however, obtain two repair estimates. Mr. O’Byrne forwarded the repair estimates to Haliburton. Mr. Burr was dealing with this matter on behalf of Haliburton. Initially it appeared that Haliburton was prepared to accept responsibility.

After the matter was reviewed by more senior officials at Haliburton, and presumably by legal counsel, Haliburton denied liability. [ 12 ] The plaintiffs commenced an action on July 26, 2006 claiming against Haliburton under the lease and Farmers’ under the insurance policy. As appears from its Statement of Defence, Haliburton took the position that it was not obliged to compensate the plaintiffs for a loss that was insurable. [ 13 ] Farmers’ filed a Statement of Defence dated November 24, 2006 which pleaded that the relay in the furnace had been by-passed resulting in the oil spill.

Farmers’ relied only on the pollution exclusion to deny liability. [ 14 ] Farmers’ filed an Amended Statement of Defence dated May 11, 2010 taking the further positions: (

a) that the plaintiffs were precluded from bringing the claim having failed to file a Proof of Loss; and (

b) that the loss was excluded as being caused directly or indirectly by mechanical or electrical breakdown or derangement. APPLICABILITY OF INSURANCE POLICY CONDITIONS AND EXCLUSIONS Alleged Failure of Farmers’ to Prove that the Policy Was Delivered to the O’Byrnes [ 15 ] The position of the plaintiffs, first advanced in final argument, was that Farmers’ could not rely upon the Policy exclusions as Farmers’ had not proven that it “issued”, that is delivered, the complete policy to the O’Byrnes. The plaintiffs rely upon s.124(1) of the Insurance Act which provides that: 124.

(1) All the terms and conditions of the contract of insurance shall be set out in full in the policy or by writing securely attached to it when issued, and, unless so set out, no term of the contract or condition, stipulation, warranty or proviso modifying or impairing its effect is valid or admissible in evidence to the prejudice of the insured or beneficiary. [ 16 ] Rule 25.06 obliges a party to plead the material facts on which it relies.

Rule 25.06(3) requires that if a party contests the occurrence of a condition precedent to a defence it shall specify and plead the non-occurrence. [ 17 ] The alleged failure to deliver should have been pleaded. I, as well as Mr. Forget, was unaware until receipt of material the day before final argument that this was an issue. [ 18 ] Further, in examination-in-chief Mr. O’Byrne was not asked about what, if any, Policy documents were delivered to him from the time of the purchase of the building in 1998 until the oil spill in March 2005. What documents he actually received is likely within his sole knowledge.

For example, Farmers’ may have records of letters sent, but only Mr. O’Byrne knows what documents he actually received. The onus was on the plaintiffs to prove non-delivery and they have failed to do so. [ 19 ] To further illustrate the problems caused when matters are not pleaded, Mr. Forget asked to re-open his case to read in excerpts from Mr.

O’Byrne’s discovery indicating he was in receipt of some insurance documents prior to the oil spill. [ 20 ] First, I would not consider the plaintiffs’ argument in the absence of a pleading asserting non-compliance with the condition precedent. [ 21 ] Secondly, there is no evidence that the Policy was not delivered.

[ 22 ] Finally, we know the O’Byrnes purchased insurance. Either they received a copy of the Policy, which as a matter of common sense and experience is almost invariably the case, or they were content to not ask for a copy. The O’Byrnes, however, assert coverage under the Policy and claim losses pursuant to the Policy terms. As such it seems to me to be unfair that they can take the contractual benefits but not be subject to the contractual limitations. I agree with Hwang v. Axa Pacific Insurance Co. , [2001] B.C.J.

No. 1213 (B.C.C.A.) at paras. 33-40 , which considered a very similar statutory provision to s.124(1) , and concluded that the insured must take the whole of the Policy wording or none of it.

Failure to File Proof of Loss-Failure to Have Loss Appraised-Waiver [ 23 ] The Policy, under the heading “Statutory Conditions”, provides in condition 6 that the insured shall “deliver as soon as practicable a Proof of Loss verified by a statutory declaration...” Further, condition 11 provides: In the event of disagreement as to the value of the property insured, the property saved or the amount of the loss, those questions shall be determined by appraisal as provided under the Insurance Act before there can be any recovery under this contract whether the right to recover on the contract is disputed or not, and independently of all other questions.

There shall be no right to an appraisal until a specific demand therefore is made in writing and until after proof of loss has been delivered. [ 24 ] Since an appraisal can only occur after a Proof of Loss a waiver of the requirement to file a Proof of Loss would effectively also waive the requirement of an appraisal.

As such my analysis will focus on the Proof of Loss requirement. [ 25 ] The Policy contained a non-waiver provision, which tracked s. 131 of the Insurance Act , and provided that an effective waiver required that it be “clearly expressed in writing, signed by a person authorized for that purpose by the insurer”. [ 26 ] Mr. O’Byrne also signed a Non-Waiver Agreement dated March 15, 2005. The standard language simply provided that actions by the insurer to investigate and negotiate cannot be taken as a waiver of rights. [ 27 ] Mr.

Clarkson, Farmers’ adjuster, by letter dated March 28, 2005, advised the O’Byrnes that there was no insurance coverage due to the pollution exclusion and then stated: To comply with the Insurance Act of Ontario , a Proof of Loss form is enclosed; however, as outlined this form is forwarded on every claim in this case coverage is not applicable and therefore completion of same would not be required. [ 28 ] Mr. Clarkson testified that when he sent his March 28, 2005 letter he believed that Haliburton would be paying the loss. Mr. Clarkson testified that he explained orally to Mr.

O’Byrne that if he wanted to pursue a claim against Farmers’ he would have to file a Proof of Loss. [ 29 ] The O’Byrnes retained counsel who wrote to Farmers’ by letter dated September 12, 2005. Carol Thomas, Farmers’ Property Claims Examiner, responded noting that the O’Byrnes had been advised by Mr. Clarkson’s letter of March 28, 2005, that the loss was not covered. [ 30 ] What I take from this is that on a matter of fundamental importance, whether the O’Byrnes were covered, Farmers’ elected to communicate with the O’Byrnes through Mr. Clarkson. Mr.

Clarkson testified he did not generally have the authority to waive contractual rights on behalf of Farmers’. There is, however, no suggestion that he lacked authority to send his letter of March 28, 2005. In that letter he was speaking on behalf of Farmers’. Farmers’ did nothing to disavow the letter and no one from Farmers’ testified at trial. It was Mr. Clarkson who, I find, had both actual and apparent authority to communicate with the O’Byrnes on behalf of Farmers’. I, therefore, regard the March 28, 2005 letter by Mr.

Clarkson as equivalent to a letter from Farmers’ itself advising the O’Byrnes that a Proof of Loss is not required. [ 31 ] Mr. Clarkson impressed me as an essentially honest and fair witness. As I will later explain in more detail the O’Byrnes also impressed me as essentially honest and fair witnesses. Mr. Clarkson acknowledged that he had some personal issues distracting him during this time period. To Mr. Clarkson the conversations with Mr. O’Byrne were fairly routine. To Mr. O’Byrne the matters discussed were of vital importance. On balance I find that Mr. Clarkson did not explain to Mr.

O’Byrne orally that he would need to file a Proof of Loss if he wanted to pursue a claim. [ 32 ] Further, I construe and find that Mr. Clarkson’s letter of March 28, 2005 constituted a waiver by Farmers’ of the Proof of Loss requirement. [ 33 ] The O’Byrnes retained counsel and commenced an action July 26, 2006. Under the Rules of Civil Procedure the onus was then on Farmers’ to plead the material facts on which it relied. [ 34 ] When Farmers’ filed its Statement of Defence dated November 24, 2006, it did not plead a failure to file a Proof of Loss or assert any related defence.

As I observed during argument, and Mr. Forget fairly conceded, if the trial had proceeded on the original Statement of Defence, the plaintiffs could have obtained a judgment despite the fact they had never filed a Proof of Loss. [ 35 ] Farmers’ Amended Statement of Defence is dated May 2010. If Farmers’ is correct: (

a) until May 2010 the failure to file a Proof of Loss was a non-issue in that it was not a bar to recovery on the part of O’Byrnes; but (

b) upon amending the Statement of Defence, after the limitation period, the failure of the O’Byrnes to file a Proof of Loss, and the related failure to submit to the appraisal process, was fatal to the claim. [ 36 ] Final argument began January 31, 2012 and was completed February 24, 2012. By letter dated February 3, 2012 I asked counsel to consider five points. Point (4) was as follows:

In the course of argument I observed, and Mr. Forget agreed, that if the case had proceeded to trial on the original statement of defencethe fact that a proof of loss had not been filed, and an appraisal had not been undertaken, would not bar the plaintiffs’ recovery. Inreviewing the chronology further, it appears from the court file that while the Amended Statement of Defence is dated May 11, 2010 itwas obtained on a motion dated December 30, 2010 which was a motion in writing. The actual order allowing the amended pleading isdated April 8, 2011. It is unclear whether this was on consent.

In any event, the affidavit in support of the motion to amend the pleading states that the Amended Statement of Defence does not assertnew facts or a new defence. As I understand it, however, the argument of Farmers’ is that the amendment having been granted theplaintiffs’ claim must fail because the plaintiffs have not filed a proof of loss and the limitation period had expired as of the date of theamendment. I bring this to your attention and if either counsel takes the position that this is legally significant, I will consider those submissions. [37] Mr.

Forget’s position was that the Motion Record, while in the court file provided to me, is not part of the evidence at trial and Ishould not have any regard to it. I agree with Mr. Forget. It is not my role to review the consent order that permitted Farmers’ toamend. My obligation is to decide the case on the pleadings in the Trial Record and the evidence at trial. [38] It is, however, clear on the face of the Trial Record that the Amended Statement of Defence is dated May 16, 2010 and oneamendment was to plead the failure to file a Proof of Loss as a bar to bringing the action.

It remains then that Farmers’, under anobligation to plead the defences it relied on, did not plead the failure to file a Proof of Loss until approximately 3½ years after its initialpleading. Farmers’ obviously authorized and speaks through its Statement of Defence. Farmers’ effectively took the position that thecourt should determine the O’Byrnes’ rights without a Proof of Loss. There is no reason to regard this as a slip or error that Farmers’could not have intended. For an insurer that is confident there is no coverage this may be a prudent tactic.

An appraisal involves eachside appointing an appraiser, an umpire then being selected and some type of hearing process. Why require a Proof of Loss and go to theadditional expense of an appraisal if the insurer is confident the action will be dismissed? [39] While not essential to my reasoning, as I have already found that Mr. Clarkson’s letter constituted a waiver by Farmers’, Iregard the Statement of Defence initially filed by Farmers’ as a further waiver of this requirement. Amending its pleading years laterdoes not nullify or impair the effectiveness of the waiver. [40] Mr.

Forget took the further position that the plaintiffs did not plead and so could not rely upon waiver. Mr. Kostyniuk took theposition it was not necessary to plead waiver. [41] I am inclined to the view that waiver should have been pleaded. It was, however, clear throughout the trial that the plaintiffsrelied upon waiver. This issue was addressed by both sides in terms of the evidence and argument presented. If it is necessary to pleadwaiver I would grant leave nunc pro tunc to the plaintiffs to do so.

There is no prejudice to the defendant. [42] Farmers’ also made reference to the fact that in paragraph 9 of the Statement of Claim the O’Byrnes pleaded that they did notfile a Proof of Loss because they were not asked to do so while at the discovery Mr. Kostyniuk stated it was not filed because there wasno requirement to do so if coverage was denied. I do not, however, see that advancing those positions, even if incorrect, operates todeprive the O’Byrnes of relying upon an actual waiver of the Proof of Loss requirement by Farmers’. Failure to Repair Damage to Property [43] Subsection III (

a) of the Policy provides that Farmers’ shall pay “the cost of repairing, replacing, constructing or reconstructingthe property (whichever is the least)”. The insured must undertake the necessary work “with due diligence and dispatch”. Further, theliability of Farmers’ shall not exceed the amount “actually and necessarily expended” to do the work. [44] The position of Farmers’ is that the plaintiffs’ failure to perform the work bars recovery by the O’Byrnes. Mr. Forget’sposition was that even if the O’Byrnes were impecunious, and so unable to effect the repairs, that is irrelevant.

The contractual bar torecovery is absolute. [45] The text Insurance Law in Canada (Brown and Donnelly) states in

Chapter 11.2(d): ...problems have arisen out of insurers’ typical requirement that payment for replacement depend on actual replacement (or repair)having been made and that it has been done with due diligence. Provisions such as these may create a catch-22 for a customer if s/he isunable to finance the repairs without insurance money. [...] But if the insurer refuses to pay for other reasons, such as an allegation ofarson, that turn out to be invalid, the insurer cannot defeat the claim for replacement cost on the ground that the customer failed toexercise due diligence. ... [46] The authors cite Olynyk v.

Advocate General Insurance Co. of Canada (1984), (MB KB), 32 Man. R. (2d)171 (Man. Q.B.), affirmed (1985), (MB CA), 33 Man. R. (2d) 234 (Man. C.A.) for the forgoing proposition. InOlynyk Scollin J. stated: However, an insurance company which wrongfully repudiates the contract and refuses to make any payment at all cannot defeat theclaim of the insured to be indemnified against the costs of actual replacement simply because the insured has not exercised due diligencein getting on with the rebuilding. The breach by the insured is overshadowed by the much more basic breach by the insurer.

In this casethe repudiation by the insurance company, however understandable, turned out to be unjustifiable, and it is very much a smudged fingerwhich the company points at the insured for delaying the decision to rebuild. It is not inequitable that an insured person who has paidthe premium set by the company for replacement indemnity should be able, when the risk materializes, to have a fair opportunity ofdeciding what to do in the light of the funds which will be available. Complete repudiation by the insurance company cripples theanticipated freedom of action of the insured.

[ 47 ] I, therefore, conclude that, to paraphrase Insurance Law in Canada and Olynyk , the refusal of Farmers’ to pay means that Farmers’ cannot rely upon the failure to effect repairs to defeat the O’Byrne’s claim to damages based on replacement cost. [ 48 ] While this is sufficient to determine the issue, I will, nonetheless, address the financial ability of the O’Byrnes to effect the repairs themselves. [ 49 ] Mr. O’Byrne testified that he was not satisfied that the scope of work in the 2005 estimates would in fact restore the building to its pre-spill state.

Specifically a proper restoration would require that areas saturated by oil would be replaced such that there would be no smell of oil. [ 50 ] Mr. O’Byrne was asked why the repairs had not been completed as of trial. He answered: A. We haven’t had the funding. If we – and if we did and we started to open up the building without being able to complete it, we’d be out of – out of business because of the – the smell would permeate through – we believe the smell would permeate throughout our retail store and cause all sorts of damage and problems done there that would ruin our, our wine business as well.

We’d be stuck with a – perhaps a partially completed building or partially completed repair. [ 51 ] It is helpful to provide some additional context. As of March, 2005 the O’Byrnes lived in Mississauga. Mr. O’Byrne sold real estate from approximately 1995 to 2007. They obviously had some financial challenges because when they sold the Mississauga home in June 2006 for $507,000 they netted only $57,000 after existing mortgages were paid and $100,000 was paid to the Canada Revenue Agency (“CRA”) for tax arrears. [ 52 ] Ms.

O’Byrne testified that as of March, 2005 they were in financial difficulty and so planned to move to Minden in order to “get back on their feet”. She noted they owed a lot of money to the CRA. [ 53 ] Mr. O’Byrne had heart related medical problems in 2006. They moved to Minden in 2006. Their Minden apartment is nice it is a far cry, in economic terms, from a $507,000 home in Mississauga. The wine store has been their principal source of income since 2006. [ 54 ] The O’Byrnes also borrowed money from Ms.

O’Byrne’s mother and still pay $640.00 a month on that loan. [ 55 ] In a nutshell, the defence position is that the O’Byrnes are attempting to con or cheat Farmers’. Farmers’ suggests they know the damage is superficial, they have grossly exaggerated the cost of repair and that they simply want to put cash in their pocket on account of repairs that will never be done.

I do not agree. [ 56 ] I can well understand, in the situation they found themselves, why the O’Byrnes would not embark upon a major repair job (which, as I will discuss, would involve removing the wine store ceiling and replacing a structural beam) when they had no way of knowing the full extent of the work that was required or the cost and Farmers’ position was that it had no responsibility. As later discussed in detail, the difficulty of predicting the cost is illustrated by the defence expert Mr. Ketner who estimated that the work proposed by the plaintiff’s expert Mr.

Thompson would cost approximately four times the amount estimated by Mr. Thompson. The O’Byrnes as of 2005 had a relatively modest capacity to earn income. Proceeding with repairs the scope of and cost of which were highly uncertain, at the same time as pursuing litigation against Farmers’ and being exposed to pay costs to Farmers’, could have been ruinous. [ 57 ] Having heard the O’Byrnes give their evidence, and considering the totality of the financial evidence, I am satisfied and find that the O’Byrnes have acted in good faith and reasonably in not effecting the repairs to date. As noted, Mr.

O’Byrne gave up a career in real estate and has had health problems. There is no evidence Ms O’Byrne had any employment history prior to the wine store. They moved to Minden to get back on their feet. They live in a modest apartment. They had every reason to be careful and conservative and not undertake repairs of uncertain scope and cost. [ 58 ] Farmers’ advanced the argument that the O’Byrnes did not plead impecuniosity as a reason for not having made the repairs and should not be able to rely upon it. First, on the authority of Olynyk I do not think the O’Byrnes have to prove impecuniosity.

According to Olynyk the wrongful denial of coverage deprives the insured of a fair opportunity of deciding what to do in light of the funds that will be available and deprives the insurer of the right to rely upon the failure to repair. Secondly, voluminous personal financial records of the O’Byrnes were put in evidence and this issue was fully explored in evidence and argument regardless of whether it was specifically pleaded. The Pollution Exclusion [ 59 ] Policy

Section 1 – paragraph 2C provides as follows: 2C POLLUTION EXCLUSION This policy does not insure against

a) loss or damage caused directly or indirectly by any actual or alleged spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of “pollutants”, nor the cost or expense of any resulting “clean up”, but this exclusion does not apply: (

i) if the spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of “pollutants” is the direct result of a peril not otherwise excluded on this policy;

(ii) to loss or damage caused directly by a peril not otherwise excluded under this policy. [60] The Policy also contains the following definition: “Pollutants” means any solid, liquid, gaseous or thermal irritant, or contaminants including odour, vapour, fumes, acids, alkalis,chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed. [61] Zurich Insurance v. 686234 Ontario Inc., (ON CA), [2002] O.J. No. 4496 (Ont. C.A.) is a recent andbinding authority which addresses the proper

interpretation of a pollution exclusion. The wording of the exclusion was similar to theFarmers’ exclusion. It applied to, “the actual, alleged or threatened discharge, dispersal, release or escape of pollutants”. Zurich’s policydefinition of “pollutant” is virtually identical to the Farmers’ definition. In my opinion, there is no material difference between Zurich’sand Farmers’ pollution exclusion. [62] I distil the following from Zurich: (

a) the use of words such as “discharge, dispersal, release and escape” reflect that the exclusion is directed to a pollutant thatresults in traditional environmental contamination: see para. 16; (

b) the pollution exclusion does not apply to injuries caused by common irritants and contaminants emitted from a faulty furnace:see para. 18; (

c) the pollution exclusion can be reasonably interpreted as applying only to environmental pollution: see para. 19; and (

d) if the exclusion is capable of more than one reasonable

interpretation it is ambiguous and should be interpreted in favour ofthe insured: see para. 39. [63] In argument, Farmers’ placed considerable reliance upon Corbould v. BCAA Insurance Corp., 2010 BCSC 1536 ,[2010] B.C.J. No. 2125 (B.C.S.C.) in which Sigurdson J. found that an oil spill from an above-ground oil storage tank was subject to apolicy exclusion of liability for “the release, discharge or dispersal of contaminants or pollutants”. Corbould is in my view clearlydistinguishable. In that case 950 litres of oil, from an above-ground tank, seeped into the soil.

The spill was reported to the authoritiesand a cleanup was undertaken in accordance with the standards in the Contaminated Sites Regulation, B.C. Reg. 375/96. It costapproximately $200,000 to excavate and remove the contaminated soil. Within the principles that I have distilled from Zurich, this wasclearly a case of traditional environmental contamination that is subject to a standard pollution exclusion. [64] Relying upon Zurich, I find that the Farmers’ pollution exclusion should be interpreted in favour of the insured such that it onlyexcludes traditional environmental contamination.

In our case the oil remained within the building and probably within 30 feet of thefurnace and did not amount to traditional environmental contamination. Mechanical Exclusion-Derangement Exclusion [65] The Policy provides: 2B PERILS EXCLUDED This Form does not insure against loss or damage directly or indirectly caused by, resulting from, contributed to or aggravated by: ...

e) centrifugal force, mechanical or electrical breakdown or derangement in or on the “premises”... [66] I now turn to interpret this exclusion. First, I consider the four authorities relied upon by Farmers’. [67] In Caneast Foods Ltd. v. Lombard General Insurance Co. of Canada 2008 ONCA 368 , [2008] O.J. No. 1811 (Ont.C.A.) the court was concerned with interpreting a mechanical exclusion that was identical to the Farmers’ exclusion quoted above. Thecourt cited with approval the

interpretation of Brown J. at trial that: ...the phrase “mechanical or electrical breakdown” denotes a failure in the operation of a piece of equipment due to some mechanical orelectrical defect in some part or parts of the equipment. [68] Further, Borins J.A. for the Court of Appeal, in finding that coverage was available, stated: ...I agree with his finding, based on the authorities to which he referred, that “breakdown” and “derangement” refer to an internalproblem 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 regionalblackout.

Caneast’s refrigeration did not stop because of some internal defect; it stopped because the power to it was cut off. ... [69] In Triple Five Corp. v. Simcoe and Erie Group, (AB KB), [1994] A.J. No. 760 (Q.B.), a roller coaster failedresulting in fatal injuries, damages to buildings, and millions of dollars in business interruption damages. Wilson J. found that the failurewas due to a design defect and that insurance coverage was not available due to the policy exclusion of liability for “mechanicalbreakdown or derangement”.

[ 70 ] In my opinion Triple Five is distinguishable. There, the roller coaster was itself the cause of its own destruction. In our case the furnace was well maintained and had no defects. [ 71 ] Farmers’ also cited 607697 Ontario Ltd. v. Anglo-Canada General Insurance Co., [1989] O.J. No. 6 (Ont. Dist. Ct.) in which the policy insured against loss of livestock resulting directly from a number of causes including “mechanical breakdown of fans.” Misener J. found that the fans overheated and then, due to a safety device, shut down.

But for the safety device the fans would have continued to overheat and would eventually have seized. Because the fans shut down, the barn temperature escalated, and 2,200 chickens died. [ 72 ] Misener J. found that insurance covered the loss. In part he reasoned that if the fans had no safety device and had failed, insurance coverage would be clear, so the parties could not have envisioned the opposite result due to the existence of the safety device. To paraphrase Borins J.A. in Caneast, the fans had an “internal problem or defect” causing them to overheat. [ 73 ] Finally, Farmers’ cites Cominco Ltd. v.

Commonwealth Insurance Co., [1985] B.C.J. No. 174 (B.C.S.C.) . In that case, one stage in the manufacture of fertilizer required that a corrosive substance be passed through a condenser. The condenser was designed such that the corrosive substance would only contact stainless steel. In 1978 the condenser was inspected and was normal. In 1980 it was inspected and substantial corrosion was found in carbon steel components which are susceptible to corrosion. This resulted in a three week shutdown and a claim for damages under a business interruption endorsement.

The policy excluded liability for mechanical breakdown and derangement. Lysyk J. found that there was a derangement in the sense of “a disturbance of the normal state, operation and functioning of the condenser” and so the exclusion applied. In Cominco , as in Triple Five, and 607697 there was something faulty in the machine itself. [ 74 ] In argument I put to Mr. Forget the admittedly unlikely scenario that a tenant hit the furnace with a baseball bat causing a pipe to split and a spill to occur. Mr.

Forget’s submission was that the cause of the mechanical breakdown was irrelevant and this scenario would fall within the mechanical-derangement exclusion. [ 75 ] As discussed, the furnace did not, on the evidence, have any internal problem or defect. It was well maintained and according to Mr. Shaw would have continued to operate for a long time. [ 76 ] Further, the words of a contract must be construed having regard to their context and purpose. The parties agreed to a category or zone of risk being excluded from coverage.

I would describe this as the risk that a mechanical system is poorly designed, manufactured with a defect, not properly maintained or simply fails over time. [ 77 ] What I regard as a different category or zone of risk is what I will describe “human factors” or colloquially “the tenant doing something unexpected or stupid”. Examples would include:

a) leaving the water running and overflowing a sink thereby flooding the building; or

b) leaving a frying pan with oil unattended on a hot element and burning the building down.

c) roughhousing causing someone to fall against a pipe and break it. [ 78 ] Farmers’ knew this was a rental building. Insurers charge a premium taking into account the associated risk. The Policy was, in my view, intended to cover a category or zone of risk created by the tenant doing something unintended or stupid. I see no material difference between a tenant being stupid and causing a fire, flood or in this case being stupid and causing an oil spill. [ 79 ] There was no internal defect or problem in the furnace. Further, the exclusion was not intended to exclude damage caused by a tenant.

Accordingly the mechanical-derangement exclusion does not bar recovery. DAMAGE TO PROPERTY The Extent of the Oil Spill – What Needed to be Repaired [ 80 ] Various witnesses testified as to the nature and extent of the oil spill. [ 81 ] Grant Shaw testified the motor on the furnace was running when he attended Monday morning. A reasonable inference is that the furnace must have been spilling oil for several hours to create the strong smell which Mr. Rowden detected late the previous evening. Mr.

Shaw was not, however, asked about the rate at which oil is pumped so it is not possible to quantify the amount of oil that would have been pumped over approximately 10 hours. The spill may, of course, have occurred over a longer period. [ 82 ] Mr. O’Byrne, who went to Minden March 16 or 17, testified that an area of the store ceiling was saturated. There was an awful smell in the store and an even stronger smell in the apartment.

The sub-floor in apartment 1 was saturated in the vicinity of the furnace. [ 83 ] Anita Hayes testified in-chief that there was a puddle of oil on the ceiling and some drops coming down. In cross-examination she said the reference to a puddle was the stain on the ceiling and that oil was not actually dropping to the floor. She could not recall if oil was spreading out of the furnace closet or whether the carpet was wet.

[ 84 ] Cindy Watson of H&R Block said that on the morning of May 14 she has a distinct memory that there was oil dripping from the ceiling. That was the reason she went into the premises briefly to cover her computer. She said she could smell the odd bit of oil in her office up to the end of May, 2005 when the office closed at the end of the tax season. [ 85 ] When asked about the extent of the oil spillage, Grant Shaw was quite animated in indicating that there was “oil everywhere”. He referred to the fact that oil creeps and can saturate items.

In cross-examination he said that there was an area of carpet that was full of oil. [ 86 ] James Thompson, the plaintiff’s expert, testified that oil had soaked into the beam that was under the furnace such that it should be replaced. He said it was necessary to remove the beam, and any other contaminated material, to get rid of the smell. [ 87 ] Mr. Burr, of Haliburton, saw oil damage but could not recall an oil smell on March 15. On March 24 he went to apartment 1. He believes the smell would have been reduced at that time because the apartment was not heated. [ 88 ] Mr.

Clarkson, the independent adjuster, said that on March 15 he noticed a very slight smell of oil in the wine store. There was an oil smell within the staircase leading upstairs. Areas of the carpet in apartment 1 were soaked. Oil had soaked up a couple of inches into the drywall between the living room and bedroom and the living room wall and the closet area in apartment 1. Mr. Clarkson said there was also some damage in the bedroom because oil, like smoke, leaves a pungent smelly residue on everything. He said the kitchen had a smelly residue.

He told the O’Byrnes that if they got rid of the items that were saturated it would greatly reduce the smell. He returned to take photos on January 3, 2012. That time he went only inside the wine store and did not notice any smell. [ 89 ] Robert Sisson, a contractor who provided a repair estimate to Mr. Clarkson, could smell oil in apartment 1 when he was there May 5, 2009. [ 90 ] Mr. Ferguson, at the time the owner of Service Master who provided a repair estimate to Mr. Clarkson, attended March 17, 2005.

He said there was an oil smell in the apartment and a detectable, but not a strong, oil smell in the wine store. [ 91 ] Curtis Ketner, an expert in construction and remediation called by Farmers’, attended the premises for the first time on March 31, 2009 and 4 times after that. He said he could not really find any evidence of an oil spill or oil damage over the 5-6 hours that he spent on the premises. He said he carefully inspected the drywall and baseboards and did not find any evidence of staining. He did not see any damage under the floor in the area where the furnace had been.

He said that 9-10 ceiling tiles appeared to be stained by oil. He looked at the space underneath baseboards where some of the carpeting was taken out. He did not see any sign of oil. On photo 42 he did recognize a stain but was not sure if it was oil. He said the white powder that he observed did not appear to have absorbed moisture. He said he inspected the bottom of the drywall very carefully but could not detect any sign of oil. He did not smell any oil on his attendances.

On Exhibit 15 he circled an area of possible leakage onto the ceiling tiles. [ 92 ] Justin Rowden, a tenant in apartment 2, came home late on March 13 and there was a bad smell of oil coming out of the heat register in the ceiling. At some point he went into apartment 1 with Anita Hayes and saw oil on the floor in the furnace room. He and his partner returned approximately one week later and there was no smell in apartment 2 at that time. They remained living in apartment 2 until June when they moved into their own house. [ 93 ] My analysis of this evidence follows. [ 94 ] The fact that Mr.

Ketner could not detect oil in 2009 does not mean that oil did not soak in to the wood and drywall. Numerous witnesses attest to the fact that a substantial quantity of oil spilled. The evidence, as well as common sense, indicates that oil can soak into wood and drywall. [ 95 ] Mr. Clarkson is an experienced adjuster who was retained by Farmers’. As an adjuster part of his job was to look for and document damage. He certainly had no interest or motive to favour the plaintiffs. I, therefore, accept Mr.

Clarkson’s evidence and find that: - in the vicinity of the furnace room, oil had soaked several inches in to the drywall; - the oil left a pungent smelly residue throughout apartment 1. [ 96 ] I also accept that the smell of oil (as per Messrs. Sisson, King and Thompson based on their attendances in 2009 and Mr. O’Byrne as to current conditions) is still detectable in apartment 1. Further, heating apartment 1, thereby circulating air, would be likely to increase the smell. [ 97 ] While the oil spill cannot be quantified, it was a substantial amount.

The oil spilled onto a carpet, soaked between the cracks of the floor boards in the furnace room and onto the beam and some of the joists. The beam consists of 5 2”x12” boards. The beam was installed such that, as you look down where the floor boards were removed, you see the top 2” wide edges of 5 boards. In other words, oil could run down two exterior sides and four cracks in the so-called beam.

Further, we know that a sufficient quantity of oil travelled through the cracks between the wooden ceiling boards such that there was obvious staining of the ceiling tiles. [ 98 ] It stands to reason that, for a significant quantity of oil to travel that far between the cracks in both the apartment 1 floor boards and the wine store ceiling boards, there must have been a significant amount of oil pooled on the boards and beam.

I find that the floor boards, beam and ceiling boards were saturated with oil in the vicinity of the furnace. [ 99 ] I find that it was reasonable and necessary to replace the floor, main beam, intersecting joists, drywall, store ceiling and ceiling tiles that had been saturated by oil.

Cost of Repair [ 100 ] Mr. Clarkson obtained two quotes at the outset. On April 11, 2005, Servicemaster of Peterborough, Larry Ferguson, provided an estimate of $9,590.00 inclusive of 10% overhead, 10% profit and G.S.T. The estimate recognized that there would be additional charges for any additional damages found during restoration. This estimate attributed $4,636.00 (+20% + G.S.T.) to replacing the entire tile ceiling in the wine store.

The balance was essentially to repair the drywall and stud wall damaged by oil and to replace the floor and carpet that had been torn up. [ 101 ] Dave Shaw provided an April 13, 2005 repair estimate of $10,700.00. He too would replace the entire ceiling, the “king beam and flooring” and the tile wall and front room wall. [ 102 ] Mr. O’Byrne obtained a repair estimate from Solo Insillations on October 18, 2007 in the amount of $29,062 including $13,662 for materials and supplies and $15,400 for labour.

The estimate was not itemized further and provided for additional charges for non-visible damages. [ 103 ] The amount of these initial quotes are of little assistance as they did not take account of non-visible damages or provided that additional charges would apply for additional work. [ 104 ] James Thompson, a professional engineer with expertise in building restoration and the cost of remediation, retained by the plaintiffs, provided a report dated June 1, 2009. In this report he identified the scope of remedial work required as follows: (

a) replacement of the oil damaged portion of the beam located under the furnace closet; (

b) removal and replacement of floor joists that intersect the beam; and (

c) replacement of floor and drywall as required to remove portions damaged by oil or that needed to be removed to allow beam and joist replacement. [ 105 ] Mr. Thompson then provided this scope of work to two contractors who provided quotes as follows: (

a) Servicemaster of Peterborough (Jason King) May 28, 2009 - $52,030.99 (

b) John Newman Contracting Limited (Robert Sisson) (May 21, 2009) - $52,854. [ 106 ] Mr. Thompson testified that the Servicemaster and John Newman quotes conformed to the scope of work which he had indentified. [ 107 ] Jason King testified that his estimate was based on removal and replacement of visibly damaged, being oil contaminated, parts of the structure. He used current labour and material costs. He testified, and I accept, that in apartment 1 if he was painting part of the living room for the sake of consistency he had to paint the whole room.

I also accept that the entire store ceiling had to be replaced since, to replace the damaged portion of the beam, supports would be required which would require ceiling tiles to be removed or damaged at a number of locations. In cross-examination he did agree that there were a few items not required due to the oil. For example it was not necessary to paint all the walls in apartment 2. [ 108 ] Robert Sisson testified he based his estimate on what was required to do the work identified by Mr. Thompson, being to remove and replace the oil contaminated parts of the structure.

He acknowledged a few items in cross-examination that were not strictly required. For example, a tub could have been re-installed instead of being replaced. Further, he could not recall why he had specified that doors be replaced or planed and refitted. [ 109 ] Mr. King did not include any amounts for debris removal, plumbing, electrical, architectural, taxes, insurance, permits and fees and consultants. Mr. Sisson did not include plumbing and electrical but did include overhead, profit and 5% G.S.T. [ 110 ] I found Mr. Sisson and Mr. King to be generally credible and reliable. [ 111 ] Mr.

Ketner’s report suggested that approximately 150 square feet of ceiling tiles should be replaced. Boards should be removed to allow a sealer to be applied to the wood in the area of the oil spill. A small amount of drywall should be replaced. Total cost was estimated to be $10-12,000. [ 112 ] I accept and find that the evidence of Mr. Thompson as to the remedial work required and the cost of that work is more reliable than that of Mr. Ketner for a number of reasons: (

a) Mr. Thompson is a professional engineer with considerable expertise in building restoration and the costs of remediation and, in my opinion, given the issues in this case has superior qualifications as an expert. (

b) Mr. Ketner could not detect significant evidence of an oil spill or oil soaking into drywall or wood and could not detect any

small of oil in any of his visits, which, as discussed, is at odds with a number of witnesses whose evidence I accept. (

c) After his initial visit Mr. Ketner was dismissive and wrote to the instructing lawyer that it was a waste of his time to even attend the premises. (

d) Mr. Ketner estimated the scope of work identified by Mr. Thompson in the order of $200-250,000, far out of line with the two estimates of Jason King and Robert Sisson. (

e) Mr. Ketner either did not know or disregarded the fact that independent or defence related witnesses such as Shaw and Clarkson observed a significant oil spill. Despite this Mr. Ketner thought this was simply a “cash grab” by the O’Byrnes. [ 113 ] To account for items not strictly required as referred to above, I would discount the estimates 7.5%. Having said that, the estimates do not include certain items that will be required such as costs to restore the plumbing and electrical systems as referred to by Mr. Thompson. These additional items would at least offset the discount.

I do not accept that the additional amount suggested by Mr. Thompson for contingencies is recoverable as damages. As such, I accept that the cost of the work that is required is $52,500 being the approximate mid-point of the estimates. Cost of Relocating Business During Repairs [ 114 ] The Policy provides coverage for “loss directly resulting from necessary interruption of business”. [ 115 ] Mr. O’Byrne testified that the wine store would need to be closed during the 2-3 months he expected it would take to effect repairs.

He stated that liquor licence regulations prohibit moving wine so that it would be necessary to secure alternate premises, obtain a licence for the new premises, and complete all wine making at the original location prior to repairs. This would in his estimation require 2 months of simultaneous operation at two locations both before and after the 2-3 month repair period. [ 116 ] Mr. O’Byrne testified he could only find one suitable alternate location for which the landlord required a one year lease. In Exhibit 4 Mr.

O’Byrne estimated the total relocation costs to be $56,938 which included base cabinets, two sinks and $5,500 for shelving. [ 117 ] When I wrote to counsel on February 3, 2012 I asked to be directed to any liquor licensing regulations addressing the prohibition against moving wine. Mr. Kostyniuk went beyond this to provide copies of correspondence not in evidence. I agree with Mr. Forget that these letters are not in evidence and should be disregarded. [ 118 ] Regulation 58/00 under the Liquor Licence Act provides that carboys being used to make wine or beer cannot be removed from the licensed premises.

The regulation, however, also provides that a licensee can apply to change the address of the licensed premises. [ 119 ] In the absence of a specified detailed request, and rejection, I do not accept that the regulatory framework would prevent a change to the address of the licensed premises and moving the wine to the new address. In the absence of more detailed of a search for premises, I do not accept that the only suitable premises will require a one year lease.

It is hard to imagine a landlord with vacant space turning down an opportunity to rent it for 2-3 months. [ 120 ] I accept that the wine store would need to be relocated during the period of actual construction of 2-3 months. For the purposes of assessing damages I take the low end of two months. It is also reasonable that the out fitting of the new premises be basic.

The temporary premises do not need $5,500 in new shelving. [ 121 ] Based upon certain of the estimates in Exhibit 4, I would quantify reasonable relocation costs as follows: Two months rent - $6,000 Utilities - $ 800 Labour cost for move - $1,040 (80 hours @$13.00) Signage - $ 339 Water - $ 509 Water Treatment - $ 265 Bell - $ 264 Fixtures - $2,658 Total: $11,875.00 [ 122 ] The fixtures will have some re-sale value after being used for two months and so I reduce the relocation cost by $1300. As such, I award the O’Byrnes $10,575.00 on account of relocation costs.

Lost Rental Revenue [ 123 ] The Policy provides coverage for loss of rent resulting from the premises being “untenantable solely and directly due to

destruction or damage” for such period of time it would take to effect the repairs with “due diligence and dispatch” up to a maximum of12 months. [124] Apartment 1 rented by Haliburton was $520 per month, and apartment 2 rated by the Rowdens was $600 per month bothinclusive of utilities. [125] The Rowdens remained in his apartment until early June and I assume paid to June 30. The lost rent on his apartment was,therefore, $5100 (8.5 months x $600).

The fact that the Rowdens may have been prepared to remain in the apartment for about twomonths, while waiting to move into a house, does not detract from my conclusion that the apartments were “untenantable”. It would nothave been reasonable for the O’Byrnes to rent premises in a building which continued to have a noxious smell about it. [126] There was no evidence as to whether and for what period Haliburton continued to pay rent so I proceed on the basis that itwas to March 30. The lost rent on apartment 1 is, therefore, $5720 (11 x 520). [127] Mr.

Kostiniuk suggested that the rent be discounted by 50% for costs such as utilities. While the plaintiffs should havepresented evidence of actual costs, as a matter of common sense costs such as utilities would not exceed 50%. There was no suggestionin cross-examination that the costs would be higher. [128] As discussed previously, Farmers’ was the author of its own misfortune in improperly denying coverage which precluded therepairs being carried out in a timely manner.

I, therefore, award $5410 ($5100 + $5720 ÷ 50%) on account of lost rent. [129] In addition, the plaintiffs claimed lost rent from the end of the 12 month policy period to date as a “consequential loss”. [130] Farmers’ cites Ferme Gérald Laplante & Fils Ltée v. Grenville Patron Mutual Fire Insurance Co., (ONCA), [2002] O.J.

No. 3588 (O.N.C.A.) at para. 78 as follow: An award of consequential damages may result from a breach of the duty to act fairly and in good faith giving rise to a separate cause ofaction that is distinct from the cause of action founded on the express terms of the policy and that is not restricted by the limits of thepolicy. (emphasis added) [131] The Statement of Claim refers only to a claim pursuant to the Policy. There is no pleading of bad faith or facts which wouldgive rise to a claim for consequential damages.

Further, and in any event, while I have found Farmers’ was incorrect in relying upon thePolicy exclusions there is no evidence before me on which I could make a finding of bad faith.

SUMMARY [132] I assess the damages of the plaintiffs as follows: (

a) cost of repair $52,500 (

b) relocation costs $10,575 (

c) lost rental revenue $ 5,410 _______ $68,485 CONCLUSION [133] Certain of the amounts awarded are conditional in the sense that they may have to be adjusted having regard to the terms ofthe settlement between the O’Byrnes and Haliburton. The parties should try to agree upon the necessary adjustments failing which Mr.Kostyniuk shall provide me with the terms of settlement and his position within 15 days, and Mr. Forget his position within a further 7days.

If counsel request an oral hearing that will be scheduled. [134] Once the amounts payable by Farmers’ under the judgment are settled counsel may make written cost submissions andadvise if there are any offers to settle. ___________________________ Sproat J. Released: May 8, 2012 CITATION: O’Byrne v. Farmers’ Mutual Insurance Company, 2012 ONSC 468 COURT FILE NO.: CV-06-2589-00

DATE: 2012 05 08 ONTARIO SUPERIOR COURT OF JUSTICE B E T W E E N: BLAKE O’BYRNE and COLLEEN O’BYRNE Plaintiffs – and – FARMERS’ MUTUAL INSURANCE COMPANY (LINDSAY) Defendants REASONS FOR JUDGMENT Sproat J. Released: May 8, 2012