Defending Property Vendors

In Hector v. Piazza¹, Ontario Superior Court Justice Peter Annis recently found a homeowner’s insurer, Axa Insurance Canada, has a duty to defend an insured who sold his apartment building, after it had been renovated, to the plaintiff. The plaintiff sued for damages arising from the settlement of the foundation. The allegations against the defendant insured included negligent supervision of construction work and breach of contract in respect of the sale.

The court found the allegations of negligence were not derivative of the contract for the purchase and sale of the property, and that the “owned property” exclusion in the insured’s policy did not apply.

This decision appears to be another step along the road first paved by McGrimmon v. Personal Insurance², which found a duty to defend the vendor in a property sale claim. However, the Hector decision may also contain a solution for insurers in terms of policy language that might avoid such claims.

Background

The insured, John Baptist Piazza, originally acquired the property in October 2001 for the purpose of renovating it, but played no role in the work involved in the renovations. The property was sold to the plaintiff, Daniel Hector, in January 2006. Hector sued in 2009. Piazza was insured by Citadel Insurance, Axa’s predecessor, followed by General Accident, now Aviva, and then by Dominion between October 2001 and January 2006, when the property was transferred to Hector.

In addition to the issue of whether it is obliged to defend, Axa also raised whether the other insurers were responsible for sharing in defence and indemnity. Since the other insurers were not before the court, the court was not in a position to address this point. The insured indicated a willingness to co-operate with Axa in this regard.

The statement of claim alleged negligent construction, negligent misrepresentation and breach of contract. But the negligent misrepresentation allegations “play[ed] no role” in the motion.

The allegations of negligence were directed at the negligent renovation work on the building and, in particular, negligent supervision, lack of inspection and failure to deal with deficiencies. The insured based his claim for a duty to defend on these pleas. The breach of contract claim alleged representations that the plaintiff characterizes as warranties and “presumably some contract terms of the agreement for purchase and sale which are not specified.”

The coverage grant in Axa’s policy afforded coverage for “compensatory damages because of property damage caused by an accident.” The policy included an exclusion for “property damage to…property owned or occupied by or rented to the insured.”

Justice Annis addressed the following two issues:
•whether the plaintiff’s claim in negligence was derivative of the contract for purchase and sale of the property; and
•whether the insured’s claim for coverage was excluded by the terms of the policy.

A Derivative Claim?

On the issue of whether this was a derivative claim, Axa argued that without the contract for purchase and sale of the property, there could be no action commenced by the plaintiff. The court noted that for a claim to be derivative, “both claims must arise from the same actions and cause the same harm. If the underlying elements are sufficiently disparate the two claims are considered to be unrelated.”

Justice Annis rejected the insurer’s argument, concluding that a “negligence claim is not derivative of one in contract merely because the conditions necessary for the negligence claim to be brought, i.e. ownership of the property, arise from the effects of the contract.”

The court held that for one claim to be derivative of another, “significant constituent elements and circumstances of the derivative claim must be subsumed by the dominant one such that its pith and substance can be said to be incorporated in the other.” It further noted it would be a challenge to convince a court that a negligence claim is subsumed in a contract claim, “unless the contractual duties are generally the same as alleged to arise in the duties of care in negligence.”

“That is not the case here,” Justice Annis concluded. “In the plaintiff’s pleadings, very disparate causes of action are raised with different constituent elements with different stipulations as to the conduct giving rise to liability and providing for reparation. This was not a contract for the construction or renovation of the building. It was one for the purchase of the property where the warranties and representations are the essence of the contract. There is no basis, therefore to conclude that the claim of negligence pleaded in the statement of claim in this matter arises from the same actions and causes the same harm as the claim in contract.”

“Owned Property” Exclusion

On the issue of the “owned property” exclusion, Axa relied upon the McGrimmon v. Personal decision. In it, the Court of Appeal affirmed the motion judge’s decision that the exclusion in that case – which read “damage to property you own” – was ambiguous and therefore did not apply. Justice Annis found comments made by the motion judge in McGrimmon – who wrote that if the “past tense had been employed in the exclusionary words,” then no coverage would be available – were obiter dicta and not binding upon him.

Thus the issue was whether, having used the past tense “owned” in its exclusion, Axa was entitled to rely upon the “owned property” exclusion, whereas the insurer in McGrimmon – which had used the present tense “own” – could not.

Piazza argued the exclusion was also ambiguous in this instance, because it may be interpreted to refer both to the present and past tenses of ownership. For example, if a claim had been made while the property belonged to the insured, an exclusion for damage to “property owned by the insured” would be caught by the wording, as would the situation after the property had been transferred to a new insured. Piazza submitted the subject exclusion should be interpreted to refer only to present ownership. This is because the “obvious intent of the liability provision is to insure against claims by third parties for damage to their property…[and not] to insure for damage against the insured’s own property when he was the owner.” The risk of damage to the insured’s own property when he was the owner would be covered by property insurance.

The court agreed with the insured’s submissions, noting that there would otherwise be an “unforeseen coverage gap not contemplated by the parties at the time they entered into the agreement” if third party liability claims such as the claims made by the plaintiff in this instance were denied.

Justice Annis also agreed with the insured’s submission that it is “difficult to reconcile the language of the exclusion with the two different scenarios of preventing claims arising from damage to the property when owned by the insured and when owned by a subsequent transferee.”

In the words of Justice Annis: “In my view, an unambiguous exclusion clause would refer to property that the insured ‘owns or owned.’ This would deny coverage for damage to the property both when the insured owns the property, which appears to be the time frame historically contemplated by the purpose of the clause, and after the property has been transferred.”

Justice Annis also rejected Axa’s submission that the exclusion could only apply to situations after the property was sold, since the coverage is by definition available only in respect of third party claims. He noted that Supreme Court of Canada Justice Marshall Rothstein in Progressive Homes v. Lombard³ concluded that the term “property damage” contains “no limitation to third-party property.” Therefore, the purpose of the ‘owns or owned’ clause would be to “head off possibly
turning third-party coverage into first-party insurance.”

“If forced to interpret the provision, I would likely adopt the insured’s submissions,” Justice Annis wrote of the insurer’s exclusion. “In its historical context and its relationship to first-party property coverage, the exclusion does not appear to have been intended to apply to situations where the property was transferred to a third party.” That said, Justice Annis stated he was “not required to rule on the point,” because it was sufficient for him to find the insurer had not demonstrated that the exclusion clearly and unambiguously excludes coverage.

In the result, the court found Axa was obliged to defend the insured.

Comment

As indicated, this case takes the McGrimmon decision one step further. The court found the exclusion in Hector was insufficient to eliminate coverage, including coverage for property sale-related claims. Given the nature of the allegations made in the statement of claim, the court essentially found that since certain of the claims had to be defended, all of them did – including those made against the vendor with respect to the sale of his property. The negligence allegations relating to the repair of the property were enough to attract a defence obligation, even though this means the insured is also being defended with respect to the breach of contract claim relating to the sale itself. There was no analysis as to whether these claims could be considered separate enough to warrant defence costs allocation.

That said, the court also suggested a possible solution for insurers in terms of policy language that might avoid such claims. Instead of using in the “owned property” exclusion – employing the present tense “own,” as was done in McGrimmon, or the past tense “owned,” as was done in Hector – Justice Annis suggested that if both words are used, then the exclusion would be unambiguous and would exclude the claim. In the future, insurers may wish to consider using the wording proposed by Justice Annis in their policies.

1Hector v. Piazza, 2011 ONSC 1302
2 McGrimmon v. Personal Insurance, [2010] O.J., No. 33 (Sup. Ct.), aff’d [2010] O.J. No. 2423 (C.A.)
3 Progressive Homes v. Lombard, 2010 S.C.J. 33