How can a commercial transaction be the subject of indemnity under an all-risks policy?
In Heart Zap Services Inc. v. Lloyd’s Underwriters, 2019 ONSC 3667 the plaintiff, Heart Zap Services Inc., received an order from Dr. Thomas Hardy for 25 AEDs (defibrillators) valued at $37,120.50. They found out, only after mailing the AEDs, that the order was fake.
Heart Zap filed a claim with its insurer. The insurer denied the claim for three reasons:
(a) The property was not lost from an insured location.
(b) The type of loss was not covered by the policy.
(c) The property was sold under a conditional sale, excluded by the policy.
The decision of Flynn J. of the Ontario Superior Court of Justice, which rejects the arguments of the insurer, does not review the coverage clause under the policy. Implicit in the decision is that the policy was written to cover all-risks of loss, subject to the exclusions.
In policy provided coverage for property “only while at the location(s) specified on the Declarations Page.” The locations listed on the declarations page included the main office of the plaintiff company in North Bay and the financial institutions it used. The insurer took the position that the loss took place at the address in Brampton to which the AEDs were shipped. The location of a loss from fraud is suffered at the location from which the goods are shipped. The loss therefore occurred at the office in North Bay, which was listed under the policy.
The insurer argued that the policy insured only “against all risks of direct physical loss of or damage to the property insured”. Flynn J. followed the decision of Joe Ng Engineering Ltd. v. Gerling Global Insurance Co. (1997), 37 O.R. (3d) 359 to conclude that, in a fraudulent transaction, the parties are not ad idem (of the same mind) in relation to the terms of the contract, so that what the insured has lost in the transaction is the merchandise and not the proceeds of sale. It is, therefore, a direct physical loss covered under the policy.
The policy excluded coverage for property “sold by the Insured under conditional sale”. A conditional sale is one in which the seller reserves title until the buyer pays for the goods, at which time the condition having been fulfilled, title passes to the buyer. The transaction involving the insured was a typical cash delivery contract, with no evidence that the insured intended to hold title pending payment. The court found that this exclusion did not apply.
The insured was therefore entitled to indemnification under the policy.
If the insurer sought to exclude fraudulent transactions under the policy, it should have specified the exception in an exclusion in the policy language.