Bullies And Their Parents Not Covered For Lawsuits Under Home Insurance Policy

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By: Camille M. Dunbar, Litigation Associate


In Unifund Assurance Company v. D.E.,[1] the Ontario Court of Appeal ruled that the parents of a school-age bully are not covered for their negligent supervision under their home insurance policy.

We recently reported on D.E. v. Unifund Assurance Company,[2] a trial level decision where the Court declared that an insurer, Unifund, had to defend and indemnify parents of an alleged school-age bully. The decision was overturned and the Court of Appeal’s reasoning is precedent-setting and instructive to both insurers and policy holders.

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A claim was brought against the minor daughter of D.E. and L.E. (the “parents”), and two other Grade 8 students, for allegedly bullying a fellow classmate, causing her physical and psychological injuries. The parents were also sued for their alleged failure to control their daughter and prevent the bullying.

The parents were insured under a comprehensive homeowners’ policy that provided for liability coverage if their personal actions unintentionally caused bodily injury or property damage. The parents successfully obtained a declaration that Unifund had a duty to defend and indemnify them in the underlying action. Unifund appealed.

On appeal, the primary issue was whether either of two exclusion clauses in the policy saved Unifund from having to defend and indemnify the parents.

Justice MacPherson, writing for the Court of Appeal, relied on the three part test set out in Non-Marine Underwriter, Lloyd’s of London v. Scalera,[3] regarding an insurer’s to duty to defend and indemnify:

  1. whether the legal allegations against the insured are properly pleaded;
  2. whether any claims are entirely derivative in nature;
  3. whether any of the properly pleaded, non-derivative claims could potentially trigger the insurer’s duty to defend.

Justice MacPherson found that the first two criteria were easily met, so he zeroed in on the third part of the test: whether the properly pleaded, non-derivative claims against the parents triggered Unifund’s duty to defend. He noted that the claims against the parents were described in terms such as “failure to take disciplinary action” and “failure to discharge their duty to prevent the continuous physical and psychological harassment.” When compared with the dictionary definition of negligence, which includes “failure to take proper care over something”, he found that the claims against the parents were squarely grounded in negligence.

Justice MacPherson then turned to one of the two exclusion clauses in the policy, which precluded coverage for:

failure of any person insured by this policy to take steps to prevent sexual, physical, psychological or emotional abuse, molestation or harassment or corporal punishment.

He dismissed the lower court’s finding of ambiguity, which was based on the lack of “express language” addressing whether “negligent failure to prevent physical abuse or molestation” was excluded under the policy. In support of this finding, he referred to a similar decision, where it was held that the policy excluded coverage for precisely the type of claim made against a babysitter for negligent supervision.

Justice MacPherson concluded that the exclusion clause was clear on its face and it applied to the claims as pleaded against the parents. As a result, he declared that Unifund did not have a duty to defend or indemnify the parents in the underlying lawsuit.

This decision makes it clear: neither school-age bullies nor their parents will be covered under a homeowners’ insurance policy that contains this specific exclusion. As bullying, and now particularly cyber-bullying, remains a sensitive issue for many Canadian schools, we expect this decision will have a precedential effect on similar claims. While insurers are entitled to choose what they cover, these cases always raise the question of how a policy that does not cover negligence that causes bodily injury can be referred to as “comprehensive”. It is also notable that at least one other insurer’s standard policy exclusion simultaneously refers to “the failure to supervise and the negligent supervision of any person”.

Footnotes

[1] 2015 ONCA 423.

[2] 2014 ONSC 5243.

[3] 2000 SCC 24.

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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Carefully Consider That Additional Insured Endorsement – It May Still Protect You!

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By: Melissa A. Wright, Litigation Associate


The Ontario Superior Court of Justice recently held that an additional insured was covered by a policy, where there was no direct claim against the named insured, even though the coverage was limited to claims arising from the negligence of the named insured.[1] The most common additional insured endorsements are generally speaking very restrictive in their application. As this case demonstrates, such an endorsement may still provide protection to an additional insured even where the plaintiff has no direct claim against the named insured.

The plaintiff hired Davis Systems of North Bay Nipissing (“Davis Systems”) to repair damage to a hotel that was caused by a fire. Davis Systems in turn subcontracted that work to Crystal Clean Carpet & Upholstery Specialist (“Crystal Clean”). Crystal Clean allegedly left a window open in the middle of winter, causing the pipes to freeze and burst.

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The plaintiff sued both Davis Systems and Crystal Clean for damages resulting from Crystal Clean’s alleged negligence. Davis Systems cross claimed against Crystal Clean and brought a third party action against Crystal Clean’s insurer, Economical Insurance Group (“Economical”). Under the policy of insurance Davis Systems was listed as an additional insured.

While the plaintiff eventually consented to a dismissal of the action against Crystal Clean, the cross claim and third party claim continued. Economical and Crystal Clean together brought a Rule 21.01(1)(b) motion seeking a dismissal of the third party claim on the basis it disclosed no reasonable cause of action.

In order for Economical to have a duty to defend the action against Davis Systems, there must be the possibility of a duty to indemnify.

Economical and Crystal Clean argued that since the action against Crystal Clean had been discontinued, the true nature and substance of the claim was with respect to Davis Systems’ negligent acts and not with respect to liability arising out of the operations of Crystal Clean. It argued that the discontinuance was an acknowledgement by the plaintiff that the factual allegations could not support its claim; accordingly coverage for Davis Systems’ omissions relating to Crystal Clean’s operation could not be triggered.

The court did not accept Economical and Crystal Clean’s argument for the following reasons. First, the court did not know the reasons why the plaintiff discontinued its claim against Crystal Clean. Second, even if the discontinuance could be said to be an admission, it was not binding on Davis Systems. Third, the discontinuance could only be said to be an acknowledgment that the plaintiff’s claim against Crystal Clean could not succeed. It was not an acknowledgment in respect of the plaintiff’s claim against Davis Systems.

The pleadings alleged that Davis Systems was liable to the plaintiff for breach of contract as a result of Crystal Clean’s negligence. This allegation was, in the court’s view, within the coverage provided by the policy. Notably, the exclusion in the additional insured clause was restricted solely to Davis Systems’ own negligent acts. The clause read as follows:

[..] Davis Systems are hereby added to the policy as additional Insureds but only with respect to liability arising out of the operations performed by or for the named insured but excluding any negligent acts committed by such additional Insured. (Emphasis in original)

As there was no other factual basis for Davis System to be liable other than Crystal Clean’s negligence, the discontinuance against Crystal Clean did not change the factual basis upon which the plaintiff was seeking to find Davis Systems liable. The policy covered damages for Crystal Clean’s negligence when those damages were sought from Davis Systems. Accordingly, the motion was dismissed.

In this case, there was real value added by the additional insured endorsement even though the language of the clause itself was restrictive. Additional insured endorsements should be carefully reviewed by your counsel to ensure that your interests are being protected.

Footnote

[1] Innvest Real Estate Trust (o/a Travelodge Airport North Bay) v. 1328151 Ontario Inc. (o/a Paul Davis Systems of North Bay Nipissing) et al., 2014 ONSC 5891

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: amseaman via Visualhunt.com / CC BY-ND

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Insurance Clauses: Priceless Or Worthless?

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By: Lawrence G. Theall, Partner

And: Shaun A. Hashim, Litigation Associate


Contracts provide an ideal opportunity for the efficient allocation of risk, and insurance clauses can cover much of this ground, often with no concessions from your client. This opportunity can be lost when the clause does not really fit the particular transaction, or where the coverage is not available when later required. Even a carefully drafted clause may be worthless, if the parties do not turn their minds to how it will apply to the specific circumstances and avoid some common traps, as discussed below. For a more thorough discussion, please sign up for our upcoming CBA webinar “Negotiating and Drafting Effective Risk Allocation: Integrated Liability and Insurance Clauses” (Fall 2015).

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Insurance certificates and erosion of limits: Many insurance provisions require the delivery of insurance certificates, presumably confirming the required insurance coverage is in place. However:

  • Certificates rarely contain key provisions, such as critical exclusions.
  • While they identify policy limits, they give no indication of whether or not those limits have been, or are at risk of, being eroded. It does not matter what coverage the policy provides, if its limits have been exhausted when the claim arises.

If multiple claims arise against a Named Insured, as a result of a defect, one or two settlements could quickly erode the policy limits, leaving nothing to pay any future claims against the additional insured.

Subsequent modifications/cancellation: The subsequent modification or cancellation of a policy can also be a problem. Clauses often contemplate that the insurer will be obliged to advise of material changes, but frequently it is not endorsed on the policy, and is therefore ineffective.

Additional insured: Adding a party as an “additional insured” is probably the most commonly used, and a largely misunderstood, risk allocation provision. There are two common misconceptions which often result in these clauses not achieving their desired goal. First, unless otherwise provided, the “additional insured” endorsement will provide that the party is only added for vicarious liability (i.e. the Named Insured’s acts and omissions). It is far better if the endorsement makes the company an additional insured with respect to all claims arising from or relating to the nature of the business being transacted, which will then cover claims arising from the company’s negligence. The second common misconception is that it is always good to be an additional insured. For many errors and omissions policies, as well as some general liability policies, this is not the case. These policies may contain an “insured versus insured” exclusion, which removes coverage for any claims asserted by one insured against another insured.

Stand Alone Policies: One solution to some of these issues is having a dedicated policy. Whether this is practical will vary from business to business. The construction industry frequently uses dedicated, project-based policies. These are intended to avoid disputes relating to who is at fault, ensuring the project can continue to completion when a claim does arise. It is also a good example of the economically efficient allocation of risk. Other businesses have similar opportunities. For example, while dedicated policies may not be as common in supply agreements, it is an option worth exploring. Another option to consider may be excess or umbrella policies, which may or may not be dedicated.

Conclusion:

So are your insurance clauses priceless or worthless? The answer is they can provide great value at little or no cost to your client. The value is often determined by thoughtful drafting, with a full appreciation of the transaction and the potential traps noted above. Consider the following when drafting or reviewing insurance clauses:

  • Get a copy of the insurance policy from the other party
  • Consider the issue of eroding limits
  • For larger contracts, the clause should include full details of what the insurance policy(ies) should and should not include
  • Consider drafting the additional insured endorsement and including it as a schedule to the agreement
  • Have the insured’s broker or risk manager confirm in writing that the insured party can comply with the requirements of the insurance clauses

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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B.C. Supreme Court Finds Workmanship/Design Exclusion Does Not Exclude Costs To Remedy Damage Caused By Defective Workmanship

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By: Camille M. Dunbar, Litigation Associate


The British Columbia Supreme Court recently released its decision in Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Company,[1] which considered for the first time in Canada the LEG 2/96 clause, a workmanship/design exclusion clause. The Court also re-affirmed a number of insurance interpretation principles, particularly in relation to Course of Construction (COC) policies, including the definition of “damage to insured property” and whether a loss must be fortuitous in order to trigger coverage.

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The plaintiffs were the design/build contractors for a $250 million public-private partnership (P3) project, which involved constructing a new hospital in Victoria, British Columbia. The project called for an eight-storey concrete structure, consisting of suspended concrete slab floors.

During construction, the concrete slabs “over-deflected”, resulting in a concave recession in the centre of the slab. Although testing showed that the over-deflected slabs met the necessary safety requirements, the slabs were unfit to meet the serviceability standards of a large hospital that required level floors for wheeled equipment. The Court accepted the plaintiffs’ expert evidence that the cause of the over-deflection was improper formwork and shoring procedures that failed to account for the unusually thin design of the slabs. Extensive remedial work was required to correct the deflection. The plaintiffs sought recovery of the remedial costs incurred from the defendant insurers under a COC policy (the “Policy”).

The Policy’s insuring agreement provided coverage for “all risks of direct physical loss of or damage to the property insured”, subject to Policy exclusions. In denying coverage, the insurers made the following arguments: 1) the over-deflection of the slabs were defects, and therefore did not constitute “damage” within the insuring agreement; 2) the loss was not fortuitous; and 3) the “defects in material workmanship” or “design” exclusion (“LEG 2/96”) excluded all losses under the Policy.

The Court noted that a COC policy is intended to provide the owner of a construction project with the promise that the contractors will have the funds to rebuild in case of loss, and to the contractors, the protection against the crippling cost of starting afresh in such an event, the whole without resort to litigation in case of negligence by anyone connected with the construction, a risk accepted by the insurers at the outset. It is in this context that the Court embarked upon its analysis.

The Court held that the over-deflection (as well as surface cracking and stretching of the rebar) constituted “damage” under the Policy. The Court noted that while some degree of deflection and cracking is expected, the slabs experienced significant degrees of deflection throughout the facility, resulting in permanent deformity which rendered the slabs unfit for its intended purpose. The slabs were left in an altered physical state, which courts have held to be the touchstone for a finding of damage.

As to the requirement of fortuity, the court stated that fortuity is inherent in the Policy as the risk undertaken by the insurer is intended to insure against possible, unintended consequences. What is required to trigger coverage is that the damage is both unexpected and unintended from the standpoint of the insured. The Court found that the over-deflection and cracking were unintended and unexpected, as the slabs were not designed to deflect to such a degree as to render them unfit for their intended use. Therefore, the fortuity requirement was met.

The Court then considered what it noted to be the central coverage issue: whether the loss was excluded under the LEG 2/96 workmanship/design exclusion. The wording of the exclusion is as follows:

This Policy does not insure:

(b) 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.

The Court held that, as worded, the exclusion was not limited to defective design of the work or facility as a whole. Rather, it included any “defects of material workmanship, design, plan, or specification”, which would include defective design of component pieces of the work, including the formwork and shoring/reshoring. The failure to account for the particular design was, the Court found, a defect in workmanship within the meaning of the exclusion. However, the Court noted that, when read as a whole, what is excluded under the LEG 2/96 clause are only those costs that would have remedied or rectified the defect immediately before any consequential or resulting damage occurred.

The “damage” in this case was the cracking and over-deflection of the slabs. The “defect in material workmanship” was the improper formwork and shoring/reshoring procedures adopted that resulted in the damage to the slabs. Therefore, the LEG 2/96 clause excluded only those costs that would have remedied or rectified the defect before the cracking and over deflections occurred (i.e. the costs of implementing proper formwork and shoring/reshoring procedures or incorporating additional camber into the formwork), which would have been minimal. Ultimately, the plaintiffs were awarded over $8 million for their costs incurred in remedy the concrete slabs.

This decision provides a welcome and thorough review of the general principles of insurance policy interpretation, and for the first time, a Canadian interpretation of the LEG 2/96 workmanship/design exclusion. The Court in Acciona was clear: where insurers have language available to them that will remove an ambiguity from the meaning of an exclusion clause or will clearly specify the scope of an exclusion, they should incorporate such language. Otherwise, the normal principles of interpretation will apply, including the principle that coverage provisions will be interpreted broadly and exclusion clauses narrowly.

The decision also provides helpful clarity on the definition of “damage” under a COC policy and the requirement of fortuity to trigger coverage.

Footnote

[1] 2014 BCSC 1568 (CanLII) [Acciona].

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/

Photo credit: miamism via VisualHunt / CC BY

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Broad Exclusions Do Not Apply Simply Because Peril Is In Chain Of Causation

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By: Lawrence G. Theall, Partner


The Ontario Court of Appeal recently held that a broad contributing cause exclusion does not apply simply because an excluded peril was included in the chain of causation. In O’Byrne v. Farmers’ Mutual Insurance Co.,[1] negligence of the insured’s tenant set in motion a chain of events ultimately leading to an oil spill after a furnace broke down. The “all risks” policy included an exclusion for “loss or damage directly or indirectly caused by, resulting from, contributed to or aggravated by: …e) centrifugal force, mechanical or electrical breakdown or derangement…” The insurer argued that since the furnace broke down, the loss was due to multiple causes including “mechanical derangement” of the furnace. The Court disagreed and looked at the evidence to determine the real cause of the loss.

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The insured owned a two-story apartment building which was insured pursuant to an “all risks” insurance policy issued by the Farmers’ Mutual Insurance Co. (“Farmers'”). An oil fired furnace was located in one of two residential apartments on the second floor. The tenant there inserted a piece of cardboard into the primary control of the furnace between two sets of contacts in order to bypass the thermostat, “presumably to keep the furnace in constant hot operation while she was away.” While the tenant was absent, there was a significant spill of heating oil from the furnace on to the apartment floor which leaked through the floorboards and saturated the main floor beam and ceiling of the building’s lower commercial units. The insured sought coverage under the policy. The insurer denied coverage for damage caused by the leaked oil. One ground for denial was reliance on the mechanical breakdown or derangement exclusion found in the “Perils Excluded” section of the policy as follows:

This Form does not insure against loss or damage directly or indirectly caused by, resulting from, contributed to or aggravated by:… (e) …mechanical or electrical breakdown or derangement in or on the “premises”…

The trial judge found on the evidence that the cause of the discharge of oil was the tenant inserting a piece of cardboard into the control panel. This, in turn, bypassed the thermostat which forced the furnace to run an excessively high temperature, causing the ignition component to fail [i.e. re-ignite] and oil to be pumped continuously without burning. Consequently coverage was provided under the policy.

Farmers’ agreed that one of the causes (i.e. the tenant’s negligence) was covered by the Policy. It argued that the other cause (i.e. the breakdown of the furnace) was “mechanical derangement” within the exclusion which should have been applied by the trial judge because the loss “was caused indirectly”, “resulted from”, “was contributed to” or “was aggravated by” a failure in the operation of the furnace due to a mechanical defect or derangement. It relied on a decision of the Supreme Court of Canada (Derksen[2]) as authority for the proposition that an exclusion can be worded to apply in case where there are multiple causes of a loss so as to exclude the entire loss.

The Court of Appeal disagreed and held that the oil spill was not a multi-causal loss. The loss in this case was not produced by two independent causes operating together, as was the case in Derksen[3]. It was caused by the tenant’s negligence (i.e. the proximate cause) that in turn led to a chain of events that culminated in the oil spill:

The fact that an element of the furnace ceased to operate does not engage the application of the mechanical exclusion. …it is not sufficient to find that some type of mechanical or electrical breakdown or derangement occurred: it is essential to examine the cause of that occurrence. The failure of a mechanical element of the furnace was not another cause of the oil damage, but rather something that occurred only after the tenant interfered with the proper operation of the furnace. Simply put, the oil damage was the result of external interference, and not a defect in the furnace.

The Court also added that, in any event, the oil damage was not the result of an internal defect in the furnace, but only occurred after the tenant interfered with its proper operation. The “mechanical derangement” exclusion consequently had no application to the facts of the case.

Footnotes

[1] 2014 ONCA 543 (C.A.).

[2] Derksen v. 539938 Ontario Ltd., 2001 SCC 72, [2001] 3 S.C.R. 398 (S.C.C.).

[3] In Derksen one independent cause was the negligent clean-up of the construction site where the operator placed a metal plate on the rear tow hook of a truck and the other independent cause was the negligent operation of the truck from which the plate flew off injuring the plaintiffs. They were independent concurrent causes because, although both needed to happen for the loss to have occurred, the operation of the vehicle was not a natural sequence or consequence of negligent site clean-up.

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).

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

Photo credit: LOLren via VisualHunt.com / CC BY

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