Top 10 Insurance Coverage Decisions The Cases You Should Know About From 2007

T^he year 2007 will be remembered as perhaps one of the busiest in recent memory in the Canadian courts for insurers, including the release of three decisions from the Supreme Court of Canada. The various provincial trial and appeal courts were no less active. Not only is the sheer number of insurance decisions of interest, but so is the breadth of issues addressed, covering all major areas of insurance law, including all-risks property cover, commercial general liability, homeowners, marine, D&O, E&O, auto and surety. In addition, Canadian courts addressed general issues of interest to insurers, including limitation periods, relief from forfeiture and jurisdiction.

With so many decisions to choose from, delineating a “Top 10” list is invariably a subjective exercise. The following are the cases that lead the charge from 2007, in this writer’s opinion.

1. Citadel General Assurance Co. v. Vytlingam, [2007] S. C. J. No. 46. Lumbermens Mutual Casualty Co. v. Herbison, [2007] S. C. J. No. 47.

Type of Coverage: Auto — Third Party Liability/OPCF 44R Underinsured Endorsement

Issue: Use or operation of a motor vehicle

The Supreme Court of Canada released its two leading decisions on “use or operation” of a motor vehicle together in October 2007.

In Vytlingam, the claimant, Michael Vytlingam, was driving on an interstate in North Carolina when his vehicle was struck by a boulder thrown off an overpass by Todd Farmer and Anthony Raynor. Farmer’s vehicle was used to transport the boulder to the highway overpass. The two then parked the car, removed the boulders and dropped them from the overpass. As Farmer carried insurance limits of only US$25,000, Vytlingam sued his own insurer, Citadel General Assurance Co. for underinsured coverage.

In Herbison, the claimant, Harold Herbison, was shot in the leg by his hunting partner, Fred Wolfe, while the two were deer hunting. Wolfe was driving to the hunting stand before sunrise when he saw and shot at what he thought was a deer. The “deer” was actually Herbison, who suffered severe injuries. Herbison obtained judgment against Wolfe and pursued a claim against Wolfe’s auto insurer Lumbermens to satisfy the judgment.

In order to succeed, both Vytlingam and Herbison had to prove their injuries resulted from the “use or oper- ation” of a motor vehicle. Vytlingham succeeded at the trial level as the judge found a sufficient connection between the use of Farmer’s vehicle to transport the boulders to the scene and the subsequent accident. Herbison failed at trial as the judge concluded the shooting was incidental to the use or operation of the Wolfe motor vehicle. Both decisions were appealed, and the Court of Appeal supported the insureds, upholding the motion judge’s decision in Vytlingam and overturning the motion judge’s decision in Herbison. The Court of Appeal found the activities giving rise to the loss — the throwing of the boulder and the shooting of the gun — each had a sufficient nexus to the use or operation of the vehicles to fall within coverage.

Both insurers successfully appealed to the Supreme Court of Canada. The Supreme Court did not agree the required nexus was present. Even the use of the broad term “directly or indirectly” in the policy did not eliminate the requirement of an unbroken chain of causation between the use or operation of the motor vehicle and the resulting injury. Wolfe’s interruption of his motoring to start hunting and Farmer’s walk to the overpass from his parked vehicle each broke the chain of causation.

2. McKenzie v. Dominion of Canada General Insurance Co., [2007] O. J. No. 2518 (C. A.).

Type of Coverage: Marine and Homeowner’s Third Party Liability

Issue: Overlapping coverage and the application of “other insurance” clauses

A collision between two boats on the Severn Channel resulted in serious injuries to the occupants of the boats, one of which was owned by Warren Tischler and operated by Michael McKenzie. McKenzie was sued and had access to three liability insurance policies to defend him — a State Farm boat owner’s liability policy issued to Tischler, a State Farm personal liability umbrella policy (PLUP) issued to Tischler and a homeowner’s policy issued by Dominion of Canada General Insurance Co. to McKenzie’s father.

While it was conceded that the boat owner’s liability policy was first loss coverage, the question was which policy came next. Dominion of Canada General Insurance Co. argued that its homeowners’ policy and the State Farm PLUP overlapped, while State

Farm argued that its PLUP only engaged after the limits of the Dominion of Canada General Insurance Co. policy had been exhausted.

Dominion of Canada General Insurance Co.’s argument was accepted by the application judge, who held that the two policy’s “other insurance” clauses were irreconcilable and the policies therefore shared pro-rata. State Farm successfully appealed to the Ontario Court of Appeal which held that a comparison of “other insurance” clauses is only appropriate where there is a “coordinate obligation to make good the loss.” No such obligation existed as the State Farm policy was clearly an excess cover and the Dominion homeowner’s policy was primary. As such, the State Farm PLUP did not engage until the limits of the Dominion of Canada General Insurance Co. policy were spent.

3. Baig v. The Guarantee Co. of North America [2007] O. J. No. 4727 (C. A.).

Type of Coverage: Auto – First Party Property

Issue: Right to an examination under oath

Rehman Baig requested auto property coverage for his vehicle from The Guarantee Company of North America (GCNA) for $71,300.00 pursuant to an OPCF-19A specified value endorsement. He supported the vehicle’s value with an appraisal completed by Leanne Giilck of Discount Auto Appraisals. The car was stolen and Baig claimed for its full value. The insurer learned Baig had bought the vehicle for US$12,500 as salvage and that the appraiser was his common law partner. Together they operated Discount Auto Appraisals.

GCNA required that Baig attend an examination under oath pursuant to statutory condition 6(4) of the policy. Baig effectively refused, as his counsel significantly limited the insurer’s questioning. GCNA refused to pay and Baig sued. The motions’ judge found against GCNA, as an examination under oath is no longer available when the relationship with the insured becomes adversarial.

GCNA successfully appealed to the Ontario Court of Appeal, which held that the right to an examination under oath exists whether the relationship between the insurer and the insured is adversarial and regardless of when litigation is commenced, though the insurer would not be permitted to ask the same questions again on a subsequent examination for discovery. The insurer is entitled to ask any questions relevant to issues, including questions with respect to the initial underwriting of the risk if that is an issue in dispute.

4. Canadian National Railway Co. v. Royal and Sun Alliance Insurance Co. of Canada (2007), 85 O. R. (3d) 186 (C. A.)

Type of Coverage: All Risks Property

Issue: Faulty Design Exclusion

Canadian National Railway (C. N.) suffered a failure of its

Lovat TBM (tunnel boring machine), which was being used to construct a tunnel under the St. Clair River. Damage to the TBM’s sealing system resulted from “dif- ferential deflection.” C. N. made a claim to its all-risk property insurer, Royal and SunAlliance Insurance Company of C
anada, who rejected the claim on the basis of the policy’s “faulty design” exclusion, arguing the failure was due to the TBM’s flawed design.

C. N. was victorious at trial, however, the insurer successfully appealed. The Ontario Court of Appeal disagreed with the trial judge’s failure to find evidence of “faulty design”. The Court agreed with the standard applied at trial — a design is “faulty” if it fails to account for all foreseeable risks. The Court however held that the TBM’s designer’s admission at trial that the design had to account for differential deflection was sufficient to support the application of the exclusion. The trial judge had misapprehended the difference between the foreseeability of the type of risk and the foreseeability of the mechanism of failure. All-risks property policies do not provide a warranty that the insured property will fulfill its intended purpose nor are they intended to underwrite entrepreneurial design risk.

5. Williams v. York Fire & Casualty

Co., [2007] O. J. No. 2517 (C. A.) Type of Coverage: Auto — first party property

Issue: Entitlement to relief

from forfeiture

Guy Williams totalled his York Fire & Casualty Insurance Co. insured vehicle. At the time of the accident, Williams’ driver’s licence was suspended, but he was unaware of this as he had been out of the province. York Fire & Casualty Insurance Co. denied his claim. Williams sued, and was granted relief from forfeiture at trial. York Fire & Casualty Insurance Co. successfully appealed, arguing that the relief from forfeiture provision of the Insurance Act pertains only to an insured’s post-loss non-compliance with the policy. The Court of Appeal agreed. As the licence suspension predated the loss, no relief was available.

6. Kolbuc v. ACE INA Insurance

[2007] O. J. No. 1862 ( C. A.). Type of Coverage: Disability

Issue: Definition of “accident”

Ryszard Kolbuc, a plasterer, was bitten by a mosquito carrying the West Nile virus and was rendered a paraplegic. Kolbuc’s disability insurer denied his claim as his illness was not caused by an “accident.” Kolbuc sued and his action was initially dismissed. The trial judge relied upon the Ontario Court of Appeal’s 2004 decision in Wang. v. Metropolitan Life Insurance Co. which held that the death of an expectant mother resulting from an amniotic fluid embolism during childbirth was not an “accident” as it resulted from natural causes without external influence.

Kolbuc successfully appealed. The Court of Appeal noted there had been no reported cases at that time of the West Nile virus in Ontario. The plaintiff’s illness was therefore an unexpected event caused by an external source, the mosquito bite, and the loss was therefore an “accident.” The court used the example of a shipwrecked sailor at sea who developed an illness from exposure to the elements. This would also qualify as an “accident,” as the shipwreck was an unforeseeable and unexpected external event which caused the illness.

7. R. E. v. Wawanesa Mutual Insurance Co. [2007] O. J. No. 482 (C. A.).

Type of Coverage: Homeowners – third party liability

Issue: Criminal act exclusion

Ryan E. was seriously injured when he was shot by Ryan P. at the home of Ryan P.’s father. Ryan P. was holding a shotgun which accidentally discharged at short range. He was convicted of criminal negligence causing bodily harm.

In the subsequent civil action, Ryan P. and his father were found negligent while Ryan E. was found 25 per cent contributory negligent. Ryan E. moved pursuant to section 132 of the Insurance Act to have his judgment satisfied by Ryan P.’s father’s homeowner’s insurer Wawanesa Mutual Insurance Co. Wawanesa Mutual Insurance Co. denied the claim on the basis that the policy excluded coverage for criminal acts committed by the insured.

On the initial motion, the motions’ judge found the criminal act exclusion did not apply as the criminal act of Ryan P. was accidental and was not intended to bring about the injury. The motions’ judge relied upon section 118 of the Insurance Act which purported to limit the application of criminal act exclusions to any criminal acts intended to bring about the loss.

Wawanesa Mutual Insurance Co. successfully appealed. The Court of Appeal found the motions’ judge ignored the opening phrase of section 118 which provides that the section applies only “unless the contract otherwise provides.” The criminal act exclusion “otherwise provided” that no specific intent was required and Section 118 of the Act therefore had no application to the loss.

8. Fidler v. SunLife Assurance Co. of Canada [2006] S. C. J. No. 30 (S. C. C.)

Type of Coverage: Disability

Issue: Aggravated damages for denial

Sun Life Assurance Co. of Canada wrongfully denied benefits to Connie Fidler under a disability policy, and was ordered to pay the amount owing plus $20,000 in damages for mental distress. The trial judge dismissed a claim against Sun Life Assurance Co. of Canada for bad faith. Both sides appealed. The Court of Appeal upheld the $20,000 mental distress award and actually awarded $100,000 in punitive damages against Sun Life Assurance Co. of Canada for bad faith. Sun Life Assurance Co. of Canada appealed to the Supreme Court of Canada.

The Supreme Court of Canada agreed with the trial judge that there was no bad faith, though Sun Life Assurance Co. of Canada’s conduct was “troubling.” The Supreme Court however upheld the award of $20,000 in aggravated damages. As the nature of a disability insurance contract is to provide piece of mind to the insured, it would be within the reasonable contemplation of the parties at the time the contract was made that mental distress could flow from a failure to pay the required benefits. While some provincial courts have upheld such awards, this represents a first for the Supreme Court of Canada.

9. MWH International, Inc. v. Lumbermens Mutual Casualty Co.,

[2007] I. L. R. 1-4586 (B. C. C. A.) Type of Coverage: Professional Errors and Omissions

Issue: Duty to defend a “circumstance”

MWH International, Inc. held a professional liability policy with Lumbermens Mutual Casualty Co. that provided coverage for MWH’s work during the design and construction of a power plant. A major structural component of the project failed, resulting in damages of $50 million and the plant was shut down. The project owners pursued a number of defendants for damages.

MWH gave notice of the failure to Lumbermens Mutual Casualty Co. in June 2004 and retained its own counsel, though no demand had been made to MWH by the owner. A formal demand letter to MWH from the power company followed in March 2005. At that point, Lumbermens Mutual Casualty Co. accepted that a duty to defend was triggered.

MWH sought indemnity for its legal fees incurred up to the point that Lumbermens Mutual Casualty Co. defended. Lumbermens Mutual Casualty Co. took the position that no duty to defend was triggered until the formal demand. MWH sued, and was initially successful at trial. The motions’ judge held that notice of a “circumstance” triggered the insurer’s duty to defend.

Lumbermens Mutual Casualty Co. successfully appealed. The British Columbia Court of Appeal held that the policy’s duty to defend only arose following notice of a “claim.” Accordingly, while MWH was free to retain its own counsel in advance of a specific demand for compensation, it was required to bear the cost itself.

10. Ocean Masters Inc. v. AGF M. A. T., [2007] Nfld. J. No. 190 (C. A.)

Type of Coverage: Marine Insurance

Issue:Warranty versus condition limiting the risk (suspensive condition)

A fishing vessel owned by Ocean Masters Inc. and insured under a marine insurance policy issued by AGF

M. A. T. caught fire an
d sank forty miles off St. John’s, Nfld. The policy contained a “warranty” stating that the insurance was invalid beyond 120 miles from shore. The vessel went beyond 120 miles, and in the course of returning to port, though within the 120 mile restriction, the vessel caught fire and sank.

The insurer denied Ocean Masters’ claim on the basis of the policy’s “warranty.” Ocean Masters sued and was successful. The trial judge held that the 120 mile limit was actually a clause “descriptive of the risk” and not a true “warranty” in spite of the expressed language of the policy. A condition “descriptive of the risk” only negates coverage where the insured is in active violation of the condition. Where the insured is not in violation at the time of the loss, and regardless of prior violations unrelated to the loss, the coverage remains in place. In the case of a true warranty, any violation of the warranty vitiates the coverage for good.

AGF appealed, though the Court of Appeal agreed with the judge that the policy term was merely descriptive of the risk insured and not a warranty. As the vessel was in compliance with the Canada Shipping Act and the Marine Insurance Act at the time of the loss, and the journey beyond the 120 mile limit have any bearing on the loss, the loss was covered.

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.