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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Failure To Take Assignment From Insured Could Bar Broker’s Claim

Dylan J Cox  

By: Dylan J. Cox, Litigation Associate


A recent Ontario case illustrates the complex nature of insurance law. It also demonstrates what can happen when a party to a coverage claim fails to have the proper advice on coverage issues. In this case, an automobile insurer denied a coverage claim because the broker listed the wrong vehicle on the application for insurance. The broker indemnified the insured, and then sought indemnity from the insurer. A judge then granted summary judgment in favour of the insurer, finding the broker had no claim in its own name, and notably it had not taken an assignment of the insured’s right to indemnity from the insurer. In January, the Ontario Court of Appeal (OCA) ordered the claim to proceed to trial. As explained below, the broker would be in a much stronger position if it had taken an assignment from the insured.

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The Facts

Waqar Zaidi held a motor vehicle insurance policy brokered by Routh Chovaz Insurance Brokers Inc. (the “Policy”). In June 2013, the Policy was amended to insure a 2010 Mercedes Benz CL-350 (the “Vehicle”). The Policy was renewed in March 2014. However, Routh Chovaz failed to arrange for the Policy to insure the Vehicle. The Policy instead insured a 2008 Mercedes Benz CL-320.

The Policy was underwritten by Aviva Insurance Company of Canada. Routh Chovaz had the authority to bind Aviva. The relationship between Routh Chovaz and Aviva was governed by a brokerage agreement (the “Agreement”). Section 10.3 of the Agreement stated that: “[Routh Chovaz] shall indemnify and hold [Aviva] … harmless from and against all [costs, expenses, claims, suits, demands or a]ctions … arising as a direct result of the negligent acts or omissions of [Routh Chovaz] … to the extent that [Aviva] … has not caused or contributed to such liability by its own acts or omissions.”

In October 2014, the Vehicle was in an accident. Mr. Zaidi made a claim under the Policy. Aviva denied coverage, voided the Policy and refunded the premiums paid by the insured. Aviva argued that at the time of the accident, the Vehicle was not insured under the Policy. If it had known that Routh Chovaz intended to insure the Vehicle under the Policy, it would have charged an additional premium of $71.

Routh Chovaz’s errors and omissions insurer (the “E&O Insurer”) indemnified Mr. Zaidi. The E&O Insurer then brought a subrogated claim, asserting Routh Chovaz’s rights to indemnity (if any) against Aviva. However, the E&O Insurer did not take an assignment of claims the insured had against Aviva.

Aviva brought a motion for summary judgment of the E&O Insurer’s claim.

The Motions Judge’s Decision

The motions judge dismissed the E&O Insurer’s claim.[1] He first found that the E&O Insurer could not sue Aviva in contract. As part of its claim, the E&O Insurer relied on a case called Hunt v. Brandie. In Hunt, a broker bound an insurer to a policy of snowmobile insurance that had been improperly issued by the broker. Like Routh Chovaz, the broker had the authority to bind the insurer. The insured was later in an accident. The insured brought a coverage claim against the insurer. The court found that the insured’s claim was covered by the snowmobile insurance policy.

The motions judge accepted the ruling in Hunt. However, he noted that the E&O Insurer had not taken an assignment of claims that the insured had against Aviva. As a result, the E&O Insurer could not sue Aviva in contract on behalf of the insured. The E&O Insurer could only sue Aviva in contract on behalf of Routh Chovaz. This was important because the claim in Hunt was brought by an insured. Hunt says nothing about claims brought by brokers against insurers. Thus, Hunt did not assist the E&O Insurer.

The motions judge then found that the E&O Insurer could not sue Aviva in contract on behalf of Routh Chovaz. Nor did the E&O Insurer have a claim in equity. In coming to this decision, the motions judge relied on the terms of the Agreement. The motions judge did not clarify why the Agreement precluded the E&O Insurer from bringing a claim in its own name against Aviva in contract or equity.

The OCA’s Decision

The OCA set aside the motions judge’s decision and ordered the claim to proceed to trial.[2] The claim was sent to trial because the motions judge failed to explain why the Agreement barred the E&O Insurer from bringing a contractual or equitable claim against Aviva on behalf of Routh Chovaz. Until this issue was dealt with, the E&O Insurer’s claim could not be dismissed.

The Importance of Retaining Knowledgeable Counsel

This case demonstrates why parties to coverage claims should always obtain legal advice from those who understand insurance law. Every coverage claim must be thoroughly investigated. Although its claim is proceeding to trial, the E&O Insurer would have been in a much stronger position if it had taken an assignment from the insured By not taking this assignment, the E&O Insurer appears to have waived its right to sue Aviva on behalf of the insured. It will now likely be limited to suing Aviva in the name of Routh Chovaz. This is important because section 10.3 of the Agreement bars Routh Chovaz from recovering damages caused solely by its own negligence. The trial judge will likely find that the damages sustained by Routh Chovaz were caused solely by Routh Chovaz’s negligence. These damages were caused by Routh Chovaz’s failure to insure the Vehicle under the Policy, an error that arguably arose solely out of Routh Chovaz’s own negligence.

To avoid these issues, the E&O Insurer should have refused to indemnify the insured. In all likelihood, the insured would have then sought indemnity from Aviva. In these circumstances, Aviva would have had to indemnify the insured. Our courts have held that if an insurer binds itself to a policy, it cannot later deny coverage by relying on a broker improperly issuing the policy.

After indemnifying the insured, Aviva would have been able to assert a claim against the E&O Insurer. As noted above, Routh Chovaz arguably acted in a negligent manner when it failed to insure the Vehicle under the Policy. Section 10.3 of the Agreement permitted Aviva to recover any damages that it sustained as a result of Routh Chovaz’s negligence. However, the damages Aviva could recover in this claim would have been limited to the $71 additional premium it would have charged if Routh Chovaz had sought to insure the Vehicle under the Policy. This additional premium appears to have been the only damages Aviva sustained as a result of Routh Chovaz’s failure to properly insure the Vehicle.

Alternatively, the E&O Insurer could have indemnified the insured and taken an assignment of the insured’s coverage claim against Aviva. It could have then brought a claim against Aviva in the insured’s place. Again, Aviva would have had to cover the claim asserted on the insured’s behalf. However, section 10.3 of the Agreement would permit Aviva to claim damages it sustained as a result of Routh Chovaz’s negligence. This claim would have been brought against the E&O Insurer in its capacity as Routh Chovaz’s insurer. As noted above, the $71 additional premium would likely be characterized as damages that Aviva sustained as a result of Routh Chovaz’s negligence. Thus, in this scenario, any recovery obtained by the E&O Insurer would have to be offset by the $71 additional premium.

Footnotes

[1] See Routh Chovaz Insurance Brokers Inc v Aviva Insurance Co of Canada, 2017 ONSC 2567.

[2] See Routh Chovaz Insurance Brokers Inc v Aviva Insurance Co of Canada, 2017 ONCA 55.

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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Court Of Appeal Dramatically Restricts Application Of “Delay” Exclusion In E&O Policy

Dylan J Cox  

By: Dylan J. Cox, Litigation Associate


In Hollowcore v. Visocchi[1], the Ontario Court of Appeal (ONCA) recently limited the application of a “delay” exclusion where damages awarded against the insured arose from two concurrent causes, notwithstanding that one of these causes was excluded from coverage. The damages in Hollowcore were caused by negligence and delay by the insured. The policy covered damages arising out of negligence claims, but excluded claims arising out of the insureds’ failure to complete engineering drawings on time.

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The Facts

In 1999, Hollowcore Incorporated and Prestressed Systems Inc. (PSI) hired Visco Engineering Inc. to prepare engineering drawings for an addition to an Ohio parking garage. There were a number of problems with the work submitted by Visco and its owner, Mr. Visocchi, who was a professional engineer. Many drawings had errors, were deficient or submitted late. These issues delayed construction and caused Hollowcore and PSI to incur back charges and other damages.

Hollowcore and PSI brought an action for breach of contract, negligence and negligent misrepresentation against Visco and Mr. Visocchi. They later added their insurers as third party defendants.

The trial judge (TJ) , found Visco and Mr. Visocchi liable for negligence and negligent misrepresentation. Visco was also found liable for breach of contract. The TJ apportioned these damages between Visco, Mr. Visocchi and the insurers, finding that some of the damages were attributable to delay on the part of Visco and Mr. Visocchi, while other damages arose out of Visco and Mr. Visocchi’s negligence. As a result, the TJ found a portion of the damages were covered by the policy, while other portions were not, as a result of an exclusion for claims arising from delay. The TJ determined that certain heads of damages were covered, but that for the vast majority of the damages it was virtually impossible to separate the damages between negligence (covered) and delay (excluded) damages. As a result, the TJ ordered the insurers to only pay 55% of those damages. Visco and Mr. Visocchi appealed.

The ONCA’s Decision

Writing for the ONCA, Justice Benotto found the insurers liable for all of PSI’s damages. The key to her decision turned on the burden of proof which she noted rested squarely on the insurers who sought to rely on the exclusion, a burden the insurers had not met.

According to Justice Benotto, the insurers had not discharged this burden. Although the damages sustained by Hollowcore and PSI had been caused by negligence and a failure to complete drawings on time, the damages attributable to delay had, in turn, been caused by Visco and Mr. Visocchi’s negligence. Consequently, these damages were captured by the policy’s coverage of damages arising out of negligence and did not fall within the exclusion for delay. In order for the exclusion to apply, the damages must be caused “by pure delay”, rather than by a delay arising from negligence.

The decision also considered the TJ’s calculation of damages and fixing of the exchange rate from US to Canadian dollars, which are not relevant to the insurance issues in this case.

Conclusion

In Hollowcore, the ONCA was asked to interpret an exclusion for losses arising from delay, that can typically be found in errors and omissions insurance policies issued to engineers and architects. The ONCA’s interpretation of this exclusion has limited its application to damages that are proven to be solely attributed to delay and not also caused by another covered act. In effect, the court found that where all of a loss is caused by concurrent negligence and delay, an insurer will be liable for the entire loss. The insurer will have the clear burden to demonstrate specific damages that were caused solely by delay by the insured.

Footnote

[1] Hollowcore v Visocchi, 2016 ONCA 600.

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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Supreme Court Limits “Cost Of Making Good” Exclusion, But Leaves Residual Uncertainty

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By: Lawrence G. Theall, Partner

And: Shaun A. Hashim, Litigation Associate


The Supreme Court of Canada has released its much-anticipated decision in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co.[1] The case is notable in three ways. First, it continues a trend of the Court bringing real commercial sense to the interpretation of insurance policies. Second, it restricts the scope of the faulty workmanship exclusion to the actual cost of redoing the work. Third, it unfortunately provides unnecessary commentary that may result in some ongoing uncertainty, particularly in the area of faulty design.

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The facts of the Ledcor decision are straightforward. A contractor was hired to clean the windows of the EPCOR Tower in Edmonton. At the time, the building was under construction and was insured under an all risks builders-risk wrap-up policy (the “Policy”). In the course of cleaning the windows, the contractor used improper materials and equipment, resulting in significant damage to them. The owner and general contractor claimed the cost of the windows’ replacement under the Policy, which contained the following exclusion clause:

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 insureds argued that this clause only excluded the cost of redoing the faulty work, which they said was the cost of re-cleaning the windows. The insurers argued that this clause excluded both the cost of redoing the faulty work and the cost to repair that part of the insured’s property on which the work was being performed. The insurer argued that “resulting damage” applied to consequential damage to some other part of the insured’s property.

The Court agreed with the insured and concluded that the exclusion only applied to the cost of redoing the work. In doing so, the Court noted that this result aligns with the commercial realities of construction projects, the very purpose of builders’ risk policies, and the expectations of both insureds and insurers when they enter into such all risk policies.

The Court also made significant findings on broader questions of law. Most notably, the Court confirmed that trial judges interpreting standard-form insurance contracts are subject to a “correctness” standard. This means that their interpretation must be consistent across all cases involving that particular standard-form policy. As a result, policyholders with standard-form wording should always be aware of court cases interpreting their contracts.

In this case, the standard-form faulty workmanship exclusion (with a resulting damage exception) was held to exclude only the cost of redoing the faulty work. While this was an excellent result for the insured, and is generally favourable to policyholders, the Court went on to discuss a number of examples of prior appellate cases which may result in some residual uncertainty.

Most notably, the Court’s interpretation of the exclusion clause places considerable emphasis on the work for which the contractor, or subcontractor, was hired to perform. As a result, the entire contractual obligation may greatly affect whether coverage is excluded.

For example, the Court referred to Ontario Hydro v. Royal Insurance[2], in which a contractor was responsible for designing a boiler system, acquiring the material and supervising the commissioning of the boiler. After installation, the contractor performed an acid wash of the superheater which caused extensive cracking to the tubing in the boilers. The judge in that case concluded that the cost of making good the faulty workmanship included the cost of the tubing and therefore excluded those costs from coverage. The Supreme Court appears to have agreed with this conclusion, because replacing the tubing was “necessary for the contractor to fulfill its contractual obligation”. In the context of Ledcor, this means that if the window cleaner had also contracted to fabricate and install the windows, the claim may have been excluded.

The Court also considered “faulty design” cases where a contractor is engaged to both design and build an “item”. The Court identified that where a contractor makes a mistake in the design of the “item” that is “integral to the whole of that item”, the costs to repair or replace that “item” would be excluded from coverage. For example, the Court referred to Simcoe & Erie General Insurance Co. v. Royal Insurance Co. of Canada[3], where an engineer was hired to design and oversee the construction of a bridge. Because the engineer made a design error that was fundamental to the whole of the bridge, and because “making good” the design involved replacing the entire structure, the exclusion applied. Unfortunately, it is not clear from the passage, whether the Court turned its mind to cases were a particular part of the design resulted in damage to other parts. In other words, it is not clear whether the Court’s reference to the “item” was to a particular component of the structure or if it would always apply to the entire structure.

Ultimately, the take-away for policyholders in this case is that, when someone is contracted to perform a particular task, a “cost of making good” exclusion of this type will only exclude the cost of redoing that particular contractor’s work. This interpretation will favour cases where the scope of work is limited. Where the contractor’s project scope is broad and undefined, the costs of redoing that particular contractor’s work will remain a live legal issue. This is especially true in faulty design cases where the question of whether the fault was “integral to the whole” is ambiguous.

Overall, this decision is a well-reasoned interpretation of the exclusion. In a case where a window washer caused resulting damage, the exclusion was correctly limited to the cost of rewashing the windows, and the actual damage was covered. While we recognize some of the Court’s references to prior decisions may be relied on by insurers to undermine the general application of this principle, the insured will be able to rely on the clear and unequivocal statement by the Court that the exclusion only applies to what is involved in actually re-doing the specific work.

Footnotes

[1] 2016 SCC 37

[2] [1981] O.J. No. 215 (QL)

[3] [1982] 3 W.W.R. 628.RE

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/ 

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Carneiro v. Durham: The Independent Rights Of An Additional Insured

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By: Camille M. Dunbar, Litigation Associate


Municipalities often retain contractors to provide a wide variety of important public services, for example, snow and ice removal. To protect itself from liability arising from a contractor’s negligence, a municipality might insist on being named as an additional insured on the contractor’s insurance policy. In Carneiro v. Durham (Regional Municipality) [1], the Ontario Court of Appeal recently had the opportunity to consider the bundle of rights afforded to a municipality, named as an additional under a contractor’s liability policy. The Court held that the municipality had independent rights under the policy, including a right to a defence, regardless of the defence provided to the named insured.

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The events that led to the dispute in this case began on a snowy day in the Regional Municipality of Durham (“Durham”). Antonio Carneiro Jr. died in a car accident when he allegedly lost control of his vehicle due to ice and snow on a Durham Road. His family members claimed damages for the alleged negligence of Durham, Miller Maintenance Limited (“Miller”), the province of Ontario and two individual defendants.

Durham had contracted Miller to provide snowplow services for the municipality’s roads during the winter. The contract required Miller to include Durham as an additional insured under its liability policy. Miller’s policy with Zurich did just that.

The statement of claim set out a laundry list of identical particulars of negligence against Miller, Durham and Ontario. It asserted a number of failings, including a failure to keep the road free of ice and snow, inadequate design and construction of the road and failure to close the road during a heavy snowstorm.

Durham brought a Third Party claim against Zurich, seeking a declaration that Zurich had a duty to defend and indemnify Durham in the action. Zurich claimed it had no duty to defend Durham because some of the particulars of negligence in the statement of claim – those unrelated to Miller’s winter maintenance work – fell outside the scope of the coverage it provided to Durham.

Zurich acknowledged that the allegations pertaining to Durham’s liability arising out of Miller’s winter maintenance responsibilities were covered by the policy. However, Zurich argued that by defending Miller it was protecting Durham against any liability it may have for Miller’s negligence.

The motion judge found that Zurich was only required to defend Durham “with respect to the claims insured for Miller”. Durham was to provide its own defence with respect to all other allegations in the claim. The motion judge concluded that Durham was ultimately protected because it would be entitled to recover its costs at the end of the litigation if it were found not liable.

The Court of Appeal disagreed and found as follows:

  1. The allegations in the claim triggered Zurich’s duty to defend Durham;
  2. The policy contained an unqualified contractual promise to defend Durham for actions covered by the policy;
  3. Zurich did not satisfy this duty to Durham by defending Miller;
  4. Zurich’s best interests do not negate its obligation to Durham;
  5. The duty to defend is a separate contractual obligation that is not met by Zurich simply indemnifying Durham at the end of the day.

The Court noted that when pleadings allege facts that, if true require an insurer to indemnify the insured, the insurer is obligated to defend the claim. The true nature of the claim in the action was clear: the deceased lost control of his car because it skidded on ice and snow on the roadway, which Durham and Miller allegedly failed to keep clear. Therefore, Zurich’s duty to defend was triggered, subject to any qualification in the policy.

Second, Zurich’s policy required it to defend the action, not just with regards to the covered claims. Zurich’s policy imposed a duty to defend Durham as an additional insured against any action seeking damages to which the insurance applied. As a result, Zurich had an obligation to pay the reasonable costs of Durham’s defence for covered claims, even if that defence furthered the defence of uncovered claims. There was nothing in the policy language to qualify the duty to defend or to suggest that the duty did not apply to “mixed” claims of covered and uncovered claims.

Third, the Court held that Zurich could not satisfy its duty to Durham by defending Miller, noting as follows:

As an additional insured, Durham has independent rights, including a right to a defence, regardless of the defence provided to the named insured. If Zurich’s position were correct, it would seldom be required to provide a defence to an additional insured because it would usually be defending the named insured against the same liabilities.

In addition, the Court found that the motion judge erred when he decided it was not in Zurich’s best interests to defend when there were both insured and uninsured claims. This finding ignored Zurich’s contractual duty to defend.

Lastly, the Court found that Zurich could not discharge its duty to defend by suggesting Durham could seek its costs at the end of the litigation if it were found not liable. The outcome of the trial, the Court pointed out, is irrelevant to the duty to defend. The Court opined that the duty to defend would be a hollow one if the insurer’s only obligation were to indemnify its insured at the end of the day. That was not the obligation Zurich undertook when it issued a policy naming Durham as an additional insured. Rather, Zurich promised to defend Durham and it should have been held to that promise.

The Court concluded that Zurich was obligated to defend Durham in the action in its entirety. At the end of the proceedings, Zurich could seek an apportionment of defence costs to the extent they dealt solely with uncovered claims or exceeded the reasonable costs associated with the defence of covered claims.

This decision reminds us of the benefits and independent rights of being listed as an additional insured under a contractor’s insurance policy. Those rights, including the right to a defence, are independent of the defence provided to the named insured. Municipalities should find some comfort in this ruling and continue to insist being listed as additional insured under their contractor’s policies.

Footnote

[1] 2015 ONCA 909

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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Is That “Faulty Workmanship” Exclusion Watertight? ONCA Finds That Insurer Cannot Exclude Resulting Damage By Implication

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By: Shaun A. Hashim, Litigation Associate


Many all-risks insurance policies exclude damage caused by a contractor’s faulty workmanship. The breadth of these “faulty workmanship” exclusions vary considerably. On one hand, a clause may narrowly exclude only the “cost of making good” the contractor’s defective work. On the other hand, a clause may exclude not only the cost of correcting the fault, but any damage caused as a result of the work performed. Such damage is commonly known as “resulting damage”. The Ontario Court of Appeal recently held that an insurer cannot exclude resulting damage by implication. Where a “faulty workmanship” clause is silent on resulting damage, such damage will remain covered. 

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In Monk v. Farmers’ Mutual Insurance Co., the insured hired Pleasantview Log Restoration Systems (“Pleasantview”) to perform restoration work to the exterior of her log home. The restoration involved the use of water and required that windows and other seams be sealed. Upon completion of the restoration in 2008, the insured discovered water damage to her carpeting, bedroom wall, and light fixtures. She noticed additional damage in 2009 and 2010.

The home was insured under a standard “all risks” homeowner’s policy issued by Farmers’ Mutual (“Farmers”) and arranged by Muskoka Insurance Brokers Ltd. (“Muskoka”).

Summary Judgment Motion

Upon denial of the claim, Monk sued Farmers and Muskoka, who both moved for summary judgment on two grounds: (i) the claim was the repair of faulty workmanship, which was specifically excluded by the insurance policy and (ii) the action was barred by the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B.[1]

The motion judge made a preliminary finding that the damage to the insured’s home was caused, either directly or indirectly, by Pleasantview’s failure to take protective measures required by their contract. As a result, the motion judge was asked to consider whether the damage resulting from Pleasantview’s failure to appropriately seal the home from water damage was covered. The “faulty workmanship” exclusion clause read as follows:

We do not insure … the cost of making good faulty material or workmanship.

The motion judge found that this exclusion clause was “clear and unambiguous” and that it excluded “both damage to the ‘work’ which forms the subject matter of the contract, as well as damages resulting from the faulty workmanship related to the work”.[2] To arrive at this conclusion, the motion judge outlined four considerations.

First, the motion judge reasoned that an “all-perils” insurance policy should not be viewed as a “de-facto performance bond for the work of a third party.” In other words, a contractor might be encouraged to charge for work at a full price, perform the work carelessly, and rely on an insurer to correct the cost of correcting its mistakes.

Second, the motion judge was mindful of the fact that insurers have good incentive to exclude resulting damage entirely because the “[c]ourts have frequently struggled with the issue of what constitutes resulting damage.” According to the motion judge, removal of any reference to resulting damage in the faulty workmanship clause provided “greater certainty”.

Third, the motion judge considered that “most home insurance policies” explicitly state that resulting damage is covered in the faulty workmanship clause.

Fourth, the motion judge turned to the policy before him and noted that, unlike “most” policies, this contract was silent on the issue of resulting damage. He concluded that this absence was intentional by the insurer and meant to exclude coverage for resulting damage. The motion judge held he was strengthened in this view because another clause of the insured’s policy (the “while being worked on” clause) included an explicit statement regarding resulting damage. That clause read as follows:

We do not insure loss or damage to … property … while being worked on, where the damage results from such process or work (but resulting damage to other insured property is covered).

In effect, the motion judge held that, absent language to the contrary, a faulty workmanship clause excludes both the work performed and any resulting damage. Due to this finding, the motion judge declined to consider the limitations issue and granted summary judgment in favour of Farmers and Muskoka.

Appeal

The Court of Appeal rejected the entirety of the above analysis and found that the motion judge erred in several ways.[3]

Writing for a unanimous Court, Huscroft J.A. recognized that while it is true that a contractor should be responsible for its faulty work, and while it is also true that an insurer might reasonably have an incentive to exclude resulting damage, the reviewing judge must take into account the wellestablished principles of insurance contract interpretation.

Huscroft J.A. pointed out that insurers draft their policies with full appreciation of the fact that the courts are required to interpret exclusion clauses narrowly and coverage clauses broadly. As a result, Huscroft J.A. held that “[i]f an insurer wants to exclude particular coverage, especially for something as well-known as resulting damage, it should do so specifically rather than by implication.”[4]

In keeping with this principle, Huscroft J.A. further disagreed with the motion judge’s finding that resulting damage was excluded due to the absence of explicit language. Huscroft J.A. wrote:

The motion judge’s suggestion that the absence of an exception for resulting damage from the “faulty workmanship” exclusion reflects Farmers’ intention not to provide coverage for such damage is misplaced. An insurer’s unilateral intention is not relevant to the interpretation of the insurance agreement.[5]

Huscroft J.A. also rejected the motion judge’s reference to “most” policies, as that consideration was “irrelevant to the proper interpretation of this insurance contract”.[6]

Finally, Huscroft J.A. disagreed with the motion judge’s reference to the “while being worked on” clause.[7] Although the “while being worked on” clause did explicitly indicate that resulting damage was covered, Huscroft J.A. held that it was not appropriate to refer to a clause intended to broaden coverage in order to strengthen the breadth of an exclusion.[8]

Ultimately, the Court granted the appeal and referred the matter back to the motion judge for determination on the limitations issue.

The decision in Monk v. Farmers’ Mutual Insurance Co. was a necessary correction to an outlier in our jurisprudence. This decision reaffirms the well-established principles of insurance contract interpretation and serves as a reminder to insurers that they cannot benefit from “exclusion by implication”. In light of this decision, policyholders are encouraged to review their insurance contract for “faulty workmanship” clauses and the specific wording dealing with resulting damage.

Footnotes

[1] Monk v. Famers’ Mutual Insurance Co., 2014 ONSC 3940.

[2] Ibid at para. 43.

[3] Monk v. Farmers’ Mutual Insurance Co., 2015 ONCA 911.

[4] Ibid at para. 34.

[5] Ibid at para 40.

[6] Ibid at para. 35 (emphasis original).

[7] Ibid at para. 40.

[8] Ibid

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/

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Bad Chair Day: Nerland v. Toronto-Dominion Bank

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By: Camille M. Dunbar, Litigation Associate


A stout, upholstered chair may, at first blush, seem innocuous. It’s easy to ignore the warnings often recited by parents and teachers to sit property when rocking back and forth on a chair’s legs. However, in Nerland v. Toronto-Dominion Bank,[1] the British Columbia Supreme Court reminded us why the old adage dies hard.

In Nerland, the 61-year-old plaintiff took a seat on a chair at a sit-down wicket at a branch of the Toronto-Dominion Bank (TD). While a bank employee went off to complete the plaintiff’s transaction, the plaintiff leaned forward to pick up some documents on the counter and the chair went out from under him. He fell to the floor, striking his head, neck, shoulder and elbow, suffering injuries.

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The parties agreed on damages and the trial proceeded on liability only. The chair at issue was upholstered with wooden legs affixed with hard plastic tips. The floor around the sit down wicket was tiled. The plaintiff argued that he did not tilt the chair deliberately, but could not recall how the chair toppled. There was no incident report or security video of the incident. After the fall, the plaintiff claimed the branch manager suggested there had been a prior incident and the bank had meant to put a mat down in that area. He also testified that when he returned to the branch a few weeks later, the chair had been placed on a mat.

TD retained an engineering expert to opine on the mechanics of the fall, particularly, the degree to which the chair could be tipped forward before it lost stability. Relying on the expert evidence, the Court found that the plaintiff was seated in the front half of the chair and deliberately tipped the chair onto its front legs to reach the documents on the wicket counter.

After dismissing the plaintiff’s claim under British Columbia Occupiers Liability Act,[2] the Court assessed the negligence claim. The plaintiff submitted that tipping the chair onto its front legs was normal, foreseeable human conduct, and injury is likely to occur only where the tipped chair slips out from beneath a person due to the plastic tips on the tiled floor.

However, the Court found that the chair tipped over because the plaintiff intentionally raised the back legs over eight inches off the floor, which required a conscious effort. Furthermore, the Court was not persuaded that the bank manager made any comment regarding prior incidents or the intention to place a mat in the area. As a result, the Court concluded that, although TD owed the plaintiff a duty of care, there was no breach of this duty in the circumstances:

The chair provided to the plaintiff to sit on at the sit down wicket was reasonably safe to sit on. I found no evidence of any prior or subsequent incidents with similar chairs. The placement of a mat under the chair at the sit down wicket at some point after the plaintiff fell was not an admission of liability and I do not find it a persuasive factor. I find the plaintiff exerted the effort required to tip the chair forward onto its two front legs to such a degree that it toppled out from under him. His action in tipping the chair forward caused the fall, not the plastic chair glides.[3]

The Court noted that the plaintiff could have waited for the bank employee to return and hand him the documents or he could have stood up to reach across the desk for them. To prevent customers from tipping chairs forward (or indeed backwards), the Court commented, TD would either have to fix the feet of the chairs permanently to the floor or appoint an employee to closely monitor the activities of customers while seated in chairs.

As the manufacturer and retailer were not named in this decision, it is not, strictly speaking, a products liability case. However, the decision does consider the question of foreseeable misuse of a product, finding that it was the plaintiff’s own intentional acts that created the danger and caused the chair to fall, not the chair itself or the plastic tips.

This decision also confirms that although TD Bank owed the plaintiff, its customer, a duty of care, the standard is reasonableness, not the elimination of every possible danger.[4] Furthermore, remedial steps taken by a defendant, like placing the impugned chair on a mat in this case, is not necessarily proof that such steps were required to make the premises reasonably safe. Lastly, and perhaps most practically important, it reminds us to heed the advice we often heard at a young age, “sit properly in that chair or you’re going to hurt yourself”! Unfortunately for the plaintiff in this case, he was left to bear full responsibility for his injuries sustained in the fall.

Footnotes

[1] 2016 BCSC 45 [“Nerland”].

[2] R.S.B.C. 1996, c. 337 [the “Act”] (finding that the chair was chattel and therefore outside the scope of the Act).

[3] Nerland, supra note 1, at paras. 75-76.

[4] Ibid at para. 67.

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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Ontario Court Of Appeal: Reasonable Apprehension Of Conflict Forces Insurer To Relinquish Control Of Defence

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By: Shaun A. Hashim, Litigation Associate


The Ontario Court of Appeal has again confirmed that an insurer’s contractual right to control a defence must yield to the interests of its insured where its coverage position creates a reasonable apprehension that defence counsel would be in a conflict of interest.

In Hoang v. Vicentini, the Ontario Court of Appeal ordered an insurer to relinquish control over the defence of its insured and pay for the insured’s independent counsel.[1] The Court confirmed that if a fact affecting your coverage is disputed in the underlying litigation, a conflict of interest arises.

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The Decision

The decision in Hoang v. Vicentini was the result of a chambers motion to remove counsel due to a possible conflict of interest.

The underlying litigation was based upon tragic circumstances. Can Hoang, the insured, dropped off his son, Christopher, at the intersection of Queens Quay and Yonge Street in Toronto, Ontario. Unfortunately, Christopher’s hat blew off and he chased it into the intersection. Christopher was severely injured when he was struck by a vehicle.

Christopher (by his litigation guardian) sued his father as well as the driver and the owner of the vehicle that struck him. The action was tried before a jury which found Mr. Hoang solely responsible. The action against the driver and owner of the vehicle was dismissed.

As part of the decision, the jury specified that Mr. Hoang’s negligence included his “unsuitable choice of unloading area.” On the basis of a prior decision of the Court, Justice Laskin recognized that this finding of fact could give rise to coverage under Mr. Hoang’s liability policy.[2]

The plaintiff launched an appeal of the decision seeking to overturn the dismissal as against the driver and owner. Mr. Hoang’s counsel responded with a notice of cross-appeal on his behalf requesting the court set aside all particulars of negligence, including his “unsuitable choice of unloading area”.

Justice Laskin recognized that, for Mr. Hoang, a decision overturning the finding of “unsuitable choice of unloading area” yet leaving in place the findings of negligent parental supervision, would be a disastrous result. He would be left without any prospect of indemnification and his son would be left without any hope of recovery.

Relying on an earlier decision of the Court in Brockton (Municipality) v. Frank Cowan Co., Justice Laskin confirmed that where a conflict of interest arises, the insurer may be required to relinquish control of the defence and pay for independent counsel for its insured.[3] To that end, Justice Laskin recognized that while “not every potential conflict … requires the insurer to yield the right to control the defence”, an insurer is required to yield where there is “a reasonable apprehension of conflict”.[4]

Justice Laskin held that the conflict was “readily apparent”. He held that a reasonable bystander might think that counsel appointed by the insurer would focus on overturning the one finding for which the insurer could be liable to indemnify the insured. Justice Laskin noted that this finding was not intended to impugn counsel’s integrity, but that “appearances count”. The test is not “actual” conflict but the “reasonable apprehension” of one.[5]

Because that appearance was alive in the case before him, Justice Laskin ordered the insurer to be added as a party to the appeal, to yield control of Mr. Hoang’s defence, and to pay for his independent counsel.

Conclusion

The conclusion in Hoang v. Vicentini is short, clear, and effective. Here, the Ontario Court of Appeal has confirmed that an insurer’s right to control a defence is not sacred. Defence counsel’s primary obligation is to the insured and this takes primacy over the interests of the insurer. This decision dispels the suggestion that defence counsel must evenly balance the interests of the insured and insurer when defending a case. Where the insurer’s interest comes into conflict with the insured’s, and where that conflict is an issue in the litigation, independent counsel is necessary to safeguard the insured.

Footnotes

[1] Hoang v. Vicentini, 2015 ONCA 780.

[2] Ibid at para. 8. See also Lefor (Litigation Guardian of) v. McClure (2000), 49 O.R. (3d) 557 (C.A.).

[3] Brockton (Municipality) v. Frank Cowan Co. (2002), 57 O.R. (3d) 447 (C.A.).

[4] Hoang at para. 16.

[5] Ibid at para. 17.

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 Courtesy of: Kat Northern Lights Man via Visual Hunt / CC BY-NC

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Judge Confirms Limited Use Of Extrinsic Evidence For Duty To Defend

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By: Shaun A. Hashim, Litigation Associate


An insurer’s duty to defend an action against its insured is triggered by the mere possibility that a claim could be made under the insured’s policy. Traditionally, a court’s analysis of whether this duty is triggered is based solely on the pleadings. However, in some limited circumstances the courts have permitted a consideration of “non-controversial” evidence.

A recent decision of the Ontario Superior Court provides a good illustration of when such extrinsic evidence is and is not appropriate. While higher authorities have opened the door to extrinsic evidence, the court stops short of permitting insurers to engage in adversarial fact-finding inquiries.

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The Decision

In Aquatech Logistics et. al. v. Lombard Insurance et. al.,[1] the applicant, Aquatech Logistics, held three insurance policies: Aviva provided an automobile policy, Lombard Insurance provided a comprehensive general liability policy, and ACE INA provided a pollution incident liability policy.

In July 2012, Aquatech was involved in an unfortunate incident that took place at a public pool in St. Catharines. Aquatech delivered chlorine which was accidentally poured into a container of hydrochloric acid. The chemical reaction which quickly ensued produced a poisonous cloud of potentially deadly chlorine gas which infiltrated the public areas of the pool and surrounding area.

Two actions were commenced against Aquatech in which the plaintiffs advanced claims under the Environmental Protection Act , R.S.O. 1990 c. E.19, in nuisance, and in negligence.

Aquatech sought a declaration from the Ontario Superior Court of Justice stating that two of its three insurers (Lombard and ACE INA) had a duty to defend the actions against it for damages arising out of the accident. The third insurer (Aviva) had already assumed a defence of the claims. As of the date of Aquatech’s application, none of the underlying claims had been proven.

The Exclusion Clause

The test to establish the duty to defend is whether there is a “mere possibility” that the claim alleged could succeed.[2] Both non-defending insurers sought to rely on exclusion clauses in their policies and extrinsic evidence to assert that there was no possibility of coverage.

Lombard lost a procedural motion prior to the hearing and was unable to produce extrinsic evidence as a result. It therefore conceded that it had no basis to dispute its duty to defend.

ACE INA relied on an exclusion clause which would deny coverage if the accident arose out of the use or operation of a motor vehicle, including the use of accessories and equipment attached to the vehicle. This exclusion only applied if there was coverage under an existing motor vehicle policy. In this case, Aviva provided that coverage. Therefore, if ACE INA could establish that a motor vehicle was involved in the incident, coverage could be excluded.

Justice Dunphy noted that the starting point of the analysis were the pleadings in the underlying claim. In this case, the pleadings in both actions made no reference to a motor vehicle.

However, ACE INA sought to rely on extrinsic evidence. In particular, it intended to establish, that the chlorine was brought to the site by Aquatech in a truck (i.e. a motor vehicle under the policy). ACE INA relied on an admission from the cross-examination of the President of Aquatech that the delivery was indeed conducted via truck.

On the basis of appellate authority, Justice Dunphy recognized that extrinsic evidence of this sort is admissible where the evidence is “non-controversial, affected only coverage, and did not affect the issues of liability in the litigation.”[3] In this case, he was prepared to accept that the delivery was conducted using a motor vehicle. Justice Dunphy noted:

While I might have been prepared to consider taking judicial notice of the exceptional rarity of commercial bulk transport of chemicals by oxcart or horse, at least in the City of St. Catharines, the admission by the applicants that motor vehicles are used by Aquatech in the delivery of pool chemicals avoids that issue and strikes me as just the sort of non-controversial matter that the Court of Appeal … was referring to.[4]

However, despite accepting this non-controversial fact, Justice Dunphy was not prepared to dismiss the application. He went on to consider a series of questions which called into doubt whether the motor vehicle was directly involved in the incident. He asked:

  1. Was the chlorine brought in a single trip or more than one?
  2. If a single load, was the chlorine unloaded directly from the tank in the insured’s truck into the wrong tank at the pool storage room or was there an intermediate step?
  3. If unloaded directly into the acid tank, was it unloaded by means of a pump?
  4. If by pump, was it a pump powered by the customer/pool operator or one powered by the systems of the truck?
  5. If by pump, was the pump portable or permanently affixed on to the truck?
  6. In light of the answers to (d) and (e) above, can the pump or other unloading device be qualified as “accessories and equipment while attached to or mounted on such vehicle” as defined in the exclusion clause of the policy?

In short, by asking these questions Justice Dunphy illustrated that the involvement of the truck was not conclusive. Instead, that non-controversial fact raised controversial issues.

Answers to the above questions would require a factual inquiry by the trial judge hearing the claims on their merits. To conduct a fact-finding process to answer those questions would convert the application to a “trial within a trial” which has been admonished by our Court of Appeal.[5] For example, Justice Dunphy noted that even if the truck driver were examined and provided affirmative answers to the questions above, it could not be assumed that his or her evidence would be accepted “as the last word” by the court.[6] If it were shown, for example, that the pool owner’s equipment was used or involved in the unloading process, the question of liability would be impacted.

Justice Dunphy concluded that the “true nature” of the claim before him was that of a pollution incident. The pleadings did not disclose the “exact means” by which the incident occurred and did not venture further than to allege that the defendant’s employee caused the mixture of the two chemicals.[7] For this reason, and as a result of the inconclusive nature of the evidence permitted, the court granted the application and held that all three insurers had a duty to defend.

Conclusion

This decision is a well-reasoned application of the rules regarding when extrinsic evidence may or may not be permitted when considering an insurer’s duty to defend.

On one hand, the court permitted the “non-controversial” evidence that a truck was involved in the delivery of chemicals. On the other hand, the court stopped short of permitting the insurer to investigate and challenge the extent of the involvement of the truck, as that would require an adversarial fact-finding process.

In short, applications regarding the duty to defend remain an analysis conducted at the pleadings level with limited admission of non-controversial evidence. This decision shows that the pleadings and such evidence must be conclusive on their own to deny coverage. An insurer cannot use a few preliminary facts to launch into an adversarial inquiry into matters that would otherwise be determined at trial.

Footnotes

[1] Aquatech Logistics et. al. v. Lombard Insurance et. al. , 2015 ONSC 5858 [Aquatech Logistics].

[2] McLean (Litigation Guardian of) v. Jorgenson, 78 O.R. (3d) 308 (Ont. C.A.).

[3] Ibid.

[4] Aquatech Logistics, supra note 1, at para. 31.

[5] Ibid.

[6] Ibid at para. 34.

[7] Ibid at para. 35.

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/

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B.C. Court Of Appeal Finds Costs To Remedy Damage Caused By Defective Workmanship Is Not Excluded By Workmanship/Design Exclusion

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By: Melissa A. Wright, Litigation Associate


The British Columbia Court of Appeal recently confirmed in Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co.[1] that a Workmanship/Design Exclusion does not exclude the costs to remedy damage caused by defective workmanship. The lower court decision was previously reported on in Covered. Acciona is the first case in Canada to consider the LEG 2/96, “Defects Exclusion” clause used in Course of Construction (“COC”) policies in Canada. While the outcome of this appeal decision is definitely pro-insured, the lasting impact of this decision will depend on whether the court’s reasoning is restricted to the unique facts of this case or applied more broadly to resulting damage claims generally.

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Background

The Respondent was the contractor for an eight-story reinforced concrete structure being built as a major addition to the Royal Jubilee Hospital in Victoria, B.C. The contractor claimed over $14 million in damages from insurers under a COC policy for the costs to repair concrete slab floors that had “over-deflected” and did not meet the level surface functionality requirements for wheeled hospital equipment.

The policy’s insuring agreement provided coverage for “all risks of direct physical loss of or damage to the property insured” subject to exclusions in the policy. The insurer denied coverage on the basis of a workmanship/design exclusion clause which read as follows:

  1. all costs rendered necessary by defects of material workmanship, design, plan, or specification, and should damage occur to any portion of the Insured Property containing any of the said defects the cost of replacement or rectification which is hereby excluded is that cost which would have been incurred if replacement or rectification of the Insured Property had been put in hand immediately prior to the said damage.For the purpose of this policy and not merely this exclusion it is understood and agreed that any portion of the Insured Property shall not be regarded as damaged solely by virtue of the existence of any defect of material workmanship, design, plan or specification.

Lower Court Decision

The trial judge accepted the expert evidence of the contractor that the over-deflection, cracking of the slabs and bending of the rebar was not caused by defective design. Rather it occurred as a result of improper formwork and shoring procedures, which did not account for the thin slab design. The damage was therefore covered by the insuring agreement. The trial judge interpreted the defects exclusion so as to only exclude those costs of repair that would have remedied the defect immediately prior to the occurrence of the damage, and based on the evidence the costs of implementing proper shoring/framework procedures were nil. The insurer appealed.

Court of Appeal Decision

The insurer argued on appeal that the over-deflection, bending and cracking was not “direct physical loss or damage to the property insured” but a manifestation of faulty workmanship. The Court of Appeal held that this argument was inconsistent with the trial judge’s finding of fact, that the defect (e.g., the faulty or defective shoring) caused actual physical damage (e.g., the over-deflection). Therefore, the greater than anticipated deflection was a fortuitous event. The Court of Appeal also did not accept that the slabs did not suffer physical loss or damage because they were never initially in a satisfactory state.[2] Accepting such an argument would have deprived the contractor of coverage for unfinished work product during construction.[3]

The insurer also argued that the trial judge erred in excluding only the costs of implementing proper shoring/framework procedures (which were nil). It submitted that the interpretation of the defects exclusion required a different inquiry than was undertaken in the resulting damage case law considered by the trial judge. The resulting damage case law addresses the distinction between resulting damage from an insured’s own work which is generally covered, and the cost of making good a defect in an insured’s own work which generally is excluded.[4]

The insurer relied upon the Alberta Court of Appeal decision in Ledcor Construction Ltd v. Northbridge Indemnity Insurance Co. (“Ledcor”),[5] which excluded from coverage the cost of replacing glass windows that suffered damage during the cleaning process caused by the faulty workmanship of a trade contractor on the basis that repairing the windows would be “making good faulty workmanship” since the damage was the direct result of the cleaning carried out by the trade contractor.[6] Based on Ledcor , the insurer submitted that the correct interpretation of the workmanship/design exclusion clause would lead to the exclusion of the entire claim.[7] The Court of Appeal disagreed, finding no error in the trial judge’s reasoning. The defects in the framing and shoring workmanship resulted in the damage to slabs, and therefore, there was no defect in the slabs themselves that could have been rectified to prevent the over-deflection, bending and cracking.[8] The Court of Appeal applied the Ontario Superior Court decision of PCL Constructors Canada Inc. v. Allianz Global Risks US Insurance Company (“PCL Contractors”),[9] which involved a similar exclusion clause that was interpreted as a deeming provision providing special treatment of loss or damage caused by faulty workmanship.[10] The effect of the clause in PCL Contractors was to classify the damage to be “resulting damage” and therefore covered under the policy. The fact that sufficient preventative measures would not have added to the costs in this case did not matter. The Court of Appeal was clear that if the parties had intended to exclude all damage caused by the actions under the control of the insured, that there was simple and direct language available to do so, in the form of exclusion clause LEG 1.[11]

The Court of Appeal dismissed the insurer’s appeal and affirmed the trial judge’s order, which awarded over $8 million to the plaintiffs for their costs incurred to remedy the concrete slabs.

Court of Appeal Decision

The insurer argued on appeal that the over-deflection, bending and cracking was not “direct physical loss or damage to the property insured” but a manifestation of faulty workmanship. The Court of Appeal held that this argument was inconsistent with the trial judge’s finding of fact, that the defect (e.g., the faulty or defective shoring) caused actual physical damage (e.g., the over-deflection). Therefore, the greater than anticipated deflection was a fortuitous event. The Court of Appeal also did not accept that the slabs did not suffer physical loss or damage because they were never initially in a satisfactory state.[12] Accepting such an argument would have deprived the contractor of coverage for unfinished work product during construction.[13]

The insurer also argued that the trial judge erred in excluding only the costs of implementing proper shoring/framework procedures (which were nil). It submitted that the interpretation of the defects exclusion required a different inquiry than was undertaken in the resulting damage case law considered by the trial judge. The resulting damage case law addresses the distinction between resulting damage from an insured’s own work which is generally covered, and the cost of making good a defect in an insured’s own work which generally is excluded.[14]

The insurer relied upon the Alberta Court of Appeal decision in Ledcor Construction Ltd v. Northbridge Indemnity Insurance Co. (“Ledcor”),[15] which excluded from coverage the cost of replacing glass windows that suffered damage during the cleaning process caused by the faulty workmanship of a trade contractor on the basis that repairing the windows would be “making good faulty workmanship” since the damage was the direct result of the cleaning carried out by the trade contractor.[16] Based on Ledcor, the insurer submitted that the correct interpretation of the workmanship/design exclusion clause would lead to the exclusion of the entire claim.[17] The Court of Appeal disagreed, finding no error in the trial judge’s reasoning. The defects in the framing and shoring workmanship resulted in the damage to slabs, and therefore, there was no defect in the slabs themselves that could have been rectified to prevent the over-deflection, bending and cracking.[18] The Court of Appeal applied the Ontario Superior Court decision of PCL Constructors Canada Inc. v. Allianz Global Risks US Insurance Company (“PCL Contractors”),[19] which involved a similar exclusion clause that was interpreted as a deeming provision providing special treatment of loss or damage caused by faulty workmanship.[20] The effect of the clause in PCL Contractors was to classify the damage to be “resulting damage” and therefore covered under the policy. The fact that sufficient preventative measures would not have added to the costs in this case did not matter. The Court of Appeal was clear that if the parties had intended to exclude all damage caused by the actions under the control of the insured, that there was simple and direct language available to do so, in the form of exclusion clause LEG 1.[21]

The Court of Appeal dismissed the insurer’s appeal and affirmed the trial judge’s order, which awarded over $8 million to the plaintiffs for their costs incurred to remedy the concrete slabs.

Footnotes

[1] 2015 CarswellBC 2210, 2015 BCCA 347; affm’g 2014 BCSC 1568 (CanLII)[Acciona].

[2] Acciona at para 54.

[3] Acciona at para 55.

[4] Acciona at para 58.

[5] 2015 ABCA 121 (CanLII)[Ledcor].

[6] Ledcor at para 8.

[7] Acciona at para 58.

[8] Acciona at paras 61-62.

[9] 2014 ONSC 7480 (CanLII)[PCL Contractors].

[10] Acciona at para 64 citing PCL Contractors at paras 23-25, 28.

[11] Acciona at para 69.

[12] Acciona at para 54.

[13] Acciona at para 55.

[14] Acciona at para 58.

[15] 2015 ABCA 121 (CanLII)[Ledcor].

[16] Ledcor at para 8.

[17] Acciona at para 58.

[18] Acciona at paras 61-62.

[19] 2014 ONSC 7480 (CanLII)[PCL Contractors].

[20] Acciona at para 64 citing PCL Contractors at paras 23-25, 28.

[21] Acciona at para 69.

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/

Photo credit: Curtis Cronn via VisualHunt.com / CC BY-NC-ND

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