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

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

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

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

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

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

The Decision in Nasr

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

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

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

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

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

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

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

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

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

Conclusions

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

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

Footnotes

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

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

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

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

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

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

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

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

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

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

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

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By: Melissa A. Wright, Litigation Associate


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

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

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

2. Exclusions…

(h) “Property damage” to: . . .

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

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

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

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

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

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

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

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

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

The exclusion at issue in Ledcor was, as follows:

This policy section does not insure: […]

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

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

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

Footnotes

[1] 2017 ONCA 298.

[2] 2017 ONCA 298 at para 8.

[3] 2017 ONCA 298 at para 11.

[4] 2017 ONCA 298 at para 17.

[5] 2017 ONCA 298 at para 18.

[6] 2017 ONCA 298 at para 20.

[7] 2006 NCLA 55.

[8] 2017 ONCA 298 at para 24.

[9] 2016 SCC 37.

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

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

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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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Pure Economic Loss Claim Applies To Patent Defects That Are Not Imminently Dangerous

Jeff

By: Jeffrey A. Brown, Partner


The Manitoba Court of Appeal has held that a defendants’ motion for summary judgment should be dismissed, rejecting their argument that claims for pure economic loss for patent defects that are not imminently dangerous should not proceed to trial. This is yet another in a long line of cases interpreting the seminal Supreme Court of Canada decision in Winnipeg Condominium Corp. No. 36 v. Bird Construction Co.,[1] where the Court held a defendant liable for a dangerous defect even though there had been no damage to persons or property (i.e. a pure economic loss claim).

In Winnipeg Condominium Corp. No. 613 v. Raymond S.C. Wan Architect Inc.,[2] the defendant architectural firm and its principal had provided architectural services for the design and construction of a condominium. The condominium suffered from defects including water pooling in the lower levels of the building’s parkade. The plaintiff’s expert opined that the parkade was not in danger of imminent collapse, and that it might take decades before it would be in danger of collapse. Moreover, there would be indications of a pending collapse before it occurred.

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The defendant architects stated that there were two principles arising out of the Bird Construction[3] case referred to above. First, that the reasoning in that case only applies to latent defects. Second, that recovery is limited to situations where the defect causes a real and substantial danger to persons or other property, or the imminent possibility of danger. They argued that the defect in the case at bar is patent, not latent, and that any potential danger arising out of the defect was years away from becoming dangerous, if at all.

The motion was heard by a Master at first instance.[4] The Master determined that although there was a latent defect at issue in Bird Construction, there is no mention of a latency requirement in the rest of the decision. Moreover, the Court referred to another decision of the Manitoba Court of Appeal[5] that permitted a claim for pure economic loss to proceed to trial even though it involved a patent defect (although the issue of a patent vs. latent defect was not argued before that court). With respect to the claim of an imminency requirement, the Court noted that this issue had been mentioned in Bird Construction and litigated in other decisions, and the courts have regularly permitted claims for non-imminent dangerous defects to proceed to trial. The Court noted that it would encourage reckless and hazardous behaviour if a defect was allowed to develop into an imminent defect before it could be the subject of a claim. It was more appropriate to permit the plaintiff to take steps to repair the defect before it cause injury. Thus, the Court denied the defendants’ motion and permitted the claim to proceed to trial.

This case was appealed to a judge in an unreported decision who adopted the Master’s decision and dismissed the appeal in a short endorsement. The defendants appealed to the Manitoba Court of Appeal, which dismissed the appeal. The Court agreed that since the law on liability for pure economic losses was still developing, it would be inappropriate to dismiss the claim before trial.

This case is an accurate statement of the law of pure economic loss, and protects the advances made in the Bird Construction decision. It makes little sense to require that a defect be imminently dangerous and/or a latent defect before a plaintiff could be entitled to claim for pure economic loss. We expect that if and when these issues are ultimately determined at trial, the Court will agree with the reasoning of the Court herein.

Footnotes

[1] [1995] 1 S.C.R. 85

[2] 2015 MBCA 49

[3] [1995] 1 S.C.R. 85

[4] 2014 MBQB 13

[5] Brett-Young Seeds Ltd. v. K.B.A. Consultants Inc., 2008 MBCA 36

Jeffrey A. Brown is a partner at Theall Group LLP. He is engaged in all aspects of the defence and trial of civil matters, including insurance law, commercial litigation, product liability and enforcement of secured transactions. Jeff has appeared as counsel at the Ontario Superior Court of Justice, Divisional Court and Court of Appeal. He was admitted to the Ontario Bar in 1999 after having completed his articles as a law clerk at the Federal Court of Canada for the Honourable Mr. Justice Teitelbaum. Jeff is 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: kennymatic via Visual hunt / CC BY

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A Cautionary Tale: The Party That Imposes Specifications For Methods And Materials Is Responsible For Its Defects

Jeff

By: Jeffrey A. Brown, Partner


The Ontario Court of Appeal has held that where a plaintiff has imposed the methods and materials that the defendant must use to complete a project, the defendant is absolved of responsibility if the project proves to be defective, as the risk has been allocated to the plaintiff. Although this decision is not a typical products case, the considerations are similar to those that a court reviews in a case involving the implied warranty of fitness under the provincial Sale of Goods acts.

In Bruell Contracting Ltd. v. J. & P. Leveque Bros. Haulage Ltd.,[1] the Ontario Ministry of Transportation (“MTO”) awarded a contract to Leveque Bros. Haulage Ltd. (“Leveque”) to resurface 17.9 kilometers of road. The contract imposed certain specifications regarding the methods that Leveque was required to use. Shortly after Leveque completed the work, the road deteriorated for a number of reasons. As a result, MTO insisted that Leveque remove the defective surface and reapply a new one. After the road was repaired, MTO refused to compensate Leveque for the additional work and Leveque brought an action against MTO for breach of contract.

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MTO’s position is that there was an implied term in the contract that the binder and aggregate (which are the main components of the surface treatment) would be compatible and Leveque was obligated to test them to ensure their compatibility. It appears that the binder and aggregate required the addition of an anti-stripping additive to be compatible; however, the aggregate and binder were tested by MTO and met all tests required by the specifications. Leveque claimed that the road surface deterioration was caused, in part, by excessive application of the binder, as directed by MTO, and heavy truck traffic permitted by MTO before the road surface had cured.

The trial judge’s decision turned on the designation of the type of contract between MTO and Leveque: i) Performance Specification Contact; or ii) Method Specification Contract. In a Performance Specification Contract, the contractor must carry out the terms of the contract and adequately perform the task. If the contract is to resurface a road, the road must be resurfaced properly without defects. The contractor takes on a “performance” risk and, as a result, charges a higher price. In a Method Specification Contract, one party specifies the methods and materials that will be used in the project. These contracts place less risk on the contractor because the methods and materials are already specified, and the contractor is only required to follow the specifications. In these contracts, the contractor/expert takes on less risk and charges a lower price.

The trial judge accepted the evidence of the contractor’s expert who opined that the specified tools, emulsion, aggregate, equipment and instructions for surface preparation were controlled by MTO. Moreover, in comparison with other MTO contracts, there was no specific warranty, no requirement for compatibility testing, and no performance specifications. The trial judge accepted that this made the contract more consistent with a method specification contract.

The Ontario Court of Appeal affirmed the trial judge’s decision, finding no error in the characterization of the contract. The Court stated that since Leveque used the materials specified and applied them in accordance with the contract specifications, the responsibility rested with MTO.

This decision illustrates that the court will not imply performance requirements into a contract where the contract does not impose performance criteria. A contractor is entitled to simply follow the specifications and methods mandated in the contract, and take consolation in the assurance that a court will protect them if the resulting product is defective.

Note the relationship between the issues in this case and those involving products that are subject to the implied warranties in provincial Sale of Goods acts. The implied warranty of fitness set out in Sale of Goods acts implies a warranty on the seller that the product will be fit for its purpose unless it can be shown that the buyer did not rely on the expertise of the seller. In other words, the seller is not responsible if the buyer relies on its own expertise. The method specification contract vs. performance specification contract dichotomy in the case at bar is similar and is a way for the parties to appropriately allocate the risk of defect.

Footnote

[1] 2015 ONCA 273

Jeffrey A. Brown is a partner at Theall Group LLP. He is engaged in all aspects of the defence and trial of civil matters, including insurance law, commercial litigation, product liability and enforcement of secured transactions. Jeff has appeared as counsel at the Ontario Superior Court of Justice, Divisional Court and Court of Appeal. He was admitted to the Ontario Bar in 1999 after having completed his articles as a law clerk at the Federal Court of Canada for the Honourable Mr. Justice Teitelbaum. Jeff is 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/

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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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Product Liability Risks And Market Globalization

Jeff

By: Jeffrey A. Brown, Partner


Globalization of industry has resulted in materials and components often being supplied from multiple markets across the world. When something goes wrong, and claims arise, it can prove difficult to enforce your contractual rights to indemnity. What could go wrong?

Unfortunately, lots. If your client, as the manufacturer or local distributor, has not taken effective steps to ensure that its product is manufactured properly, your client could find itself facing substantial fines from regulatory authorities along with class actions that can put a serious dent in your client’s bottom line.

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As experienced product liability litigators, we see a number of common difficulties that might be avoided through effective negotiations and risk allocation When advising your client, you should be discussing the issues outlined below as part of any supply agreement, particularly when it involves multiple jurisdictions.

Product Design:

  • Who is responsible for the design of the product or the particular component?
  • If the supplier is responsible, what steps can your client take to ensure that the component is acceptable?
  • Will there be a clear line between your client’s responsibilities and those of the supplier, which can be memorialized in the agreement?
  • Consider whether your client should be entitled to access all drawings for design and the manufacturing process. Do you want your client to be involved in the process or should it be left to the supplier in order to keep those roles clear and distinct?

Product Testing:

  • Who tests the product? It is preferable that all product testing be performed at an independent laboratory. If product testing takes place at the supplier’s facility, it should be performed under the supervision or audited by an independent party, and possibly including one of your company’s knowledgeable representatives. Again, it should be clear that the responsibility for testing and its accuracy will always rest with the supplier.

Product Certification:

  • Is independent certification necessary for the component, and if so, how is certification achieved?
  • Is the certification authority used by the supplier reputable? Your client’s defence that the product was certified to all safety standards, will ring hollow if the certification authority merely rubber-stamped the certification. Consider retaining independent counsel in the supplier’s jurisdiction with product liability expertise. Their assistance can help your client evaluate the certification process, and other local issues, making the process more efficient and reliable.

Design & Manufacturing Consistency:

Where a company has effectively managed the above risks, it often takes a company by surprise when its product ultimately experiences widespread failures: “We thought we did everything right!” Unfortunately, the supplier sometimes makes changes to its product or components without notice. Where your client is purchasing an integrated component, it may be impossible to identify changes just by looking at the product. The solution can be expensive. Therefore, consider the following:

  • The supply contract should include a right to audit the supplier’s facilities to ensure that the product is being made properly.
  • If the supplier’s component is such that a change could only be identified by testing, then your client may need to ensure testing is done on a regular basis.

Notice of Failure:

If something goes wrong, the only way to get ahead of the problem is to know it exists. In order to avoid disputes, suppliers may not reveal the existence of a problem, or the extent of it. Information sharing is crucial.

  • It may be that the component in your product is sold to other companies. You need to ensure that contract terms require that your client is immediately advised if there are failures in other products using that same component. Unfortunately, it is ultimately the integrity of your client’s supplier that dictates whether it will be forthright with your client regarding any failures, or whether it will try to “manage” the problems themselves.

The issues outlined above are a subset of the opportunities available to limit your risk of product failures. The financial stability of the supplier can be crucial. You should also attempt to manage risk via contractual provisions such as insurance, the right to control the defence of any claims, defined responsibilities, indemnification, and law of the contract.

Finally, you should consider how you will enforce all of these rights: can they be backstopped with some form of attornment, bonding or insurance so that you are not fighting jurisdiction battles when claims arise? Once you have considered all of these issues, you will be in a better position to impose responsibility on the supplier.

Jeffrey A. Brown is a partner at Theall Group LLP. He is engaged in all aspects of the defence and trial of civil matters, including insurance law, commercial litigation, product liability and enforcement of secured transactions. Jeff has appeared as counsel at the Ontario Superior Court of Justice, Divisional Court and Court of Appeal. He was admitted to the Ontario Bar in 1999 after having completed his articles as a law clerk at the Federal Court of Canada for the Honourable Mr. Justice Teitelbaum. Jeff is 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/

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