Pushing the Limits

Kawartha Lakes (City) v. Gendron et al, an Ontario court decision concerning an environmental clean-up claim, is particularly interesting given its potential impact on insurers and their service providers. Simply put, does an insurer have a duty to a third-party claimant to finish an environmental clean-up in a situation in which the policy limits have been exhausted?

BACKGROUND

The claim in Kawartha is based on an oil spill on a residential property in Ontario that migrated to an adjoining property and then into Sturgeon Lake.

Ontario Superior Court Justice Barry MacDougall allowed an amendment of the statement of claim to include allegations against the homeowners’ insurer, Farmers’ Mutual, in negligence for improper clean-up. The judge dismissed the summary judgment motion to dismiss the action against Farmers, R. Ian Pepper Insurance Adjusters Inc. and D.L. Services (DLS) Inc.

The court found the allegations made against Farmers, Pepper and DLS did not constitute a new cause of action and that, applying the Anns test, it was not plain and obvious that no duty of care was owed to the plaintiff, the City of Kawartha Lakes, in negligence. The Anns test establishes a duty of care of one party to another if there is a “sufficient relationship of proximity based on foreseeability” between the two parties, and consideration has been given to why there should not be a duty of care. Citing Combined Air, the court said it was too early to have a full appreciation of the evidence to find Farmers, Pepper and DLS owed no duty of care.

MacDougall, however, did dismiss the claim for breach of statutory duty under the Environmental Protection Act (EPA) against the aforesaid defendants.

FACTS

The defendant, Thompson Fuels, delivered approximately 700 litres of furnace oil to the home of the defendants, Wayne and Liana Gendron (the homeowners) on Dec. 18, 2008. On the same day, Wayne Gendron determined that the oil was leaking from the furnace. He notified Thompson Fuels, which in turn notified the defendant, the Technical Standards and Safety Authority (TSSA). The TSSA visited the site on Dec. 22, 2008 and issued a remediation order.

On Dec. 29, 2008, the homeowners reported the spill to their insurer, Farmers, which in turn assigned the matter to its adjuster, Pepper. Pepper consulted the defendant, DLS, to investigate the cause of the spill and assess its remediation.

DLS determined on Dec. 30, 2008 that the spill had migrated from the homeowners’ property onto adjoining property and into Sturgeon Lake. DLS then notified Ontario’s Ministry of the Environment (MOE).

DLS gave a preliminary estimate that the cost of remediation would exceed the homeowners’ $1-million policy limit with Farmers.

From January to June 2009, DLS was actively engaged in remedial activities both on the homeowners’ property and off site, involving various measures in and on the shoreline of Sturgeon Lake.

On or about Mar. 20, 2009, DLS and Pepper notified the MOE that the homeowners’ policy limits had been exhausted. The ministry responded by issuing an order three days later for the City of Kawartha Lakes to remediate the contaminated public property.

In response to the order, the city commenced an appeal before the Environmental Review Tribunal, which was subsequently dismissed. The city has sought judicial review of the tribunal’s decision in the Ontario Divisional Court, which is still outstanding.

The city initiated investigative and remedial efforts on its property and retained the services of Golder Associates Ltd. on or about Mar. 29, 2009.

On July 30, 2010, the city commenced this action against multiple parties, including the homeowners, Thompson, Her Majesty the Queen (MOE), the TSSA, DLS, Pepper, Farmers and the fuel tank manufacturer, Granby.

Prior to completion of the exchange of documents and examinations for discovery, Farmers brought a summary judgment motion seeking an order that the city’s claim against it be dismissed. By way of a notice of cross-motion, the city moved to amend the statement of claim to include an allegation of negligence against Farmers, and to add the words “and/or cost-efficient,” so the amended paragraph in the statement of claim would read as follows:

“The defendants, Gendrons, Thompson Fuels and Les Reservoirs d’acier de Granby Inc. are strictly liable in nuisance. The Gendron defendants, the TSSA, Thompson Fuels, DLS, Ian Pepper, the MOE, Farmers Mutual and Les Reservoirs d’acier de Granby Inc. are also liable in negligence for causing the spill or failing to respond to the spill in a timely and/or cost-efficient manner causing the city to incur remediation costs.”

Subsequently, DLS and Pepper also brought motions for summary judgment.

AMENDMENTS REQUESTED

Technically, the plaintiff did not require the consent of the parties or leave of the court to amend its statement of claim, since the motion was brought before the close of pleadings. However, the judge decided to deal with the issues raised by the responding defendants because these issues would likely be before the court on a motion to strike out the amended pleading as disclosing no reasonable cause of action.

With respect to adding the words “and/or in a cost-efficient manner,” the responding defendants’ arguments were as follows:

• The addition amounts to a new cause of action and is not a clarification or a further particular of negligence;

• As a new cause of action, since the plaintiff was aware of the underlying facts as of Apr. 2, 2009, more than two years before the amendment request, the proposed amendment is barred by the Limitations Act, 2002.

• The proposed amendment is not tenable at law.

Upon reviewing the statement of claim, the court found that: allegedly resulting from an oil spill that migrated from the homeowners’ property onto public property, the city was required to incur costs to complete the remediation that was not completed by the remediator DLS, retained by the adjuster of the homeowners’ insurer, because the homeowners’ policy limits had been reached.

Consequently, the court rejected the responding defendants’ argument that the factual matrix pleaded related only to the “delay issue” and not to the “remediation issue.” Although the respondents were not specifically named, the plaintiff did raise the allegation that if the homeowners, the TSSA and the MOE had acted differently, the cost of remediation would have been well within the homeowners’ policy limits.

Adding the words “and/or in a cost-effective” manner was considered to be a further particular of negligence that allegedly caused the city to incur remediation costs.

Having found this requested amendment did not assert a new cause of action, it was not necessary for the court to consider the limitation issue.

With respect to the amendment adding an allegation of negligence against Farmers, the court determined the plaintiff was simply proposing an alternative theory of liability based on the same factual matrix. Therefore, the court granted the amendment and left the argument that the proposed amendment did not raise a reasonable cause of action to the summary judgment portion of the motion.

SUMMARY JUDGMENT MOTIONS

The moving parties on the summary judgment motions, Farmers, Pepper and DLS (the applicants), were successful on their motion to dismiss the city’s statutory claim under Part X of the EPA, because they were not “owners of the pollutant” or “the person having control of the pollutant.”

In response to the city’s negligence claims, the applicants submitted there is no recognized duty between an insurer and
a third-party claimant. Since there is no duty of care owed by the insurer’s agents to a third-party claimant, the city’s claim of negligence against each of them is not tenable at law. Moreover, if the city’s claim succeeded, the court would be extending the categories of duty of care that exist under the common law to include this type of relationship.

The city argued that since the case involved multiple parties and voluminous documents, combined with the fact that the exchange of documentation had not been completed and examinations for discovery had not been held, the issue of the defendants’ negligence could not be fully appreciated at this stage.

The City of Kawartha Lakes also submitted the defendants owed the city, as an adjoining property owner, a duty of care with respect to the remediation carried out on municipal property.

Furthermore, the city submitted that, if the court reached the second stage of the Anns test, an analysis of “policy considerations” would be best understood in the context of the relationships among all parties that were involved and could not be fully appreciated without a complete record.

ADDITIONAL CONTEXT

Apart from the issue of whether or not the insurer or its agents owe a duty of care to a third party, the court found the duty of care issue in these circumstances could arguably be considered from an additional context. For example, as a result of the MOE’s order against the homeowners, Farmers and/or Pepper retained DLS to go onto the city’s property to try and effect a remediation of the oil spill that originated on the homeowners’ property.

Given the case law presented, the court determined this matter could be considered a “novel case,” since the duty of care did not fall within an established category or within a category analogous to an established category. Accordingly, the Anns test was required.

The court held the issue is not whether a duty of care will be recognized, but whether it is plain and obvious that no duty of care can be recognized. Furthermore, when dealing with policy concerns that might exclude liability, if it is not plain and obvious, the issue will be determined at trial.

Upon applying the Anns test to the case at bar, the court found a sufficiently close relationship between the parties existed that carelessness on the part of the defendants might cause damage to the plaintiff. Specifically, the court found, the applicants could foresee they would create a risk of harm to the city if the remediation of the city’s property were to be handled carelessly.

Turning next to proximity, the court looked at several factors:

• the MOE had ordered the homeowners to remediate the public lands adjacent to the homeowners’ land;

• the homeowners’ insurer had retained a remediator for that purpose;

• the homeowners’ insurance policy had an off-site limit of $1 million; and

• the remediator spent several weeks on the city’s property performing remediation services.

Given these factors, the court concluded, a sufficient proximity existed to make it just and fair that a prima facie duty of care could be imposed on the moving parties to the city.

Accordingly, the court found it was not plain and obvious that no duty of care could be recognized in these circumstances. Furthermore, the court had no hesitation in determining that any potential policy considerations negating the duty of care must be left for the trial court to decide in this case.

Finally, given the very early stage of litigation, the court was not able to have a full appreciation of the evidence and the issues to make a finding on the negligence claim with respect to whether or not these defendants have a duty of care to the City of Kawartha Lakes. For the foregoing reasons, the motions for summary judgment on the city’s negligence claims were dismissed.

COMMENT

This decision is particularly interesting given its potential impact on insurers and their service providers. The court does not go so far as to say a duty exists between an insurer or its agents and a third-party claimant. However, it found it was not plain and obvious that no duty of care can be recognized in these circumstances.

It is an intriguing question whether or not liability will be ultimately found given that policy limits were exhausted. Can an insurer be forced to complete a task, notwithstanding that the contractual obligation fueling the undertaking of the job had been fulfilled (i.e., the policy limits were exhausted in endeavouring to remediate the damage)?

And what happens if it is known this exhaustion of limits is likely to occur? Does the theory advanced by the plaintiff — that is, we could have done something to keep the claim within the policy limits had we known about the need for remediation — have any merit?

For now, the case has been allowed to proceed, but we understand Farmers is seeking leave to appeal.