Top 10 Insurance Decisions

After a lively 2012, insurers saw a relatively quiet year at the Supreme Court of Canada in 2013. Picking up the slack was the Ontario Court of Appeal, which rendered a number of significant decisions in the area of directors and officers liability, homeowners coverage and commercial general liability coverage. And here we go……

Goodyear Canada Inc. v. American International Cos.
June 13, 2013, Ontario Court of Appeal

Commercial General Liability

Goodyear faced claims for selling asbestos related products from 1968 onwards. Goodyear had liability insurance from 1968 through to 1980, however, from 1980 to 1985, Goodyear elected to self-insure. Starting in 1985, coverage for asbestos risks became unavailable in the market as insurers ceased to underwrite the risk. On motion to the Ontario Superior Court of Justice, Goodyear sought to compel its “1968 through 1980” insurers to cover its “post-1985” liabilities. The argument was based on the “Stonewall Principle”, which had been adopted by a number of U.S. States, and which held that an insured does not elect to self-insure during a period for which coverage was not commercially available. As such, the insurers on risk during the “insured” periods should pick up the shortfall in coverage for the “uninsurable” time periods.

Justice Stinson rejected Goodyear’s argument and his decision was upheld on appeal. The Ontario Court of Appeal cited four reasons for rejecting the “Stonewall Principle” – (1) it is inconsistent with the language of the pre-1980 policies, which only covered damage occurring “during the policy period”, (2) the “Stonewall Principle” was not universally accepted by all states, and in fact, was seen as “highly suspect” by many U.S. courts, (3) Ontario policy considerations militated against its adoption, and (4) the law of Ontario historically applied the pro-rata allocation method, which was inconsistent with the “Stonewall Principle”. Goodyear chose to continue manufacturing asbestos products knowing that insurance was no longer available and as such, should be held to its business decision to court the risk.

Bawden v. Wawanesa Mutual Insurance Company
November 26, 2013, Ontario Court of Appeal

Homeowner’s Insurance (Liability)

The insured’s eight year old daughter was injured after being struck by a car. She sued the driver and owner of the car, and they in turn claimed against her parents for failure to supervise. The parents sought liability coverage from Wawanesa, their homeowners insurer. Wawanesa denied coverage, relying on the policy’s exclusion for injuries to members of the household. The exclusion precluded coverage “for bodily injury to you or to any person residing in your household.” Historically, similar exclusions had been upheld by Canadian courts.

In finding that the exclusion did not apply, the Court of Appeal focused on the difference between the language in the coverage grant and that of the exclusion. The policy covered bodily injury or property damage “arising out of your personal activities anywhere in the world.”, while the narrower exclusionary language excluded coverage “for bodily injury to you or to any person residing in your household…” The Court of Appeal held that the claim was not one “for” the injuries to the daughter, but instead, was one “for” contribution and indemnity arising out of negligent supervision.

Onex Corp. v. American Home Assurance Co.
February 25, 2013, Ontario Court of Appeal
leave to appeal to S.C.C. denied

D&O Policy

Onex and certain of its directors sought reimbursement for defence costs and settlement amounts paid in an action commenced against them in Georgia. That litigation was brought by the trustee in bankruptcy of a former Onex subsidiary, Magnatrax Corp., claiming that various officers and directors of Onex breached their duties to Magnatrax. The action was settled for $9.25 million and Onex incurred approximately $35 million in defence costs.

Onex had a 2002-2003 D&O policy with American Home, and purchased a “run-off” policy when it looked like Magnatrax might be sold. The “run-off” coverage added an endorsement which precluded coverage for claims being made by Magnatrax itself (Endorsement 14), and an endorsement reducing the limits of the “run-off” policy where there was other coverage available from American Home (Endorsement 16).

Onex had provided notice of circumstances to American Home under the 2002-2003 policy(s) after receiving a demand letter from Magnatrax’s counsel in August, 2003. When the Trustee for Magnatrax subsequently sued the Onex directors and officers in May, 2005, they tendered the claim to American Home, seeking coverage under the 2004-2005 D&O policies. American Home denied coverage, taking the position that the claims had been “reported” to American Home under the 2002-2003 policies. American Home’s position was ultimately upheld by the Court of Appeal.

American Home also denied coverage on the basis of endorsement 14, arguing that the claims were being made against the directors and officers of Magnatrax by Magnatrax itself. The motions judge disagreed, holding that the claims were being made against the directors and officers, in part, in their capacity as directors and officers of Onex. As such, the “insured” versus “insured” exclusion did not apply. The judge found endorsement 14 to be unambiguous in this regard. The Court of Appeal disagreed, holding that competing interpretations of Endorsement 14 were available. However, with no other interpretive aids to assist, and no extrinsic evidence, the Court of Appeal was left to refer the matter back to the Superior Court to determine which interpretation should prevail. The same result held with the similarly worded Endorsement 16. American Home had already accepted that the Georgia action triggered coverage under the “run-off” policy, and ultimately paid $15 million in legal fees under that policy.

Sam’s Auto Wrecking Co. v. Lombard General Insurance Co. of Canada
March 28, 2013, Ontario Court of Appeal

Commercial General Liability

Sam’s Auto Wrecking opted out of worker’s compensation for its management-level employees, instead purchasing coverage privately. The insured’s vice president was seriously injured on the jobsite when he was run over by a crawler crane. When he sued, Sam’s sought coverage from its CGL insurer Lombard after settling the claim for $750,000. Lombard denied coverage on the basis of the “employee injury” exclusion. The trial judge agreed with Lombard’s position, noting that CGL policies are intended to protect against losses caused to third parties, and not employees of the insured. Regardless of one’s status as an “employee” or “executive”, all individuals were “employees” of the company in the sense s by the exclusion.

Dominion of Canada General Insurance Company v. Hannam
May 24, 2013, Newfoundland Court of Appeal
leave to appeal to S.C.C. denied

Homeowners’ Coverage – Liability

The insured family had a homeowner’s policy with Dominion. The son was operating an ATV with the father’s consent. The son permitted a friend to drive the ATV in a rock quarry, and a passenger was seriously injured during a crash. The passenger sued. The defendants included the father, who owned the ATV, the mother and the son. The claim
s against the father included vicarious liability as “owner” under statute for the negligent operation of the ATV and failure to supervise the son. The mother was sued for failure to supervise the son. The son was sued for consenting to the negligent use of the ATV by the friend.

Dominion denied coverage on the basis of the exclusion for “ownership, use or operation, by you or on your behalf, of motorized vehicles…” The policy did, however, extend coverage for the use of any ATV not “owned” by the insured. Dominion brought an application denying a duty to defend. The application judge found coverage for the father, son and mother holding that the claim(s) being made against them arose out a failure to supervise and not the “use or operation” of the ATV. Dominon successfully appealed.The Court of Appeal supported a denial of coverage to the father, as his failure to supervise was inextricably linked to the “use or operation” of the ATV. While the same held true for the son and mother, they were covered as they did not “own” the ATV. Leave to appeal to the Supreme Court of Canada was refused.

Boyce v. The Co-Operators General Insurance Company
May 8, 2013, Ontario Court of Appeal

Property Insurance

The insured’s business suffered a loss in 2010 as a result of odour contamination. Co-Operators alleged that the odour was caused by a skunk and denied coverage. The insured filed a proof of loss in December 2010, and commenced an action seeking coverage in February 2012. The insured sued within the two-year period set out in the Limitations Act, but not the one-year limitation period in the statutory conditions. Co-Operators moved for summary judgment on the limitation issue.

The motions judge held in favour of the insured, as the insurance policy lacked the necessary language to be a “business agreement” under the Ontario Limitations Act. Had it been a “business agreement”, the insurer could have contracted out of the two year limitation period. Co-Operators successfully appealed. The Court of Appeal held that commercial policies incorporating a one-year limitation period are “business agreements”, and therefore the limitation period was enforceable. However, if the coverage is for personal, family or household purposes, then the two-year limitation period applies.

Turpin v. The Manufacturers Life Insurance Company
June 17, 2013, British Columbia Court of Appeal

Travel Insurance/Reasonable Expectations

Turpin incurred medical expenses in California and sought indemnity from Manulife under a travel insurance policy. Just prior to her trip, she went to her doctor and the hospital for abdominal pain. She was given medication and her pain subsided. She subsequently purchased a travel insurance policy with Manulife, but did not read the policy wording. While in California, Turpin incurred $27,000 worth of medical treatment for abdominal pain and, upon her return to Canada, underwent an appendectomy. Turpin’s claim to Manulife was denied on the basis of the policy’s exclusion for pre-existing medical conditions. Turpin sued.

The trial judge held that the policy’s exclusions were unambiguous. Turpin had suffered from an unstable medical condition in the 90 days prior to travel, and had received treatment prior to departure. However, the “reasonable expectations” doctrine permitted the judge to find coverage regardless of the clear exclusion, as Turpin had a “reasonable expectation” of coverage. The Court of Appeal disagreed, upholding Manulife’s denial of coverage. The Court of Appeal held that the “reasonable expectations” doctrine could only to be applied in circumstances where the policy language was ambiguous. Here, where there was no ambiguity, the doctrine was of no application.

Aviva Insurance Company of Canada v. Lombard General Insurance Company of Canada June 20, 2013, Ontario Court of Appeal

Ranking of Policies/Equitable Contribution

Eight legal proceedings were commenced in the wake of a fire at a Toronto apartment that resulted in the deaths of six people. The building owner and property manager were both found liable. Lombard provided a primary policy of $1 million and an excess policy of $9 million to both the owner and property manager. Aviva provided a $5 million excess liability policy insuring only the property manager. Lombard appointed a single counsel to defend the owner and property manager. Aviva did not participate in the defence. At the end of the underlying trial, liability was not apportioned between the owner and property manager as “one defendant”.

Lombard had previously received an order from the Ontario Superior Court of Justice that the Aviva excess policy ranked ahead of the Lombard excess policy with respect to the property manager’s liability. In the wake of that decision, Lombard refused to satisfy any portion of the judgment in excess of its $1 million primary policy. Aviva was left to pay the remaining $2.5 million. Aviva successfully sued Lombard to recover 50% of that payment. The Court of Appeal held that principles of restitution, equitable contribution and unjust enrichment all applied to hold Lombard liable to pay 50% of the excess judgment based on Lombard having been the sole excess insurer of the owner.

ACE INA Insurance v. Associated Electric & Gas Services Limited
November 14, 2013, Ontario Court of Appeal

Commercial General Liability

After an explosion in 2008, various lawsuits were brought against Toronto Hydro seeking in excess of $50 million in damages. ACE provided primary insurance of $1 million per occurrence. That policy had a duty to defend, with no limit for defence costs and without such costs reducing the limit of liability. Toronto Hydro had a $45 million excess policy with AEGIS. The AEGIS policy did not contain a duty to defend, though AEGIS did have a right to associate in the insured’s defence. The payment of defence costs, if required, under the AEGIS policy, eroded the policy limits.

ACE brought an application seeking a contribution to defence costs from AEGIS. ACE argued that both it and AEGIS shared exposure to risk, and therefore should share equally in the defence costs. Both the application judge and the Court of Appeal sided with AEGIS. Equitable contribution only arises when insurers cover the same risk. The AEGIS policy could only be called upon to defend where other insurance was not valid and collectible. The Court of Appeal reiterated that, absent a duty to defend in the excess policy, there was no entitlement on the part of a primary carrier to a defence cost contribution simply because the excess carrier was exposed to indemnity.

Certain Underwriters at Lloyd’s of London v. All Spec Home Inspections et al.
November 19, 2013, Ontario Superior Court of Justice

Professional Liability

The insured was a self-employed home inspector who had a professional liability policy with Lloyd’s written on a “claims made and reported” basis. The insured inspected a home in July of 2010. A contractor was subsequently killed on August 16, 2010 after coming into contact with an exposed electrical wire that the inspector had missed. The Ministry of Labour interviewed the insured and also conducted an inquest. When the insured renewed his policy nearly a year after being interviewed by the Ministry, he was asked if he was aware of any situation or circumstance which may in the future result in a claim. He answered “no”.

In November, 2011, the family of the deceased contractor sued a num
ber of parties, including the home inspector. The inspector tendered the action to Lloyd’s for coverage. Lloyd’s denied on the basis of the failure to disclose circumstances which could have given rise to a potential claim. Lloyd’s successfully applied to the Ontario Superior Court of Justice for a declaration that there was no coverage. The application judge agreed that the insured’s failure to disclose the circumstances, including the Ministry of Labour investigation, violated the terms of the policy. _

Chris Dunn is a partner at Dutton Brock LLP. His practice involves advising insurers, corporations and individual on insurance and reinsurance coverage issues, with a particular focus on commercial general liability policies. Josiah MacQuarrie is an associate at Dutton Brock LLP. His practice is dedicated to insurance litigation, with a focus on the defence of personal injury and property claims, insurance coverage and subrogation.