Date:
20120730
Docket: A-141-11
Citation: 2012 FCA 215
CORAM: LÉTOURNEAU
J.A.
PELLETIER
J.A.
MAINVILLE J.A.
BETWEEN:
FEUILTAULT SOLUTION
SYSTEMS INC.
Appellant
and
ZURICH CANADA
Respondent
REASONS FOR JUDGMENT
PELLETIER J.A.
INTRODUCTION
[1]
This
is an appeal from the decision of the Federal Court, reported as Feuiltault
Solution Systems Inc. v. Zurich Canada, 2011 FC 260, [2011] F.C.J. No. 309
(Reasons), dismissing Feuiltault Solutions Systems Inc.’s (Feuiltault) claim
against its insurer under an all-risks marine insurance policy. The issues
raised by the appeal are who bears the onus of showing fortuity/lack of
fortuity, and whether the policy exclusion with respect to packing applied to
the loss.
FACTS
[2]
Feuiltault
is a manufacturer of specialized book binding machines known as pocket
feeders. It sold forty of these machines to a customer in Germany. The goods were loaded into three separate containers. Feuiltault’s employees used
pieces of pressure treated wood to immobilize the machines within the
containers. The Court accepted that the machines were in good condition when
they left Feuiltault’s yard. The containers were trucked from Feuiltault’s
yard to the Port of Montreal where they were loaded onto a ship for the
transatlantic voyage.
[3]
The
containers were off-loaded at the North Sea Terminal, Bremerhaven, Germany, after an uneventful ocean voyage, and were then trucked to the customer’s premises. When
the containers were opened, all of the machines were rusted to the point that
they were eventually declared a total loss.
[4]
The
consignee, Feuiltault’s customer, refused to accept the goods. Various investigations
were undertaken in order to determine the cause of the rusting. Feuiltault
made a claim under its marine insurance policy. When Feuiltault’s insurer, Zurich Canada (Zurich) refused to pay, Feuiltault sued pursuant to the Ocean Marine
Certificate issued by Zurich, which incorporated the Institute Cargo Clauses
(A). These clauses constitute an industry standard insurance policy, which are
given contractual effect as a result of being incorporated by reference in a
certificate of insurance, as they were here.
[5]
Clause
1 provides that the insurance “covers all risks of loss or damage to the
subject-matter insured” except as provided in the exclusions. Zurich denied coverage on the basis of the exclusion found at Clause 4.3 which, in its
material parts, provides:
4. In no case shall this
insurance cover
…
4.3 loss, damage or expense
caused by insufficiency or unsuitability of packing or preparation of the
subject matter insured …
[6]
The
insurer did not plead lack of fortuity and did not rely on the exclusion of
loss caused by inherent vice: Appeal Book, Vol. 1, p.55-57.
THE FEDERAL COURT’S DECISION
[7]
After
reviewing the evidence of the various expert witnesses, the Federal Court came
to a conclusion as to the proximate cause of the loss. The
Federal Court accepted the conclusions of Zurich’s expert, Captain Fernandes.
These conclusions were summarized by the Federal Court as follows:
He [Captain Fernandes]
concludes that it is reasonable to attribute the corrosion damage to heavy
condensation within the containers during transit and that the most likely
source of the heavy condensation is the high moisture content in the heat
pressure treated lumber. Cpt. Fernandes concludes that the machinery was
insufficiently packed (unwrapped steel machines in a container full of wood
that has not been kiln dried and no use of desiccants) and that the wood used
as dunnage was clearly unsuitable because of its high moisture content.
Reasons,
at para. 50.
[8]
The
Federal Court then began its review of the relevant law by referring to the
famous passage from British and Foreign Marine Co. v. Gaunt, [1921] 2 AC
41 [Gaunt], with respect to all-risks insurance policies:
There are, of course,
limits to "all risks". They are risks and risks insured against.
Accordingly the expression does not cover inherent vice or mere wear and tear
or British capture. It covers a risk, not a certainty; it is something, which
happens to the subject-matter from without, not the natural behaviour of that
subject-matter, being what it is, in the circumstances under which it is
carried.
[9]
The
Federal Court took from this passage that, in order to succeed, the insured
needs to establish on a balance of probabilities that the loss was due to a
fortuity, that is, an external, accidental cause: see Reasons, at para. 60.
[10]
The
Federal Court then reviewed some of the jurisprudence where the issue of lack
of fortuity has been considered. The Court referred to Global Process
Systems Inc. v. Syarikat Takaful Malaysia Berhad, [2011] UKSC 5 [Global
Process Systems], T. M. Noten B.V. v. Harding, [1990] 2 Lloyd’s Rep
238 (C.A.) [Noten], and Nelson Marketing International Inc. v. Royal
and Sun Alliance Insurance Co. of Canada, 2006 BCCA 327, [2006] B.C.J. No.
1454 [Nelson Marketing].
[11]
The
Federal Court also considered whether, on the facts of this case, it could be
inferred that the loss was due to a fortuitous event or an accident in the
course of the voyage. It found that although an inference could be drawn that
a fortuitous event had occurred if other shipments had been made under closely
comparable circumstances without being damaged, that was not the case here.
The presence of pressure treated wood in the containers was a departure from
past practice and, as a result, the Court could not infer that the loss was due
to a fortuity.
[12]
The
Federal Court considered that this case was analogous to the Noten and Nelson
Marketing cases, cited above. The Court noted that, as in those cases,
there was in this case no evidence of any unusual or untoward weather, or of
any unusual features of the containers themselves. Nor was there evidence of
any ingress of water or humid air in the course of the voyage. It is implicit
in the Court’s reasoning that the absence of these factors pointed, as it did
in Noten and Nelson Marketing, to the absence of a fortuitous
cause of loss.
[13]
The
Federal Court also rejected Feuiltault’s theory that the loss was caused by the
presence of an aggressive chemical agent accidentally introduced into the
container in the course of the voyage. The presence of such an agent would have
satisfied the requirement of a fortuitous cause of loss.
[14]
In
the end result, the Court concluded that there was no coverage for the claim
because Feuiltault, the insured, had not shown that the loss was caused by a
fortuity.
[15]
The
Federal Court went on to consider the exclusion pleaded by Zurich, namely
“insufficiency or unsuitability of packing”. The Court referred to the
decision of the Supreme Court of Canada in Canadian National Railway Co. v.
Royal and Sun Alliance Insurance Co., 2008 SCC 66, [2008] 3 S.C.R. 453 [CNR],
a case which dealt with an exclusion for “faulty and improper design” in a
builder’s risk policy. The Court was of the view that the standard applied by
the Supreme Court to determine if the design in that case was “faulty or
improper” should also be used to determine if the packing or preparation of the
cargo was insufficient. The standard applied by the Supreme Court was that of
the “ordinary reasonably cautious and prudent person”: see Reasons, at para.
67.
[16]
The
Federal Court concluded, after considering all of the evidence, that the
packing and preparation of the cargo were insufficient. The Court also found
that the pressure treated wood used to brace the machines in the containers was
unsuitable considering the absence of wrapping to protect them from rusting.
The Court found that, had the machinery been wrapped with a protective
covering, as it was in a later shipment, the loss would not have occurred.
[17]
As
a result, the Federal Court dismissed Feuiltault’s claim against Zurich.
STANDARD OF REVIEW
[18]
This
is an appeal of a decision of a judgment rendered after a trial. As such, the
standard of review set out in Housen v. Nikolaisen, 2002 SCC 33, [2002]
2 S.C.R. 235, at paras. 8, 10, and 37, applies: palpable and overriding error
with respect to questions of fact and questions of mixed fact and law (save in
the case of an extricable legal error), and correctness with respect to
questions of law.
ANALYSIS
[19]
The
first issue to be considered is whether the Federal Court erred in concluding
that Feuiltault had the onus of showing that the loss was caused by a fortuity.
In my view, the proposition that an insured under an all-risks policy must
prove that the loss occurred as a result of a fortuity is of limited
application and is subject to the caveat that, where the insurer has
contractually excluded non-fortuitous losses, the onus of proving lack of
fortuity with respect to those losses falls on the insurer.
[20]
Ever
since Gaunt was decided, it has been the law that “all-risks” policies
cover only losses caused by fortuity or casualty, that is, “something which happens to the subject-matter from without, not
the natural behaviour of that subject-matter, being what it is, in the
circumstances under which it is carried”: see Gaunt, cited above, at
455. In his speech, Lord Sumner expanded upon this notion:
There are risks and
risks insured against. Accordingly the expression does not cover inherent vice
or mere wear and tear or British capture. It covers a risk, not a certainty;
it is something which happens to the subject-matter from without, not the
natural behaviour of that subject-matter, being what it is, in the
circumstances in which it is carried. Nor is it a loss which the assured
brings about by his own act, for then he has not merely exposed the goods to
the chance of injury, he has injured them himself.
Gaunt,
cited above, at 455.
[21]
The roots of the issue with respect to fortuity
raised by this appeal lies in the passage that immediately follows the one
quoted above:
Finally, the
description “all risks” does not alter the general law; only risks are covered
which it is lawful to cover, and the onus of proof remains where it would have
been on a policy against ordinary sea perils. I think, however, that the
quasi-universality of the description does affect the onus of proof in one
way. The claimant insured against and averring a loss by fire must prove loss
by fire, which involves proving that it is not something else. When he avers
loss by some risk coming within “all risks”, as used in this policy, he need
only give evidence reasonably showing that the loss was due to a casualty, not
to a certainty, or to inherent vice or to wear and tear.
Gaunt,
cited above, at 455.
[22]
Two propositions emerge from these passages. The first
is that the insured has the onus of showing that the loss was due to a fortuity
or a casualty. The second is that inherent vice is not a fortuity. These two
propositions must be considered together with another legal proposition, namely
that the insurer has the burden of proving the exclusions upon which he relies
when denying coverage:
A long standing line
of authorities require an insurer, seeking solace in an exclusion from
otherwise unlimited liability, to show that the exclusion applies.
Continental Insurance
Co. v. Dalton Cartage Co., [1982] 1 S.C.R. 164
[Dalton Cartage Co.].
[23]
Dalton Cartage Co.
is not a marine insurance case. However, the same rule applies in marine
insurance cases: see Global Process Systems, cited above, at para. 20.
[24]
The question of onus becomes important where the
insurer excludes non-fortuitous losses, such as losses caused by inherent
vice. The definition of inherent vice was settled in Soya GmbH Mainz KG v.
White, [1983] 1 Lloyd’s Rep 122 (H.L.) [Soya], where Lord
Diplock, at page 126, wrote:
This phrase (generally
shortened to “inherent vice”) where it is used in s. 55(2) refers to a peril by
which a loss is proximately caused; it is not descriptive of the loss itself.
It means the risk of deterioration of the goods shipped as a result of their
natural behaviour in the ordinary course of the contemplated voyage without the
intervention of any fortuitous external accident or casualty.
This definition was confirmed
by the Supreme Court of the United Kingdom in Global Process Systems,
cited above, at paras. 45, 81, and 129-133.
[25]
In light of this definition, it is manifest that
there is a conflict between the following propositions:
a)
an insured under an all-risks policy must show, if only by inference,
that the loss was caused by a fortuity; and
b)
the insurer must prove the application of the exclusion, including
non-fortuitous losses, on which it relies to deny coverage.
An insured who cannot
show that the loss was caused by a fortuity will have, in effect, shown that
the loss was caused by inherent vice, since, by definition, inherent vice is
the deterioration of the cargo without the intervention of any fortuitous
external accident or casualty. This reverses the onus with respect to proof of
the cause of loss, since requiring the insured to show that the loss was due to
a fortuity imposes on the latter the onus of disproving inherent vice.
[26]
In my view, the jurisprudence with respect to the
burden on the insured to prove a fortuity as a condition of recovery under an
all-risks policy must therefore be read carefully. It is trite law that
insurance policies must be read as a whole so as to give effect to all terms of
the contract: see BG Checo International Ltd. v. British Columbia Hydro and
Power Authority, [1993] 1 S.C.R. 12, [1993] S.C.J. No. 1 at para. 9 [BG
Checo]. In practice, this means that the scope of coverage is determined
by the interplay between the insuring agreement and the exclusions. Where the
question of coverage falls to be decided solely on the scope of the insuring
agreement, in the absence of exclusions, Gaunt is authority for the
proposition that the insured must show his loss is fortuitous. But where the
question of coverage depends upon both the insuring agreement and the
exclusions, then Gaunt and the jurisprudence that follows it must be read
subject to the following caveat: where the insurer has specifically excluded
non-fortuitous losses, especially inherent vice, then it must be taken to have accepted
the burden of proving lack of fortuity.
[27]
This is also consistent with the rule that all
terms of the policy must be given meaning: see BG Checo, cited above, at
para. 9. Requiring the insured to prove that the loss was due to a fortuity
effectively renders the exclusion of non-fortuitous losses superfluous. If the
insured can prove that the loss was caused by a fortuity, the exclusions cannot
apply. If the insured cannot prove that the loss was cause by a fortuity, his
claims fails and the issue of the exclusions for non-fortuitous losses will
never arise. The only way to give both the insuring agreement and the
exclusions their proper scope is to hold that the insured under an all-risks
policy needs only show that the cargo was in good condition when the insurance
attached and that the goods were damaged while the insurance was in force. It
is for the insurer who wishes to deny coverage to prove that the exclusion with
respect to inherent vice or other non-fortuitous loss applies.
[28]
Nelson Marketing,
cited above, which the Federal Court relied on in coming to its conclusion,
illustrates the anomaly that results from an unqualified application of the
principle set out in Gaunt. In Nelson Marketing, the insured
cargo was laminated flooring, manufactured in Malaysia and shipped from there
to North America. Upon arrival, the flooring was found to be cracked,
delaminated and water-stained.
[29]
The insurance policy was the same as the one in
issue in this case, an all-risks policy that excludes, among other perils, loss
caused by or resulting from inherent vice, or from the nature of the
subject-matter insured. The insurer denied the insured’s claim under the
policy. The insured sued and lost at trial. The insured appealed.
[30]
In considering the matter, the British Columbia
Court of Appeal made the following observations:
Thus, to succeed on a
claim under an "all risks" cargo policy, the Insured must establish,
by direct evidence or by an inference to be drawn from the available evidence,
that an external fortuitous occurrence caused the deterioration of the cargo as
distinct from the cargo having simply succumbed to the ordinary incidents of
the voyage because of the cargo's inherent nature or susceptibility.
Nelson Marketing,
cited above, at para. 13.
The Court then framed
the issue before it as follows:
The issue is only
whether what did cause the loss was fortuitous and not attributable to the
inherent nature of the flooring. The nature of the flooring was to absorb and
release moisture. The amount of moisture absorbed and released (and the damage
that could result) varied with the environmental conditions of temperature and
humidity to which the flooring was exposed. For the cause of the loss to have
been fortuitous, the flooring, which had absorbed some moisture before
shipment, must have been exposed to conditions other than what could be said to
have been ordinary in the holds of feeder vessels on each of the three
carriages from the Malaysian ports to Singapore. The Insured bore the burden
of establishing that the conditions in the holds of the three vessels was
substantially different than was to be expected as part of the ordinary
incidents of the carriage. The question now is only whether there was
evidence that would support a finding that the environmental conditions were
substantially out of the ordinary.
Nelson Marketing,
cited above, at para. 23 (my emphasis).
[31]
In the end, the Court found that the insured had not
shown that the environmental conditions were out of the ordinary, with the
result that, having failed to establish that the loss was due to a fortuitous
condition, the insured was denied coverage under the policy.
[32]
The significance of the environmental conditions was
that, if they were proven by the insured to be out of the ordinary, they would
have represented a fortuity that brought the loss within the terms of
coverage. But as I noted above, proof of such a fortuity necessarily renders
the exclusion for inherent vice superfluous and the insurer is thereby relieved
of the burden of proving that the exclusion applies. The Court would have come
to the same result had it considered that the loss was, prima facie,
within the terms of coverage and then applied the exclusion for inherent vice.
[33]
I am therefore of the view that, in order to give
full effect to the terms of the policy in this case, it is necessary to treat
the exclusions for non-fortuitous losses (inherent vice, wear and tear,
deliberate acts of the insured) as an undertaking by the insurer to assume the
burden of proving that the loss was not fortuitous, thereby relieving the
insured of the obligation to do so. In my view, this
is an incremental advance, based on the terms of the policy, on the principle
set out in Arnould’s Law of Marine Insurance and Average, 17th
ed. (London: Sweet & Maxwell, 2008), at p. 1058, “[i]f the goods are
shipped sound and arrive damaged, and the damage is of such a kind as to raise
a presumption of some external cause, there is [under an “All risks” policy] prima
facie evidence of loss by an insured peril, and the burden is on the
underwriter to prove that the loss in fact occurred in some way for which he is
not liable.” See also Canadian National Railway Co. v. Royal and Sun
Alliance Insurance Co. of Canada, [2008] 3 S.C.R. 453, 2008 SCC 66 at
paras. 5, 31 and 34.
[34]
As a result, I find that the Federal Court erred in
law in imposing on the insured the burden of proving that the loss was caused
by a fortuity. In doing so, it failed to give effect to the contract between
Feuiltault and Zurich.
[35]
Since the insurer did not plead that the loss was
caused by a non-fortuitous loss, the only remaining issue is whether the
exclusion for insufficiency of packing relieves Zurich of liability under the
policy. For ease of reference, I reproduce the exclusion again:
4.3 Loss,
damage or expense caused by insufficiency or unsuitability of packing or
preparation of the subject matter insured.(for the purpose of this Clause 4.3
“packing” shall be deemed to include stowage in a container or lift van but
only when such stowage is carried out prior to attachment of this insurance by
the Assured or their servants).
Appeal Book, Vol. 1,
p. 31.
[36]
While the jurisprudence on this exclusion is sparse
indeed, it has been held to apply to “those steps which are necessary to
prepare the cargo for the loading process, not the very acts which result in
the cargo being stowed on board”: see Helicopter Resources Pty Ltd v. Sun
Alliance Australia Ltd (The Icebird), (1991) 312 LMLN (Supreme Court of
Victoria), at 31. I understand this to mean that the exclusion applies to the
steps taken by the insured to protect the cargo from the ordinary incidents of
carriage, including stowing cargo in a container and taking steps to immobilize
it in the container. By necessary implication, I also understand this
exclusion to refer to the suitability of the materials used by the insured for
those purposes. The application of this clause to circumstances where the
conditions encountered in the course of the voyage depart from “the ordinary
incidents of carriage” does not need to be answered here as it does not arise
on these facts.
[37]
In order for the exclusion to apply, the packing
must occur prior to the attachment of the insurance. Clause 8.1 deals with the
attachment of the insurance:
8.1 This insurance
attaches from the time the goods leave the warehouse or place of storage at the
place named herein for the commencement of the transit, continues during the
ordinary course of transit …
Appeal Book, Vol. 1,
p. 35.
[38]
It is not contentious that the containers were
packed on the insured’s premises prior to being picked up for transportation to
the Port of Montreal and onwards.
[39]
The exclusion requires that the loss or
damage be caused by the insufficiency or unsuitability of packing. In
this case, the Federal Court accepted that the corrosion of the cargo was
caused by condensation in the container due to the high moisture content of the
pressure treated wood used to secure the machinery in the container.
Since the wood was a packing material, I agree with the Federal Court's
conclusion that the packing was unsuitable. It follows from this that the
unsuitability of the packing was the cause of the loss. The Federal Court
also found that the packing was insufficient. It appears that the
insufficiency consisted in the absence of protective wrapping which could have
prevented the loss. While the absence of the protective wrapping, in an of
itself, did not cause the loss, in the circumstances of this case, it did
contribute to the loss so as to satisfy the requirements of the exclusion.
[40]
This conclusion is consistent with the general
purpose of marine insurance, which is to indemnify against the risks incident
to a maritime voyage, and not to guarantee the skill and workmanship of the
insured in preparing the cargo for such a voyage.
CONCLUSION
[41]
For
these reasons, I would dismiss the appeal with costs.
"J.D. Denis
Pelletier"
“I
agree
Gilles
Létourneau J.A.”
“I
agree
Robert M. Mainville
J.A.”
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