As 2020 comes to an end, we note that it has been quite an active year for insurance law, in particular due to the long-awaited judgment of the Quebec Court of Appeal in Deguise. It is now time for our traditional annual review of the key judgments from across Canada that marked the past year.
This judgment of the British Columbia Supreme Court concerns the interpretation of a construction project insurance policy, in particular whether there was a limit on the amount payable under the policy’s mitigation of loss coverage.
The insurers in this case argued that the mitigation of loss coverage was constrained by a $10 million insurance limit and further reduced by amounts paid on behalf of insured professionals and claim expenses incurred during the investigation.
The Court found that as a matter of contractual interpretation, the absence of any reference to a limit of liability in the mitigation of loss coverage wording itself suggested that there were no such constraints for this specific coverage. This conclusion was also supported by the relative independence of this type of coverage in relation to the rest of the policy.
The Court concluded that no limit applied to the mitigation of loss coverage in the project specific professional liability insurance policy.
An appeal was filed on February 6, 2020.
This case highlights the distinction between an insurance policy and an insurance contract, and more specifically the importance of this distinction in determining whether the insurer has a duty to defend the members of a group insurance plan.
Trisura Guarantee Insurance Company issued a professional liability insurance policy, i.e., the master policy, to the Appraisal Institute of Canada (AIC). The master policy concerned claims made against the AIC, AIC members, their personal corporations and their employers for the negligent provision of professional appraisal services. Coverage under the master policy was extended to individual members of the AIC by way of an individual application. An individual certificate of insurance was issued to each member.
The Court’s judgment addresses the differences between insurance policies and insurance contracts, as recognized by the statutory definitions of “contract” and “policy” in the Insurance Act. The Court noted that insurance policies are instruments, which do not create legal obligations merely by their existence. Absent a further contractual relationship, a policy is simply a recitation of terms and conditions that do not attach to a particular person or object. In contrast, an insurance contract creates contractual obligations between the parties. Like any other contract, there must be offer and acceptance, and agreement on all material terms. The premium, the nature and duration of the risk to be covered, and the extent of liability are all essential terms of an insurance contract.
The Court explained that the master policy was not a binding agreement on its own, but merely set out the terms of the professional liability insurance being offered to the members of the AIC. Each AIC member who seeks coverage must apply for it. Provided the member and the insurer come to an agreement on the other essential terms (for example, the premium to be paid and the term of the insurance), a certificate of insurance will be issued to the member to confirm the existence of the insurance contract.
The Ontario Court of Appeal’s recent decision in Markham (City) v. AIG Insurance Company of Canada has significant implications for situations where several policies are triggered and may lead towards the joint handling of loss from the outset in cases where two insurers are potentially liable.
This judgment is significant in that it highlights the importance of specific wording. When several policies cover the same risk, priority is often dependant upon “other insurance” clauses to determine which is the primary policy and which is considered excess. The primary policy controls the defence. It should be noted that the Court of Appeal placed less emphasis on the wording of the primary and excess policies. It departed from the application judge’s decision by concluding that Lloyd's policy was excess solely in regard to the allegations that overlapped and that fell under the coverage provided by AIG.
For insurers, this judgment reiterates the importance of implementing appropriate file management systems to minimise potential conflict issues.
The Supreme Court of Canada refused leave to appeal on December 3, 2020.
This highly anticipated judgment of the Quebec Court of Appeal is considered the main judgment in the pyrrhotite files. The matter has been divided into three waves of proceedings, and this judgment was rendered on the appeal of the decision in the first wave.
Recall that the owners of buildings in Trois-Rivières brought close to 880 actions for damages, grouped into 69 different files, due to the deterioration of their foundations caused by the swelling and cracking of concrete. The actions were instituted against several parties, including the individual sellers, the general contractors and formworkers involved in the construction of the foundations, the concrete producers that supplied the problematic concrete, the corporation operating the quarry that supplied the aggregate, the geologist who approved the use of the aggregate and his employer, SNC-Lavalin Inc., as well as all the insurers of those parties.
First, and subject to some exceptions, the trial judge found the contractors, the concrete producers, the quarry, the geologist, SNC, and their insurers liable. He found that the presence of pyrrhotite was both a latent defect and a construction defect resulting in the loss of the work.
The Court of Appeal found that the Superior Court did not err in its interpretation of the insurance policies of the concrete producers, the quarry, and certain contractors. The trial judge correctly rejected the insurers’ argument that the policies should be declared null and void because the insureds breached their obligation to declare the risks. The insurers also failed to demonstrate the existence of a pyrrhotite exclusion. Finally, the Court of Appeal found that the trial judge did not err in his interpretation of the clauses in SNC-Lavalin’s insurance policy, including those relating to the exclusions and the retroactive date invoked by the insurers. The Court also found that the contractors had a direct right of action against the insurer in relation to the amount of the liability insurance, which must be used exclusively to pay their claim. The insurers cannot invoke a reduction in the amount of insurance coverage based on erosion caused by claims expenses and legal costs, regardless of the origin of such amounts.
This decision may be analyzed from various perspectives. In the field of insurance alone, several issues are addressed, including the insurer’s underwriting process, defence costs outside of limits to the benefit of Quebec claimants and the complications of tower insurance. We refer you to our specific articles on those issues.
A recent judgment of the Alberta Court of Appeal reminds insurers that clear policy wording is required in multi-peril or all-risk policies for a faulty workmanship clause to apply.
The Court of Appeal considered the judgment finding that the claim of Condominium Corporation 9312374 (Condominium) was not covered by its insurance policy issued by Aviva. The appeal was allowed.
The facts are as follows. Condominium’s parkade sustained structural damage when the workers hired to perform repair and remediation work on the parkade membrane cut too deeply into the concrete slab. Aviva denied coverage for the claim on the basis of the exclusion for the cost of making good faulty workmanship in the multi-peril policy. However, the exclusion clause contained an exception for loss or damage caused directly by a resultant peril.
The Court found that the exclusion clause and the exception were ambiguous. It noted that the parties reasonably expected that the cost of making good faulty workmanship would be excluded, but not the consequences of that faulty workmanship. The Court concluded that the repair and remediation work to the parkade membrane was not covered by the insurance policy but that the damage to the structure of the parkade was a covered loss under the policy.
In this judgment, the Quebec Court of Appeal provided an interesting clarification on wrap-up insurance policies.
In the context of a construction project, a painting subcontractor struck a sprinkler head in a stairwell, causing water damage, after the date of receipt of the certificate of substantial completion of the work from the general contractor. Temple denied liability, arguing that the loss could not be covered by the wrap-up policy because the painting work underlying the water damage was not completed at the time of the occurrence.
Temple’s policy covered many types of claims for damage resulting from the performance of the construction work by the insureds. However, it contained an exclusion for property damage caused to the project itself.
The exclusion contained a “completed operations hazard” exception, which specified that property damage to the project would be covered if the occurrence was “after the Insured’s Work has been completed or abandoned”. The policy also defined this expression.
In this case, the issuance of a certificate of substantial completion of the work could not be used as proof of completion of the work because the certificate was issued in the name of the general contractor rather than the owner.
The issue in dispute, however, was related to the application of the expression set out in the policy to define completed work, that is when the work “has been put to its intended use”.
The Superior Court accepted three meanings that could be attached to this expression:
The Court found that so long as the painting work had not been completed, the work could not be put into service or used for its intended purpose. The Court also noted that the fact the lofts were more than 80% occupied had no impact on the analysis. Because the painting work had not been completed in the common areas, that work could not be deemed completed within the meaning of the policy.
On appeal, the Court added to the Superior Court’s analysis, noting that the possibility that incomplete work of another nature could be deemed completed within the meaning of the expression “has been put to its intended use” could not be set aside. That said, the painting work, in view of its nature and the extent of its progress could not be deemed completed within the meaning of that expression.
In this judgment rendered in July, the Ontario Court of Appeal reversed the trial judgment finding that Treport Wedding & Convention Centre Ltd. was covered for sewer back up only and that there was no coverage available under the flood endorsement of its all-risks policy issued by Co-operators.
Treport’s commercial premises sustained severe flooding as a result of a rainstorm. Water entered the building through the doors, floor drains and ceilings, causing significant damage to the premises. Treport presented a claim for indemnity to Co-operators General Insurance under its all-risks insurance policy. The insurer paid out the policy limit pursuant to the sewer back up endorsement. The dispute centered on whether the policy’s flood endorsement applied to the claim. The trial judge found that the flood endorsement did not apply for two reasons: 1- the damage to the property was caused by “surface water”, defined in the policy as “water or natural precipitation temporarily diffused over the surface of the ground” and accordingly, the “surface water” exclusion in the policy applied to exclude coverage; 2- the event was not caused by a flood as defined in the flood endorsement. The Ontario Superior Court of Justice therefore found that the insured was not entitled to coverage under the “flood” endorsement.
The Court of Appeal examined the policy wording in detail to determine whether the event constituted a flood within the meaning of the policy. The Court reiterated that an endorsement is not independent from the policy as it has no independent existence from the rest of the policy. They must be read together. The Court also noted that giving effect to the definition of “surface water” when interpreting the “flood” endorsement would have the effect of nullifying the coverage provided. Flood coverage would effectively be nullified in almost all cases because most buildings stand a certain distance away from the water. Thus, the “flood” endorsement must be read without giving the surface water exclusion any weight.
Co-operators filed an application for leave to appeal to the Supreme Court of Canada on October 20, 2020.
This is an update to the judgment cited in our 2019 annual review. This decision of the Ontario Court of Appeal addresses the interpretation of an expression commonly used in liability insurance policies, that is, the expression “arising out of the operations”.
Sky Clean Energy appealed from the judgment of the Superior Court of Justice dismissing its application against Economical Mutual Insurance Company. Recall that when Sky Clean contracted with Marnoch Electrical Services Inc. for the installation of two transformers in the context of two solar energy projects, Marnoch agreed to name Sky Clean as an additional insured under its CGL policy. However, coverage was limited to liability arising out of Marnoch’s operations. After installation, a fire broke out at one of the sites where the transformer was located. It was replaced, and Sky Clean eventually sold the projects to Firelight Solar Limited Partnership. A few months later, another fire broke out at the other site, also caused by the solar transformer. Firelight shut both projects down for investigation and repairs and sued Sky Clean for remediation costs and loss of revenue. In turn, Sky Clean filed a claim for indemnity from Economical under the insurance policy to cover its losses pursuant to its liability to Firelight. The insurer denied coverage on the basis of the limit set out in the policy, asserting that the loss did not arise from the operations of the contractor, Marnoch. The Ontario Superior Court of Justice agreed with the insurer, finding that the contractor had been told to install the transformers in accordance with Sky Clean’s instructions. The appeal was dismissed.
The Court of Appeal considered the requisite connection between the contractor’s operations and the liability of the additional insured. It confirmed the usual limitations to the expression “arising out of the operations”, which requires more than a “but for” test to establish the connection between the liability of the additional insured and the operations of the insured. The Court explained that requiring an “unbroken chain of causation” and a connection that is more then merely incidental or fortuitous between the liability of the additional insured and the operations of the named insured provides certainty and predictability for all parties. The Court also found this approach consistent with the reasonable expectations of the parties to the construction contract and that of their liability insurers.
With the soaring interest in cybersecurity issues, we found it important to highlight this recent judgment on the subject.
Future Electronics was the victim of a social engineering fraud, a practice of psychological manipulation for the purpose of perpetrating a swindle, in the amount of US$2.7 million. It therefore submitted a claim to its insurer, Chubb, under its crime insurance policy. The insurer refused to indemnify Future for the loss, asserting that it was a case of social engineering fraud covered under a crime policy endorsement with a coverage limit of $50,000. Future Electronics argued that its loss was covered under the computer fraud or funds transfer fraud provisions of the policy. The Court agreed with the insurer.
The insurance policy provided coverage for direct loss sustained by the insured, resulting from computer fraud by a third party. The policy used the expression “unlawful taking”. That requires a direct act of stealing perpetrated by a fraudster, through the use of a computer. However, it cannot be construed as being so broad that the simple operation of a computer in an incidental way would give rise to a situation covered by the policy. The use of a computer by the fraudsters as a means of communicating with the employees did not give rise to coverage under the computer fraud provision.
In this case, the British Columbia Court of Appeal distinguished between omissions and misrepresentations.
The obligation of good faith is a central element of insurance contracts in the sense that both insureds and insurers must conform to high standards regarding disclosure. For insureds, this means that they must disclose all material facts concerning the risk. Any omission or misrepresentation affecting that risk will be considered a relevant factor should the insurer attempt to cancel the contract. However, there may be differences between the two.
In Nagy, the Court of Appeal provides advice to practitioners for situations where the boundary between omissions and misrepresentations becomes blurred.