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

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By: Shaun A. Hashim, Litigation Associate


Many all-risks insurance policies exclude damage caused by a contractor’s faulty workmanship. The breadth of these “faulty workmanship” exclusions vary considerably. On one hand, a clause may narrowly exclude only the “cost of making good” the contractor’s defective work. On the other hand, a clause may exclude not only the cost of correcting the fault, but any damage caused as a result of the work performed. Such damage is commonly known as “resulting damage”. The Ontario Court of Appeal recently held that an insurer cannot exclude resulting damage by implication. Where a “faulty workmanship” clause is silent on resulting damage, such damage will remain covered. [show_more more=”Show More” less=”Show Less” color=”000000″ align=”center”] In Monk v. Farmers’ Mutual Insurance Co., the insured hired Pleasantview Log Restoration Systems (“Pleasantview”) to perform restoration work to the exterior of her log home. The restoration involved the use of water and required that windows and other seams be sealed. Upon completion of the restoration in 2008, the insured discovered water damage to her carpeting, bedroom wall, and light fixtures. She noticed additional damage in 2009 and 2010.

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

Summary Judgment Motion

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

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

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

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

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

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

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

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

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

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

Appeal

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

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

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

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

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

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

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

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

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

Footnotes

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

[2] Ibid at para. 43.

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

[4] Ibid at para. 34.

[5] Ibid at para 40.

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

[7] Ibid at para. 40.

[8] Ibid

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

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

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Missing the Mark: Contractor’s Use of Products in Violation of Code was Evidence of Negligence

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By: Shaun A. Hashim, Litigation Associate


Even for those who purchase and install products, compliance with statutory regulation is a must. In Taylor v. Great Gulf (Whitby) Ltd.,[1] a contractor who purchased and installed materials which were improperly labelled learned an important lesson in negligence law: although a breach of statutory authority does not alone give rise to civil liability, such breaches can be evidence of negligence. In deciding that there was a serious issue to be tried, the court took a broad view of causation and decided that it would be open to trier of fact to find that the defendant’s breach of code was substantially connected to the plaintiff’s injury. [show_more more=”Show More” less=”Show Less” color=”000000″ align=”center”] In Taylor, the defendant, I/Land Plumbing, was hired by the co-defendant, Gulf View Contracting Limited, to install a series of plumbing fixtures in residential homes. One of those residences was owned by the plaintiff. As part of its contractual duties, I/Land installed a toilet using a particular flex hose. Five years after installation, a flood occurred which caused damage to the plaintiff’s residence.

The plaintiff sued the defendant contractors, and I/Land moved for summary judgment alleging that there was no evidence of negligence on its part.

The Canadian Standards Association’s (“CSA”) standards, as well as provisions of the Ontario Building Code,[2] were central to the motion for summary judgment. The CSA requires that plumbing supply fittings be marked with particular certification information, while the Building Code states that products lacking these markings “shall be regarded as proof, in the absence of evidence to the contrary, that no certification exists”.[3] The hose installed by I/Land was in violation of the Building Code as it had not been certified by the CSA and did not have the requisite markings.

In its motion for summary judgment, I/Land argued that the mere absence of CSA certification was not the cause of the damage. The defendant pointed out that, according to expert evidence, both CSA-certified hoses and non-certified hoses had failings that would lead to failures after a period of time. Thus, I/Land claimed that the absence of a CSA certification is not the cause of the loss.

The Court stated that I/Land’s argument amounted to “the proposition that there is no evidence of negligence because there is no evidence of causation.” The Court rejected this argument, stating that “the mere breach of a statutory authority or code does not, of itself, automatically give rise to civil liability. However, failure to observe the requirements set out by regulatory authorities is evidence of negligence”.[4] The Court also pointed to other allegations of negligence that were confirmed by the discovery of I/Land’s witness, and were sufficient to show that there was a sufficient issue requiring a trial.

The Court also rejected I/Land’s causation argument that the expert evidence showed that even CSA-approved hoses had failed, so the mere absence of CSA approval could not have “caused” the hose to fail. The Court noted that the fact that CSA-approved hoses failed does not have any bearing on the question of whether I/Land was negligent in selecting a defective hose. In addition, the Court relied on Supreme Court jurisprudence which states that causation is not a simple “join the dots” exercise,[5] the Court held that the test for causation is whether there is “a substantial connection between the injury and the defendant’s conduct”.[6] The Court concluded that it was open to the trier of fact to determine that there was a substantial connection between I/Land’s selection and fitting of a defective hose and the damage. Accordingly, the summary judgment motion was dismissed.

Ultimately this case reaffirms that, although an otherwise innocuous breach of code (such as the failure to stamp a flex hose) may not in itself give rise to civil liability, a breach of code is nevertheless evidence of negligence. Given the court’s broad view of causation, an act of non-compliance with code can support a “substantial connection” capable of establishing causation in tort.

Footnotes

[1] Taylor v. Great Gulf (Whitby) Ltd., 2015 ONSC 6891 [Taylor].

[2] O. Reg 332/12.

[3] Ibid, s. 7.2.1.3(3).

[4] Taylor at para. 19. See also Ryan v. Victoria (City), [1999] 1 S.C.R. 201 (S.C.C.).

[5] Clements (Litigation Guardian of) v. Clements, 2012 SCC 32.

[6] Hanke v. Resurface Corp., 2007 SCC 7.

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

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

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Bad Chair Day: Nerland v. Toronto-Dominion Bank

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By: Camille M. Dunbar, Litigation Associate


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

In Nerland, the 61-year-old plaintiff took a seat on a chair at a sit-down wicket at a branch of the Toronto-Dominion Bank (TD). While a bank employee went off to complete the plaintiff’s transaction, the plaintiff leaned forward to pick up some documents on the counter and the chair went out from under him. He fell to the floor, striking his head, neck, shoulder and elbow, suffering injuries. [show_more more=”Show More” less=”Show Less” color=”000000″ align=”center”]

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

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

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

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

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/

Photo credit: trix0r via Visualhunt.com / CC BY

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

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

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

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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