Broker Liable to Property Owner for Insurer’s Denial of Coverage Based on Vacancy Exclusion

In Newbigging et al. v. M. Butler Insurance Brokers al., 2012 ONSC 5174 (CanLII), Superior Court Justice Theresa Maddalena dismissed an appeal from a decision of a Small Claims Court judge who had awarded damages against an insurance broker. At trial, the broker had been held liable to a couple who owned a rooming house. The rooming house had suffered water damage while the building was unoccupied. The insurer, Lloyd’s Underwriters, denied coverage, relying on a vacancy exclusion, which read as follows:

“This peril does not include loss or damage…[o]ccurring while the building is under construction or vacant even if permission for constructions or vacancy has been given by us.”

As a result, the insureds sued the broker, alleging that he had failed to explain the vacancy exclusion to it. The broker countered by arguing that the insureds were the authors of their own misfortune because they had failed to read the policy or ask any questions about it.

The insureds admitted having received the policy and having acknowledged, signed and returned it to the broker. They also admitted that they had not read the policy. However, they took the position that they had relied on the expertise of the broker. The insureds also contended that the policy for the rooming house was a new one for them and that they had only had homeowner’s insurance before this.

Justice Maddalena found that the Small Claims Court trial judge had correctly applied the law as laid down in the well-known Court of Appeal decision in Fine’s Flowers Ltd. , et al. v General Accident Insurance Co., of Canada et al. (1979) 17 O.R. (2d) 529. At the Small Claims Court trial, it was found that the insureds had “looked to [the broker] to provide coverage for a rooming house” and that the broker had “advised that this required a special rental policy”. It was also found that “[t]he agent made specific recommendations about a specialized rental policy for the rooming house and thus had an obligation and duty to advise of the specific exclusions under the policy.”

In dismissing the broker’s appeal, Justice Maddalena said that “[t]he trial judge thus correctly concluded…I do find that the defendant did breach his obligation in not telling the Plaintiff that at any time this place was vacant, under the definition, that there would be limitations to coverage. It put the Plaintiff at risk of having the place vacant…I do find the loss is directly related to the failure to meet the obligation of the insurance agent to let him know about the vacancy gaps in the policy…”

This decision is difficult to accept. Both Justice Maddalena and the trial judge seem to have placed a great deal of emphasis on the fact that the insureds were inexperienced and that this risk required a specialized “rental policy”. That reasoning might be easier to accept if the basis for the denial of coverage had been an esoteric provision found only in such policies. But a vacancy exclusion is a standard provision in most homeowner’s policies and the insureds admitted that they had had such coverage before. Following the reasoning in this case to its logical conclusion, an insured can avoid being bound by the terms of the insurance contract by not reading the policy. This places a heavy onus on the broker, to explain every single detail of the policy to the insured, including such common provisions as a vacancy exclusion.


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