Appeal court dismisses lawsuit against Economical over additional insured endorsement

A solar energy developer has lost its appeal against Economical in a commercial coverage dispute regarding an additional insured, in which the policy wording referred to “liability arising out of the operations” of the insured.

“Contractual insurance obligations and additional insured endorsements are a frequent source of litigation between owners, contractors, and their insurers,” as Chief Justice of Ontario George Strathy observed in the Court of Appeal for Ontario’s unanimous ruling in Sky Clean Energy Ltd. (Sky Solar (Canada) Ltd.) v. Economical Mutual Insurance Company, released Sept. 9.

Central to the dispute was what it means when an additional insured is covered for something “arising out of operations” of the client who buys the policy.

Sky Solar (Canada) Ltd. was named as an additional insured in 2012 in an Economical policy placed for Marnoch Electrical Services Inc. by brokerage Firstbrook, Cassie & Anderson Limited.

Marnoch was installing electrical equipment for Sky Solar projects.  Sky Solar had a contract in 2010 under the Ontario Power Authority’s feed-in-tariff program to build solar projects northwest of Toronto. One was in Bolton and the other was in Brampton.

Under its 2012 construction contract with Sky Solar, Marnoch was required to name Sky Solar as an additional insured.

Sky Solar transferred its solar power installations in Brampton and Bolton to Firelight Solar Limited Partnership in late 2012. Then fires occurred at both locations – the Brampton one in August 2012 and the Bolton one in March 2013. Sky Solar had provided warranties and indemnity to Firelight when it transferred ownership.

As a result of the fires and subsequent interruptions, Sky Solar paid about $377,000 to compensate Firelight for loss of revenue from March through July of 2013, and nearly $215,000 to compensate Firelight for remediation costs.

In order to recoup those costs, Sky Solar submitted a claim to FCA in late 2013. Economical denied the claim. In Sky Solar’s lawsuit against Economical and FCA, Justice Peter Cavanagh of the Ontario Superior Court of Justice ruled in 2019 favour of the insurer and broker.

Sky Solar appealed the dismissal of its lawsuit against Economical. It did not appeal the dismissal of its lawsuit against FCA. Sky Solar had blamed FCA for what it called a gap in coverage.

Justice Cavanagh ruled in favour of FCA for several reasons. Among them, FCA is not the broker for Sky Solar, the project owner. Instead, FCA was the broker for Marnoch, the electrical contractor. FCA provided a certificate showing that Sky Solar was added as a named insured under Marnoch’s policy with Economical. But the relationship between Sky Solar and FCA was not close enough to impose a duty on FCA to investigate Sky Solar’s insurance requirements and ensure that the coverage afforded to Sky Solar (as an additional insured) met Sky Solar’s requirements.

Turning to Sky Solar’s dispute with Economical, the endorsement for an additional insured says Economical is only covering Sky Solar “with respect to liability arising out of the operations” of Marnoch.

In a separate arbitration proceeding involving new owner Firelight, a witness for Sky Solar said the fires resulted from an electrical fault that initiated within a transformer. That transformer was supplied but not manufactured by Marnoch.

In the arbitration proceeding, it was found that Marnoch played no role in the decision to purchase that particular transformer. And so, in the coverage dispute with Economical, Justice Cavanagh ruled there was not enough proximity between Sky Solar’s decision to use the transformer it selected and Marnoch’s actions to order and install those transformers to conclude that Sky Solar’s liability to Firelight arose out of Marnoch’s operations.

Marnoch simply ordered and installed the Marcus transformers in compliance with the directions given by Sky Solar, Justice Cavangh ruled.

In upholding that ruling, Chief Justice Strathy held that Justice Cavanagh correctly applied the approach made in 2012 by the B.C. Court of Appeal in Vernon Vipers Hockey Club v. Canadian Recreation Excellence (Vernon) Corporation.

In Vernon, a hockey fan launched a lawsuit after slipping and falling on arena property. The plaintiff sued Canadian Recreation Excellence (Vernon) Corporation and Regional District of North Okanagan, who were named as additional insureds on a liability policy written for Vernon Vipers Hockey Club. The defendants sought indemnity from the hockey club and also coverage for their legal defence under the hockey club’s liability insurance policy.

The defendants argued that the comings and goings of spectators were part of the “operations” of a hockey club, but the court disagreed.

The phrase “arising out of” should be construed as requiring “an unbroken chain of causation” and a connection that is more than “merely incidental or fortuitous,” the B.C. Court of Appeal wrote in Vernon.

Applying that reasoning, Justice Cavanagh ruled in 2019 that, in the Sky Solar case, the failure of the transformer and the fire in March 2013 were not caused by any decision taken by Marnoch in the course of its operations, or by any action of Marnoch in the discharge of its contractual obligations. Instead, the event that made Sky Solar liable to the new owner, Firelight, was Sky Solar’s decision to continue using a certain type of transformer, a decision in which Marnoch had no involvement.

Feature image via iStock.com/alvarez