May 2006

The Return of Solway v. Davis Moving & Storage Inc.:
A Judicial Admonition for the Commercial and
Reasonable Interpretation of an Insurance Policy

The decision in Solway v. Davis Moving & Storage Inc. (c.o.b. as Kennedy Moving Systems)1 served up a "shotgun blast" on the carrier liability landscape in Ontario. Carriers defending cargo claims will attempt to distinguish that case and shippers, trying to "break" limits of liability will no doubt seek the application of same.

This case presented a notorious outcome whereby a carrier of household goods for a domestic move was deprived the opportunity to limit liability on the standard bill of lading - there having been no declaration of value by the shipper - because the Court found that on the facts surrounding the loss the application of the limit (60 cents per pound) was "unreasonable".

Under the terms of the contract, evidenced by a bill of lading, the plaintiffs (the Solways) contracted a mover, Kennedy Moving and Storage Limited ("Kennedy") to pick up the Solways' belongings on February 1, 1999, and to deliver them to their new home on February 15, 1999. There was therefore a necessary two week "layover". During this period of time the trailer, containing the Solways' goods was stolen while it parked on a street in front of the Kennedy business location. Kennedy attempted to avail itself of the "uniform bill of lading conditions", deemed to apply in respect of household goods which included a provision that, absent a declared valuation by the shipper on the bill of lading, that liability for the loss be limited to 60 cents per pound. Kennedy argued that the contract terms were clear and unambiguous and that the circumstances of the loss, whether conventionally amounting to "fundamental breach" or otherwise would not nullify the limitation clause. The problem however for Kennedy in this regard was that the Court found that there had been a separate agreement, achieved orally, independent of the bill of lading whereby Kennedy was seen to have assured the Solways - "lulling" the Solways into the contract - that during the two week period layover that their belongings would be stored safely in a trailer in a secured area. As Kennedy was seen to have failed to live up to this end of the bargain - the trailer having been stolen from the unsecured street location - the Court ruled that Kennedy could not limit its liability to the bill of lading amount of 60 cents per pound.

The case has to be of concern to carriers given the heavy incidence of trailer theft. Carriers will no doubt attempt to "limit" the precedential value of this case to a misrepresentation or "collateral contract" case. Predictably, shippers will attempt to broaden the precedent value of the case by pointing out facts surrounding the cause of loss, suggesting that a limitation of liability is unreasonable.

The Solway v. Davis Moving & Storage Inc. case therefore remains an established factor in road carriage litigation which recently produced a significant "sequel". The sequel raises interesting questions about insurance coverage for the carrier who performs storage incidental to transit services.

The "Sequel"

Kennedy, who could not limit liability with the claim by the Solways, was adjudged liable for an amount of approximately $750,000.00. Prior to the loss, Lloyd's of London ("Lloyds") issued to Kennedy a comprehensive liability policy providing for a per occurrence coverage limit for transit losses of $500,000.00, and for warehouse incidents, a limit of $1,000,000.00.

Prior to the loss, Allianz Insurance ("Allianz") had issued to Kennedy an excess commercial umbrella policy which would apply upon the Lloyd's "primary" cover being exhausted. The amount of the Kennedy "exposure" being $750,000.00, Lloyd's and Allianz had more than a passing interest in it being determined whether the loss occurred during transit, or during warehouse "storage". The insurers disagreed: Lloyd's argued that its exposure peaked at $500,000.00, and Allianz argued that the Lloyd's $1,000,000.00 limit governed. An application for a declaration on the issue was brought before an "application judge" of the Ontario Superior Court of Justice. The application judge agreed with the position taken by Allianz that in effect the goods were stored when they were stolen with Lloyd's therefore being responsible for the entire amount of the judgment.

Lloyd's appealed the order of the application judge to the Ontario Court of Appeal, which just recently released its reasons on May 24, 2006.

Proceedings at the Ontario Court of Appeal

Lloyd's appealed three discrete aspects of the Order from the application judge, arguing that:

1. the judge erred in finding that its indemnity obligation under the policy extended to $1,000,000.00, instead of $500,000.00, with Lloyd's asserting that the goods were stolen while in the course of transit - the storage period in question being incidental to transit;
   
   
2. should it succeed in its argument that its liability is limited to $500,000.00, Lloyd's should not be required to pay the Solways' post-judgment interest on the damage award above and beyond that limit; and
   
   
3. should it succeed in its argument that its liability is limited to $500,000.00, Lloyd's should not have to pay the litigation costs arising from the prior Solway litigation as being beyond that limit.2

The outcome at the Court of Appeal provided mixed results for the parties. The Court of Appeal ruled that the loss was in fact a transit loss, with the Lloyd's limit being $500,000.00 on the policy. However, Lloyd's was found responsible, above and beyond that limit, for the payment of post-judgment interest and litigation costs.

In arriving at this result, the Court of Appeal revisited the reasons for judgment of the original trial judge in the action by the Solways against Kennedy, touching on certain findings of fact as binding for the purposes of the coverage analysis:

• It had been accepted by Kennedy on the initial litigation that it was liable to the Solways for its failure to deliver their belongings in accordance with the terms of the bill of lading. Liability not being in issue, the question all along was simply whether Kennedy could limit its liability according to the terms of the bill of lading.
  
  
• The trial judge found that Kennedy was liable by virtue of its failure under the terms of the contract to deliver the goods, as distinct from it being liable for failing to safely store the goods.
  
  
• The Solways did not declare the value of their belongings on the bill of lading and it was found by the judge, as evidenced from the existence of the Lloyd's policy, that the Solways had elected to obtain their own insurance over the cargo.
  
  
• The trial judge found that the Solways had been assured that their belongings would be stored in a locked trailer on a secured lot, and that Kennedy had not lived up to that end of the bargain. In the circumstances, the limitation of liability clause should not be applied as it would be unreasonable to apply it - the Solways having established that they entered into the contract with Kennedy because they were assured of the security of their belongings.

The Court of Appeal analyzed the reasons of the application judge initially finding for Allianz on the issue.

Proceedings in First Instance Before the "Application Judge"

In his reasons, the application judge had identified the relevant policy provisions:

COVERAGE 3B - CUSTOMERS GOODS INSURANCE

TRANSPORTATION & STORAGE

1. PROPERTY INSURED

The insurance provided by this policy applies with respect to property of any description, the property of others, from the time such property comes into the care, custody or control of the Insured or its authorized agents for the purposes of transportation or storage including all handling incidental thereto.

2. SCOPE OF INSURANCE

The Insurer agrees to pay:

A.   As respects property under a Bill of Lading, similar shipping document or agreement under which the Insured has agreed to provide Declared Valuation Protection, for direct loss, destruction or damage (including General Average and Salvage charges) of the Property Insured occasioned by all risks, except as hereinafter excluded, provided such loss, destruction or damage occurs while in due course of transit, including handling for packing and unpacking, or while in storage incidental to transit for a period not exceeding 90 days.

B.   As respects property under a Warehouse Receipt or similar document under which the Insured as agreed to provide insurance to protect the interest of the owner(s) of the Property Insured while in storage in any location(s) described in the Schedule of this policy, including while in transit thereto or therefrom in or on trucks or trailers operated by the Insured or his authorized representative, for direct loss, destruction or damage (including General Average and Salvage charges) of the Property Insured by all risks except as hereinafter excluded.

C.   To the extent that such is not provided for under sub-paragraphs A or B above, all sums which the Insured shall become obligated to pay by reason of the liability imposed by law upon, or assumed under agreement by the Insured as a private or common carrier or warehouseman.

. . .

4. LIMITS OF LIABILITY

The insurer shall not be liable under this policy for more than:

(a)   As respects claims made under sub-paragraphs A and B of Scope of Insurance the amount of insurance or Declared Valuation agreed between the Insured and the Owner(s) of the Property Insured.

(b)   As respects claims made under sub-paragraphs A and C combined, in no event for more than the Limit of Liability expressed in the Schedule as applicable to Transportation Insurance in any one occurrence.

(c)   As respects claims made under sub-paragraphs B and C combined, in no event for more than the Limit of Liability expressed in the Schedule as applicable to Warehouse Insurance in any one occurrence.

. . .

GENERAL CONDITIONS

6. VALUATION

Except where clause 8 - Replacement Cost - applies, as respects claims made under paragraph A or B of Scope Of Insurance of this policy the Insurer agrees to pay not exceeding the actual cash value or cost of repair of property lost, damaged or destroyed, nor exceeding as respects any one in transit, or in storage lot the value declared in the applicable Bill of Lading, Warehouse Receipt or similar document.

As respects claims made under paragraph C of Scope Of Insurance under this policy, the Insurer agrees to pay all sums for which the Insured is legally liable subject to the limits of liability of the Transportation and Storage Sections.

The application judge concluded that the Solways' claim, and Kennedy's right to indemnity under the Lloyd's policy, fell within clause 2C under "Scope of Insurance". This was by virtue of the fact that a declared valuation did not appear on the bill of lading (ousting the application of clause 2A) and clause 2B did not apply because there was i) no agreement to place insurance during the storage period and ii) as a warehouse receipt had not been issued to the Solways by Kennedy

The application judge then ruled that paragraph 2C provided insurance to Kennedy for "liability that might be imposed upon it by law" and that as neither coverage 2A or 2B applied, Kennedy's right to indemnity under the policy therefore was under coverage clause 2C.

As will be seen below, the Court of Appeal was at this point in agreement with the analysis of the application judge.

The application judge then proceeded to rule that a claim founded on a breach of a storage contract was subject to the warehouse insurance limit. The application judge ruled that the determination of which policy limit was applicable came down to the proper characterization of the claim in respect of which Kennedy sought indemnity for the Solway judgment. The application judge interpreted (wrongly, according to the Court of Appeal) the essential part of the trial judge's reasons in finding Kennedy liable to stem from a failure to provide safe storage of the Solways' goods as agreed upon. The application judge ruled that as Kennedy was found to have breached a contractual term relating to the storage of the customer's goods, that the basis of liability was that of a storer.

The judge identified two locations in the policy where insurance limits are located. First, there is paragraph 4 ("Limits of Liability") and second, General Condition 6 ("Valuation"). The judge considered paragraphs 4a), b) and c) to be inapplicable based on the finding that the Solways' loss fell exclusively under paragraph 2C under "Scope of Insurance". As the only remaining limit of liability was found in General Condition 6, he concluded that this governed, being the $500,000.00 for transit insurance and $1,000,000.00 for warehouse insurance. Given the finding that what happened was a breach of a storage requirement, the storage limit of $1,000,000.00 should govern.

In summary, the application judge found that the $1,000,000.00 limit would govern for two reasons:

1. General Condition 6 governed, (relying on clause 2C under "Scope of Insurance"); and
   
   
2. Kennedy's liability arose from the failure to store the goods.

Court of Appeal Analysis

The Court of Appeal disagreed with the application judge, firstly in pointing out that the operative part of the judgment against Kennedy was on the basis that it failed to deliver the goods under the terms of the bill of lading. The application judge was seen to have confused notions. The original trial judge did not fix Kennedy with liability per se for having breached the terms of the safe storage contract, rather, the unsafe storage issue arose only in the context of fixing the extent of Kennedy's liability i.e. whether there could be a limitation of liability or not for Kennedy having failed to deliver goods. Accordingly, what occurred was a transportation breach, not a storage breach.

The Court of Appeal then addressed the issue about the competing limits of liability in the Lloyd's policy. The Court of Appeal ruled that the application judge misconstrued paragraphs 2A, 2B and 2C above under the heading "Scope of Insurance". A correct interpretation of the policy would lead to the conclusion that paragraph 4b) under "Limits of Liability" would govern the extent of Lloyd's liability.

The reasoning was as follows:

• Firstly, insurance contracts, as any other contract, should be construed in a manner that attempts to harmonize and make sense out of the various provisions contained in it, and does not strain them. Ambiguities are to be resolved in favour of the insured, however ambiguity does not exist whenever the policy contains wordings that could be open to two or more reasonable interpretations. Before resorting to the contra preferentum principle, an effort should be made to interpret the policy in a commercially reasonable fashion and in a way that gives effect to the reasonable expectations of the parties.3
  
  The Court of Appeal found that the applications judge failed to apply these principles in his construction of the Lloyd's policy.
  
  
• The Court of Appeal said that it makes little commercial or practical sense to interpret paragraphs 2A, B and C (under "Scope of Insurance") in a manner that fails to harmonize them with paragraphs 4a), b) and c) under "Limits of Liability".
  
  
• The application judge failed to harmonize the paragraphs of these two sections by, in error, proceeding to General Condition 6 - a "Valuation" clause, having nothing to do with limits of liability. The judge was seen to have rewritten the contract by treating general condition 6 as a limit of liability provision. The Court of Appeal ruled that paragraph 2C should not be read in isolation of, but should be read in conjunction with paragraphs 2A and 2B, being a totally different approach taken than that taken by the application judge.
  
  
• The Court of Appeal agreed with the application judge that paragraphs 2A and 2B did not apply, there not having been a declared value in the bill of lading, or the issuance of a warehouse receipt.
  
  
• The application judge was however seen to have been in error by concluding that none of the three paragraphs in clause 4 ("Limits of Liability") applied by virtue of their not referring to claims brought exclusively under paragraph 2C of the "Scope of Insurance" clause. For the purposes of interpreting the limits of Lloyd's liability under clause 4, the Court of Appeal saw no impediment to reading paragraph 2C in conjunction with 2A, where there was no declared valuation.

The Court found that paragraphs 2A and 2B would apply where the amounts for which the insurer agrees to indemnify the insured is specified - under paragraph 2A, being the amount of the declared valuation, and under 2B, being the amount of the insurance that the insurer agreed to provide under a warehouse receipt. Accordingly, when a claim is made exclusively under either of those paragraphs the limit of Lloyd's liability is known from the outset. This obligation relates back to the opening wording of paragraph 2 in the words "The Insurer agrees to pay: . . ".

A formula is then established to fix limits of liability under 4a). Where however, as in this case, the insured has not agreed under a bill of lading to provide declaration valuation protection, then paragraph 2C is engaged. The opening words of 2C start with the words "To the extent that such is not provided for under sub-paragraphs A or B above . . . ". The Court of Appeal reasoned that the word "such" in 2C refers back to the opening words of clause 2 i.e. "The Insurer agrees to pay". Where "such" is not provided for in the bill of lading, it is then identified under paragraph 2C as "All sums which the Insured shall become obligated to pay by reason of liability imposed by law . . .".

Accordingly, the Court reasoned that paragraphs 2C and 2A fit comfortably together for the purposes of interpreting the limits of Lloyd's liability under clause 4 of the policy where a declared value was not provided by the shipper. The Court then reasoned that the limits of liability under 4b) governed in this case given that the Solways' claim was, in essence, a claim made under a combination of paragraphs 2A and 2C as a result of which the limit of liability under the transportation insurance section of the policy governed.

The Court reasoned that Kennedy and Lloyd's would have likely expected that the limit of Lloyd's liability would be found in the "limits of liability" portion of the policy as opposed to being determined from a general condition elsewhere.

It is interesting to note that upon a different instruction of the policy, the Court of Appeal came to such a dramatically different result than the application judge, on the basis of assessing a commercial and "expectation" analysis.

The Post Judgment Interest Issue

On the post-judgment interest issue, the Court of Appeal upheld the reasoning of the application judge who ruled that Lloyd's had to pay post-judgment interest exceeding the $500,000.00 policy limit. The Lloyd's policy was silent as to whether post-judgment interest was included or excluded from the policy limit. The application court judge ruled that post-judgment interest accrues automatically and cited that in the absence of an express contractual provision that there was no good reason for post-judgment interest to be included within the policy limits. The Court raised the interesting scenario, where judgment was granted against an insured for the amount equal to or greater than the policy limits. In such a situation, if post-judgment interest were to be included in the policy limit, the insurer could theoretically delay payment with "virtual impunity" by (for example) prosecuting an unmeritorious appeal, since its exposure to its insured would be capped at the policy limit. Meanwhile, post-judgment interest would continue to accrue. Given the insured's obligation to pay post-judgment interest once a claim has been crystallized into a judgment, it makes sense to impose a like obligation on the insurer.

The Liability for Costs Issue

On the question of costs, the Appellate Court ruled that Lloyd's was responsible for the payment of costs above and beyond the $500,000.00 policy limit. In this respect, the Court of Appeal agreed with the applications court judge, who noted that Lloyd's had elected to defend the Solway action (resulting in an adverse cost award of more than $110,000.00). Applying the defence costs/defence obligation portion of the policy - which included the words "with no expense to the insured" the Court of Appeal ruled that a proper construction was that the insured would not be called upon to bear any expense arising from a defence of the claim. Accordingly, the costs of the defence ought to be borne by the insurer and should be excluded from the policy limits.

Gordon Hearn

Endnotes

1. (2001) 57 O.R. (3d) 205, affirmed by a majority of the Ontario Court of Appeal (2002) 62 O.R. (3) 522.
2. For those uninitiated with the Canadian litigation process, the question of costs is a huge factor at the end of any lawsuit, the general rule being that "costs follow the event". The award of costs to a successful party usually results in the payment by the losing party of a significant portion of the successful party's attorney's fees together with litigation disbursements.
3. Consolidated-Bathurst Export Ltd. v. Mutual Boiler & Machinery Insurance Company [1980] 1 S.C.R. 888 and Reid Crowther and Partners Ltd. v. Simcoe and Erie General Insurance Company [1993] 1 S.C.R. 252.