Insurance Coverage Decisions

While 2008 was somewhat less “busy” in the Supreme Court of Canada for insurers than 2007, it was actually a very productive year at the provincial Appellate level, particularly in Ontario, where a number of major decisions dealing with issues ranging from the duty to defend to proximate cause under all-risk property policies were release. While this made 2008 a difficult year to select a clear Top 10 hopefully, the following cases cover a reasonable range of decisions based on both geography and policy type. While all are not necessarily revolutionary in their overall approach or result, each decision nonetheless represents a significant statement in its specific area of coverage.

1. Canadian National Railway Co. v. Royal and Sun Alliance Insurance Co. of Canada

[2008] S. C. C. 66 (Supreme Court of Canada)

Type of Coverage: All-risks property

Issue: Faulty Design Exclusion

The underlying loss arose out of damage to a Lovat TBM (tunnel boring machine) being used by C. N. to tunnel under the St. Clair River. The TBM was the largest ever built by Lovat, and had a complex sealing system to protect the main bearing. After two months of operation, extensive damage to the sealing system was discovered. Experts concluded the loss was caused by deflection of the cutterhead, known as “differential deflection.” C. N’s claim was rejected by the property insurers, who relied on the “faulty design” exclusion.

C. N. sued for coverage and was initially successful at trial. The trial judge held that while the TBM’s designer had to accommodate all “foreseeable” risks of damage, the expert evidence was that the risk of excess differential deflection was not foreseeable. Though the TBM failed, it was not faultily designed.

The property insurers successfully appealed. The Ontario Court of Appeal noted the designer of the TBM conceded at trial he had anticipated differential deflection and had done calculations to try and accommodate for it. Therefore, as the TBM had failed as a result of differential deflection, its design was necessarily “faulty.” The policy was not intended to be a warranty of entrepreneurial design risk.

The Supreme Court of Canada allowed C. N.’s appeal by a narrow majority (4 to 3) and found in favour of coverage. The court’s decision hinged on the innovative nature of the TBM’s design. The standard is “state of the art” and not “perfect knowledge.” While a machine may be designed to meet all foreseeable risks, it may nonetheless fail due to some unanticipated operating condition or external force. Such a design is not “faulty.” The court cited the DeHavilland Comet and the Tacoma Narrows Bridge as examples of designs that were, at the time, “state of the art.” No engineer would have found fault with either design in advance of their failures. Both designs nonetheless failed when confronted with unknown or unexpected conditions during use. The Lovat TBM’s design met the “state of the art,” a determination supported by the substantial peer review and approval during the design phase to which the design was subjected.

2. Boliden Ltd. v. Liberty Mutual Insurance Co.

[2008] O. J. No. 1438, Ontario Court of Appeal

Type of Coverage: Director’s and Officers

Issue: Pollution exclusion

Liberty issued a directors’ and officers’ liability policy to Boliden Ltd. Boliden sought coverage for defence costs incurred in defending an action against its directors by shareholders alleging prospectus misrepresentation respecting certain events involving an environmental disaster at a Boliden zinc mine. Liberty denied coverage, relying on the D&O policy’s pollution exclusion.

Both the motion’s judge and the Court of Appeal found in favour of coverage for many of the pollution-related claims. As there were both covered and uncovered claims in the action, Liberty was required to pay 80 per cent of the defence costs pursuant to the policy’s allocation endorsement. The court held that for the pollution exclusion to apply, the loss had to be attributable directly to the pollution. The court cited a number of misrepresentations by the directors which did not relate to the collapse of the pond and subsequent pollution event. The exclusion only applied to pollution-related “losses”, and not all pollution-related “claims.”

3. Gibbens v. Co-operators Life Insurance Co.

[2008] B. C. J. No. 625, British Columbia Court of Appeal

Type of Coverage: Group Life and Disability

Issue: Independent external cause of illness

Gibbens was a beneficiary under a group disability policy issued by Co-operators. In early 2003, he had unprotected sex with three women and became infected with type 2 herpes simplex virus (HSV-2). This in turn caused inflammation of the spinal cord, paralyzing Gibbens from the mid-abdomen down. Gibbens made a claim under the group policy. Co-operators denied coverage, arguing the loss did not result “directly and independently of all other causes” nor “solely through external, violent and accidental means.”

Gibbens sued, and both the trial judge and subsequently, the Court of Appeal, found in favour of coverage. Gibbens’ paralysis did not arise naturally, but instead arose from the external introduction of the HSV-2 virus into his body by a sexual partner. This was sufficient to qualify as “accidental” based on the ordinary meaning of that term. The Supreme Court of Canada has granted Co-operators’ leave to appeal, and its decision will be eagerly anticipated in 2009.

4. York Region Condominium Corp. No. 772 v. Lombard Canada Ltd. [2008] O. J. No. 1377, Ontario Court of Appeal

Type of Coverage: Commercial General Liability

Issue: “Own work” exclusion

Bradsil constructed the plaintiffs’ condominium. Bradsil damaged an aquifer during construction, then negligently repaired it. This caused the garage of the condominium to sink. The building was evacuated to repair the foundation. The condo corporation sued Bradsil, and it tendered to the action to its CGL carrier Lombard. Lombard denied coverage on the basis the CGL policy did not cover Bradsil’s own negligent work. The condominium owners obtained a judgment against Bradsil and pursued Lombard for indemnity.

Both the trial judge and the Court of Appeal found in favour of coverage. The damage caused by Bradsil’s negligence was not to the actual foundation of the building, but to the “natural foundation,” the land beneath the building. This was part of the owner’s property and not Bradsil’s “work.” Lombard also argued there was no occurrence as the damage was not accidental. The court disagreed. The destruction of the natural foundation of the building was an “unlooked for mishap” from Bradsil’s perspective.

5. Caneast Foods Ltd. v. Lombard General Insurance Co. of Canada

[2008] O. J. No. 1811, Ontario Court of Appeal

Type of Coverage: All-risks property

Issue: Proximate cause

Lombard provided all-risks property coverage to Caneast, a pickle manufacturer. On Aug. 14, 2003, during the infamous blackout, the supply of electricity to Caneast’s refrigeration equipment was cut for 27 hours, spoiling a large quantity of pickles and cucumbers. Lombard denied coverage for the loss, relying on policy exclusions for “changes of temperature” and “mechanical or electrical breakdown or derangement.”

Both the motion’s judge and the Court of Appeal disagreed with Lombard. “Breakdown” and “derangement” referred to internal problems or defects in a machine, and not failure due to an interruption in the power supply. If Lombard had intended to exclude blackouts from the policy, it would have been a simple matter to do so. The court also rejected Lombard’s reliance on “changes of temperature.” The power outage was the proximate cause of the loss and not a change of temperature.

6. Boland v. Allianz Insurance Co. of Canada

[2008] O. J. No. 3000, Ont
ario Court of Appeal

Type of Coverage: Directors and officers

Issue: Knowledge of circumstances which might give rise to a claim

Boland, a director of a condominium corporation, was sued by a condominium purchaser for allegedly knowing, prior to the sale, that the seller had illegally enlarged his unit. Allianz had provided director’s and officer’s liability coverage to the condominium corporation since 1994 on a claims-made basis. Boland reported the claim to Allianz under the Apr. 30, 2005 to Apr. 30, 2006 policy term. The policy only covered claims where the directors had no knowledge, prior to the “effective date” of the policy, of the circumstances which resulted in the claim. The evidence demonstrated that Boland was aware of the problem as of 1998.

While the application judge held there was no coverage for Boland given his prior knowledge of the underlying circumstances, the Ontario Court of Appeal disagreed. The court held the “effective date” of a series of claims-made E&O or D&O policies is actually the date the first policy in the series was issued by the insurer. In the case of the condominium corporation, that would have been 1994. As there was no evidence that Boland had the requisite knowledge as of 1994, there was coverage for the loss.

7. AXA Insurance (Canada) v. Ani-Wall Concrete Forming Inc.

[2008] O. J. No. 2843, Ontario Court of Appeal

Type of Coverage: Commercial General Liability

Issue: “Own work” and “own product” exclusions

Ani-Wall constructed foundations for a builder using concrete purchased from Dominion Concrete. The concrete was defective, and the builder had to replace the foundations. Ani-Wall was sued and it tendered the claim to AXA for coverage. AXA denied on the basis of the CGL’s “your product,” “your work” and rip and tear exclusions. Ani-Wall argued Dominion was a “sub-contractor,” thus bringing the loss within an excep tion to the “your work” exclusion.

The Court of Appeal found in favour of coverage. The term “subcontractor” was to be construed broadly. It could reasonably be said that Ani-Wall subcontracted its obligation to supply concrete to Dominion.

8. Hanis v. Teevan

[2008] O. J. No. 3909, Ontario Court of Appeal

Type of Coverage: Commercial General Liability

Issue: Apportionment of defence costs between insurer and insured

Hanis was a professor hired by the University of Western Ontario in 1972. He was fired in 1987. He sued for wrongful dismissal, malicious prosecution and defamation. UWO tendered the action to its CGL carrier, Guardian. Guardian denied coverage for all claims. The trial judge, and subsequently, the Ontario Court of Appeal, disagreed with Guardian’s position. Guardian owed a duty to defend the defamation claims even though the wrongful dismissal claims fell outside of coverage. Guardian also appealed the trial judge’s determination it had to pay 95 per cent of the substantial defence costs incurred by the University.

The trial judge’s apportionment of costs was upheld by the Ontario Court of Appeal, which concluded that the language of the policy governed, and not principles of equity. The policy provided that Guardian would defend all covered claims, regardless of whether the defence of such claims would also assist in the defence of uncovered claims. There was nothing in the language of the policy that qualified Guardian’s defence obligation or suggested that it did not apply to so-called “mixed claims.” Defence costs will only be apportioned where it can be proven by the insurer that the defence of the uninsured claims would not overlap with the defence of the covered claims.

9. Trisura Guarantee Insurance Co. v. Belmont Financial Group Inc.

[2008] N. S. J. No. 436, Nova Scotia Court of Appeal

Type of Coverage: Professional Liability

Issue: Material misrepresentation

Belmont Financial was the administrator for a union pension plan. A union member, Richardson, requested the transfer of the commuted value of his pension to an RRSP. Belmont refused, and Richardson retained counsel. In May, 2006 Richardson’s counsel wrote to Belmont alleging a breach of its duty to Richardson, and advised he had instructions to commence action against Belmont without further notice. Five months later, Belmont applied to Trisura for professional liability coverage. When asked whether it had knowledge of any facts or circumstances which could give rise to a claim, Belmont answered “no.” Belmont was subsequently sued by Richardson and tendered the claim to Trisura. Trisura denied coverage, taking the position that the May 2006 letter constituted a “claim” made prior to the policy period.

While the trial judge sided with the insured, the Court of Appeal disagreed, and upheld Trisura’s denial. The May 2006 letter alleging a breach of duty along with a threat to commence an action against Belmont constituted a “claim.” The insured’s argument that the action arose out of negligent misrepresentation, which was different than the allegations contained in the demand letter, was rejected. A reasonable insured would have concluded from the May 2006 letter that Richardson might pursue a claim for negligent misrepresentation.

10. ING Insurance Co. of Canada v. Harder Estate

[2008] A. J. No. 579, Alberta Court of Appeal

Type of Coverage: Auto

Issue: Use or operation of a motor vehicle

Harder shot and killed his son in the cab of his truck. The boy’s mother sued Harder for the resulting psychological injuries she suffered. Harder tendered the action with his auto insurer, ING, alleging the loss arose from the “ownership, use or operation” of the truck. The motions’ judge, prior to the release of the Supreme Court of Canada’s decisions in Vytlingham and Herbison, found for the insured. ING successfully appealed. The Court of Appeal indicated the question was whether Harder’s actions were fairly within the risk created by his use or operation of the truck, or whether the use of the truck merely created an opportunity in time and space for the loss. Applying this test, the Court felt the elements of the loss did not meet the requirements for causation, as they did not show an unbroken causal chain connecting the operation of the truck to the shooting of the boy. The use of the vehicle was legally “interrupted” in order to commit the crime.

Chris Dunn is a partner with Dutton Brock, LLP and his practice involves representing and providing insurance coverage advice to those in the insurance industry.