Missed Opportunity

We need a unified approach to the duty to defend additional insureds in liability claims, but it seems like every court decision in this area uses a different set of rules. Regrettably, the recent Ontario Court of Appeal decision in Great Atlantic & Pacific Company of Canada Limited v. Economical Mutual Insurance Co (2014 CarswellOnt 5667, ONCA). has only added to the inconsistency.

Great Atlantic is an unsatisfying decision for two reasons – not only did it fail to clarify the test for defending additional insureds, but it resulted in two appellate level decisions endorsing different approaches to this issue.

A party is typically added as an additional insured to a liability policy when they hire a contractor to perform services related to their business. The most common example is when a property owner hires a winter maintenance contractor to plow and salt their premises, but it can include any number of commercial relationships.

The coverage afforded to the additional insured is limited. The language used typically states that the policy of the contractor will cover the additional insured for liability “arising out of” the operations of the contractor. But additional insured coverage is rarely this simple.

Often, the claims made against the property owner include independent allegations of negligence that do not “arise out of” the operations of the contractor. For example, in a slip and fall situation, they may allege that the area of the fall was poorly lit, or that the premises did not conform to the relevant building code. This can bring the claim outside the ambit of additional insured coverage.

“True Nature” vs. “Specific Allegations”

Courts have struggled with how to deal with these situations, and two distinct lines of case law have emerged in response. One line looks to the “true nature” of the claim being made. Essentially, this is an all or nothing approach where, if some of the claim could fall within the scope of coverage, the additional insured is owed a defence.

However, another line of case law has looked at the “specific allegations” made against an additional insured. It holds that insurers may be obligated to defend some, but not necessarily all, of the claims made against the additional insured, with corresponding defence costs.

In RioCan Real Estate Investment Trust v. Lombard General Insurance Co (2008 CarswellOnt 2129, ONSC). a plaintiff suffered a slip and fall at one of RioCan’s shopping malls. The plaintiff named RioCan as the defendant, and RioCan in turn added its winter maintenance contractor as a third party. The contractor had a contractual obligation to add RioCan as an additional insured to its liability policy.

RioCan tendered the claim to the contractor’s liability insurer (Lombard) for a defence, which was denied. RioCan sued for coverage. The court held that, because some of the claims made against RioCan could fall within the scope of coverage, Lombard was therefore obligated to defend RioCan. All that was required was that the additional insured demonstrate the mere possibility that a claim could fall within the scope of coverage in order for the duty to defend to be triggered.

A similar approach was taken by the Nova Scotia Court of Appeal in SREIT (Park West Centre) Ltd. v. ING Insurance Co. of Canada (2009 CarswellNS 191, NSCA), where ING had initially assumed the defence of the additional insured. However, the claim was later amended and ING refused to defend the additional allegations made in the amended claim. The court did not accept ING’s position, however, and ordered it to defend.

A much different approach was taken in Atlific Hotels and Resorts Ltd. v. Aviva Assurance Co. of Canada (2009 CarswellOnt 2697, ONSC). Atlific Hotels and Resorts Ltd. operated the Deerhurst resort. A hotel guest slipped on ice on hotel property, and commenced an action against both Atlific and its winter maintenance contractor. The claim contained a number of allegations about improper winter maintenance, but also included allegations of poor lighting and a lack of anti-slip matting, as well as the failure of the resort to cancel an evening program. While some claims fell within the scope of additional insured coverage, several allegations were related to the general operations of the resort. The court held that Aviva was only obligated to defend Atlific with respect to the former, and not to the latter. The result: Aviva had to contribute to some, but not all, of Atlific’s defence costs.

The reasoning in Atlific was adopted by the Court of Appeal in Papapetrou v. 1054422 Ontario Ltd (2012 CarswellOnt 9127, ONCA). Papapetrou is a confusing decision in its own right, but until now was the leading decision on defending additional insureds. The problem with Papapetrou was that the winter maintenance contractor failed to add the property owner as an additional insured. The Court instead looked to the indemnity and hold harmless provisions of the maintenance contract to find that an insurer was only obligated to defend a party to the extent that specific allegations of negligence were made against them. This problematic approach has left many in the insurance industry anxious for clearer direction from the Court of Appeal.

Recent Developments

Rather than clarifying the law, Great Atlantic & Pacific Company seems to have endorsed the “true nature” approach set out in RioCan without actually rejecting Atific and Papapetrou. As a result, we now have decisions from the Ontario Court of Appeal endorsing both approaches.

In Great Atlantic, the plaintiff fell on water left behind by a cleaning machine. She sued the property owner, the maintenance company and a maintenance subcontractor. Economical defended its insured (the maintenance contractor), but refused to defend the property owner. The property owner commenced a coverage application seeking a defence and indemnity. The application judge considered whether there was a duty to defend the property owner based on the language of the policy. He examined a number of cases, including RioCan and Atlific (though surprisingly did not mention Papapetrou), and held that there was a duty to defend where the “true nature” of the case was that injuries were suffered due to a failure to maintain the premises.

On appeal, the Court of Appeal simply adopted the reasons of the application judge, with which they said they “largely” agreed. One would have hoped for a clearer signal from the Court as to what approach governs the duty to defend an additional insured.

Conclusion

The current state of the law is problematic. While some commentators suggest that RioCan and Atlific are not contradictory, the reality is that the two lines of cases lead to lengthy and often unnecessary disputes about the duty to defend and whether a certain case is more like RioCan or more like Atlific.

While both the “true nature” cases and the “specific allegations” cases have merit, lost in the discussion is the specific purpose of additional insured coverage. It is not meant to provide liability insurance to property owners in all cases where there is a slip and fall on their property. In that sense, the “true nature” cases, which draw heavily on the traditional duty to defend analysis, go astray. It is a limited coverage meant to limit the liability exposure of property owners due to the negligence of their contractors. The “specific allegations” cases seem to better reflect thi
s intent, and allocate the cost of defending claims accordingly. Unfortunately, we will have to wait before the case law is reconciled.

In the meantime, and regardless of the approach taken, it is important to remember that issues involving additional insured coverage are best addressed early. Failure to do so will likely result in added defence costs and potentially unnecessary coverage litigation. This is true no matter what approach the courts ultimately take.

Josiah T. MacQuarrie is a lawyer with Dutton Brock LLP, with a practice focus on the defence of personal injury and property claims, insurance coverage and subrogation. 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.