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)
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.
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:
- 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
- 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
- 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.
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
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
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
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.
. . .
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
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:
- General Condition 6 governed, (relying on
clause 2C under "Scope of Insurance"); and
- 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.
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
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.
- (2001) 57 O.R. (3d) 205,
affirmed by a majority of the Ontario Court of Appeal (2002) 62
O.R. (3) 522.
- 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.
Export Ltd. v. Mutual Boiler & Machinery Insurance Company  1 S.C.R. 888 and Reid Crowther and Partners Ltd. v.
Simcoe and Erie General Insurance Company  1 S.C.R.
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