Top 10 Insurance Decisions from 2011

The Ontario Court of Appeal was particularly busy this past year, while the Supreme Court of Canada rested a little in the wake of Progressive Homes v. Lombard in late 2010. Without further adieu, here are the insurance coverage cases from across Canada from 2011 that I believe are worthy of review.

Cabell v. Personal Insurance Co. (Feb. 8, 2011, Ontario Court of Appeal)
Homeowner’s property

The insureds suffered a loss to their in-ground swimming pool as a result of hydrostatic lift due to a build-up of groundwater. The basic policy specifically excluded damage to pools, hot tubs and spas and also excluded damage caused by “settling, expansion, contraction, moving, bulging, buckling or cracking of any insured property . . .” The insured purchased an endorsement, which returned coverage for outdoor pools, hot tubs and spas, subject to the caveat that “all other terms, conditions and exclusions” of the policy remained unchanged. The insurer denied coverage, arguing settling, expansion or cracking of the pool caused the damage. While this argument was successful at trial, it was rejected by the Ontario Court of Appeal, which held that the insurer’s argument virtually nullified the coverage provided by the endorsement, as expansion and cracking represented the primary risks to the pool. The court held that the doctrine of “nullification of coverage” (the refusal to apply an exclusion where to do so would remove virtually the entire coverage) represented a stand-alone doctrine which can be relied upon to find coverage where a court is satisfied that the upholding of a denial would result in a nullification of the very coverage the insured bargained for.

Pietrangelo v. Gore Mutual Life Insurance Co. (Feb. 23, 2011, Ontario Court of Appeal)
Homeowner’s property insurance

The insureds owned four houses, three of which were rental properties. A tenant at one of the properties caused an explosion, which destroyed the house. An investigation revealed that the tenant was using the residence as a grow operation, and he subsequently pleaded guilty to criminal charges relating to marijuana production. The insurer denied coverage to the owner as the policy provided that “we do not insure . . . loss or damage . . . to dwellings . . . used in . . . processing [or] manufacture of marijuana.” Both the trial judge and, subsequently, the Ontario Court of Appeal, upheld the denial, rejecting the insured’s argument that the exclusion was “unjust or unreasonable” when applied to an innocent owner. The Court of Appeal found the trial judge interpreted the clause reasonably, and, further, there was a rational basis for its existence. As such, its application was not “unjust or unreasonable.”

Bulldog Bag v. AXA Pacific Insurance Co. (Apr. 12, 2011,  British Columbia Court of Appeal)
Commercial General Liability

Bulldog Bag manufactured plastic packaging for a garden product manufacturer, Sure-Gro. When Sure-Gro put the bags to use, the ink began coming off, rendering the bags unusable. The already packaged Sure-Gro product had to be salvaged and repackaged. Sure-Gro was only able to salvage 90 per cent of its product and sued Bulldog Bag for its losses. Bulldog’s CGL carrier, AXA, denied coverage on the basis that there was no “property damage” or, in the alternative, that the only covered “damage” was to the 10 per cent lost product. It was agreed that the value of Bulldog’s defective bags was excluded from coverage. While the trial judge initially sided with AXA, finding that only the costs associated with the 10 per cent damaged product fell within coverage, the B.C. Court of Appeal disagreed, holding that the entirety of the loss was covered. Once there is resultant damage to third party property found (in this case, the 10 per cent lost Sure-Gro product), there is full coverage available for the cost of rectifying that damage.

ING Insurance Co. of Canada v. Miracle (Apr. 26, 2011, Ontario Court of Appeal)  
Commercial General Liability

The insured, Miracle, operated a gas station and was sued when fuel allegedly escaped from an underground storage tank, causing damage to neighbouring property. Miracle sought coverage from its CGL carrier, ING, which denied that there was a duty to defend and/or indemnify given the policy’s “absolute pollution exclusion.” While the application judge rejected ING’s position, declaring the exclusion only applied to active polluters, ING successfully appealed. The Ontario Court of Appeal held that nothing in the pollution exclusion limited its application to only active polluters. As gasoline qualified as a pollutant and such pollutant had escaped from the insured’s property, the pollution exclusion applied to preclude coverage.

Maccaroni v. Kelly (May 30, 2011, Ontario Court of Appeal) Auto Liability — OPCF 44R

Mary Maccaroni sued after being rear-ended by a vehicle driven by Kevin Kelly, who was insured with The Co-operators. The Co-operators denied coverage to Kelly and his mother, the owner of the vehicle, on the basis that Kelly’s driver’s license was suspended at the time of the accident. In response, Maccaroni sued her own insurer, ING, under the OPCF 44R endorsement. Maccaroni settled her action with The Co-operators for the $200,000 minimum limits and sought to recover her damages in excess of $200,000 from ING. ING argued the release of The Co-operators and its insureds barred recovery under the OPCF 44R, as there was no judicial determination of The Co-operators off-coverage position. This argument was accepted by the motion’s judge, who dismissed the claim against ING, however, Maccaroni successfully appealed. The Ontario Court of Appeal held that, while Maccaroni was still required to prove that The Co-operators coverage denial was valid, this could still be proven in the insured’s direct action against ING. Further, it was not “plain and obvious” that Maccaroni’s release of The Co-operators and its insureds barred recovery against ING.

Saskatchewan Government Insurance v. Patricia Hotel (1973) Ltd. (Jun. 20, 2011, Saskatchewan Court of Appeal)  
Commercial General Liability

SGI provided CGL coverage to the Patricia Hotel (Pat). The declarations page of the policy provided that the business of the Pat was a “hotel, beverage room and beer and wine store.” During the demolition of a building on the premises, which was owned by another company, the building collapsed on an electrical sub-station. The City of Saskatoon sued the Pat for the damage. The Pat sought coverage from SGI under the CGL policy. SGI denied coverage on the basis that demolition operations fell outside the scope of the risk insured. While the initial application judge held in favour of the Pat, SGI successfully appealed. The Saskatchewan Court of Appeal held that there was no proven link between the demolition operations and the Pat’s operation of a “hotel, beverage room and beer and wine store.” As such, the operations in question were uninsured. This decision is contrary to an American line of authority, which precludes an insurer from restricting coverage to the operations described in the policy declarations absent explicit language to that effect.

Mahoney v. Cumis Life Insurance Co. (Mar. 30, 2011, Nova Scotia Court of Appeal)  
Accident and Sickness

The insured, Mahoney, was driving a van in New Brunswick in 2005 when he struck a moose. His injuries were limited to minor abrasions. An hour later, h
e experienced chest pains and died of a heart attack. He had a prior heart attack in 2002. His family sought coverage under an accidental death policy on the basis that the car accident was the cause of his death. While the trial judge upheld the denial, the insured successfully appealed on the basis that the motion judge had exceeded her authority in determining the actual cause of death. While the case was remitted for another trial in order to determine the cause of death, the court importantly held that, if Mahoney’s prior medical condition was found to have “even partially” contributed to his death, the policy would not respond.

Swailes v. Insurance Corp. of British Columbia (Mar. 2, 2011, British Columbia Court of Appeal)  
Automobile property insurance

The insured, Swailes, was covered under a comprehensive auto policy issued by ICBC for his 2006 Chevrolet Corvette. While driving, Swailes spun the car’s rear tires, causing the axle to break, immobilizing the car’s rear wheel, permitting the heat to rise, eventually causing a fire, which destroyed the vehicle. Swailes claimed under the auto policy for the loss of the vehicle. ICBC denied coverage on the basis of the policy’s exclusion for “mechanical fracture, failure or breakdown,” arguing the insured was not saved by the exclusion’s exception for loss or damage caused by fire, theft or malicious mischief. The denial was upheld at trial, with the trial judge agreeing that the fracture of the car’s axle was the cause of the fire, and thus excluded from coverage. Swailes successfully appealed, as the British Columbia Court of Appeal held that the trial judge erred in restricting his interpretation of the phrase “loss or damage” to only the damage caused by the mechanical breakdown. This phrase necessarily included all “loss or damage” claimed by the insured, including all losses other than the axle. As such, the claim was saved by the exception, as the loss to the remainder of the vehicle was caused by fire (the exception) and not mechanical breakdown.

Onex Corp. v. American Home Assurance Co. (Jun. 30, 2011, Ontario Court of Appeal)  
Directors and Officers Liability

Onex, and a number of its officers, were sued in Georgia for damages related to their alleged conduct in managing a subsidiary, Magnatrax. The litigation was brought by the Magnatrax Litigation Trust, which alleged that Onex and its directors and officers had effectively looted Magnatrax. The directors and officers sought indemnity for their defence costs incurred in the suit under a number of officers and directors insurance policies issued to Onex by American Home and various excess insurers in 2002-2003 and again in 2004-2005. The primary issue was which D&O policy year was required to respond to the allegations. American Home and the excess insurers for the 2004-2005 policy year argued a demand letter sent on Aug. 1, 2003 (Foley letter) qualified as notice of circumstances which could give rise to a claim. As that letter had been provided by Onex’s broker AON to American Home prior to the expiry of the 2002-2003 policy, that policy should respond. The directors, however, argued that the Foley letter was not sufficiently clear to qualify as a notice of circumstances, and therefore, the later policies applied. The court decided on summary judgment that the 2002-2003 D&O policies should respond, agreeing that the Foley letter was sufficiently detailed to trigger coverage under those policies. This meant that the claims were specifically excluded under the 2004-2005 policies. Various other arguments against coverage made by American Home relating to exclusions in the 2002-2003 policies were rejected.

Lancer Enterprises Ltd. v. Saskatchewan Government Insurance (Mar. 9, 2011, Saskatchewan Court of Appeal)  
All-risks property

This was an appeal from a finding that the loss was excluded from coverage under an all-risks property policy as one of the insured’s directors/officers intentionally set the fire. The trial judge provided a useful review of the judicial test for proof of arson, holding that there is no requirement for an insurer to establish unequivocally that there is no other possible cause of the fire. The insurer must simply show on the totality of evidence that arson was proven. Further, the trial judge’s finding that the business owners had motive and opportunity were upheld. The insured owner had lied initially to the RCMP about attending at the premises in the hours prior to the fire, eventually admitting that he went to the premises in the early morning hours just prior to the fire.

Christopher Dunn is a partner with Dutton Brock, LLP. His practice involves representing and providing insurance coverage advice to those in the insurance industry.