In March 2025 a Canadian appeal court held that the insured, who had a licence to cultivate marijuana at his premises, was entitled to insurance cover for his home that was destroyed by an accidental fire that started in the kitchen despite an exclusion in the policy relating to marijuana cultivation on the property. An improperly cited reference to legislation in the exclusion reflected poor drafting and created ambiguity. Secondly, the exclusion was ambiguous with respect to the particular substances which triggered the exclusion.

The exclusion read that the insurer did “not insure direct or indirect loss or damage in whole or in part … to dwellings … used in whole or in part for the cultivation, harvesting, manufacture, distribution or sale of marijuana or any product derived from or containing marijuana or any other substance falling within Schedule (Section 2) of the Controlled Drugs and Substances Act Narcotic Control Regulations, regardless of any other cause …”

At the time of the fire, marijuana was listed as a controlled substance under the Controlled Drugs and Substances Act and in a Schedule (Section 2) of the Narcotic Control Regulations. The exclusion clause created an ambiguity in two ways. First, the clause combined the titles of the two laws as if they formed one piece of legislation. Second, the reference to “… marijuana or any other substance falling within” the laws did not make it clear what cultivated substances were excluded. In Canada, one of the tests when interpreting a contract is to prefer an interpretation consistent with the reasonable expectations of the parties. The insured had a licence to cultivate marijuana on his premises for medical reasons. Underpinning the reasonable expectations test was the fact that the ambiguity was resolved against the insurer. The exclusion clause was held not to apply and the insurer was liable to  indemnify the insured.

The court said:

“I agree with the appellant that the exclusion clause is not enumerated into subcategories nor is it visually separated into subcategories. In my view, dividing the exclusion into subcategories, acknowledging one subcategory to be poorly drafted but not tainting the others, effectively rewrites the clause—to the disadvantage of the insured. Further, separating the clause into distinct elements, and interpreting those elements separately, directly contradicts the general principles of contract interpretation the judge cited just a few paragraphs before—“… the court should give effect to clear language, reading the contract as a whole …”:

The court said that the insurer could have explicitly excluded from coverage property used for any purpose  or cultivation of marijuana – illegal or licensed, to make certain the insured would be aware of the extent of the coverage but declined to do so.

There are a few lessons here. Manifestly poor drafting of an exclusion clause will justify the courts finding against the insurer. Secondly, courts will more readily find ambiguity when there is no causative link between the excluded risk and the event, which in this case was an accidental fire in the kitchen unrelated to the marijuana cultivation. Thirdly, although South African courts do not explicitly apply the reasonable expectations of the parties test, treating customers fairly principles include policyholders being provided with products that perform as insurers have led them to expect. Fourthly, the insurer had been warned in a 2011 judgment interpreting the same exclusion that the exclusion was in part “unclear and inaccurate” and “faulty and confusing” but had not changed the wording.

[Busato v Gore Mutual Insurance Company, [2025] BCCA 79 (Can Lll)]