Requested and Denied

In General Electric Canada Co. v. Aviva Canada, Inc., the Appeal Court determined the MOE letter request for information relating to contamination at a former company property was not a “claim” for defence cost purposes. Upholding the application judge, Justice Michael A. Penny of Ontario’s Superior Court of Justice, the court states in its August 2, 2012 ruling that the letter related to “compliance costs” and not “defence costs.”

In so doing, the court found the “pleadings rule” used to determine whether or not a defence obligation exists can also be applied to a “demand” letter.

Beyond the issue of whether or not the MOE letter was a “claim,” Justice Penny also addressed in his 2011 ruling an action by the Toronto Transit Commission (TTC) that had been instituted and in which a defence was owed, and allocated defence costs equally. Interestingly, that part of his decision was not in issue on the appeal.

SUMMARY OF FACTS

General Electric (G.E.) was seeking a defence for an environmental loss: the historic release of a chemical used as a degreasing solvent from a former G.E. industrial property in Toronto, in respect of which both the MOE and the TTC sought remediation and damages, respectively.

Justice Penny concluded the expenses incurred by G.E. to respond to the MOE letter were not “costs of defending against the MOE’s claim but, in fact, the costs of complying with the MOE’s claim.” As such, no coverage was available for the more than $4.5 million incurred as “indemnification expenses.”

The judge considered two comprehensive general liability policies issued by the predecessor companies of Aviva and Dominion of Canada General Insurance Co. (now The Dominion).

The MOE letter to G.E., dated April 16, 2004, was primarily in issue. It requested further information concerning the potential trichloroethylene (TCE) contamination and required G.E. to take certain action. Specifically, the company was to delineate the source area of the TCE plume on its former property, as well as determine the current levels and full vertical and horizontal extent of all contamination within the soil and ground water.

The letter noted the MOE was willing to enter into an agreement with G.E. to pursue the required action items voluntarily, but reserved the right to issue a director’s order to resolve matters in the event of unsatisfactory progress.

G.E. responded to the MOE request by agreeing to co-operate. The company incurred $2.1 million for investigation costs, $1.86 million for remediation costs, and $750,000 for legal costs, and sought to recover these from its insurers.

Justice Penny concluded the application on this point raised two questions:

1. whether it is “possible” that the MOE letter amounted to a “claim” that fell within the policies and, thereby, triggered the insurer’s duty to defend; and

2. whether G.E. was seeking a defence to the MOE’s “claim” or, rather, an indemnity for the cost of compliance with the MOE request.

The judge also observed that in terms of the April 2004 letter, the coverage questions were whether:

1. with respect to the Aviva policy, the letter constituted a “claim” for “damages because of damage to or destruction of property” or a “suit” against G.E. alleging damages on account of damage to or destruction of property; and

2. with respect to the Dominion policy, the letter constituted a “notice” of “damage to property of others” or a “suit” against G.E. for damages alleging damage to property of others.

Either would engage the duty to investigate and the duty to defend under the respective policies.

In concluding that there was no duty to defend, Justice Penny stated the duty to investigate and defend is only triggered in the context of the policies by a “claim” arising from an alleged liability for damage. Under the pleadings rule (to determine whether or not a defence duty is owed), one looks at the “claim” to establish if it falls within the scope of the coverage afforded by the policy, he noted.

Justice Penny held that there is a “distinction in the policies between the obligation to investigate/defend and the obligation to indemnify.” In his view, there is “also a distinction between the cost of an investigation/defence of a claim and the cost of compliance with a claim.”

G.E. argued the steps it took were “in the nature of” defence costs in that the company sought to delineate and reduce any liability. Justice Penny found the argument to be flawed in that the only “claim” by the MOE entered into evidence on the application did not allege liability for clean-up costs to ameliorate damage to the property of others, but simply noted an obligation to conduct a delineation exercise with respect to TCE contamination.

The company complied with the MOE’s request and performed the work on the basis that it was thought to be in its best interests to do so, the judge added.

Justice Penny rejected G.E.’s request for a declaration that Aviva and Dominion have a duty to investigate and to defend the ministry’s request “solely on the fact that there was no investigation or defence of the MOE’s claim at all,” and that what G.E. is seeking is rather “indemnification for its costs of complying with the MOE’s claim.” That said, he made no finding about whether or not matters alleged and requested in the letter “fall within the coverage language of the Aviva and Dominion policies from an indemnity perspective.”

The time to determine the insurer’s duty to indemnify is at the conclusion of the underlying litigation, not during the abbreviated application for defence costs, Justice Penny wrote. His conclusion was, therefore, without prejudice to the parties’ positions.

ON APPEAL

To dispose of the appeal, the court found it had to deal with whether or not Justice Penny “erred in limiting his analysis of the MOE’s assertion of liability to the literal text of the April letter and in failing to consider the underlying statutory context and the broader liabilities it imposed on a PRP (potentially responsible party) like G.E. Canada.”

G.E. argued the application judge’s focus on the language of the April letter led him to ignore a substantial potential liability for property damage imposed by the Environmental Protection Act (EPA), thereby failing to appreciate that the letter involved the possibility of broader off-site liabilities.

The company submitted the letter should be read as an allegation that G.E.’s operations at its former site were responsible for a TCE plume that was the source of downstream contamination at a property owned by the TTC. It also noted Justice Penny failed to consider the underlying statutory scheme and the range of liabilities for property damage that would flow from G.E. being a responsible party under the EPA.

The Appeal Court considered the scope of the “pleadings rule” articulated by the Supreme Court of Canada in a number of cases. “Although in most cases the ‘pleadings rule’ applies to a statement of claim or similar pleading, it can apply to a letter that asserts liability for damages against an insured,” the ruling notes.

The court also referenced the Supreme Court’s consideration of what the necessary requirements are to establish a “claim” that would give rise to a duty to defend. Referencing the 2006 decision Jesuit Fathers of Upper Canada v. The Guardian Insurance Company of Canada, the court notes the Supreme Court indicated the authorities established that “as a general rule, for a ‘claim’ to be made, there must be some form of communication of a demand for compensation or other form of reparation by a third party upon the insured, or at least communication by the third party to the insured of a clear intention to hold the insured responsible for the damages in question.”

On behalf of a three-member panel, Justice Robert P. Armstrong states that G.E. did not oppose, defend or investigate the request that it take action in delineating the source of the TCE
contamination. “G.E., as it was invited to do in the letter, voluntarily complied with the request of the MOE. It cannot be said that it suffered any defence or investigation costs recoverable under its insurance policies,” he notes.

“The fact that G.E. provided a list of costs, which it has characterized as potential defence costs, does not, in my view, change the analysis of whether the April letter triggers a duty to defend,” he adds.

“I see no merit in the argument that the application judge erred in failing to consider the underlying statutory scheme of the EPA and the range of liabilities for property damage that might be imposed on G.E. To do so would have been to invite speculation: it would not have served any useful purpose.”

The Appeal Court also agreed with the application judge that G.E.’s reliance on the Ontario Superior Court judgment in Bridgewood Building Corp. v. Lombard General Insurance Co. was not helpful to the analysis in this case. In that decision, the court found that payment of claims under Ontario New Home Warranty Plan legislation was covered and stated in obiter that the legislation was “akin to environmental protection legislation which requires pollution clean-up and costs thereof to be carried and absorbed by persons regardless of proof or negligence or fault.”

OF NOTE

At first blush, one would think that in light of the obiter comments in Bridgewood, there might be some basis for G.E.’s argument that the April letter clearly implied more than it said. The court here, in agreeing with the application judge, took a very literal approach to the content of the letter in finding it did not constitute a claim that attracted a defence.

“Notwithstanding the usual approach of giving the ‘widest latitude’ to the allegations made, it appears the Appeal Court was of the view that the letter was not sufficiently ‘threatening’ in terms of being some form of a demand for compensation or other reparation, or at least communication of a clear intention to hold the insured responsible for the damages in question. Without specifically saying so, it appears the court did not view the threat of a director’s order as meeting this requirement.”

The court viewed these costs as “compliance costs, and not defence costs.” Ultimately, however, the question of whether or not the expenses incurred may constitute indemnity payments for which coverage is available remains to be determined.

In the final analysis, this decision turned on the court’s strict reading of the MOE letter, which the court held can be treated as comparable to a pleading for the purpose of determining whether or not defence and investigation expense obligations flow.