March 22, 2016 by Chris Dunn, partner; and Josiah MacQuarrie, associate, Dutton Brock LLP
This was an active year at the provincial appellate court level, with two issues dominating the insurance coverage landscape. The first was the “faulty workmanship” vs. “resultant damage” debate, which was addressed by three separate appellate courts and is headed to the Supreme Court in 2016. The other is the application of the Supreme Court of Canada’s decision in Sattva Capital to standard-form insurance policies.
Ledcor Construction Limited v Northbridge Indemnity Insurance Company, 2015 ABCA 121; leave to appeal to SCC granted September 24, 2015 (Builders’ Risk – Poor Workmanship vs. Resultant Damage)
Ledcor dealt with the line-drawing exercise between faulty workmanship and resultant damage. A window cleaner damaged the windows of a commercial building. The owner sought indemnity from its builder’s risk insurer, Northbridge, for the cost to replace the windows. Northbridge denied the claim, taking the position that the loss was caused by faulty workmanship, and was therefore excluded. The trial judge initially found in favour of the insured, but the Alberta Court of Appeal disagreed, holding that the cleaning service was “workmanship”, and the cost to repair the cleaner’s faulty work was not “resultant damage”, but instead, a direct result of the faulty work. The court confirmed builder’s risk coverage is not intended to provide a construction warranty, in spite of fact that the policy covers “all-risks”.
The court also suggested that the deference standard of appellate review established by the Supreme Court in Sattva Capital may not be applicable in insurance cases where standard form language is used.
Leave to appeal was granted by the Supreme Court of Canada in September, which is helpful, given the starkly differing approach taken in the next decision on our list.
Acciona Infrastructure Canada Inc. v. Allianz Global Risks US Insurance Co., 2015 BCCA 347; leave to appeal to SCC filed October 21, 2015 (Course of Construction Policy – Defects exclusion)
The trial decision in Acciona made last year’s Top 10 list, a decision which has now been upheld by the B.C. Court of
Appeal. Acciona involved wide-spread cracking of concrete during the construction of a large hospital. The concrete failed to set properly due to improper formwork and re-shoring.The trial judge held that, while the improper formwork and shoring was faulty workmanship, the subsequent cracking of the concrete was “resultant damage”, and therefore outside the scope of the faulty workmanship exclusion. The BC Court of Appeal looked to the purpose of the faulty workmanship exclusion in deciding that there was coverage for this loss. The court found that the purpose of the exclusion was to prevent recovery for negligent work, but not the damage resulting from negligent work.
This is a completely different approach than that seen in Ledcor, and reconciling these two different approaches will be a challenge left to the Supreme Court of Canada, hopefully in 2016. Leave to appeal was filed on October 21, 2015.
Precision Plating Ltd. v. Axa Pacific Insurance Company, 2015 BCCA 277; leave to appeal to Supreme Court of Canada dismissed January 14, 2016 (CGL Policy – Pollution Exclusion)
Precision Plating is another case that we covered in 2014 that has now gone to appeal. Precision Plating was sued by a third party after a fire triggered the sprinkler system at its property, resulting in the overflow of dangerous chemicals. Axa denied coverage under its liability policy, relying on the absolute pollution exclusion. Although the claim alleged concurrent causes of damage from the fire and pollutants, the court found no possibility that the insurer would be obligated to indemnify the insured. Ultimately, the purpose of the absolute pollution exclusion is to exclude damage caused by the escape of pollutants, however caused. The fact that the escape of pollutants resulted from an insured peril (fire) did not nullify that purpose.
Similar to the Alberta Court of Appeal in Ledcor, the Court openly questioned whether the deference standard of appellate review from Sattva Capital applies to boilerplate insurance contracts.
The Supreme Court of Canada refused leave to appeal on January 16, 2016.
Allstate Insurance Company of Canada v. Aftab, 2015 ONCA 349 (Homeowner’s Policy – Exclusion for claims arising out of bodily injury to member of household)
The Ontario Court of Appeal has now clarified its earlier decision in Bawden v. Wawanesa Mutual Insurance Company, which refused to enforce the standard exclusion in homeowner’s liability policies for claims of bodily injury to members of the insured household.
Ms. Atfab sued a third party for injuries suffered by her young son while he was exiting a vehicle. The third party counterclaimed against Atfab for failure to supervise her child. Atfab sought coverage from her homeowner’s insurer Allstate. The application judge, relying on the Ontario Court of Appeal decision in Bawden, held that there was a duty to defend in spite of her son being a “member of the household”. Allstate successfully appealed based on the wording of its policy. The Court of Appeal distinguished Bawden, as the policy wording in Bawden excluded claims “for” injury to any person in the household, while the Aftab policy excluded coverage for claims “arising out of” an injury to a member of the household. This broader exclusionary language was sufficient to preclude coverage.
Unifund Assurance Company v. D.E., 2015 ONCA 423; C.S. v. TD Home and Auto Insurance Company, 2015 ONCA 424; leave to appeal to SCC filed September 29, 2015 (Homeowner’s Policy – coverage for bullying claims)
These companion decisions addressed coverage for claims arising out of bullying. The homeowner’s policies at issue contained typical language indicating that the insurer would pay all sums to which the insured becomes legally liable for unintentional bodily injury or property damage, but excluding claims resulting from intentional acts. An abuse exclusion sought to negate coverage for any failure to prevent sexual, physical, psychological or emotional abuse.
The insureds argued that the claims against them were based in negligent failure to supervise their children, not intentional acts. The insurers argued that such claims were derivative of the underlying claim of bullying, which was expressly excluded. The application judge held that the policies did not clearly exclude a “negligent” failure to prevent abuse, finding in favour of coverage. Unifund and TD successfully appealed. The Ontario Court of Appeal agreed that, regardless of the degree of intention, the only way to find liability on the parents was to find that they failed to prevent the bullying from happening, thus falling squarely within the abuse exclusion.
Onex Corporation v. American Home Assurance Company, 2015 ONCA 573; leave to appeal filed October 13, 2015 (D&O Policy – coverage for defence costs)
This is the second trip to the Court of Appeal for Onex v. American Home, a coverage dispute between Onex and American Home under both D&O and Run-Off policies. The 2015 appeal results from the Court of Appeal originally sending the case back to the Superior Court for a determination of coverage.
The new issue involved the interpretation of the term “Claim”. After finding that the full $15 million policy limit was available to Onex, the case made its way back to the Court of Appeal.The Court of Appeal agreed that the trial judge correctly used extrinsic evidence to resolve the ambiguity of the term “Claim” in Endorsement 14. The court pointed to the fact that the trial judge was not tasked with interpreting the policy afresh, but rather with using extrinsic evidence to resolve a specific ambiguity that had already been found. The Court agreed with the trial judge’s interpretation of Endorsement 16, holding that “Claim” was not used in isolation, but rather was part of the phrase “claim under this policy”, thus applying to claims under the Run-Off policy, which would not include claims under the Onex policy.
Leave to appeal to the Supreme Court of Canada was sought on October 13, 2015.
MacDonald v. Chicago Title Insurance Company of Canada, 2015 ONCA 842 (Modifying the Sattva Capital test for standard form contracts).
MacDonald represents the Ontario Court of Appeal’s opportunity to weigh in on Sattva Capital, and the standard of review on appeal as it applies to insurance contracts. In MacDonald, the Ontario Court of Appeal held that the Sattva Capital decision heightening the standard of appellate review does not apply in the case of standard-form contracts. Given the importance of appellate review in the case of standard form contracts, the standard of review must remain one of “correctness”. This allows appellate courts to step in more readily in any case where a trial judge has incorrectly interpreted a standard form insurance contract.
Daverne v. John Switzer Fuels Ltd., 2015 ONCA 919 (CGL Policy – Limitation Periods)
M&W was sued over a fuel tank leak, and tendered the claim to its liability insurer, Federated, which denied coverage on April 9, 2010. M&W sued Federated for coverage on March 11, 2012, almost two years later. On a summary judgment motion, Federated argued that the one-year limitation period set out in the policy, running from the insured suffering “loss or damage”, barred M&W’s claim. While the motion’s judge held in favour of coverage, the Ontario Court of Appeal agreed with Federated, holding that the one-year limitation period barred the claim. The Court held that the insured suffers “loss or damage” on the date of the insurer’s refusal to defend. Importantly, M&W’s claim was barred only with respect to defence costs, as the issue of indemnity hadn’t crystallized, as the action remained ongoing.
The finding that there can be two separate limitation periods for defence costs and indemnity represents a significant shift from the historic approach taken under commercial liability policies, where the limitation period for both defence costs and indemnity generally ran from the date of settlement or judgment. Of course, the policy language is paramount.
Monk v. Farmer’s Mutual Insurance Company (Lindsay), 2015 ONCA 911 (Homeowner’s Policy – exclusion for repair of faulty workmanship)
Monk put in a claim under his homeowner’s policy after existing property in the home was damaged by a contractor. Farmer’s Mutual denied the claim on the basis of the faulty workmanship exclusion. Monk sued for coverage. The court held that the claim was not for faulty workmanship, but rather “resultant damage”. The “faulty workmanship” exclusion was to be interpreted narrowly, while the grant of coverage in the “all-risks” policy should be interpreted broadly. The faulty workmanship exclusion was in conflict with the “property being worked on” exclusion, which expressly preserved coverage for resulting damage to other insured property. (For a detailed review of this case, see page 28.)
Ontario Society for the Prevention of Cruelty to Animals v. Sovereign General Insurance Co., 2015 ONCA 702 (CGL Policy – fortuity principle)
The OSPCA was sued for malicious prosecution and defamation, claims arguably involving intentional conduct. When OSPCA’s liability carrier, Sovereign General, denied coverage, the OSPCA sued. While Sovereign admitted that certain claims were covered by the policies, it nonetheless denied on the basis of certain exclusions in addition to the claims not being “fortuitous”. The Ontario Court of Appeal rejected Sovereign’s argument. The alleged damages were fortuitous, as there were no allegations that the OSPCA intended the harm that resulted from its actions. There is also no general insurance ‘rule’ that non-fortuitous claims are automatically excluded. The Court noted that the policy expressly covered several non-fortuitous acts such as malicious prosecution. It is only in circumstances where an intentional act accomplishes an intentional result that coverage will be unavailable.
Chris Dunn is a partner and Josiah MacQuarrie is an associate with Dutton Brock LLP. Both specialize in insurance litigation. Dutton Brock LLP is a member of Canadian Defence Lawyers (CDL), the only national organization representing the interests of civil defence lawyers. It offers broad opportunities to unite the defence bar over common issues, as well as providing accredited continuing legal education.