McGrimmon v. Personal: Anomaly or Harbinger?

Justice McKinnon of the Ontario Superior Court recently found in McGrimmon v. Personal Insurance, 2010 ONSC 108, that a homeowner’s insurer owed a duty to defend to the defendant owners/vendors of the insured property in respect of allegations of misrepresentation, non-disclosure and negligence relating to alleged defects and deficiencies in the property. This decision has potentially far-reaching implications because it suggests that depending on the wording of a policy and what is alleged, an insurer may be obliged to defend insureds who have made misrepresentations with respect to the sale of not only realty but, for example, any other item that an insured might sell. We query whether a liability policy is intended to provide such extensive protection.

The plaintiffs sued McGrimmon and Sholea and others with respect to the construction and sale of a new home to the plaintiffs. The Personal Insurance Company issued a homeowner’s liability policy to McGrimmon and Sholea (the insureds), which covered them during the time they occupied the property.

The insureds entered into an Agreement of Purchase and Sale with the plaintiffs. When the plaintiffs took possession of the property, they allegedly discovered numerous defects and deficiencies with the house and property. The allegations against all of the defendants included faulty design and poor construction, negligent inspection, poor supervision of the design, inadequate repair, negligent regulation, misrepresentations, failure to disclose the condition of the property, breach of a contractual duty of care and other duties. The specific allegations against the insureds were with respect to misrepresentations, nondisclosure and negligence.

The third party liability coverage in Personal’s homeowner’s policy stated the insurance “applies to your legal liability for injury to others or damage to their property arising out of your premises or your personal actions.” It appears the coverage grant also provided that the insurance “applies only to accidents or occurrences which take place during the term of this policy,” and that payment would be made for “all sums which you become legally liable to pay as compensatory damages because of bodily injury or property damage.”

The coverage also extended to claims arising from “personal liability” — being “legal liability for unintentional bodily injury or property damage arising out of your personal actions anywhere in the world.” But, there was no insurance for claims “made against you arising from damage to property you own, use, occupy or lease, and for “premises liability,” — being “legal liability for unintentional bodily injury or property damage arising out of your ownership, use, or occupancy of the premises.” Again, there was no insurance for “claims made against you arising from damage to property you own, use, occupy or lease.”

It was argued by the insurer the claim was, in its “pith and substance,” a claim for breach of contract and breach of warranty and that the “nature of homeowner’s liability insurance is to cover accidental or unforeseen losses only,” and that liability insurance does not cover losses which are neither fortuitous nor contingent.

While the court acknowledged these arguments, it appears the decision on this point turned on whether or not a breach of contract is covered by a homeowner’s policy. After reviewing the authorities referenced by both parties, McKinnon expressed the view, at para. 42 of his reasons, that a “liberal interpretation of the wording employed in the Personal policy is preferable to effectively ‘reading in’ an exclusion that is not identified. If Personal wished to exclude liability to third parties for breach of contract it would have been simple to include the exclusion in the contract of insurance. They did not. The broad wording of the coverage would allow a defence to an action for breach of contract.” His Honour concluded that the “assumed exclusion” refers only to intentional tort and not to breach of contract, particularly given that it has “become the fashion to plead both tort and breach of contract in actions that are essentially actions for unintentional tort.”

McKinnon goes on to find that even if he is incorrect in this view, the pith and substance of the claim “sounds in negligence including negligence in general, negligent misrepresentation, negligent construction and negligent design,” which are insured.

The other principal argument addressed by the court was whether the loss was excluded because it arose from “damage to property you own, use or occupy,” and if the time period during which to consider this was when the alleged representations were made by the insureds at the time of the Agreement of Purchase and Sale when they owned the property.

McKinnon held that because the exclusionary words were not cast in the past tense, they did not apply. He noted that exclusionary words “must be given their literal meaning and where any ambiguity might arise, interpreted in favour of the insured”. He continued:

The insurance contract covers third party liability. It is very broad and portable. It covers occurrences anywhere in the world. It is obvious that claims upon a policy will invariably be brought after an “occurrence” . . . If the occurrence took place within the applicable policy period of the contract of insurance, a duty to defend arises, even though the policy is no longer in force. The duty to defend is subject to express exclusions. In this case there is no express exclusion for property that was “owned, used or occupied or sold.” As stated, had the past tense been employed in the exclusionary words, the defendants would be denied coverage.

McKinnon concludes his reasons with the following observation: Fundamental to a determination of whether the duty to defend arises is the fact that contracts with insurance companies are not subject to negotiation. The wording of the policies is written in stone. The buyer must “take it or leave it”. The buyer is looking for peace of mind when purchasing insurance. Peace of mind should only be disturbed in the face of clear, unambiguous wording.

In the instant case, the third party liability coverage is broad and portable and I find the claim gives rise to the duty to defend. In essence, the action is one of negligence. The negligence is not subsumed by the assertion of a breach of contract. It is disparate, based on a fair reading of the claim. In the result, even if I am wrong that a claim for breach of contract is not insured, there is no doubt that the claim for negligence is insured.

Comment

This decision and McKinnon’s reasons raise a number of issues and concerns as follows:

1) Was there, in fact, an “occurrence” in this instance? Were the allega- tions against the defendant insureds ones that could be considered to be fortuitous, i.e., either an “unforeseen mishap” or an “untoward event,” which are commonly considered to be what an accident or occurrence entails?

The allegations are not set out in detail and, accordingly, it may be possible there were specific allegations relating to, for example, negligent construction, that, taken with other pleas in their entirety, might be viewed as constituting an “occurrence.”

Moreover, it could be argued that the manner in which the policy was worded does not seem to emphasize the need for there to be an occurrence and, therefore, this may have appropriately impacted on how the court interpreted the policy in terms of whether or not a fortuitous event was required.

In the final analysis, as the Ontario Court of Appeal has stated in Bridgewood v. Lombard, [2006]
O.J. No. 1288 (C. A.) the wording of the policy prevails over legal maxims. Moreover, allegations of negligent misrepresentation will attract a duty to defend as found in Westridge Construction v. Zurich, [2005] S.J. No. 396 (C. A.).

2) That said, it appears no consideration was given as to whether there was “property damage.” The decision does not state how “property damage” is defined in the subject policy. A common definition is “physical injury to tangible property, including all resulting loss of use of that property; or loss of use of tangible property that is not physically injured.”

We do not know the particulars of the damages claimed in this instance, but it appears appropriate to ask whether given what is known, the plaintiffs sustained any property damage — for example, were there allegations of loss of use of tangible property — that would attract coverage under the policy in question.

3) In the case law that is reviewed about whether or not a breach of contract claim is covered under a liability policy, no mention is made of Acklands v. Canadian Indemnity, [1985] M.J. No. 506, a Manitoba Court of Appeal decision which found that a contractual claim for wrongful dismissal was not covered under a liability policy. However, that said, given the various allegations relating to negligence in the case at hand, it appears the issue of whether or not a breach of contract is covered under a liability policy was subsumed within these allegations of negligence.

4) While the case law suggests if there are one or more covered allegations, then the entire action must be defended, the Ontario Court of Appeal’s recent decision in Hanis v. Teevan, [2008] O.J. No. 3909 indicates it may be possible in the appropriate case for an insurer to recoup its defence costs for uncovered allegations. There is no indication this was addressed here.

5) As McKinnon acknowledges, his determination that the “own, use, occupy or lease” exclusion does not apply because it is in the present tense disagrees with a finding by Justice Henderson on the same wording in Brant Mutual Insurance v. Sinden, [2002] O.J. No. 5956. If the pertinent time to determine when this exclusion applies is when the representations were made and/or the sale occurred, and not when the allegations are made, which seems logical, is Henderson’s interpretation the more appropriate one?

6) McKinnon’s observation that insureds are looking for “peace of mind” when purchasing insurance is a propos when addressing first party coverage, as has been noted by the Supreme Court of Canada in Fidler v. Sun Life Assurance, [2006] S.C.J. No. 30. The same view has not, however, been expressed with respect to third party liability coverage, at least to date. It will be interesting to see whether, if this decision is not appealed, it will become an anomaly or a harbinger for attempts at expanding coverage available under liability policies — particularly homeowner’s policies. Will this decision open the floodgates to coverage or is it simply the natural flow or progression of coverage available under such policies, subject always, of course, to the policy’s specific wording?

Michael Teitelbaum is a partner with Hughes Amys. Hughes Amys is a member firm of The ARC Group Canada.