Ontario Court Provides “Appropriate” Relief Against Statutory Limitation For Insurance Claims

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By: Lawrence G. Theall, Partner

And: Shaun A. Hashim, Litigation Associate


Ontario’s two year limitation period often becomes a trap for unwary policy holders who suffer a property loss. It is not uncommon to see claims drag on through the adjusting process, with interim payments being made, only to have insurers deny some or all of the claim more than two years after the loss. When the insured sues, insurers then claim the action is statute barred — a position our courts have accepted in a number of cases. A recent decision by Justice Paul Perell provides the insured with some relief from this trap.

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In Nasr Hospitality Services Inc. v. Intact Insurance (“Nasr“),[1] Justice Perell confirmed that even though your claim may arise on the date of loss, it is not necessarily fully “discovered” until a later date. He concluded that where an insurer began paying on a property loss, a coverage claim was not discoverable until the insurer communicated a clear repudiation of its obligation to indemnify the insured.

The test to establish when the limitation period commenced was whether the insured had knowledge of all of the material facts of the claim and that a legal action would be “appropriate” in the circumstances. The question of “appropriateness” was critical to the Court’s decision. Most claims for insurance involve some period of negotiation between the insured and the insurer. During this period, it is not typical for the parties to seriously consider litigation, particularly where interim payments are being made. In Nasr, the Court has signalled that a formal denial letter is a signpost marking the end of negotiations and the commencement of a period in which litigation is legally “appropriate” — at which point the claim is “discovered” and the limitation period begins to run. This is especially true when, before serving the formal denial letter, the insurer makes payments under the policy.

The Court cautioned that determining the “appropriateness” of a legal proceeding is a factual analysis dependent on the circumstances. This means that the date of a formal denial letter will not always be the date in which the limitation period begins.

The Decision in Nasr

On January 31, 2013, a business property owned by Nasr Hospitality Services Inc. (the insured) was flooded. The insured promptly reported the loss to its insurer, Intact Insurance. Between that date and June 2013, Intact paid portions of the insured’s claim for business interruption losses and utility costs. In that period, the insured delivered several proof of loss forms for property damage which were rejected. On July 22, 2013, Intact formally denied the property damage claim. The insured commenced its action for coverage on April 22, 2015.

The question for the Court was therefore: when did the two-year limitation period begin to run, on the date of loss or at some later date?

Justice Perell began with the basic statement of the law on discoverability. He noted that the earliest date a claim may be discovered is the day when “the plaintiff discovers the underlying material facts” (i.e. the subjective requirement) or, alternatively, when the plaintiff “ought to have discovered those facts by the exercise of reasonable diligence” (i.e. the objective requirement).[2] If the plaintiff has either subjective or objective knowledge, a claim may be considered “ripe” and a limitation period may run.

However, the plaintiff’s knowledge of material facts is not the end of the analysis. Justice Perell recognized that section 5(1)(a)(iv) of the Limitations Act, 2002 requires that the plaintiff must also know that a legal proceeding would be “an appropriate means to seek to remedy” his or her potential claim. If knowledge of material facts is established, the question then becomes, when was it appropriate to bring a legal proceeding?

To determine the meaning of “appropriate”, Justice Perell thoroughly reviewed the jurisprudence interpreting this postponement provision. In doing so, he reviewed Justice Sharpe’s decision in Markel Insurance Co of Canada v. ING Insurance Co of Canada. In that case, Justice Sharpe held:

… the word “appropriate” must mean legally appropriate. To give “appropriate” an evaluative gloss, allowing a party to delay the commencement of proceedings for some tactical or other reason beyond two years from the date the claim is fully ripened and requiring the court to assess to tone and tenor of communications in search of a clear denial would, in my opinion, inject an unacceptable element of uncertainty into the law of limitation of actions.[3]

Justice Sharpe’s decision in Markel highlights the dangerous uncertainty the “appropriateness” factor could introduce into a limitations analysis. Upon his review of the jurisprudence, Justice Perell concluded that the “appropriateness” analysis must accord with the policies behind limitation periods, which include three purposes:

… (1) to promote accuracy and certainty in the adjudication of claims; (2) to provide fairness to persons who might be required to defend against claims based on stale evidence; and (3) to prompt persons who might wish to commence claims to be diligent in pursuing them in a timely fashion Having regard to these principles, and on the basis of the facts before him, Justice Perell decided that the limitation period for the insured in Nasr began to run from the date upon which Intact formally denied the claim in July 2013. In doing so he assumed, without deciding, that the plaintiff’s claim would have been “ripe” on the date of loss on February 1, 2013. Having regard to the fact that Intact had made $42,000 in payments from the date the claim was “ripe” until its denial, Justice Perell concluded that the limitation period was postponed until the formal denial in July 2013.

Although on its face, this analysis may be a review of the “tone and tenor” of the communications between the parties — which Justice Sharpe had cautioned against — it was clear from the facts of Nasr that, up to the date of the formal denial letter, litigation would have been premature.

Conclusions

The decision in Nasr is important because it confirms that the date of loss for a property is not necessarily the date when the statutory limitation period commences. This is true even if the plaintiff can be said to have knowledge of all necessary material facts on that date. Instead, in situations where there are ongoing negotiations between an insured and an insurer, and where the insurer has made payments for portions of the claim, the limitation period may be postponed.

It is also important to note that while Justice Perell applied the Limitations Act, 2002, he did not expressly address whether insurers can contract out of its discovery provisions in the case of business contracts. The Limitations Act, 2002, permits an insurer to “vary” the limitation period for commercial contracts, which includes the power to “extend, shorten and suspend” the statutory period. However, the Act does not specifically state whether insurers can contract out of discoverability. In addition, it is important to note that Nasr does not change the law as it applies to Statutory Condition 14,[4] which bars claims under fire insurance policies brought more than one year after the date of loss. It is common for property insurers to incorporate Statutory Condition 14 into its other property coverage. In such policies, the Statutory Condition becomes a contractual limitation period.[5] Because Statutory Condition 14 specifically references the date of loss as the date upon which the limitation period begins to run, incorporation of this clause into an insurance policy raises questions of enforceability. In effect, Statutory Condition 14 not only shortens the limitation period but also purports to eliminate discoverability. In these cases, it remains unsettled whether the discoverability principles set out in the Limitations Act, 2002 (and discussed in Nasr) will apply.[6] It can be argued that a provision incorporating the entire limitation clause set out in Statutory Condition 14 into an insurance policy is void, as it is not permitted by the Limitations Act, 2002. Notwithstanding the result in Nasr, the best practice for insureds and their counsel is to treat the date of loss as start of the limitation period, and assume that any claim must be commenced within two years from the date of loss, or one year if the policy incorporates Statutory Condition 14. As Justice Perell noted, the “appropriateness” inquiry is one of “facts and circumstances”. Although ongoing negotiations and payments may stop the clock, a claim may be considered “ripe” on the date of loss. In the face of lengthy negotiations, an insured or their counsel should not risk allowing a ripe claim to die on the vine.

Footnotes

[1] Nasr Hospitality Services Inc. v. Intact Insurance, 2017 ONSC 4136 [Nasr].

[2] Nasr, at para. 21. This requirement is set out at ss. 5(1)(a) (i) to (iii), and 5(b) in the Limitations Act, 2002.

[3] Markel Insurance Co of Canada v. ING Insurance Co of Canada, 2012 ONCA 218 at para. 34.

[4] The Statutory conditions for fire insurance policies are set out at section 148 of the Insurance Act, R.S.O. 1990 c. I.8.

[5] See e.g. Boyce v. Co-operators General Insurance Co., 2013 ONCA 298 at paras. 11-12.

[6] See Cargojet Airways Ltd. v. Aveiro Constructors Ltd., 2016 ONSC 2356 at para. 55. See also Vine Hotels Inc. v. Frumcor Investments Ltd., 2004 CarswellOnt 5129 at para. 22 (Div. Ct.) (N.B. The Vine decision pre-dated the 2006 amendments to the Limitations Act, 2002 which permitted parties to business agreements to vary their limitation periods).

Lawrence G. Theall is the founding partner of Theall Group LLP. He practices commercial litigation, insurance and product liability (including class proceedings), and has appeared before all levels of the Ontario and Federal courts, as well as the superior courts of Manitoba and Alberta. He is honoured to have been selected as a Lexpert Ranked Lawyer for Product liability and selected by his peers for Best Lawyers 2017  for Insurance, as well as in  Expert Guides in the areas of Litigation, Product Liability, Insurance and Reinsurance. He is an editor for the Insurance chapter to be published in Bullen & Leake & Jacob’s 3rd Edition of Canadian Precedents of Pleadings in 2017 and a co-author of the annually updated loose-leaf text, Product Liability: Canadian Law and Practice (Canada Law Book).

Shaun Hashim is an associate at Theall Group LLP and maintains a broad commercial litigation practice. Prior to joining Theall Group LLP, Shaun summered and articled at the Toronto office of a prominent national law firm, gaining commercial litigation experience in a wide range of disputes involving fraud, breach of fiduciary duties, employment law, and the oppression remedy. Shaun graduated from the University of Windsor’s Faculty of Law in 2014 and was called to the Ontario Bar in 2015. Shaun is an editor for the Insurance chapter to be published in Bullen & Leake & Jacob’s 3rd Edition of Canadian Precedents of Pleadings in 2017.

For more information, visit http://www.theallgroup.com/

Photo Credit: Matilda Temperley @ http://www.matildatemperley.com/

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Social Engineering Fraud: Significant Coverage Gap Under Commercial Crime Policy

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By: Camille M. Dunbar, Litigation Associate


The Court of Queen’s Bench of Alberta recently released what appears to be Canada’s first coverage decision dealing with “social engineering fraud”, which involves fraudsters deceiving an organization’s employees to gain access to confidential information and funds. In The Brick Warehouse LP v. Chubb Insurance Company of Canada,[1] the Court held that a loss arising from social engineering fraud, did not meet the requirements for coverage under a commercial crime policy. This decision illustrates a significant gap in coverage under a crime policy for these types of cyber risks.

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The facts of this case should give pause to corporations, large and small alike. On multiple occasions, an individual contacted The Brick Warehouse’s (the “Brick”) accounts payable department, claiming to be from Toshiba, one of the Brick’s suppliers. Through a series of calls and emails, and under the pre-tense of being a new Toshiba employee, the individual was able to obtain information about the Brick’s payment process from a helpful Brick employee. Eventually, the individual advised the Brick that Toshiba had changed banks and requested that all payments be made to a new bank account. As requested, a Brick employee changed Toshiba’s bank information on the Brick’s payment system following the Brick’s standard practice.

No one from the Brick took any independent steps to verify the change in bank accounts. No one contacted Toshiba, or any of the banks involved. The total amount transferred to the “new” fraudulent account was over $338,000.

The fraud was discovered a few weeks later, when the fraudsters attempted to impersonate another Brick supplier, Sealy Canada, and gave the same bank-changing story and “new” bank account number. Fortunately for the Brick, because that account number was already associated with the Toshiba account, it could not be entered into the Brick payment system. A Brick employee contacted the number provided by the Toshiba imposters to make inquiries about the duplicate bank account number and the Toshiba imposter claimed Sealy and Toshiba had merged. However, while the Brick awaited further details of the alleged merger, a representative of Toshiba called to inquire why it had not received payment for recent invoices. That call started an investigation at the Brick that finally uncovered the fraud.

The fraud was reported to the police and the Brick was able to recover $113,847 of the fraudulently transferred funds.

The Brick was insured under a commercial crime policy issued by Chubb Insurance Company of Canada (“Chubb”). The Brick made a claim to Chubb for $224,475, the amount transferred less the recoveries. Chubb denied the claim on the basis that the Brick’s losses did not fall within the “fund transfer fraud” coverage.

The Chubb policy defined funds transfer fraud as follows:

Funds transfer fraud means the fraudulent written, electronic, telegraphic, cable, teletype or telephone instructions issued to a financial institution directing such institution to transfer, pay or deliver money or securities from any account maintained by an insured at such institution without an insured’s knowledge or consent.

Since there was no doubt that funds were transferred out of the Brick’s account, the question really was whether the funds were transferred under instructions from an employee who did not “know” about or “consent” to the fraudulent transactions.

The Court found that the Brick was not covered under the Chubb policy based on the wording of the “fund transfer fraud” provision, specifically the words “knowledge” and “consent”. Since “knowledge” and “consent” were undefined in the policy, the Court held the words should be given its plain and ordinary meaning. Ordinarily, consent can be defined as “permission for something to happen, or agreement to do something”. In this case, a Brick employee gave instructions to the bank to transfer funds. In so doing, the Court found, the employee “permitted” the bank to transfer funds out of the Brick’s account. Consequently, the transfer was completed with the Brick’s consent. Although the Brick employee may have been an unwitting pawn in the fraudster’s scheme, they were not forced or threatened to issue the instructions.

The Court considered a California decision[2] (as well as a line of pending cases in the US[3]) with very similar facts: fraudulent emails were sent to a company employee who acted upon them, transferring money out of the insured’s account. The California court held that the insurer was not liable because the insured’s employee initiated the transfers.

In this case, no coverage was afforded to the Brick because the Brick’s instructions to its bank were authorized by its employee, regardless of the fact that the employee was deceived by fraudsters into making those instructions. This leaves a significant gap in coverage for companies (and its employees) that fall prey to the manipulative tactics of skillful, social engineering fraudsters.

This case is a cautionary tale: companies and organizations would be well-served to review internal controls to safeguard against these types of cyber risks, in addition to purchasing a robust crime policy, of course. In the commercial context, social engineering fraud depends on the fraudster establishing and manipulating employee trust. In this case, the fraudsters were successful because they were able gain valuable knowledge about the Brick’s internal procedures and payment information through a sequence of phone calls and emails with trusting Brick employees. To mitigate against employees unwittingly becoming pawns in a fraudster’s scheme, it is important to properly train and refresh staff on detecting and preventing fraud and implement appropriate cross-checks.

Additionally, although cyber risks are still a relatively new peril in the insurance industry, cyber-crime is rapidly evolving. It is critical to review the scope of coverage, definitions and exclusions in a crime policy to ensure that your business or organization is adequately covered. As fraudsters continue to adapt quickly in today’s changing technological landscape, insured’s must remain ever vigilant and regularly re-assess their insurance needs.

Footnotes

[1] 2017 ABQB 413

[2] Taylor and Lieberman v Federal Insurance Company, 2:14-cv-03608, unreported.

[3] Ameriforge Group Inc. v. Federal Insurance Co. [Doc. 4:2016cv00377 (U.S. Dist. Ct. S.D. Tex. February 12, 2016)]; Medidata Solutions, Inc. v. Federal Insurance Company, No. 1:15-cv-00907 (S.D.N.Y. Mar. 10, 2016) [“Medidata“]. It is worth noting that the decision in Medidata was released July 21, 2017 and found that the “funds transfer fraud” provision covered the losses. In that case, a fraudster impersonated the president of the insured company and successfully directed an employee via email to transfer $4.8 million. While the employee knowingly initiated the transfer, the Court held that “larceny by trick is still larceny” and the employee’s knowledge and consent was only obtained by deception.

Camille M. Dunbar is an associate at Theall Group LLP and maintains a broad civil/commercial litigation practice. Prior to joining Theall Group LLP, Camille summered and articled at the Toronto office of a prominent national business law firm, gaining commercial litigation experience in class proceedings, injunctions, franchise disputes, professional liability, employment law, municipal liability and negligence/product liability. Camille graduated from Osgoode Hall Law School in 2013 and was called to the Ontario Bar in 2014.

For more information, visit http://www.theallgroup.com/

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Coverage Issues For Off-Road Vehicles

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By: Melissa A. Wright, Litigation Associate


A recent decision by the Ontario Licence Appeal Tribunal reminds us of the potential coverage issues surrounding off-road vehicles, such as all-terrain vehicles, commonly referred to as ATVs.[1]

The applicant was injured in an ATV incident on July 11, 2015, while a guest at a property in rural Ontario. He attended the property as a guest of Family A. Family A had recently purchased the property from Family B. The applicant suffered significant injuries and applied for accident benefits, under his father’s insurance policy with Aviva Canada Inc. under the Statutory Accident Benefit Schedule — Effective September 1, 2010 (the “Schedule”).

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Aviva paid the applicant accident benefits for eleven months, but later terminated benefits on the basis that the applicant’s claim did not meet the definition of an accident because the ATV was not an “automobile” under the Schedule. The Schedule does not define “automobile”.

The test to determine whether the ATV is an “automobile” under the Schedule was established in Grummett v. Federation Insurance Co. of Canada,[2] and affirmed by the Court of Appeal in Adams v. Pineland Amusements Ltd.,[3] (generally referred to as the “Adams” test). It is a three step test, based on the following questions:

i.   Is the vehicle an “automobile” in ordinary parlance?

     If not, then,
ii.  Is the vehicle defined as an “automobile” in the wording of the insurance policy?

     If not, then,
iii. Does the vehicle falls within any enlarged definition of “automobile” in any   relevant statute?

An affirmative answer to any of the above questions meant that the vehicle is insured by the standard Ontario automobile insurance contract.

The issue in this case turned on who owned the ATV at the time of the incident. Specifically, whether there had been a verbal agreement for Family A to purchase the ATV from Family B prior to the incident. This is because section 15(9) of the Off-Road Vehicles Act (“ORVA”) provides that insurance is not required for an ATV if it is driven on private property of the owner of the ATV. If the ATV was exempt from being insured, it could not qualify as an automobile under the Schedule and the applicant would have no entitlement to accident benefits.

The decision focused on (iii) of the Adams test and whether the ATV falls within a definition of “automobile” in any relevant statute.

Section 224 of the Insurance Act defines an automobile as follows:

a. a motor vehicle required under any act to be insured under a motor vehicle liability policy; and
b. a vehicle prescribed by regulation.

In this case, both parties agreed that the ATV met the definition of an “off-road vehicle”, under the Off-Road Vehicles Act (“ORVA”):

“off-road vehicle” means a vehicle propelled or driven otherwise than by muscular power or wind and designed to travel,

a. on not more than three wheels, or
b. on more than three wheels and being of a prescribed class of vehicle; (“véhicule tout terrain”)

Generally, the ORVA requires that off-road vehicles be insured when operated, but there is an exception in subsection 15(9) of the ORVA as mentioned above, which hinges on ownership. The determination of ownership of the ATV as at the date of loss was therefore critical to whether the ATV qualified as an automobile under (iii) of the Adams test.

The respondent Aviva argued that Family B owned the ATV at the time of the incident. The ATV was therefore not required to be insured, as it met the exemption in 15(9) of the ORVA.

The applicant argued that Family A owned the ATV at the time of the incident. As the incident took place on the property of Family B, it could not meet the exemption in 15(9) of the ORVA and would have required insurance.

The adjudicator found that the ATV was owned by Family B at the time of the accident, meaning that the ATV did not meet (iii) of the Adams test and the ATV did not qualify as an automobile under the Schedule.

The adjudicator’s reasons emphasized the applicant’s evidence as to ownership was insufficient, as no evidence directly in support of this application from either Family A or B was submitted. Rather, the evidence submitted was an affidavit made in support of third party litigation against the insurance company.

The applicant was therefore not entitled to accident benefits, and was not entitled to any award under the Ontario Regulation 664, which provides for a lump sum award of up to 50% of the amount to which a person is entitled under the Schedule.

The applicant also argued that the respondent Aviva was estopped from denying accident benefits coverage because they had paid the applicant for eleven months. In denying this argument, the adjudicator noted that the administrative Tribunal (which is now the exclusive venue for accident benefits disputes) has no jurisdiction to grant equitable relief.

This case is an interesting reminder of the insurance coverage issues that can arise from accidents involving ATVs, and builds on earlier jurisprudence concerning ATVs. For example, the Court of Appeal for Ontario in Matheson v. Lewis[4] clarified that ATVs are subject to the province’s compulsory motor vehicle liability insurance regime when operated on land not occupied by the owner.

The Court of Appeal noted in Matheson v. Lewis that:

  • Section 15 of the ORVA prohibits a person from driving an off-road vehicle on land not occupied by the owner of the vehicle unless it is insured under a motor vehicle liability policy in accordance with the Insurance Act.
  • Highway Traffic Act, O. Reg.316/03, provides that an off-road vehicle shall not be operated on a highway unless it is insured in accordance with s. 2 of the Compulsory Automobile Insurance Act and s. 15 of the ORVA.

Therefore, insureds owning ATVs would be prudent to ensure that their ATVs are insured where they will be: (i) driven by anyone other than the ATV owner; or (ii) driven on property other than the ATV owner’s property.

Footnotes

[1] 16-003674 v. Aviva Canada Inc., 2017 CarswellOnt 11164 (Ont. L.A.T.).

[2] (1999), 46 O.R. (3d) 340 (Ont. S.C.J.), at para. 14.

[3] 2007 ONCA 844, at para. 7.

[4] 2014 ONCA 542.

Melissa A. Wright is an associate at Theall Group LLP and maintains a broad commercial litigation practice. Prior to joining Theall Group LLP, Melissa summered, articled and practiced at the Toronto offices of a prominent business law firm gaining corporate tax, dispute resolution and commercial litigation experience. Melissa graduated from the University of Windsor’s Faculty of Law in 2011 and was called to the Ontario Bar in 2012.

For more information, visit http://www.theallgroup.com/

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Policyholder Entitled To Full Indemnity Costs for Coverage Action

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By: Melissa A. Wright, Litigation Associate


The recent costs endorsement in Hoang v. The Personal Insurance Co.[1] provides policyholders with a succinct reminder of the general rule that a policyholder is entitled to full indemnity costs where an insurer wrongfully denies its obligation to provide coverage.

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The underlying action arose as a result of injuries sustained by a minor pedestrian, Christopher Hoang, when he was struck by a motor vehicle shortly after being dropped off on a city sidewalk by his father. A claim was commenced against the driver of the vehicle and against Christopher’s father, Mr. Hoang. A jury found that the driver of the vehicle that struck Christopher was not negligent. It found that Mr. Hoang negligently caused or contributed to the accident and his son’s injuries by selecting an unsuitable choice of unloading area.

The insurer denied coverage to Mr. Hoang, and the plaintiffs were forced to bring an action for coverage, under section 258(1) of the Insurance Act directly against the defendant insurer to have the insurance money payable under Mr. Hoang’s motor vehicle policy applied toward satisfaction of the judgment.

In the coverage action, the plaintiffs were successful in obtaining summary judgment against the defendant insurer requiring the payment of damages, costs and interest in the underlying action.[2]  With respect to the costs of the costs of the coverage action, the plaintiffs sought costs on a full indemnity basis, rather than on the usual partial indemnity scale.

While the costs endorsement repeats well-established case law, it is noteworthy because it affirms an expansive view: that an insured is entitled to full indemnity in any coverage case.  Justice E.M. Morgan accepted the plaintiffs counsel’s submissions that insured parties and insurance companies should be considered in a different light than other litigants. Such a view is “both authoritative and logical” since “it would be unfair and burdensome to make their customers pay a premium plus legal fees in order to obtain the coverage they bought.”[3]  Insurance premiums are presumed to reflect the insurance company’s risk, and any attempt to reduce that risk by engaging in litigation over coverage obligations, should result in full compensation where the insurance company loses.[4]

The costs endorsement is consistent with earlier jurisprudence that provides a policyholder full indemnity costs where an insurer wrongfully denies its duty to defend, with respect to any application to enforce its rights, as well as for costs incurred defending the underlying action until the insurer assumes its defence obligations.[5]

Footnotes

[1] 2017 ONSC 4193.

[2] 2017 ONSC 3649.

[3] 2017 ONSC 4193 at paragraphs 4-6.

[4] 2017 ONSC 4193 at paragraph 6.

[5] Aitken v. Unifund Assurance Co. 2012 ONCA 641 at para. 44.

Melissa A. Wright is an associate at Theall Group LLP and maintains a broad commercial litigation practice. Prior to joining Theall Group LLP, Melissa summered, articled and practiced at the Toronto offices of a prominent business law firm gaining corporate tax, dispute resolution and commercial litigation experience. Melissa graduated from the University of Windsor’s Faculty of Law in 2011 and was called to the Ontario Bar in 2012.

For more information, visit http://www.theallgroup.com/

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Coachman Insurance Co. v. Kraft: A Passenger can be in “Use” of a Motorized Vehicle

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By: Camille M. Dunbar, Litigation Associate


In Coachman Insurance Co. v. Kraft,[1] a recent decision of the Ontario Superior Court, the Court found that “use” of a “motorized vehicle” in a homeowner’s policy exclusion includes the conduct of a passenger on an ATV. Even as a passenger, one may exercise “some form of control over” a motor vehicle, sufficient to come within the definition of the term “use”.

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In the underlying action, David Kraft (“Mr. Kraft”) was allegedly injured in a single-vehicle ATV accident caused by Barry Kelley’s (“Mr. Kelley”) negligent conduct. The ATV was owned and operated by Mr. Kraft. Mr. Kelley was a passenger seated behind Mr. Kraft, on the left side of the ATV’s rear rack. Mr. Kraft alleges that as he began to execute a turn, the ATV flipped backwards and landed on top of him causing significant injuries.

The relevant allegations against Mr. Kelley in the statement of claim were grouped by the Court into 3 categories:

  1. Allegations with respect to the negligent manner in which Mr. Kelley physically interacted with the ATV, or a part of the ATV, which caused the ATV to flip over. sitting/straddling the ATV or exiting the ATV in a manner that caused it to flip over (the “First Category”);
  2. Allegations that Mr. Kelley was negligent in the manner in which he interacted with Mr. Kraft during and after the time that the ATV flipped overe. physical contact with Mr. Kraft’s body which impeded Mr. Kraft’s ability to extricate himself when the ATV flipped over (the “Second Category”); and
  3. General allegations of negligent conduct which may have contributed to the alleged negligent conduct that comprises the other two categories. Mr. Kelley being intoxicated to the point he became a danger to others including Mr. Kraft and creating and perpetuating a situation of danger (“the Third Category”).[2]

At the time of the accident, Mr. Kelley was insured under a home insurance policy issued by Coachman Insurance Company (“Coachman”). The Coachman policy granted third party liability coverage for bodily injury and/or property damage fortuitously arising out of Mr. Kelley’s personal actions anywhere in the world. However, that coverage was subject to a series of enumerated exclusions, which included “claims due to a motorized vehicle or trailer that you own or use” [the “Motorized Vehicle Exclusion”]. The term “motorized vehicle” expressly included “all-terrain-vehicles”; however, the term “use” was not defined in the policy.

Coachman brought an application for a declaration that it did not owe a duty to defend or indemnify Mr. Kelley, asserting that the policy’s Motorized Vehicle Exclusion precluded coverage.

Mr. Kelley did not defend the underlying action and similarly, did not respond to Coachman’s application. However, Mr. Kraft, the plaintiff in the underlying action, argued that the allegations of liability against Mr. Kelley fell within the policy’s scope of coverage because the word “use” in the motorized vehicle exclusion should be construed as meaning “some measure of operational control over” a motorized vehicle, in this case the ATV. The allegations in the statement of claim did not assert that Mr. Kelly exercised “operational control” over the ATV and therefore they did not amount to allegations of his “use” of it.

Mr. Kraft’s own automobile insurer also intervened on the application pursuant to the underinsured coverage (OPCF 44R Family Protection endorsement), in support of Mr. Kraft’s position.

In finding that Coachman had a duty to defend Mr. Kelley in the underlying action, the Court first reviewed the well-established legal principles applicable to assessing an insurer’s duty to defend and the interpretation of insurance policies, generally. The Court pointed out that an insurer’s duty to defend (which is broader than its duty to indemnify) is triggered when a “mere possibility exists” that a pleaded claim falls within the scope coverage.[3] The Court also noted that where the language of the policy is ambiguous, the court should resolve the ambiguity in accordance with general rules of contract construction, contra proferentem and the principle that coverage clauses should be construed broadly in favour of the insured and exclusion clauses narrowly against the insurer.[4]

The Court found that the Motorized Vehicle Exclusion was ambiguous as it relates to the nature of the activities intended to constitute an insured’s “use” of a motorized vehicle. In resolving this ambiguity, the Court reviewed the relevant case law and narrowly construed the subject exclusion, finding that the Motorized Vehicle Exclusion is intended to apply when the insured’s negligence giving rise to liability is founded in an act or omission in which the insured exercises “some form of control over” a motorized vehicle and that conduct causes “bodily injury” or “property damage”.[5]

In each of the allegations in the First Category, the Court noted, there is an inference or expression that Mr. Kelley exercised “some form of control over the ATV”, because his various negligent actions and interactions with the ATV (or a part thereof) were alleged to be the direct cause of the ATV flipping over. As a result, the Court concluded that the allegations included in the First Category constituted “claims due to a motorized vehicle…used” by Mr. Kelley, within the meaning of the Motorized Vehicle Exclusion and therefore did not trigger Coachman’s duty to defend.

However, the Court found that the substance of the Second Category of allegations did not constitute claims due to Mr. Kelley’s “use” of a motorized vehicle within the meaning of the exclusion. In support of this conclusion, the Court noted as follows:

The basis for the liability asserted in the allegations included in the second category are not dependent on an allegation or finding involving the insured’s “use” of the ATV, within the meaning of the exclusion. The allegations in the second category do not plead any exercise of control by the insured over any aspect of the ATV. Rather, the asserted basis for liability is founded in: Mr. Kelley’s alleged unreasonable conduct in physically contacting Mr. Kraft’s body in a manner that prevented him from safely exiting the ATV; and Mr. Kelley’s breach of a pleaded duty “not to obstruct, delay or prevent Mr. Kraft from exiting the ATV in an emergency situation”. The substance of those allegations rests upon a claim that Mr. Kelley negligently interfered with Mr. Kraft’s person and his activities and that his conduct, in that regard, resulted in bodily injury to Mr. Kraft.[6]

The Second Category of allegations were distinct and divisible from the allegations of negligent use of the ATV by Mr. Kelley in the First Category. As a result, the Court held that the allegations in the Second Category triggered Coachman’s duty to defend.

With regards to the Third Category of allegations, the Court found these allegations were equally capable of applying to Mr. Kelley’s alleged negligence in the manner in which he interacted with the ATV and his alleged negligent interference with Mr. Kraft’s body and activities. The allegations that Mr. Kelley was negligent due to intoxication and creating a situation of danger could be read as elements of both Mr. Kelley’s negligent “use of/interference with” the ATV and his “negligent interference” with Mr. Kraft’s person and activities, thereby falling both within and outside of the Motorized Vehicle Exclusion. As a result, the Court concluded that the Third Category of allegations also engaged Coachman’s duty to defend.

The Court made a point to note that had Coachman wished to exclude coverage where the loss was concurrently caused by a covered peril and an excluded “motorized vehicle” peril, it ought to have employed specific language to achieve that result, as it did with another exclusion in the policy.[7]

As a result of the Court findings regarding the Second and Third Category of allegations, the Court held that Coachman owed a duty to defend Mr. Kelley in the underlying action. The Court also concluded that a determination of Coachman’s duty to indemnify was premature and should only be made after relevant findings of fact are made in the final disposition of the underlying action.

The Court in Coachman interprets the definition of “use” to include exercising “some form of control over” a vehicle. This “control” over a motorized vehicle, as we have seen in this case, can be exercised by not only an operator of a motorized vehicle, as one would expect, but also as a passenger. Counsel may wish to consider how this interpretation can be applied in other cases involving allegations of “use”.

Footnotes

[1] 2017 ONSC 1875 [“Coachman”].

[2] Coachman, supra at para 102. The relevant allegations against Mr. Kelley are set out in complete detail at para. 10 of the decision.

[3] Coachman, supra at para 23 citing Progressive Homes Ltd. v. Lombard General Insurance Co., 2010 SCC 33 at paras. 19-20.

[4] Coachman, supra at para 29.

[5] Coachman, supra at para 105.

[6] Coachman, supra at para. 107.

[7] Coachman, supra at para. 114.

Camille M. Dunbar is an associate at Theall Group LLP and maintains a broad civil/commercial litigation practice. Prior to joining Theall Group LLP, Camille summered and articled at the Toronto office of a prominent national business law firm, gaining commercial litigation experience in class proceedings, injunctions, franchise disputes, professional liability, employment law, municipal liability and negligence/product liability. Camille graduated from Osgoode Hall Law School in 2013 and was called to the Ontario Bar in 2014.

For more information, visit http://www.theallgroup.com/

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The Ontario Court Of Appeal Leaves Window Cleaners Out To Dry On Window Replacement Costs

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By: Melissa A. Wright, Litigation Associate


The Ontario Court of Appeal’s recent decision in G & P Procleaners and General Contractors Inc. v. Gore Mutual Insurance Co. (“Procleaners”)[1] is an interesting example of the application of the “your work” exclusion, particularly since the Court rejected the approach to policy interpretation that the Newfoundland Court of Appeal gave to an exclusion with very similar wording.

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Procleaners involved a contractor who was hired to clean the windows of a newly constructed commercial building. Some of the windows were damaged by cement debris that adhered to the wet windows during cleaning. The debris came from stone cutting machines that were being used onsite at the time of cleaning. The contractor reimbursed the owner of the building approximately $134,000 for the damage to the windows and then sought indemnification under its commercial general liability policy (the “Policy”).

The coverage grant in the Policy insured against an “occurrence” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”[2] The contractor argued that the damage to the windows arose as a result of unforeseen environmental conditions at the construction site (e.g., the airborne debris from the stone cutting machines) and was therefore an “occurrence” under the Policy triggering coverage. The insurer denied the claim on the basis that it was excluded by the “your work” exclusion clause in the Policy, which read as follows:

2. Exclusions…

(h) “Property damage” to: . . .

(v) that particular part of real property on which you or any contractor or subcontractor working directly or indirectly on your behalf is performing operations, if the “property damage” arises out of those operations; or

(vi) that particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.

The motions judge agreed with the insurer, finding that the property damage was excluded by the Policy. On the motion, the contractor had admitted that the scratches on the windows resulted from, or arose out of, its window cleaning operations.[3] The contractor did not rely on any exception to the “your work” exclusion clause.

An “occurrence” is an event that causes property damage that is neither expected nor intended by the insured.[4] In the reasons for judgment of the Court of Appeal, Justice Hourigan agreed with the motions judge that the “occurrence” causing property damage in this case was the scratching of the windows caused by the contractor’s employees and not the presence of airborne cement debris. The cleaning of the windows using squeegees was expected and intended; however the scratching that occurred from cleaning was unexpected and unintended.[5] The damage did not “arise out of” cleaning itself, because the contractor’s employees chose to undertake their cleaning operations in the midst of airborne debris.[6] If they had not done so, there would have been no property damage.

The damage therefore fell within the initial coverage grant, but was excluded from coverage by the “your work” exclusion. The exclusion covered property damage to that particular part of real property (i.e., the building’s windows) on which the employee was performing operations (i.e., cleaning the windows) since the property damage (i.e., scratching of the windows) arose out of those operations.

The contractor argued on appeal that the exclusion clause was ambiguous, relying on the Newfoundland Court of Appeal’s decision in Lombard General Insurance Company of Canada v. Crosbie Industrial Services Limited (“Crosbie”).[7] In Crosbie, a fuel oil tank was destroyed following an explosion that occurred while the inside of the tank was being cleaned. Crosbie involved a nearly identical exclusion clause. The Court held for the insured on the basis that the exclusions at issue were ambiguous because they failed to identify a relationship between an “occurrence” and “your work” incorrectly performed. Therefore the “your work” exclusions could only apply where the damage was caused by incorrectly performed work absent an occurrence. As the explosion was an occurrence, the exclusions did not apply. The Court of Appeal in Procleaners rejected Crosbie as circular and inconsistent with the proper interpretation of insurance contracts, as it was illogical to apply an exclusion clause prior to determining whether there was an occurrence that triggered coverage. This is the correct result, since first principles require an occurrence to fall within the coverage grant before an exclusion clause can apply.

In response to the contractor’s argument that this interpretation of the policy rendered coverage illusory, the Court of Appeal disagreed and set out what it claimed is the general intention behind commercial general liability policies:

[…] Commercial general liability policies are generally intended to cover an insured’s liability to third parties for property damage other than to the property on which the insured’s work is being performed. They also cover consequential damage to parts of the property other than to the particular part of the property on which the work is performed. But they are not “all-risk” policies. They do not insure the manner in which the insured conducts its business. They do not generally cover the cost of repairing the insured’s own defective or faulty work product (citations omitted).[8]

While Procleaners is not a “cost of making good” case, the facts are reminiscent of the Supreme Court of Canada’s decision in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. (“Ledcor”)[9] (previously discussed in Covered, September 16, 2016). Ledcor involved a contractor hired to clean the windows of a building which was covered by an all risks builders-risk wrap up policy. In the course of cleaning the windows, the contractor used improper materials and equipment resulting in significant damage.

The exclusion at issue in Ledcor was, as follows:

This policy section does not insure: […]

(b) The cost of making good faulty workmanship, construction materials or design unless physical damage not otherwise excluded by this policy results, in which event this policy shall insure such resulting damage.

The Supreme Court held that the costs of replacing the windows was covered under the policy at issue as resulting damage, and only the costs of redoing the faulty work (i.e., cleaning the windows) was excluded by the faulty workmanship exclusion in the policy. Essentially the “cost of making good” was limited to the cost of redoing the particular contractor’s work.

The takeaway from Procleaners for policyholders is that small contracts have the potential to result in significant financial liability for costs that may not be covered by a commercial general liability policy. Prudence is required by employees, to not undertake work in conditions that may cause unexpected and unintended property damage. In contrast, greater coverage may be afforded to a contractor under an all-risks builders-risk wrap-up policy, as was the case in Ledcor. For counsel, this case is a good demonstration of the proper approach to policy interpretation, which requires a finding that the loss falls within the coverage grant before the exclusions can be considered.

Footnotes

[1] 2017 ONCA 298.

[2] 2017 ONCA 298 at para 8.

[3] 2017 ONCA 298 at para 11.

[4] 2017 ONCA 298 at para 17.

[5] 2017 ONCA 298 at para 18.

[6] 2017 ONCA 298 at para 20.

[7] 2006 NCLA 55.

[8] 2017 ONCA 298 at para 24.

[9] 2016 SCC 37.

Melissa A. Wright is an associate at Theall Group LLP and maintains a broad commercial litigation practice. Prior to joining Theall Group LLP, Melissa summered, articled and practiced at the Toronto offices of a prominent business law firm gaining corporate tax, dispute resolution and commercial litigation experience. Melissa graduated from the University of Windsor’s Faculty of Law in 2011 and was called to the Ontario Bar in 2012.

For more information, visit http://www.theallgroup.com/

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In Nodel v. Stewart Title Guaranty Co., it “Paid” to Know the Rules of Policy Interpretation

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By: Camille M. Dunbar, Litigation Associate


In a recent decision from the Ontario Superior Court, Nodel v. Stewart Title Guaranty Co.,[1] Justice Matheson applied well established policy interpretation principles to an “exception from coverage” clause contained in a schedule to a title insurance policy, which effectively operated as an exclusion clause. Typically, an exclusion clause bars coverage when a claim otherwise falls within the initial grant of coverage. Exceptions then bring an otherwise excluded claim back within coverage. Oddly, in the title insurance policy issued by the respondent, Stewart Title Guaranty Co.’s (“Stewart Title”), both the exclusion and “exception from coverage” clauses set out risks that fell outside the scope of the coverage grant. It was one such “exception from coverage” clause that was at issue in Nodel, specifically the interpretation of the words “are paid to”.

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It all started with a fraudulent mortgage transaction. The applicant, Karl Nodel (“Mr. Nodel”), a private lender, agreed to provide a loan to (who he thought was) John Colarieti (“Mr. Colarieti”). Mr. Colarieti purported to be borrowing the funds for investment purposes. The proposed security was a second mortgage registered on his property in Toronto.

Mr. Nodel hired Isaac Singer (“Mr. Singer”) to act on his behalf as the lender in the transaction. Colarieti hired Bryan Dale (“Mr. Dale”) to act on his behalf as the borrower. Prior to the close of the deal, Mr. Singer applied for title insurance from the respondent, Stewart Title, on behalf of Mr. Nodel to protect his investment against fraud.

Stewart Title had initially flagged the transaction for review because Mr. Dale was on a “flash list” of real estate lawyers with a prior disciplinary history with the Law Society of Upper Canada (“LSUC”). After an internal review, and upon receiving supporting documentation from Mr. Singer, Stewart Title cleared the flag and issued a title insurance policy (the “Policy”) to Mr. Nodel.

On closing, Mr. Singer disbursed the mortgage funds to Mr. Dale in trust for the borrower, according to a written direction from Mr. Dale himself. A mortgage was registered against Mr. Colarieti’s property.

The fraud was discovered shortly thereafter. It was also discovered at that time that Mr. Dale had disbursed the mortgage proceeds from his trust account to unrelated third parties, not to Mr. Colarieti.

Mr. Nodel made a claim under the Policy. Although Stewart Title acknowledged that the Policy provided coverage for mortgage fraud, it denied coverage relying on the following exception from coverage clause:

This policy does not insure against loss or damage… which arise by reason of: …

2. Notwithstanding anything else contained within this Policy, in the event that the proceeds of the Insured Mortgage are paid to any person or entity other than: i) to the registered title holder or holders, as the case may be

[. . .] then the Company can deny coverage and shall have no liability to the Insured for any matters that involve the allegation of mortgage/title fraud [. . .].

This clause removed coverage if the proceeds were not paid to one of the listed parties. In this case, the relevant party to which the proceeds ought to have been paid was the registered title holder, Mr. Colarieti.

When coverage under the Policy was denied, Mr. Nodel sued (among other parties) Mr. Singer for his loss on the mortgage transaction. Mr. Singer brought a third party claim against Stewart Title. The action was settled except with respect to Stewart Title. LawPRO, on behalf of Mr. Singer, proceeded against Stewart Title by way of an application for an interpretation of the exception from coverage clause relied upon to deny coverage and, in the alternative, for a relief from forfeiture.

Justice Matheson, writing for the Court, began her analysis by setting out the well-established principles governing policy interpretation:

i. when the language of the policy is unambiguous, the Court should give effect to clear language, reading the contract as a whole;

ii. when the language is ambiguous, the Court should rely on general rules of contract construction;

iii. in that regard, the contract of insurance should be interpreted to promote the reasonable expectations of the parties and a reasonable commercial result; and,

iv. if there remain ambiguities, they are construed against the insurer − coverage provisions are interpreted broadly and exception provisions narrowly.[2]

The Court also pointed out that a clause that nullifies coverage will not be enforced. In addition, although the factual matrix is less relevant for standard form contracts, factors such as the purpose of the contract and the industry in which it operates should nevertheless be considered. The parties agreed that the purpose of the Policy was to provide insurance for mortgage fraud (among other things). The parties also admitted it was common practice to disburse funds to lawyers in trust for their clients.

The Court then turned to the exception from coverage clause at issue, specifically the phrase “are paid to any person or entity other than [. . .] to the registered title holder”. Stewart Title argued that monies are “are paid to” the registered title holder if the cheques is made out to them or wired to their bank account directly. Mr. Nodel argued that funds are paid to the registered title holder/borrower when they are disbursed to the title holder/borrower’s lawyer, in trust for title holder/borrower.

The Court found that the term “paid” was ambiguous. The Court pointed out, for example, that “paid” could mean that a person has received monies that they are entitled to. When funds are paid to a lawyer in trust for their client, the Court noted, the funds are not necessarily received by their client. As a result, if the term “paid to” required proper receipt by the borrower, the exception from coverage clause would be unenforceable because it would nullify coverage for fraud. In circumstances of fraud, the funds are never properly received by the purported borrower. While Stewart Title acknowledged that this was one potential meaning of “paid”, this definition was not advanced by the insurer as it would effectively nullify coverage and would therefore be unenforceable.

Having found that the clause was ambiguous, the Court moved on to apply the general rules of contract construction. The Court looked to the regulatory regime regarding client identification and the flow of trust funds as well as the common practice of lawyer holding and disbursing funds in trust on behalf of a client. LSUC by-law 9 requires lawyers holding funds in trust for their clients to withdraw funds only in specified circumstances, namely where the money is “properly required for payment to a client or to a person on behalf of a client”. When Mr. Singer disbursed the funds to the borrower’s counsel in trust for his client, borrower’s counsel was restricted in what could be done with those funds. Relying on the foregoing background facts, which would have been known by both the insurer and the insured, the Court found that the exception from coverage clause permitted payments to a lawyer in trust for his or her client.

In addition, given the accepted interpretative rule that ambiguities are construed against the insurer, the Court concluded that the clause did not incorporate the unexpressed requirement that cheques must be made payable to a listed approved party, or wired to them directly, or the subject of a special undertaking from their lawyer. By not expressing the manner of payment, the Court found that the impugned clause permitted multiple payment methods including disbursing the funds to the lawyer, in trust for his or her client.

Having found that the exception from coverage clause did not apply to bar coverage, the court did not address the alternative claim for relief from forfeiture.

This decision provides a recent application of the well-established principles of policy interpretation, as well as a close look at the meaning of the words “”are paid to” in what was effectively an exclusion clause in a title insurance policy. The Court confirmed that where the language of the policy is ambiguous, general rules of contract interpretation apply. The reasonable expectations of the parties and the surrounding circumstances must be considered to resolve the ambiguity. If all else fails, the doctrine of contra proferentem still applies to interpret ambiguities against the insurer as the drafter of the policy.

Footnotes

[1] Nodel v. Stewart Title Guaranty Co., 2017 ONSC 890 [“Nodel“].

[2] Nodel, supra at para. 43.

Camille M. Dunbar is an associate at Theall Group LLP and maintains a broad civil/commercial litigation practice. Prior to joining Theall Group LLP, Camille summered and articled at the Toronto office of a prominent national business law firm, gaining commercial litigation experience in class proceedings, injunctions, franchise disputes, professional liability, employment law, municipal liability and negligence/product liability. Camille graduated from Osgoode Hall Law School in 2013 and was called to the Ontario Bar in 2014.

For more information, visit http://www.theallgroup.com/

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