Ontario Court of Appeal: Insured’s Failure to Provide Up to Date Address Not a “Breach of Duty to Cooperate” as not “Substantial”

hashim (105x104) By: Shaun Hashim, Litigation Associate

The insured has a duty to cooperate with defence counsel appointed by his insurer. The Ontario Court of Appeal recently reconfirmed that this duty to cooperate is not subject to a standard of perfection. Instead, to establish a breach of duty, an insurer must show that the insured’s breach was “substantial” and not merely “inconsequential or trifling”. The Court will always consider the facts and consequences of the alleged conduct to determine whether a breach can be established.

In Ruddell v. Gore Mutual Insurance Company,1 an insurer argued that its insured’s failure to keep them updated on her current address was a substantial breach of the duty to cooperate. On a summary judgment motion, a judge of the Ontario Superior Court disagreed and ruled that – in these circumstances – the insured’s conduct was not a “substantial” failure to cooperate. This was upheld on appeal.

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Facts

The circumstances of Ruddell are peculiar. As cases involving the duty to cooperate are adjudicated on a case by case basis, a full appreciation of the facts is important to understand the decisions of both the lower court and the Court of Appeal.

Gore Mutual Insurance Company (“Gore”) was defending its insured, Gayle Bass. Gayle was the owner of a vehicle involved in a single car accident. At the time of the accident, the vehicle was driven by her son, Alan Stewart. Alan had allegedly been driving too fast, down a road he was unfamiliar with. When the road ended abruptly, he took a sharp turn, slid on gravel and rolled the vehicle. Because of the accident, Alan’s passenger, Michael Ruddell, sued both Gayle and Alan for personal injuries.

As most Ontarians with auto insurance, Gayle’s relationship with Gore was subject to the Statutory Conditions – Automobile Insurance, O. Reg 777/93, a regulation made under the Ontarian Insurance Act. Statutory Condition 5(3) codifies a general principle of insurance: an insured’s duty to cooperate with his or her insurer in the defence of an action. That condition reads:

The insured shall, whenever requested by the insurer, aid in securing information and evidence and the attendance of any witness and shall co-operate with the insurer, except in a pecuniary way, in the defence of any action or proceeding or in the prosecution of any appeal.

When first contacted by Gore, Gayle cooperated fully in compliance with her obligations under statute. In Gore’s first letter to Gayle, they asked that she “keep [Gore] advised of any change of address”. Gayle provided a statement and particulars for their file including her current address and information about past addresses. She also provided all the information she had about the accident.

The Court of Appeal and the court below were careful to note that the information provided at this stage was effectively exhaustive. Gayle was not involved in the accident and was merely the owner of the vehicle. She had little else to provide than particulars of her ownership, herself and her son. Gayle’s son Alan, on the other hand, was in the best position to provide information about the case and would likely have been a witness at trial.

After cooperating fully at this early stage, Gore and Gayle fell out of contact for a period of time.

The action proceeded and pleadings were closed. About one year into the litigation, as discovery was approaching, counsel for Gore tried to reconnect with Gayle. Gore’s counsel tried the various phone numbers and addresses provided by Gayle without success. Efforts to contact Gayle continued without success for several years. During this period, Gore was also unable to locate Gayle’s son Alan. Alan had what the court described as a “peripatetic” lifestyle. He worked as a rigger in the entertainment industry – colloquially, he was a “roadie” who traveled with stage productions and set up equipment rigs.

Three years into the litigation, in 2013, Gore’s counsel removed themselves from the record and Gayle and Alan were noted in default. Gore was then added as a statutory third party. The litigation continued and in 2016, it came to light that Mr. Ruddell’s insurer, Allstate Insurance Company of Canada (“Allstate”), had located Gayle two years earlier, through a private investigator. With new contact information, Gore connected with Gayle in 2016. At this time, Gayle once again cooperated fully with all of Gore’s requests. The case was later settled and a judgment of over $300,000 was ordered.

Following judgment, Gore refused to indemnify its insured claiming that Gayle had breached her policy and statutory condition 5(3) by failing to cooperate. Gore alleged that she had a positive obligation to keep counsel up to date on her current address. On this basis, Gore argued that Allstate was therefore responsible for the judgment, as Gayle was without insurance.

Decision

The motion judge found that Gayle did not breach her policy and cooperated at all times when involved. In both 2010, when she was first contacted, and 2016 when she was later found, she provided all that was requested. The motion judge held that during her period of absence there was no evidence that she “was somehow evading process or trying to hide from those responsible in litigating the lawsuit”,2 nor was there evidence that she had been “working in concert with her son, encouraged him not to cooperate, or failed to assist Gore in locating [Alan]”.3 To the contrary, the motion judge believed Gayle had acted reasonably. Ultimately, he found that she had “little information to give that could assist in their defence of the action beyond assisting Gore in finding [Alan]. When asked to do so, she did provide that information”.4 In light of these findings, the motion judge concluded there was no breach of duty.

On appeal, the Court agreed with the motion judge. In doing so, the Court recognized the long-established principles set out in its 1996 decision of Canadian Newspapers Co. v. Kansa General Insurance Co. In that decision, Justice Weiler quoted this foundational passage from the New Brunswick Court of Appeal:

The duty of the insured to co-operate with the insurer, being a condition precedent to his right to recover, requires him to assist willingly and to the best of his judgment and ability. If in this connection a breach occurs in some material respect the insurer is entitled even to refuse to defend an action. Lack of co-operation, however, must be substantial. No inconsequential or trifling breach of such obligation should serve to exonerate the insurer from his contractual liabilities under the policy. The breach of the duty of co-operation in this case was substantial because it affected the insurer’s assessment of the risks of the litigation.5

In other words, to find a breach of the duty to cooperate the court will look for “substantial” conduct. The Court noted that a breach of this duty differs from, for example, a breach of a more straightforward obligation like the 90-day deadline to provide a declaration about a loss set out in Statutory Condition 6(1)(c). There, compliance with the condition is straightforward, either the declaration is provided in-time or not. If it is not, it is a breach (subject to relief from forfeiture).

With the “duty to cooperate”, there is no bright line. In this case, the Court of Appeal confirms that whether a “substantial breach” is established will depend on the particular facts and circumstances of each case. While Gayle did not strictly “cooperate” with the requested obligation to keep her address up to date, the result of that “breach” was inconsequential. She had little information to assist the defence. All she could have done was help Gore locate her son. Given her son’s nomadic lifestyle, she was not in any better position than Gore to do so. Further, it is noteworthy that Gore’s efforts to locate Gayle were subject to some criticism by the court below.

Comment

This case serves as a strong reminder from the Court of Appeal that a breach of the duty to cooperate must be “substantial”. Ruddell shows us that – in practice – without real consequences arising from the insured’s conduct, there can be no “substantial” breach of the duty to cooperate.

Despite missing 6 years out of a 7-year litigation, Gayle’s absence had no substantial impact on Gore’s ability to defend the action. While such an extended absence sounds significant, in the circumstances, the effect was minimal. Gayle had only a minor role in the litigation. The Court acknowledged that the only assistance Gayle might have provided during the 6-year absence would have been to assist Gore in locating her son, Alan. However, given Alan’s transience as a “roadie”, Gayle was in no better position that Gore to assist. Thus, while Gayle’s conduct might strictly have been a “failure” to meet her insurer’s initial request regarding her address, her conduct had no consequential effect on the defence.

While this decision breaks no new ground in the law, insurers and insureds alike can look to Ruddell as a yardstick to measure whether an insured’s conduct is a “substantial breach” of the duty to cooperate.

Footnotes

1 Ruddell v. Gore Mutual Insurance Company, 2019 ONCA 328.
2 2018 ONSC 3932 at para. 8.
3 2018 ONSC 3932 at para. 7.
4 2018 ONSC 3932 at para. 7.
5 Canadian Newspapers Co. v. Kansa General Insurance Co. (1996), 30 O.R. (3d) 257 (C.A.).

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/

Banner Photo Credit: Patrick Fore @ https://unsplash.com/@patrickian4

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A coverage ‘Thrilla’ in Manila – Court finds underinsured endorsement provides worldwide coverage

This image has an empty alt attribute; its file name is christiaan-jordaan-2-796x1024.png By: Christiaan Jordaan, Counsel

A recent decision of the Alberta Court of Queen’s Bench demonstrates that policy holders must carefully consider the interplay between an insurance policy and its endorsements. In Wage v Canadian Direct Insurance Incorporated, 2019 ABQB 303, the court interpreted a standard form family protection endorsement to an automobile insurance policy to provide coverage for an accident in the Philippines, even though the territorial limit of the underlying policy was Canada and the United States.

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The decision turned on a conflict between the wording of the territorial limit stated in the policy and the nature of the family protection endorsement. The policy provided coverage while the insured automobile was located within Canada or the U.S., but the endorsement extended coverage to certain accidents not involving that vehicle. As a result, even though the endorsement was expressly subject to all limits specified in the policy, the insured argued that the accident in the Philippines was covered because the insured vehicle remained at all times in Canada, and the endorsement’s only additional territorial limitation was to exclude application in Quebec.

The court accepted that argument. While it acknowledged that worldwide coverage outside of Quebec may not have been intended, that was the effect of the insurance contract read as a whole. Furthermore, the court noted that a more commercially-reasonable effect could have been easily achieved, as was done in a referenced Ontario case with the following wording: “This policy covers you and other insured persons for incidents occurring in Canada or the United States.” In the absence of such wording, the policy holder is entitled to a plain language interpretation, with broad construction given to coverage provisions.

The holding in Wage demonstrates the need for a careful review of the policy text in any coverage dispute. One consideration will be the distinction between endorsements that provide stand-alone coverage and those intended only to modify the existing policy terms. However, most important is the over-arching principle that any limitations of coverage should be stated clearly.

Christiaan Jordaan is counsel at Theall Group LLP . He assists clients to resolve various commercial disputes, with a focus on appellate advocacy, class actions, judicial review and insurance matters. He also handles competition, employment and some insolvency litigation. He has appeared at the Supreme Court of Canada, all civil levels of court in Ontario, before the Federal Court and the Federal Court of Appeal, as well as private arbitrations. He is an experienced trial and appellate lawyer.

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

Banner Photo Credit: Bash Carlos @ https://unsplash.com/@bash_carlos

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Speeding Motor Vehicle Makes an Eggs-press Delivery

cox_thumbnail By: Victoria Yang, Litigation Associate

An Ontario court recently found that the injuries sustained by a pedestrian when eggs were thrown at her from a vehicle arose “directly or indirectly from the use or operation of an automobile”. The court determined that the act of egg throwing in this case was not a distinct and intervening act from the use or operation of the vehicle, as the speeding vehicle created speed and kinetic energy for the egg(s) which were crucial in causing the extensive damage it did.

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The Facts

The plaintiff in Gilbraith v Intact Insurance Company1 was a pedestrian walking along a sidewalk with her friend when a car approached her from the opposite direction. The front passenger threw an egg or multiple eggs at her, striking her right eye, which caused serious and permanent injuries.2 It was believed that the car was travelling 10-20km/h above the speed limit, and it did not stop. Both the car and its occupants remained unidentified.3

As a result, the plaintiff commenced a claim against Intact Insurance Company (“Intact”) in accordance with the OPCF 44R Family Protection Coverage Endorsement of the standard Ontario automobile insurance policy. The relevant section of the Endorsement provided:

Insuring Agreement

[The] insurer shall indemnify an eligible claimant for the amount that he or she is legally entitled to recover from an inadequately insured motorist as compensatory damages in respect of the bodily injury to or death of an insured person arising directly or indirectly from the use or operation of an automobile. [Emphasis added]4

Intact moved for summary judgment, arguing that the plaintiff’s injuries did not arise directly or indirectly from the use or operation of an automobile, but rather by an egg thrown from a passenger in the vehicle.

Law

It is well-established that courts apply a two-part test in determining entitlement to coverage under the OPCF 44R Endorsement for bodily injuries or death that arose “directly or indirectly from the use or operation of an automobile”. The two parts are: (i) the purpose test, and (ii) the modified causation test:

Purpose test (“use or operation”): Did the incident occur in the course of the ordinary and well known activities of automobiles?
Modified causation test (“arising directly or indirectly”): Was there an unbroken chain of causation linking the claimed loss or injuries to the use and operation of the motor vehicles, which is shown to be more than simply fortuitous or “but” for?5

Purpose Test

The purpose test generally has a lower threshold where the court merely examines whether the incident occurred through the use or operation of ordinary and well-known activities of automobiles. Transporting individuals or cargo including rocks and guns have been found to meet the purpose test.6

It is notable that here, Intact argued that the motor vehicle was used as a catapult for an egg, which was not an ordinary and well-known use to which motor vehicles are put. The Ontario Superior Court rejected this contention and found that the driver was simply transporting passengers and cargo (the egg(s)) which was an ordinary and well-known activity of automobiles.

Modified Causation Test

The court’s finding in the modified causation test appears to stand directly against the Supreme Court’s decision in Vytlingam.

Intact relied upon the courts in Vytlingam and Russo to argue that the modified causation test was not satisfied due to a broken chain of causation. In Russo, the plaintiff was injured in a restaurant due to a drive-by shooting. The Court of Appeal found that the shooting was a distinct and intervening act completely independent from the use or operation of the van.7

Vytlingam involved tortfeasors who drove to an overpass with rocks, before exiting the vehicle and dropping the rocks onto the road below, causing catastrophic injuries. The Supreme Court of Canada found that the chain of causation was broken as the tort, which consisted of dropping rocks from the highway, was separate from the use and operation of the motor vehicle.8

In particular, the Supreme Court in Vytlingam explicitly rejected the British Columbia Court of Appeal’s finding in Chan v Insurance Corp. of British Columbia,9 which involved a passenger injured by a brick thrown from an oncoming vehicle.10 The court in Chan found it was impossible to isolate the throwing of the brick from the use or operation of the vehicle as two entirely separate and distinct acts; instead, it said that operation was “part and parcel” to the throwing of the brick.11 The court in Vytlingam opined:

…Nevertheless, if the analysis had focused on the elements of the tort that gave rise to the tortfeasor’s liability (as it should have), the fact the brick was thrown from a car rather than a horse does not qualify it as a motoring activity. The rock throwing was an intervening act. Neither in Chan nor in the present appeal was the tortfeasor at fault as a motorist.12

Justice Sosna distinguished this case from Vytlingam because the egg was thrown from a speeding vehicle, where he found that the speed was crucial to changing the likelihood of the plaintiff’s injury from unlikely to “more likely than not”.13 As a result, he concluded there was an unbroken chain of causation as throwing the egg(s) from a speeding vehicle was not a distinct and intervening act independent from the use or operation of the vehicle.14

The court here essentially adopts the reasoning in Chan and justified its approach by considering the speed of the motor vehicle. It found that where speeding increased the likelihood of the injury, an unbroken chain of causation linked the injuries and damages to the use and operation of the motor vehicle.

Conclusion

Although the court distinguished its facts from those of Vytlingam, its findings muddy the waters on how the modified causation test should be applied, particularly when items are propelled from a moving vehicle resulting in injury. Chan found that in such circumstances, there is no intervening or distinct act, whereas Vytlingam explicitly overruled Chan. The court in Gilbraith did not clearly address why speeding, which affected the balance of probabilities of injuries, resulted in an unbroken chain of events. As a result, this decision leaves the fate of future cases involving projectiles from a vehicle that result in injury unclear.

Footnotes

1 Gilbraith v Intact Insurance Company,2019 ONSC 1875, [Gilbraith].
2 Gilbraith at paras 7-9.
3 Gilbraith at paras 3 and 61.
4 Gilbraith at para 28.
5 Gilbraith at para 33, Vytlingam (Litigation Guardian of) v Farmer, 2007 SCC 46 at para 12, [Vytlingam].
6 Vytlingam at para 33, Russo at para 24 (ONCA).
7 Russo v John Doe, 2009 ONCA 305, at para 34.
8 Vytlingam at para 38.
9 Vytlingam at para 31.
10 Traders, 60 ACWS (3d) 605, [Chan].
11 Chan at para 30.
12 Vytlingam at para 31.
13 Gilbraith at paras 56 and 61.
14 Gilbraith at para 62.

Victoria Yang is an associate at Theall Group LLP and maintains a broad commercial litigation practice. She was admitted to the Ontario Bar in 2017 after having completed her articles at a prominent Ontario law firm. During her articles, Victoria worked on diverse commercial litigation disputes including those involving construction law, employment law, creditors’ rights, commercial leasing and insurance law matters.

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

Banner Photo Credit: Jiang Xulei @ https://unsplash.com/@jiangxulei1990

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Traders v. Gibson: Injury claim between co-habiting family covered by homeowner’s policy despite “household exclusion”

cox_thumbnail hashim (105x104) By: Victoria Yang, Litigation Associate
& Shaun A. Hashim, Litigation Associate

An Ontario court recently found that a personal injury claim, by a daughter against her mother, was covered by homeowner’s insurance. The two lived together and the policy contained an exclusion for claims arising from injury to “any person residing in [the] household”. However, the court concluded that the daughter was a “tenant” under the policy and therefore the exclusion did not apply. In the absence of explicit terms, the court concluded that the insured had a reasonable expectation of coverage for claims made by tenants, even if that tenant was a family member.

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The Facts

Traders General Insurance Company v Elizabeth Gibson 1 involved a daughter, Betty Gibson (“Betty”), born July 22, 1949, who, except for 10 months, lived at her mother’s property her entire adulthood until 2016. Since high school graduation, Betty paid rent to her mother, Elizabeth Gibson (“Elizabeth”), and shared daily living tasks as well as various maintenance and upkeep costs with her.

An accident occurred on March 31, 2014 when Betty and her mother were waiting for a taxi to take them to medical appointments. Her mother was sweeping the porch and when the taxi arrived, reached to hand over the broom to Betty on the porch. When Betty leaned over to get the broom, she fell from the porch as the railing came down with her. As a result, she sustained bodily injuries and sued her mother, the contractor, his company, and a neighbor.

Traders General Insurance Company (“Traders”) brought a coverage application in the course of trial for a declaration that it did not have to defend or indemnify Elizabeth.

Coverage

The mother’s homeowner policy provided personal liability protection, which included coverage for compensatory damages due to unintentional bodily injury arising out of her “ownership, use or occupancy” of the premises. However, the policy included the following exclusion:

We do not ensure claims made against you arising from:
5. Bodily injury to you or any person residing in your household other than a residence employee2. [emphasis added]

Traders relied on this exclusion (the “Household Exclusion”) and argued that, because Betty “resided” at her mother’s household at the time of the accident, coverage for a defence and indemnity against Betty’s action was excluded.

During its analysis, the court decided that the Household Exclusion’s purpose was to prevent potential collusion between the insured and family members residing within a household. Although they were family members occupying the same residence, Elizabeth argued that Betty was either a “residence employee” or a “tenant” and thus her claims against Elizabeth would not be subject to the Household Exclusion.

Residence Employee Argument

Elizabeth relied on two arguments on this application. First, she argued that Betty was a “resident employee” retained to perform household services or duties in exchange for a low monthly rent. As quoted above, the Household Exclusion relied on by Traders contained an explicit exception for claims made by “residence employees”.

Elizabeth’s policy defined “residence employees” as follows:

“Residence Employee” means a person employed by you to perform duties in connection with the maintenance or use of the premises. This includes persons who perform household or domestic services or duties of a similar nature for you. This does not include contractors or sub-contractors. It also does not cover persons while performing duties in connection with your business.3

The court found that Betty could not be considered a “residence employee” as there was no “employer and employee” relationship between her and Elizabeth, nor was there a “family business”. Further, the court noted that Betty did not have a schedule or list of duties, and she had discretion over the services or duties she performed—for instance, when her health was poor she did no tasks at all.

Tenant Argument

Elizabeth argued, in the alternative, that Betty was a tenant and thus her claims against Elizabeth should be covered under the Traders policy. Traders argued that the Household Exclusion applied.

As noted above, the court had already decided that the purpose of the Household Exclusion was only to protect insurers from collusion between family members who were residing together. Here, although Betty and Elizabeth were family, the evidence was clear that Betty had been paying a fixed rent since 1994. Faced with this bona fides tenancy between family, the court was tasked with deciding whether the Household Exclusion still applied due to Betty’s tenancy.

Noting the general rules for insurance policy construction, including that coverage terms be interpreted broadly and exclusion clauses be interpreted narrowly, the court considered the intentions of the parties at the time that the policy was issued. The court held that:

I am of the view that it had to have been in the reasonable contemplation of the parties that the owner may have rented a room to a tenant for remuneration, and that the owner may call upon that policy if a tenant were injured on the property, as the policy was obtained for the express purpose of providing liability coverage in respect of the ownership, use and occupancy of the property. … [I]t would have been in the mind of Elizabeth when she first purchased the policy of insurance that she would be covered for liability for accidents occurring in the home for tenants. The opposite conclusion would be contrary to the reasonable expectations of Elizabeth and to the ordinary person as to the coverage purchased. Therefore, in my view, if Betty were a tenant, then her injury would be covered by the Traders policy of insurance.4 [emphasis added]

This conclusion follows the general rule that a coverage grant be interpreted broadly. Because the policy provided coverage for all injury arising from the “ownership, use and occupancy” of the premises, it was reasonable to conclude this term covered injury to “tenants” – with a tenancy being an ordinary “use” of the premises. By extension, the court concluded this interpretation would accord with Elizabeth’s reasonable expectations when purchasing the Traders policy.

While the court did not explicitly address the Household Exclusion in its analysis, the above conclusion also follows the general rule that exclusion clauses are to be interpreted narrowly. Because the court decided that the Household Exclusion had the narrow purpose of avoiding collusion between family members, it follows that the exclusion ought not to apply to claims made by bona fides “tenants”, even if those tenants are family.

To determine whether Betty was truly a “tenant, in the absence of a definition for “tenants” in the policy, the court established two criteria: (i) that the person occupy the property in question, and (ii) that there is an exchange of consideration that allows the tenant to occupy the property.5 The court found that, in this case, both requirements were satisfied.6 As such, the court dismissed the application, concluding that Betty was a “tenant” and her claims against Elizabeth were covered under the Traders policy. The court ordered that Traders continue to defend Elizabeth and indemnify her, if required.

Conclusion

This case serves as a reminder that policyholder intentions at the time of the purchase of insurance can be critically important. These intentions can inform the interpretation of a policy in the face of ambiguity. While an exclusion applying to “any person residing in your household” at the premises could have been interpreted to include any “tenants”, the court relied on the intentions of the parties to support a narrow view of that exclusion. Here, the court refused to extend a vaguely worded exclusion to deny coverage to a policyholder who – in the court’s contemplation – would have reasonably expected coverage for claims of bodily injury by “tenants” under the policy.

Footnotes

1 Traders General Insurance Company v Elizabeth Gibson, 2019 ONSC 1599, [Traders].
2 Traders at para 14.
3 Traders at para 16.
4 Traders at para 38.
5 Traders at para 39.
6 Traders at para 40-41.

Victoria Yang is an associate at Theall Group LLP and maintains a broad commercial litigation practice. She was admitted to the Ontario Bar in 2017 after having completed her articles at a prominent Ontario law firm. During her articles, Victoria worked on diverse commercial litigation disputes including those involving construction law, employment law, creditors’ rights, commercial leasing and insurance law matters.

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/

Banner Photo Credit: Jonathan Borba @ https://unsplash.com/@jonathanborba

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Ontario Court rejects well established rules for interpreting insurance policy exclusions

LGT (105x104) hashim (105x104) By: Lawrence G. Theall, Partner
& Shaun A. Hashim, Litigation Associate

In Pembridge Insurance Company of Canada v Chu,[1] a judge of Ontario’s Superior Court of Justice recently concluded that insurance policies ought to be interpreted differently when multiple insurers are involved. In this problematic decision, the court deviated from the long-standing rule that exclusion clauses should be interpreted “narrowly”. Remarkably, the court began with the assumption that one of the insurance policies must respond to the loss. Based on this assumption, the court decided that different rules of contractual interpretation would apply.

This case is problematic because (i) it conflicts with the well-established rules for policy interpretation; (ii) it suggests that a policy can be interpreted by looking outside the contract to its effect on a non-party; and (iii) the assumption that one policy must indemnify the insured was both irrelevant and an improper consideration on a duty to defend application. Absent appellate guidance, this decision may create confusion and unintended consequences on coverage applications involving multiple insurers.

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Facts

The case in Pembridge involved allegations that Chu, after a motor vehicle accident, left his vehicle to engage in physical violence and threatening behavior. In a typical “road rage” incident, he allegedly hit the window of another vehicle, while yelling and making other gestures. Because of Chu’s conduct, the underlying plaintiffs alleged that they feared for their lives. Chu was insured under a Pembridge homeowner policy which covered “bodily injury or property damages”. The policy contained an exclusion for claims “arising from the ownership, use or operation of a motorized vehicle…”.[2] Dominion, Chu’s auto insurer, accepted the duty to defend for allegations arising out of the use, ownership or operation of the vehicle. Dominion argued that that the allegations of Chu’s conduct, after he left his vehicle, triggered a duty to defend under the Pembridge policy.[3]

A False Premise and Errors in Privity

The court began its analysis by correctly articulating the well-settled principles for interpreting insurance policies. The court acknowledged that, generally, coverage terms are to be interpreted broadly and exclusion clauses are to be interpreted narrowly.

However, when it turned to interpreting the exclusion clause in question, the court decided that the narrow interpretation rule need not apply because, in the court’s view, the insured would have coverage no matter the outcome of the analysis. The court stated:

In this case, however, regardless of how the exclusion clause is interpreted, one of the insurers will be providing coverage to the insured in relation to the insured’s actions after exiting the vehicle, and the other will not. If I were to interpret the exclusion clause more broadly, this would leave Dominion responsible for following through with the coverage. If I were to interpret the provision more narrowly, this would make Pembridge liable for the conduct.

This was a false premise that gave rise to numerous errors in this decision. Here, the court assumes that only one insurer can respond to a loss, when it is entirely possible that both policies could respond. The error in this analysis was further illustrated when the motion judge concluded in the next paragraph that “between Dominion and Pembridge, in light of the jurisprudence, it is more appropriate for Dominion to provide coverage in this case.” In effect the court concluded that only one policy would respond, and that it was charged with deciding which appeared to be “more appropriate.” The judge misdirected himself on what the issue was and how it should be determined.

It is well settled that a policy of insurance is to be interpreted by reference to the intent of the insurer and the insured alone – even if the dispute is “as between” insurers. For example, in dealing with an “other insurance” exclusion, the Supreme Court of Canada in Family Insurance Corp. v. Lombard Canada Ltd. ruled that the intentions of one insurer regarding another insurer was irrelevant. Justice Bastarache wrote:

[T]he interpretation exercise is concerned with determining the intentions of the insurers vis-à-vis the insured. … In the case of an insurance contract, the entire agreement between the insurer and the insured is contained within the policy itself and evidence of the parties’ intentions must be sought in the words they chose. … In the absence of privity of contract between the parties, the unilateral and subjective intentions of the insurers, unaware of one another at the time the contracts were made, are simply irrelevant. [emphasis added][4]

The Ontario Court of Appeal in TD General Insurance Company v. Intact Insurance Company recently affirmed and relied on the conclusion in Family Insurance Corp. The Court noted that in cases of overlapping insurance “…insurance policies themselves must be construed to determine the liability of each insurer, and the court should not refer to surrounding circumstances or look outside the policies. [emphasis added]”[5]

But the court in the Pembridge did just that when it began with the false assumption that, no matter the outcome, at least one insurer would have to indemnify Chu for the loss. As discussed in the section below, that false assumption distorted the motion judge’s interpretation of the exclusion clause. As discussed later in this article, the false assumption also caused an improper finding on the ultimate responsibility for indemnity.

Errors in Interpretation

Informed by the improperly assumed result, the court proceeded with its analysis of the Pembridge policy. The exclusion in the Pembridge policy read:

You are not insured for claims made against you arising from:
The ownership, use, or operation of any motorized vehicles, trailer or watercraft, except those insured in this policy.

On reading this exclusion, the court concluded that Chu’s road rage incident “arose from” the use or operation of a motor vehicle. In reaching that conclusion, the court relied on: (i) s. 239 of the Insurance Act which specifically requires that automobile policies provide coverage for loss or damage caused “directly or indirectly” in operation of a vehicle; and (ii) Amos v Insurance Corp. of British Columbia, which afforded a broad, liberal interpretation of the phrase, “arising from”.[6]

The court found that cases interpreting the Insurance Act and following Amos have “very broadly construed” the phrase “arising from”.[7] In relying on this line of cases, the court specifically observed, but ignored, that the Pembridge policy did not contain the phrase “directly or indirectly”. The court further specifically observed, but ignored, that the line of cases cited by Pembridge arose in the context of interpreting coverage grants rather than coverage exclusions. The motion judge reasoned that because the interpretation analysis was being conducted “as between” insurers, the typical rules of interpretation do not apply.

This approach contradicts well-established Supreme Court of Canada precedent, which has repeatedly affirmed that clauses granting coverage are to be construed broadly and clauses removing coverage are to be construed narrowly.[8] The court offered no reason to deviate from this rule other than its improper conclusion that the Dominion’s policy would respond if the Pembridge policy did not.

In fact, the Supreme Court of Canada dealt with this very issue in Derksen v. 539938 Ontario Ltd. In Derksen, the Court held that the Amos interpretation of “arising out of” ought not to apply to cases interpreting insurance exclusions:

It is clear however that Amos is distinguishable from the case at bar on the basis that the relevant provision in that case was a coverage clause, as opposed to an exclusion clause. It is well-established that, in the construction of insurance contracts, coverage provisions should be construed broadly and exclusion clauses narrowly. Amos is of no assistance in this appeal.[9]

By broadly construing the exclusion, the court in Pembridge applied Amos in direct contravention of the Supreme Court’s ruling in Derksen.

In line with Derksen, the Dominion specifically relied on cases dealing with similar exclusions which show that road rage incidents “break the chain of causation” so they are deemed not to arise out of the use or operation of the vehicle.[10] This characterization of road rage incidents has been relied on by the Supreme Court of Canada in Law Union & Rock Insurance Co. v Moore’s Taxi Ltd.[11] and has been reaffirmed by appellate courts.[12] The court ignored these cases, preferring the broader interpretations afforded by the coverage (and not exclusion) analysis in Amos. As a result, the court maintained that Chu’s actions after exiting the vehicle were “incident” to the ownership, use or operation of the vehicle.[13] Accordingly, the court concluded that Pembridge had no duty to defend, and therefore no duty to indemnify.

Notably, toward the end of the decision, the court briefly acknowledged that an intentional act exclusion might also apply in this case.[14] Although the court did not conduct the analysis, it is noteworthy that, given the underlying facts as pleaded, it is possible – but unclear, without a full factual record – that such an exclusion might apply. That analysis would be guided by the Supreme Court’s ruling in Non-Marine Underwriters, Lloyd;s London v. Scalera, which dealt with intentional act exclusions and the intent to cause harm.

Errors regarding the Duty to Indemnify

Much of the analysis in Pembridge decision is centred upon the court’s assumption that at least one insurer would ultimately be required to indemnify the insured. Because of this assumption, and given its ruling in favour of Pembridge, the court improperly went on to definitively rule on the Dominion’s duty to indemnify. This ruling was inappropriate on a duty to defend application.

After deciding that the term “arising from” was broad enough to capture the road rage incident, and further deciding that the incident did not “break the chain of causation”, the court held:

I am finding that as between Pembridge and Dominion, Dominion will be required to provide the requisite coverage. Dennis Chu’s actions after exiting the vehicle is now deemed to be incident to the ownership, use or operation of a vehicle. This finding should not be revisited by the trial judge.

This finding contradicts well-established precedent that the duty to indemnify should not generally be determined on a duty to defend application. To find there is no duty to defend, a court must find there is not even a “mere possibility” of coverage under the policy.[15] Therefore, the sole question on the application is whether the Court can conclusively rule out the “mere possibility” that an insurer might have to provide indemnity based solely on the pleadings. Where there is no “mere possibility” of coverage, it is appropriate to rule on the duty to indemnify. But where the duty to defend exists or is assumed – as was the case with Dominion – it is inappropriate to make a definitive finding on indemnity.

The policy reasons for this are clear and compelling. In most cases, the duty to indemnify will turn on the ultimate findings of fact at trial and the basis upon which liability is imposed on the insured. Without the benefit of a trial, the court is not in a position to make a finding that the insurer has a legal obligation to indemnify because the indemnity claim has not yet crystalized.

Conclusion

The decision in Pembridge is clearly problematic. The conclusion that an insurance policy ought to be interpreted differently because another insurance policy might respond is simply wrong.

The critical error in Pembridge occurred when the court assumed that only one insurer could, and must, provide coverage. That assumption gave rise to all of the other errors in this case. Because the court assumes there will be coverage for Chu, no matter the outcome, it wrongly concluded that the normal rules of policy interpretation do not apply. Absent the proper rules of interpretation, the court makes a ruling that Pembridge has no duty to defend. Based on the initial error that there must be coverage, no matter the outcome, the court goes further and decides that the Dominion must be responsible and imposes a duty to indemnify.

The court’s initial assumption creates a false choice between insurers. In deciding that only one insurer can respond to the loss, the court narrows the scope of coverage that might otherwise be available. It is always possible to have two insurance policies that provide different coverage, but both cover the losses. In that case, the insured may very well have the benefit of additional limits of coverage, which would be lost by using the approach adopted in Pembridge.

The decision in Pembridge runs contrary to basic rules of contractual interpretation and conflicts with well-established precedent. If followed, this case could lead to commercially unreasonable results and could result in eroding the benefits of coverage available to an insured. It is our view that the decision was in error and should be treated as wrongly decided, as it directly contradicts prior decisions of both the Court of Appeal and the Supreme Court of Canada.

Footnotes

[1] Pembridge Insurance Company of Canada v Chu, 2019 ONSC 1359, [Pembridge].

[2] Pembridge at para 12.

[3] Pembridge at para 16.

[4] Family Insurance Corp v. Lombard Canada Ltd., 2002 SCC 48 [Family Insurance Corp.].

[5] TD General Insurance Company v. Intact Insurance Company, 2019 ONCA 5.

[6] Amos v Insurance Corp. of British Columbia, [1995] 3 SCR 405 at para 24 [Amos].

[7] Pembridge at para 36.

[8] Reid Crowther & Partners Ltd. V Simcoe & Erie General Insurance Co., [1993] 1SCR 252 at para 37; Amos v Insurance Corp. of British Columbia [1995] 3 SCR 405 at para 19; Progressive Homes Ltd. V Lombard General Insurance Co. of Canada at para 24.

[9] Derksen v. 539938 Ontario Ltd., 2001 SCC 72 [Derksen].

[10] Pembridge at para 42. See also, Trench v. Erskine (2006), 244 N.S.R. (2d) 55.

[11] Law Union & Rock Insurance Co. v Moore’s Taxi Ltd., [1959] SCR 80 at para 11.

[12] Aetna Insurance Co. v Canadian Surety Co., [1994] 114 DLR (4th) 537 at para 70.

[13] Pembridge at para 43.

[14] Pembridge at paras 44-46.

[15] Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801 (S.C.C.).

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: Marc Olivier Jodoin @ https://unsplash.com

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Let the Bygones be Bygones: Evidence Insurers cannot use in Arson Defence

cox_thumbnail By: Victoria Yang, Litigation Associate

An Ontario court recently refused an insurer’s attempt to rely on evidence about its insured’s prior conduct. The insurer tried to suggest that a prior loss and misrepresentations on a mortgage application suggested a propensity towards arson or fraud. The judge’s decision demonstrates the heavy burden on an insurer seeking to rely on an arson defence to a fire loss claim.

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The Facts

The case in Azami v. TD Home and Auto Insurance[1] arose out of a fire in September 2012 that destroyed the plaintiff’s home. Following the fire, the plaintiff made a claim with the defendant insurer under his homeowner’s insurance policy for the loss of his home, its contents and living expenses. During a pre-trial motion, the plaintiff moved to exclude certain evidence relating to two matters of pre-loss conduct.

First, the plaintiff sought to exclude evidence regarding a prior loss. One year prior to the present loss, the plaintiff made a claim related to a different fire under a previous homeowner’s insurance policy issued by the defendant. The defendant investigated the incident and accepted the claim, as it found the fire to be of indeterminate cause with no evidence of arson. After extensive renovations paid for by the insurer, the plaintiff sold the previous property at a profit, before purchasing his current property a few months later.

Second, the plaintiff sought to exclude the plaintiff’s mortgage application for the current property. In 2012, the insured purchased the current property and financed the transaction with a mortgage from Home Trust. When he submitted his application to Home Trust, he included a fictitious employment letter misrepresenting that he was employed as a Human Resources Manager at Century 21 Realty Inc., with a fictitious paystub. In reality, he was unemployed.

The Result

Although the court found that both pieces of evidence were relevant – the prior loss was relevant to the issue of bad faith and the mortgage application to the issue of motive – the evidence was inadmissible.

Prior Loss

As noted above, in 2011, the insured suffered a fire loss where he claimed insurance and received proceeds which he used to purchase the current property. In 2012, the insured listed the current property for sale less than one month before the fire loss and received no offers. The insurer’s theory was that the insured intentionally set fire to his property to improve his precarious financial situation through another insurance claim.

The insured argued that the insurer’s use of his past conduct was against the evidentiary rule prohibiting the use of bad character evidence and that the insurer could not rely on any recognized exception to that rule. The insured claimed that admitting the evidence would “cast an aura of suspicion over him by suggesting to the jury that there is something peculiar about a person who has two house fires within 18 months”.

The court found that while the prior loss may have been relevant to the issue of the insurer’s bad faith, it had little probative value and its exclusion would not prejudice the insurer. The court noted that there was other evidence the insurer could rely on to argue that the insured could not escape his financial circumstances by ‘flipping’ his house for a profit. The court was also concerned that the indeterminate cause of the first fire would raise questions in the juror’s minds and would compel the plaintiff to lead responding evidence. This would substantially increase the length of trial and distract the jury’s focus from the central issue.

Mortgage Application

The insured also objected to the use of the mortgage application on the basis that it was inadmissible as bad character evidence. The court did note that in civil arson cases, courts routinely admit evidence of the insured’s financial history and financial circumstances in assessing motive. Nevertheless, the court excluded the mortgage application. In this case, admitting the application would have encouraged the jury to unfairly conclude that the plaintiff was more likely to commit arson and make a dishonest insurance claim because of his past conduct in relation to his mortgage application – an application that was entirely unrelated to the issues before the court. The court noted that this was a “textbook” example of inadmissible bad character evidence.

The court again considered the prejudicial effects of such evidence, the consequences of a prolonged trial, and that excluding the application would not prejudice the insurer’s ability to establish the insured’s financial circumstances at the time of fire.

Significance of the Court’s Findings

The court in Azami considered three factors in deciding the admissibility issue:

(i) the prejudicial effects of admitting evidence of prior conduct versus its probative value and, in particular, whether exclusion of the evidence prejudices the defendant’s ability to establish its defence;

(ii) whether the admission of the evidence would unnecessarily prolong trial due to the insured’s need to respond to the evidence; and

(iii) whether the jury’s focus would be distracted from the central issues in dispute.

This case serves as a reminder that insurers generally cannot admit evidence of an insured’s past dishonest behaviours or claims history. While this limits the insurer’s ability to satisfy its burden, the rule against bad character evidence ensures a fair adjudication of each case on its merits.

Footnotes
[1] Azami v. TD Home and Auto Insurance, 2018 ONSC 1697.

Victoria Yang Victoria Yang is an associate at Theall Group LLP and maintains a broad commercial litigation practice. She was admitted to the Ontario Bar in 2017 after having completed her articles at a prominent Ontario law firm. During her articles, Victoria worked on diverse commercial litigation disputes including those involving construction law, employment law, creditors’ rights, commercial leasing and insurance law matters.

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

Banner Photo Credit: Getty Images

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Ontario judge allows insured to amend claim to include additional policies and new heads of damages after expiry of limitation period

cox_thumbnail By: Dylan J. Cox, Litigation Associate

An Ontario judge recently permitted an insured to amend its claim after the limitation period had expired, to plead additional insurance policies that applied to the same claim and new heads of damages.[1] The judge’s decision is a sensible one. It protects insureds from having to claim aggravated and punitive damages or a breach of the insurer’s duty of good faith before the evidence underlying those claims is typically available. [show_more more=”Show More” less=”Show Less” color=”000000″ align=”center”]

The Facts

Peter Sbaraglia held three different long-term disability (LTD) policies issued by Canada Life Assurance Company. In 2011, he made a claim with Canada Life under each policy. In 2012, Canada Life denied his claim. The following year, Mr. Sbaraglia sued Canada Life for breach of contract. Mr. Sbaraglia’s Statement of Claim only identified one of his three LTD policies. His failure to list the other two policies was inadvertent. Mr. Sbaraglia later asked for Canada Life’s consent to add the two policies to the Statement of Claim by way of amendment. Canada Life refused to give its consent, so Mr. Sbaraglia issued a second Statement of Claim in November 2016, which referenced all three policies.

The Motion to Amend

To avoid the need for multiple proceedings, in August 2017, Mr. Sbaraglia moved to add the missing two policies to his first Statement of Claim by way of amendment. Mr. Sbaraglia also sought to add a claim for punitive and aggravated damages.

The court granted Mr. Sbaraglia’s motion, finding that there was a history of the three policies being treated as a single unit. When Mr. Sbaraglia made his 2011 claim, he did so under all three policies. Communications in Canada Life’s file, including its 2012 denial letter, referred to the three policies as a single unit. When it received the first Statement of Claim, Canada Life knew that Mr. Sbaraglia was contesting its denial of disability benefits. Although the first Statement of Claim only referred to one policy, Canada Life ought to have known the claim was being made under all three policies.

The court also accepted the proposed amendment because it did not allege any new and distinct claims unrelated to those made in the first Statement of Claim. Adding allegations of aggravated and punitive damages did not amount to adding a new and distinct claim. A claim for a particular type of damages is a remedy, not a separate claim. Mr. Sbaraglia was also not advancing a new theory of liability. Instead, he simply sought to rely on additional facts (i.e., the existence of the two missing policies) to support an existing breach of contract claim. All of Mr. Sbaraglia’s claims were based on a theory of liability advanced in the first Statement of Claim.

The final reason for granting Mr. Sbaraglia’s motion was that his proposed amendment would eliminate the need for multiple proceedings.

Guidance Regarding the Drafting of Coverage Claims

Sbaraglia is a well-reasoned decision that provides guidance to insureds. The court sensibly found that allegations of aggravated and punitive damages are not new and distinct claims. A contrary finding would have imposed a strict deadline for bringing such claims. In Ontario, this deadline would usually be two years after the date of the insurer’s denial, although under certain property policies, the deadline is one year after the loss or damage of the insured property.

The imposition of such a deadline would have an unwanted effect on the preparation of coverage claims. Claims for aggravated and punitive damages do not arise from every policy denial. However, the evidence required to determine whether these claims are warranted is typically not available to an insured until later in the litigation process, potentially after the limitations deadline would have passed.

Ruling that allegations of aggravated and punitive damages are new and distinct claims would have placed insureds in a difficult position. On the one hand, the court in Sbaraglia notes that claims for aggravated and punitive damages should not be made lightly. However, faced with an early deadline for alleging these damages, insureds would have to include such allegations in every coverage claim, as a matter of course. Insureds would then have to subsequently abandon whatever allegations are not borne out by the evidence, a practice that would waste resources. This would be the only way to protect those claims for aggravated and punitive damages that would be eventually borne out by the evidence.

Fortunately, Sbaraglia shows that allegations of aggravated and punitive damages are not new and distinct claims. Insureds can rest assured that if they fail to demand aggravated and punitive damages but later discover supporting evidence, they will still be able to make a claim.

Finally, the court in Sbaraglia noted that when advanced alongside a claim for wrongful denial of policy benefits, a claim for breach of the insurer’s duty of good faith is not a new and distinct claim.[2] The comments regarding aggravated and punitive damages also apply here. If an insured sues for wrongful denial of policy benefits, he/she can add a claim for breach of the duty of good faith if he/she subsequently discovers evidence supporting that claim.

Footnotes

[1] See Sbaraglia v. Canada Life Assurance, 2018 ONSC 8.

[2] For further discussion, see Britton v. Manitoba, 2011 MBCA 77 at paras 15, 46, a case cited in Sbaraglia.

Dylan J. Cox is an associate at Theall Group LLP and maintains a broad commercial litigation practice. Prior to joining Theall Group LLP, Dylan articled at a prominent litigation boutique in downtown Toronto where he worked on commercial litigation, appellate, class actions and insurance law files. Dylan graduated from the University of Toronto law school and was called to the Ontario bar in 2016.

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

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“You’ll Shoot Your Eye Out, Kid!” – Pellet Guns And Conflicts Of Interests

wright_Carousel (105x104) By: Melissa A. Wright, Litigation Associate

A recent decision by the Court of Appeal is a cautionary tale, for both insurers and counsel they appoint to defend a policyholder. The Court of Appeal’s recent decision in Reeb v. The Guarantee Company of North America1 is an application of the test for reasonable apprehension of a conflict of interest in the context of insurer appointed defence counsel. It demonstrates what can happen where instructions given to defence counsel by an insurer conflict with the best interests of the insured.[show_more more=”Show More” less=”Show Less” color=”000000″ align=”center”]

The underlying action involved a fact scenario reminiscent of the classic holiday movie “A Christmas Story”. The action involved a claim brought by James Riley (“Riley”), a 14-year-old boy who lost his eye, against Ryan Reeb (“Reeb”). Riley and Reeb were playing with pellet guns when Reeb shot Riley in the eye. Reeb was insured through his mother’s homeowner’s policy with Royal & Sun Alliance Insurance Company of Canada (“RSA”). The homeowner’s policy had a $1 million third party liability limit. James Riley’s claim was for $1.5 million.

RSA defended Reeb under a non-waiver and reservation of rights agreement. The defence counsel appointed by RSA to defend Reeb, then brought an application for a declaration that Reeb was insured under two additional insurance policies (one policy issued to his father and one to his step-mother). This was done at the direction of RSA. The other insurers conceded that Reeb was insured under both policies, but relied on the intentional act exclusion to deny coverage for the injuries sustained by Riley. This was also an exclusion RSA apparently reserved its rights on in the non-waiver agreement.

Of particular note is that fact that prior to the hearing of the appeal, the plaintiff made a settlement offer under the policy limits of $1 million dollars under the mother’s homeowner’s policy. Acceptance of this offer would in effect result in no benefit to the insured from proceeding with the application since RSA had not denied coverage under the mother’s homeowner’s policy.

The Court of Appeal raised the issue of whether there was an apparent conflict of interest in this case. Obviously, there was a significant financial benefit to RSA if the application was determined and the intentional act exclusion was found to apply under the two additional insurance policies. That finding would result in Reeb not having coverage under any of the insurance policies, including the RSA policy. Therefore, if the appeal failed, Reeb would likely have no insurance coverage whatsoever.

When an insurer appoints counsel to represent the interest of its insured, a conflict of interest may arise where the interests of an insured and the interests of an insurance company are not aligned. The insured’s right to full and fair representation may be compromised. The case law requires a “degree of divergence” before a court can require an insurer to surrender control of the defence.

The Court of Appeal applied the test as established in its recent decision of Hoang v. Vicentini2 to determine whether there was a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer:

The question is whether counsel’s mandate from the insurer can reasonably be said to conflict with his mandate to defend the insured in the civil action. Until that point is reached, the insured’s right to a defence and the insurer’s right to control that defence can satisfactorily co-exist.3

The Court of Appeal held that in this case, there was a reasonable apprehension of a conflict between the interests of Reeb and RSA, which precluded the Court from ruling on the merits of the appeal. The Court directed that Reeb ought to have independent counsel or amicus curiae appointed to advise him of the suitability of bringing the application for a declaration in the face of the plaintiff’s settlement offer.

Essentially, the Court of Appeal recognized that Reeb would be better off accepting the plaintiff’s settlement offer under the $1 million limit of his mother’s home owner’s policy, than continuing to pursue the application to determine if there was any coverage in excess of the limit, under the two additional insurance policies. RSA would either (i) provide coverage and pay the settlement amount or (ii) deny coverage on the basis of the intentional acts exclusion under the non-waiver and reservation of rights agreement.

By bringing the underlying application, the insurer was essentially instructing defence counsel to take steps that were in conflict with the best interests of the insured. These were instructions that should never have been given and if given should have caused defence counsel to identify and flag the conflict. This is why the Court of Appeal directed that an independent counsel or amicus curiae should be appointed to assist the court with determining what future steps should be taken in the proceedings, and appointed amicus curiae in the interim.

Footnotes

1 2017 ONCA 771 [“Reeb“].

2 2016 ONCA 723 [“Hoang“].

Reeb at paragraph 14, citing Hoang at paragraph 74.

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/[/show_more]

Motion To Appoint Independent Defence Counsel Creates Confusion Over Insured’s Right To Full Indemnity Costs

LGT (105x104) hashim (105x104) By: Lawrence G. Theall, Partner
& Shaun A. Hashim, Litigation Associate

In a potentially controversial ruling, an Ontario judge recently refused to grant two insured applicants full indemnity for costs on a motion related to the duty to defend. This decision is likely to create some confusion regarding an insured’s entitlement to full indemnity costs in duty to defend proceedings. Appellate authority has long established that when an insured applies to the court to enforce an insurer’s duty to defend, that insured is entitled to full indemnification for both the costs of the defence and the costs of the insured to litigate with the insurer over entitlement to the defence. However, in Lefeuvre v. Boekee,1 the court may have deviated from this general principle. [show_more more=”Show More” less=”Show Less” color=”000000″ align=”center”]

In Lefeuvre, the underlying case was a pedestrian/motor vehicle collision. Two municipalities had been sued in the action along with two winter maintenance companies. The two municipalities sought a defence from their insurers — however, those insurers were also defending the winter maintenance companies, who were adverse in interest. Due to this apparent conflict, the two municipalities brought a motion requesting that they be entitled to appoint and manage their own counsel at the insurer’s expense. The insurers admitted coverage for the defence but maintained that there was no conflict. In the result, the insureds were successful and independent counsel was ordered. The insureds sought their costs on a full indemnity basis.

In additional reasons, the court concluded that full indemnity costs on the motion were not appropriate. Instead, the court applied the general rules for costs on a motion and found that the insureds were instead entitled to “reasonable indemnification”. In arriving at that conclusion, the court held that the costs of the motion were not legal fees owing under a contract but instead, simply costs under the Rules of Civil Procedure.

This ruling appears to be out of step with appellate authority which holds the costs borne by an insured to secure his or her right to a defence under an insurance policy should be paid on a full indemnity basis. The Ontario Court of Appeal has consistently held that the insured is “entitled to a defence … at no cost to them”.2In other words, an insured is “entitled to be made financially whole” for legal costs incurred in securing a defence under the policy.3 This broad principle has not only been used to indemnify insureds for their past defence costs, but also the future defence costs of counsel of their choice, the costs of the coverage application and the costs of any subsequent appeal.4 This principle of full indemnity is based, not in the law of costs, but in the law of contract. The “costs” of the insured on an application are in fact damages for a breach of the insurance contract. A successful insured is therefore entitled to be placed in the same position it would have been in had the contract been fulfilled. In duty to defend cases, that includes the legal expenses incurred by the insured to ensure their rights under contract are secured.5

Despite this accepted principle, the court in Lefeuvre — without relying on any prior authority —  held that the motion costs did not flow from any contractual right under the policy and were not “incurred in ‘defending’ the action”. Instead, the court decided that the costs were incurred to “[interpret] the meaning and scope of the duty to defend”.  The court further concluded that the insured’s right to costs flowed from “success on the motion” rather than the policy.  In arriving at this conclusion, the court in Lefeuvre appears to have characterized the conflict of interest question as one defining the “extent” of the duty to defend and not necessarily a “breach” of that duty. This is problematic for two reasons.

First, there is little difference between defining the “extent” of the duty to defend and determining whether there has been a breach of duty. In the face of a conflict of interest, an insurer’s refusal to rectify that conflict is better characterized as a breach of duty. To allow the defence to proceed with a conflict would have undoubtedly been a breach of the insurer’s obligations to the insured. Indeed, a conflicted defence is really no defence at all. As a result, the application to remove that conflict is not a mere question of “extent” or “interpretation”, but a matter of securing a definitive right to a defence under the policy. If the conflict of interest issue were characterized in this way, the insured’s right to full indemnity costs ought to have flowed from the principle that an insured should not to be put to expense in securing a defence under the policy.

Second, in concluding that the question before it was one of “extent” and not a breach of duty, the court noted in obiter that the underlying action may deal with a “mixed” claim of covered and uncovered allegations. For that reason, the court decided that, even if it were wrong, a portion of the defence costs may relate to uncovered claims for which there would be no entitlement to indemnity. If the court relied on this reasoning, it would have been conflating the concept of indemnity on an application for coverage with the concept of an after-the-fact “allocation” of defence costs.

The basis for such an allocation of defence costs was laid down in the Court of Appeal’s well-known decision in Hanis v. University of Western Ontario.6 Contrary to the court’s suggestion in Lefeuvre, the Court of Appeal in Hanis held that even in cases of “mixed” claims, “the insurer is required to pay all reasonable costs associated with the defence of [the underlying claim] even if those costs further the defence of uncovered claims”.7 It is only where the “costs [relate] solely to the defence of uncovered claims” that an insurer need not indemnify the insured.8 The decision that a portion of a claim is “solely” uncovered is a finding of fact that is generally dealt with after final resolution of the underlying matter. It is only in exceptional cases that an allocation can be reliably made at an early stage in the proceeding. In the absence of any findings of fact, the court in Lefeuvre could not have decided the allocation issue.

In any event, an allocation of defence costs under Hanis is entirely distinct from the costs of an application to secure a defence under the policy. In an allocation case, there is no breach of duty. On a duty to defend application, the insurer’s breach is the central issue: the insured is forced to litigate in order to gain benefit of a conflict free defence under the policy.  As noted above, damages for that breach of duty are the full indemnity costs of the application. Accordingly, where there is a breach of duty, the insured’s entitlement to full indemnity for the application costs would apply even if an allocation of subsequent defence costs were ordered.

In the absence of confirmation of Lefeuvre from the Court of Appeal, the general rule remains: full indemnity is applicable to all breaches of the duty to defend. In any event, policyholders seeking coverage for defence costs are still encouraged to follow the best practice of addressing any potential conflict of interest issues as early as possible and ideally during the initial application for coverage.

Footnotes

Lefeuvre v. Boekee, 2018 ONSC 1010 (Ont. Sup. Ct.).
Aitken v. Unifund Assurance Co., 2012 ONCA 641 at para. 43-45. See also, M.(E.) v. Reed, 2003 CarswellOnt 1723 at para. 22, 2003 CanLII 52150 (Ont. C.A.); Godonoaga (Litigation Guardian of) v. Khatambakhsh (Guardian of), [2000] O.J. No. 3807 at para. 4 (Ont. C.A.); Carwardine (Litigation Guardian of) v. Northumberland Clarington Board of Education, [2001] O.J. No. 63 at para. 5 (Ont. C.A.); Savage v. Belecque, 2011 ONSC 5771 at para. 4 (Ont. S.C.J.), aff’d, 2012 ONCA 426 (Ont. C.A.); Austco Marketing and Service (Canada) Ltd. v. Lloyd’s Underwriters, 2013 ONSC 6486 at paras. 4-5 (Ont. S.C.J.).
3 See e.g. Austco Marketing and Service (Canada) Ltd. v. Lloyd’s Underwriters, 2013 ONSC 6486 at para 5.
4 See e.g. Aitken v. Unifund Assurance Co., 2012 ONCA 641 and Markham (City) v. Intact Insurance Co., 2017 ONSC 3150.
Savage v. Belecque, 2011 ONSC 5771 at para. 3-4, aff’d 2012 ONCA 426.
Hanis v. University of Western Ontario, 2008 ONCA 678.
Hanis v. University of Western Ontario, 2008 ONCA 678 at para. 2.
Ibid.

Lawrence G. Theall 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. Larry has acted as lead counsel in over 75 trials and hearings, all of which went to a final decision or verdict. He has extensive experience with interlocutory proceedings, including being lead counsel on more than 15 injunctions, a number of which involved Anton Piller Orders and Mareva Injunctions. He acts as insurance coverage counsel to the Attorney General of Ontario, and regularly represents auto manufacturers, aircraft manufacturers and other fortune 500 companies with respect to insurance, product litigation and regulatory issues, as well as a number of publicly traded corporations and insurance brokers with respect to commercial insurance issues. Larry also has significant auto industry experience, primarily in the areas of product liability, dealer disputes, risk management and commercial insurance.

Shaun A. Hashim is an associate at Theall Group LLP. Shaun is developing an insurance coverage practice across a variety of areas including property, environmental, and commercial general liability lines. He also maintains a broad commercial litigation practice with a focus on product liability. He has experience in both trial and appellate level advocacy and has appeared at all levels of court in Ontario. Shaun has also acted as lead counsel in private arbitrations. Shaun has written articles and spoken about a wide range of insurance coverage related issues, including providing seminars for in-house counsel on litigating new and emerging risks. Shaun graduated from the University of Windsor where he received the Raymond E. Brown Alumni prize for the highest standing in tort law. He was called to the Bar in 2015. [/show_more]

Social Engineering Fraud: Significant Coverage Gap Under Commercial Crime Policy

Camille 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. [show_more more=”Show More” less=”Show Less” color=”000000″ align=”center”]

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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