February 26, 2020

Mitigation of loss coverage: beware of unlimited coverage

Mitigation of loss coverage is a useful tool for insurers and insureds to limit the impact of design issues in construction projects. In Surespan Structures Ltd. v. Lloyds Underwriters [1], the Supreme Court of British Columbia changes the calculus by concluding that no limits apply to a loss mitigation coverage in a project-specific professional liability policy.

Insurers may not want to wait to review their loss mitigation coverage wordings to ensure that they have made as clear as possible which limits apply (if any).

Surespan Structures Ltd. ("Surespan") was the design-builder of hospitals and parkades on Vancouver Island (the "Project"). Surespan retained the services of engineering professionals to assist it in the design of the parkades. In late 2016, cracks were discovered in the load-bearing precast elements of the parkades. Surespan undertook remedial work in the order of $9.9 million and sought coverage from the project-specific professional liability insurers for those costs under the loss mitigation provisions of the policy. While several coverage issues were debated by Surespan, the insurers and the design professionals, the decision mostly addresses if sums to be paid by the insurers should be constrained by the wording of the policy.

The Decision

The insurers argued that the mitigation of loss coverage was constrained by the $10 million policy limit and should be further reduced to take into account the amounts paid on behalf of the professionals and the expenses incurred in the course of the investigation.

The Court found that as a matter of contract interpretation, the absence of limits in the wording of the loss mitigation coverage provisions suggested that there were no such constraints for this coverage. This was further supported by the relative independence of the loss mitigation coverage (first-party coverage) from the rest of the policy (third-party coverage).

The insurer referred to the limits of liability clause of the policy suggesting that the $10 million for "CLAIMS made against the INSURED" acted as a limit to the coverage afforded. The Court rejected this approach arguing that there was no need for claims under the mitigation of loss coverage and that the limits of liability clause did not constrain available coverage.

Finally, the insurers raised multiple arguments with regard to the declarations of the policy acting as a restraint on available coverage for loss mitigation. The Court dismissed the arguments, noting that the limit stated in the declarations does not apply to other coverages not mentioned in the clause.

The Court found that the language of the loss mitigation clause was unambiguous and that there were no applicable limits to the covered mitigation costs.

The Court further noted that even if the clause had been found to be ambiguous, the reasonable expectations of the parties would not have tipped the scales in the insurers' favour.

This judgment is being appealed, but insurers may not want to wait to review their loss mitigation coverage wordings to ensure that they have made as clear as possible which limits apply (if any).

Other Incidental Issues

The Court also provided additional guidance on other issues that are bound to arise in the context of loss mitigation coverage. First, the Court determined that the "passing of the post" (i.e. when an expense by a party to the policy can be indemnified and how it would erode coverage) should arise at the earliest of a formal denial of coverage or 60 days after the expense has been incurred (based on the BC Insurance Act). Second, the Court confirmed that the limits may be properly eroded by the insurers' expenses in the investigation of the loss. Third, the Court found that the financing costs of the insureds will generally not be covered except in exceptional circumstances. In the present case, the failure of the insurers to adjust the claim in accordance with a previous Court order justified the award of damages to offset such financing costs.

 

[1] Surespan Structures Ltd. v. Lloyds Underwriters (2020 BCSC 27). Under appeal.