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Determining Limits


June 1, 2016   by Michael Teitelbaum, Partner, Hughes Amys LLP


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In the December 2015 ruling by the Court of Appeal for Ontario, Daverne v. John Switzer Fuels Ltd., the court dealt with the issue of what limitation period applies within the context of an insurer’s duty to defend. The successful appeal found the insured’s claim was barred by the limitation found in the subject liability policy of one year.

In rendering its decision, the three-person panel considered an issue that has not been comprehensively addressed in Ontario. The court, which applied the “correctness” standard of review, concluded that when an insurer denies the duty to defend, this is a “loss” for the purpose of the triggering of a limitation period.

In light of the application of the limitation period, the appeal court held that the analysis at first instance of the duty to defend did not have to be considered.

Michael Teitelbaum, Partner, Hughes Amys LLP

Michael Teitelbaum, Partner, Hughes Amys LLP

BACKGROUND

The main action arose out of a fuel tank leak that caused damage to the Davernes’ property. McKeown & Wood sold the fuel tank to the Davernes in 2000, but at some point after the last fuel delivery was made in January 2008, the tank began to leak. The Davernes discovered the leak after returning from vacation late that month.

They started the main action against McKeown & Wood and others on December 31, 2009, seeking compensation for damage to their home and the additional living expenses they incurred because of the leak.

Federated Insurance Company of Canada insured McKeown & Wood until the last policy expired on October 24, 2007, just months before the leak occurred. On February 11, 2010, McKeown advised Federated Insurance of the Daverne claim, but the insurer denied coverage on the basis that the occurrence took place in January 2008, and that McKeown & Wood was not insured on the date of loss.

The company defended the main action, assuming its own legal costs, and brought a third-party action against a number of insurers, including Federated Insurance, on March 15, 2012, seeking a declaration that the insurers were required to provide a defence under three different policies.

SUMMARY JUDGMENT MOTION

Justice Graeme Mew of Ontario’s Superior Court of Justice found that the defendant oil tank seller was owed a defence under one of three policies and the claim against Federated Insurance, the insurer with the defence obligation, was not limitation-barred.

On a motion for summary judgment, the insurer argued the third-party claim was filed after the one-year limitation in the policy had expired. Federated Insurance relied on a statutory condition that was incorporated into the policy that stated an action against the insurer must be commenced within one year after the loss or damage occurs.

Its position was that for the purpose of liability coverage, “loss or damage” equated to the “loss” that occurs when an insurer denies an insured’s claim for coverage.

Justice Mew held that Federated Insurance could not succeed on this limitation defence. Citing the 2003 Supreme Court of Canada decision, KP Pacific Holdings Ltd. v. Guardian Insurance Co. of Canada, he stated the fire statutory conditions that were incorporated into the policy, and the one-year limitation period that the conditions contained, did not apply.

In KP Pacific, Canada’s high court considered statutory conditions that were essentially identical to those contained in the Federated Insurance policy. Writing for the court, Chief Justice Beverley McLachlin concluded the comprehensive policy at issue on the appeal could not be “shoehorned” into the fire insurance section without “contrived reconstruction and anomalous consequence.”

Justice Mew found that Federated Insurance should not be able to rely on a limitation defence because the result of including a statutory condition that was intended for first-party insurance as a policy condition, and applying it to cover third-party risks, would yield an anomalous consequence akin to those envisioned by the Supreme Court of Canada in KP Pacific. Therefore, he held that the limitation period in the statutory condition did not apply to claims made under the commercial liability coverage provided by the policy and the applicable limitation period was the two-year limitation provided for in Section 4 of Ontario’s Limitations Act, 2002.

ISSUES ON APPEAL

Correctness

The Court of Appeal for Ontario concluded the standard of review applicable to the motion judge’s interpretation of the insurance policy was correctness.

Justice Peter Lauwers, writing for the court, stated that since the appeal was heard, the appeal court determined in 2015, in MacDonald v. Chicago Title Insurance Company of Canada, that the correctness standard of review applies on standard form insurance contracts.

Justice Lauwers cited reasoning in MacDonald that it would be “untenable” to give insurance policy wording different meanings by different judges. Because of the nature of insurance policies, with similar language and general principles of law, he concluded there is a public policy argument that the high degree of generality and precedential value justifies a standard of correctness.

Limitation period

Ontario’s appeal court held that the one-year limitation period in the policy is enforceable. Justice Lauwers found that the third-party claim for a declaration that Federated Insurance owes McKeown & Wood a duty to defend the main action should be dismissed.

Justice Lauwers cited Section 148 of Ontario’s Insurance Act, which makes certain conditions part of every fire insurance contract in Ontario. Statutory Condition 14 was included in Federated Insurance’s policy as clause 14 of the “Basic Policy Statutory Conditions” form included in the policy and that provides a one-year limitation for action after the loss or damage occurs. He held that clause 8 of “Additional Conditions” applies as a contractual limitation period the limitation provided for in clause 14 to the other perils insured against in Federated Insurance’s policy and to the liability coverage provided by it.

The Limitations Act, 2002 has a two-year limitation and Section 22(1) prohibits contracting out of the limitation period. However, a subsequent exception to the no-contracting-out rule was permitted in the case of “business agreements.”

The court observed it is plain that none of the parties to Federated Insurance’s insurance policy is a consumer and the parties are business entities.

Justice Lauwers held the combination of clause 14 and clause 8 clearly varies the two-year limitation period provided for in the Limitations Act, 2002. He found the motion judge incorrectly concluded that the phrase “loss or damage” in clause 14 did not include loss or damage suffered by a third party who then seeks compensation from the insured.

Justice Lauwers also found the motion judge should have applied the basic principle that the insured “suffers a loss from the moment the insurer can be said to have failed to satisfy its legal obligations under the policy of insurance.”

Furthermore, he disagreed the difference between first-party property claims and a third-party claim for defence is a point of distinction that affects the application of the principle that the insured suffers a loss when the insurer fails to meet its obligation under the policy.

Because the insurance policy in this case is a business agreement for the purpose of Section 22 of the Limitations Act, 2002, the one-year contractual limitation period is enforceable by Federated Insurance. Therefore, because the third-party claim was issued almost two years after Federated Insurance’s letter denying coverage, the claim that the insurer owed a contractual duty to defend McKeown & Wood is barred by the one-year contractual limitation period.

Despite the fact that Federated Insurance did not have a duty to defend the insured, this does not dispose of the insurer’s possible obligation to indemnify.

COMMENT

The 2015 decision by Ontario’s Superior Court of Justice, Zochowski v. Security National Insurance, is consistent with Daverne. In Zochowski, the plaintiff, Ludwick Zochowski, while riding a bicycle in 2006, struck and injured a pedestrian, Sophia Tubis. Tubis sued the plaintiff for damages, but Zochowski’s insurer denied coverage and refused to fund his defence.

Zochowski then sued the insurer, but waited almost three years to do so. The insurer argued the plaintiff’s action was time-barred. The motion judge dismissed the plaintiff’s action, but the court held the plaintiff suffered a loss because of the insurer’s failure to defend, and the time for bringing an action ran from the date of denial.

In the “Issues in Focus – Limitation Periods and Liability Insurance in Ontario” section of Insurance Law in Canada, the view is expressed that subject to the terms of the policy, the statutory two-year limitation period for the duty to defend begins with the denial of coverage, where there is a denial. However, there is a “good argument that the limitation renews itself with each dollar spent on defence,” it adds.

Thus, it may be arguable that the limitation begins to run with each defence costs account. However, with Daverne, the question is whether this possibility may no longer be viable.

That said, the court’s finding that the loss can be the damages claimed by the injured party, as opposed to the damages sustained by the insured when its defence accounts are not paid, is an interesting interpretation of what constitutes a loss. Still, it does appear to be consistent with recent decisions about when a limitation begins to run, namely, from the date of denial.

What is the effect of the Court of Appeal for Ontario’s March 2016 decision, Pickering Square Inc. v. Trillium College Inc.? Decided after Daverne, the case explored, in the circumstance of a commercial lease, when a claim is discovered for limitations purposes in the context of a continuing breach of contract.

The court specifically endorsed the concept of a “rolling limitation,” (which is discussed in Insurance Law in Canada, where the authors note that causes for action for recovery of ongoing payments, such as accident benefits, continually renew themselves each time an installment becomes payable because the insurer is under a continuing liability for each succeeding benefit), and discusses the concept of a “breach of a continuing obligation under a contract.” Would the obligation to pay defence costs qualify?

It remains to be seen if the courts may be called upon to reconcile the Daverne and Pickering Square decisions at some point. As well, as can be seen from Daverne and Zochowski, and not surprisingly, there are two different limitations in respect of liability coverage, one for defence costs, and the other in respect of entitlement to indemnification, which would presumably run from when a determination is made of the damages an insured is obliged to pay.

 

Many thanks to Stephen Hopkins, student-at-law in Hughes Amys LLP’s Toronto office, for his excellent assistance in the preparation of this article.

Hughes Amys LLP is a member of The ARC Group of Canada, a network of independent insurance law firms across Canada.

 


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