When a broker’s (mis)understanding with a client can extend coverage

Brokers’ negotiations with their clients can extend an insurer’s policy coverage — even if their mutual understanding isn’t explicitly reflected in the certificate of insurance issued by the broker, B.C.’s Court of Appeal has ruled.

Consequently, the court ruled, Continental Casualty Company has a duty to defend a gravel pit owner, Deasan Holdings Company, in a claim arising from a September 2018 landslide on Deasan’s property located near Fort St. John, B.C.

The landslide during Deasan’s gravel mining operation led to the company being sued for damages by neighbouring property owners.

A broker for CMB Insurance Brokers, Brett Kanuka, thought his client was covered for liability arising out of the gravel pit operations when he had previously switched Deasan’s commercial insurance provider from Specialty Wholesale Services to Continental.

However, Deasan’s affiliate company, D.R.S. Energy Services Inc., was listed on Continental’s policy as the “named insured.” The certificate of insurance issued by the broker listed the gravel pit owner, Deasan, as an “additional insured.”

After the landslide, Deasan called on Continental to defend its claim. But the insurer denied coverage, saying its coverage only applied to the “named insured” on the policy, D.R.S.

A lower court found the broker’s certificate of insurance narrowly used the term “named insured” in relation to the affiliate company D.R.S. and not to Deasan. Therefore, the broker’s certificate of insurance did not extend Continental’s coverage to Deasan.

But the appeal court overturned that ruling. It found the full context of the broker’s role and negotiations between him, his client and the insurer could extend Continental’s policy coverage — even if it wasn’t explicitly stated in the certificate of insurance.

“When Deasan told the broker that [its gravel pit] operations were started, this was notice of a change in risk,” the B.C. Court of Appeal ruled. “The broker accepted this advice, which was consistent with the earlier advice that these operations would eventually start, and the broker did not warn or tell Deasan that coverage was not in fact available or might not be available or that the broker would need time to obtain coverage.

“Any objectively reasonable person in Deasan’s position would conclude, based on the broker’s representations in the context of the broker’s conduct and the history of the broker’s dealings with Deasan, that the broker had authority to extend coverage to Deasan for the gravel pit operations, and had done so upon receipt of Deasan’s notice that these operations were starting, without the need for anything more.”

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DRS provides oil field services, including hauling equipment to and from oilfield sites. Deasan is not a subsidiary of DRS (i.e., DRS itself does not own Deasan shares), but the two companies are affiliates under BC law. Both have some common shareholders that together own 50% or more of the shares of Deasan and DRS.

In August 2017, Deasan was a numbered shelf company. However, that changed when DRS transferred some property to it, located in Fort St. John. These lands were initially insured under DRS’s name and housed a metal clad building and two portable offices.

In October 2017, Deasan purchased additional property located outside of town, where the landslide occurred in September 2018. These gravel pit lands had an inactive gravel mine on it, and DRS used it to store some DRS equipment. There were no buildings on it, and the broker referred to it as “vacant land.”

The broker arranged for Deasan to be added to the policy protecting the buildings and the land with the inactive gravel pit.

Deasan gave the broker a heads-up that it eventually intended to open the gravel pit operations.

The broker, who had dealt with DRS since 2015, emailed back: “Keep in mind that when/if you do open up the gravel pit operations there are better insurance companies for that type of operation, and it would make sense to set up a separate policy for that operation.”

The courts noted the broker intended to obtain insurance for DRS that would be a substitute for the SWS insurance, and that would also cover Deasan. He obtained a quote for liability covering the gravel pit operations from Continental; in December 2017, he asked Continental to bind the coverage.

The broker informed Deasan he had obtained coverage with Continental. He explained the premiums would be less than with SWS. He knew from his dealings that both DRS and Deasan wanted insurance coverage together; both had been covered when the insurance was issued by SWS. The broker believed both DRS and Deasan were covered by Continental’s insurance.

“On Jan. 5, 2018, the broker created a certificate of insurance that was supposed to reflect Continental’s insurance quote and coverage,” the Appeal Court found. “The broker forwarded the certificate of insurance to [a Deasan representative] on behalf of DRS and Deasan. It was not sent to Continental. This certificate of insurance is an important document in the case.”

The certificate of insurance listed Deasan as an additional insured. DRS was the named insured.

However, Continental’s policy had DRS listed as the “named insured.” The insurer argued before court that it had no duty to defend, because Deasan was not a named insured, and only the named insured had coverage.

“At the policy page headed ‘common policy declarations,’ the ‘named insured’ was identified as DRS,” the court found. “DRS did not have a 50% or more controlling interest in Deasan.”

Nevertheless, the court held the broker’s negotiations with Deasan extended Continental’s coverage to Deasan, since both the broker and the client understood this to be the case (even if mistakenly).

“In my view, this appeal turns on these issues only: whether the broker, as agent, had the ability to bind Continental to provide insurance to Deasan in relation to the gravel pit operation, and whether the broker in fact did so,” the B.C. Court of Appeal ruled. “It is my view the answers to both questions are affirmative, and therefore I would allow [Deasan’s] appeal.”

David Gambrill

David has twice served as Canadian Underwriter’s senior editor, both from 2005 to 2012, and again from 2017 to the present.