Background

On September 29, 2018, a landslide occurred at Deasan Holdings’ gravel pit. Deasan was sued by neighbouring property owners for damages. Deasan tendered the underlying civil action to Continental Casualty Company for a defence. Continental denied coverage, alleging that Deasan was not an insured under a policy issued by Continental.

Deasan and DRS Energy Services are affiliated corporations with common ownership. Deasan owns and operates a gravel pit. DRS’ main business is oilfield hauling and related work. Through a holding company, Mr. Beech is a part owner of both corporations. He is involved in the operation of both corporations.

DRS used the same insurance broker for all of its insurance needs since at least 2015.

Prior to August 2017, Deasan did not have any property or operations: it was only a numbered shelf company. In August 2017, it obtained some property that was transferred from DRS. In October 2017, Deasan purchased additional property which came to be known as the gravel pit lands.

After purchasing the gravel pit lands, Mr. Beech contacted the broker to arrange for additional insurance in light of Deasan, its ownership of the original lands and its purchase of the new gravel pit lands. There were no gravel pit operations at the time. The lands were used for storing equipment, though the Broker was aware that the gravel operations may commence in the future. The Broker notified DRS’ insurer at the time about Deasan and its property. That insurer advised that Deasan was automatically covered under the policy. The Broker advised Mr. Beech to notify him if and when gravel operations would commence.

In December 2017, the Broker submitted an insurance application to a different insurer, Continental. The application materials provided by the Broker to Continental were out of date and contained errors. They did not expressly identify Deasan. The gravel pit lands were identified for liability only. Continental knew that the materials were out of date, but still chose to quote the risk. It was the Broker’s intention that coverage would be obtained for both DRS and Deasan.

On December 29, 2017, the Broker bound coverage with Continental for a property and liability policy for the year beginning December 31, 2017. The Broker then informed Mr. Beech that he obtained coverage from Continental. The Broker believed that coverage was obtained for both DRS and Deasan.

The Broker had a “producer agreement” with Continental by which Continental appointed the Broker “as its producer with full power and authority to receive proposals for insurance coverage for such classes of risk as [Continental] may from time to time authorized to be insured.” 

On January 5, 2018, the Broker created a Certificate of Insurance intended to reflect Continental’s quote and coverage and forwarded it to Mr. Beech on behalf of DRS and Deasan. It was not sent to Continental. The Certificate named DRS as the “Named Insured.” It also identified Deasan as an “Additional Insured” with respect to the original lands transferred in August 2017. Attached to the Certificate was a property statement of values which described the gravel pit lands as being covered for “liability only.”

On January 26, 2018, Continental sent the Policy wording to the Broker. The Broker did not forward it to DRS or Deasan until after the landslide.

In the summer of 2018, Deasan determined that the gravel pit lands were viable to commence gravel operations. On August 31, 2018, Mr. Beech told the Broker that Deasan intended to commence operations. At that time, Mr. Beech and the Broker believed that Deasan was already an insured under the Policy. Shortly after this, Mr. Beech instructed his staff to send the Broker additional information with respect to the gravel operations. His staff did so the same day.

On September 4, 2018, the Broker telephoned Continental about adding the gravel operations to the Policy. Continental requested that certain information be sent to it. An internal email within the Broker’s office requested assistance with sending information to Continental such as the equipment list and certain buildings, which was the same information sent by Mr. Beech’s staff to the Broker on August 31. Another internal email in this regard was circulated September 26, and another email to Mr. Beech’s staff on September 28 asking for address information for some buildings to be insured.

The landslide occurred on September 29, before the Broker sent anything in writing to Continental about the gravel operations. Deasan was sued and Continental denied liability coverage to Deasan on the basis that it was not an insured under the Policy.

The Broker’s authority and Continental’s liability

The trial judge found that when the Certificate of insurance was delivered to Mr. Beech, naming Deasan as an additional insured, the Broker was agent for Continental with authority and responsibility to deliver the Certificate prior the Policy itself being created and delivered. He found that the Broker had either actual implied authority from Continental to extend coverage and to include Deasan in it, or ostensible authority to do so. Continental was therefore bound by the actions of its agent, the Broker, in sending the Certificate to Mr. Beech on behalf of DRS and Deasan.

However, the judge added that Continental “cannot be bound beyond that,” and all that the Broker communicated by way of the Certificate was that Deasan was an additional insured with respect to the original lands obtained in August 2017, not the gravel pit lands. The judge held that any “coverage Deasan has is not based on the language of the policy but is a product of its agency relationship with [Continental] and must be appropriately narrowly construed.” Accordingly, the trial judge found that Deasan was not insured for the gravel pit lands and gravel operations, and Continental did not owe a duty to defend against the underlying action arising from the landslide.

Court of Appeal confirms coverage: Broker’s broader authority triggers duty to defend

The BC Court of Appeal (BCCA) overturned the trial judge’s decision and declared that Continental has a duty to defend Deasan in the underlying action.

The BCCA held that the trial judge was correct in finding that the Broker was an agent of both Continental and DRS/Deasan, but erred by limiting the Broker’s authority to simply that which the Broker communicated expressly in writing under the words “additional insured” in the Certificate, namely, coverage for a building on the original lands.

The BCCA held that the judge ought to have considered the entire factual matrix and context of the relationship between the Broker and Deasan rather than only considering some express words on one section of the Certificate. For example:

  • the Broker knew that Deasan wanted to be added to the DRS policy and have the same full coverage;
  • the Broker knew that the gravel pit lands were listed in the statement of values attached to the Certificate as insured property, and that the lands were owned by Deasan;
  • the Broker believed that Deasan was being added to the Policy and would receive equivalent coverage as DRS; and
  • the Broker’s communicated to Deasan that he had bound coverage with Continental.

The BCCA held that the judge failed to apply the law that an agent’s implied authority arises based on conduct and, as regard third parties, is that which “he is reasonably believed to have, having regard to all the circumstances.” The Certificate formed only one part of the Broker’s communications and representations to Deasan. The Broker’s overall conduct, in the context of its ongoing relationship with Deasan, formed another part of the Broker’s communications and representations.

Further, the BCCA held that the Certificate itself was ambiguous. It was a short form document that can only be understood in the factual matrix of what was known by the Broker and Deasan at the time it was issued. The limiting language of Deasan being an “additional insured [with respect to] ownership of” buildings on the original lands was ambiguous when considering that the gravel pit lands were listed on the Statement of Values and that the Broker and Deasan knew that hey were owned by Deasan.

The only way to resolve the ambiguity in accordance with the established principles of insurance contract interpretation was to conclude that the Certificate communicated to Deasan exactly what the Broker intended and thought to be the case, consistent with what Deasan expected:

… the certificate of insurance communicated to Deasan exactly what Mr. Kanuka intended and thought to be the case, consistent with what Deasan expected: that the gravel pit lands were covered by the Policy for liability no matter which of DRS or Deasan owned the lands; and Deasan was an additional insured including with respect to its ownership of the gravel pit lands, but that the only buildings it owned that were covered by the insurance were located on the original lands.[1]

The Court of Appeal then considered the effect of Statutory Condition 4, which provides in part as follows:

Material change in risk

4(1)   The insured must promptly give notice in writing to the insurer or its agent of a change that is

(a) material to the risk, and

(b) within the control and knowledge of the insured.

(2)    If an insurer or its agent is not promptly notified of a change under subparagraph (1) of this condition, the contract is void as to the part affected by the change. …

The BCCA held that if the Broker had authority to extend coverage on behalf of Continental, then it also had authority to accept an expansion of the risk that was covered. The Broker was aware back in 2017 that Deasan bought the gravel pit lands and was contemplating commencing gravel operations. The Broker knew in August 2018 that Deasan was commencing operations. Written communications followed from Mr. Beech’s staff to the Broker providing the additional information requested.

The Court of Appeal held as follows:

[97]   Any objectively reasonable person in Deasan’s position would conclude, based on the Broker’s representations in the context of the Broker’s conduct and the history of the Broker’s dealings with Deasan, that the Broker had authority to extend coverage to Deasan for the gravel pit operations and had done so upon receipt of Deasan’s notice that these operations were starting, without the need for anything more. …

[102]  In conclusion, the Broker had authority as agent for Continental to expand the coverage under the Policy, and did so by expanding coverage to Deasan, first as owner of the gravel pit, and then for the gravel pit operation. Based on the Broker’s conduct, coverage for the gravel pit operation commenced at least as of August 31, 2018, when Mr. Beech informed [the Broker] that they were starting up the gravel pit operations, and [Mr. Beech’s staff] sent the follow up written information, and [the Broker] did not immediately warn that coverage was not available.

The BCCA held that Deasan is an insured under the Policy and that Continental had a duty to defend Deasan in the underlying action.

Deasan was represented by Gowling WLG Calgary partners Paul Stein, KC, and Marc Matras, who have extensive experience in insurance coverage disputes for insurers and policyholders.

If you have questions about this decision or its implications, please contact one of the authors or a member of our Insurance and Professional Liability team.

[1] Para. 87.