Assurance et réassurance
It’s that time of year again for our annual review of case law from across Canada that had an impact on the landscape of insurance litigation.
This Quebec Court of Appeal ruling turned on the extent to which commercial liability insurance policies cover defective work. A real estate developer sued its insurer to take up its defence against a claim alleging defects in the construction of a housing project. The policy covered claims for occurrences – or “accidents” as defined in the policy – but excluding work performed by the insured. At trial, the Superior Court had found that the damages resulting from defective workmanship by the developer or its sub-contractors were excluded.
Citing the Supreme Court of Canada’s ruling in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, the Court of Appeal held that the defective workmanship could constitute an “accident”, as the insured had neither intended nor foreseen the defects that caused material damage to the building. It also found that the exclusion applied to the defective work itself, not to damage to other parts of the property because of it, such as water damages and moisture accumulation, condensation, sewer backup and traces of water infiltration in the building. Also, it refused to apply the defective work exclusion to the insured' subcontractors.
The decision stands for the proposition that the duty to defend can be triggered in complex construction litigation primarily seeking redress for defective work, where there are allegations of peripheral damages even if it’s not obvious that they are part of the claim. That can run contrary to the purpose of commercial liability insurance meant to cover claims brought by third parties. Clyde & Co Montreal, representing Intact Insurance in this dispute, has filed an application for leave to appeal to the Supreme Court.
In a late 2018 ruling, the Ontario Superior Court of Justice issued a reminder that policyholders must always be mindful of not reporting claims late.
In its ruling, the court held that a Lloyd’s policy did not provide coverage to an engineering company, against whom a claim was made by the subrogated insurer of a Holiday Inn. The claim was for damages resulting from a mechanical room explosion at the hotel. However, Cronnox, the engineering company, did not report the claim to Lloyd’s until two months after its “claims-made-and-reported” policy expired (even though Cronnox had received correspondence in which the subrogated insurer advised that it intended to sue during the policy period, before it switched professional liability insurers).
Somewhat complicating matters, an insurance adjuster mistakenly determined that Lloyd’s policy provided for a duty to defend and even appointed counsel to defend the claim against Cronnox in the underlying litigation. More than two years later, Lloyd’s denied coverage after an investigation. Cronnox responded by claiming that Lloyd’s was precluded from withdrawing from its defence and from denying indemnity coverage.
The court ultimately disagreed, as there was no relationship at the relevant time the acts and omissions said to have given rise to an estoppel.
Another Ontario estoppel case contains a warning that failure by an insurer to be diligent in delivering a timely reservation of rights letter could result in it having to defend and indemnify its insured in a personal injury action. In this case, the Ontario Court of Appeal found that Commonwell Mutual Insurance Group could not refuse to defend and deny coverage. It had appointed counsel to deliver a statement of defence, and waited long enough to be deemed to have waived its right to rely on coverage exclusion.
“In cases where there is doubt about a duty to defend or where there may be a duty to defend but there may not be a duty to indemnify, the insurer must take steps to bring the possibility the claim will be denied to the attention of the insured,” the court wrote.
The dispute originated from a collision between a dirt bike and an ATV. The ATV driver sued the motorcyclist’s employer for negligence. In June 2015, without issuing a reservation letter, the employer’s homeowner insurer appointed a lawyer to defend the claim. In January 2016, the plaintiff’s counsel enquired about coverage issues, prompting an investigation. The insurer then realized it could exclude coverage because the dirt bike had not been correctly registered. It sent a denial of coverage letter to the insured. However, the appeal court held that the insurer made a promise or representation about coverage at a time it knew all the facts necessary to deny coverage and refuse to defend. Also, the insured relied on the insurer’s promise to handle the case. To the insured’s detriment, this involved making tactical decisions on its behalf as the litigation advanced. Therefore, the insurer had to assume its duty to defend, and was precluded from denying coverage.
Also out of Ontario is this case in which the Superior Court of Justice found a property owner liable to its contractor for legal costs that would have been covered by a wrap-up policy it had promised to acquire.
A general contractor, Ashcroft Construction, had a contractual obligation with its sub-contractor to acquire wrap-up liability insurance. The property owner alleged that the subcontractor, while performing land clearing and excavation services, caused damages to the foundation of an adjoining monastery. The subcontractor, realizing that the general contractor had not secured insurance, initiated a third-party claim against it. The court found that the contractor, unable to prove that a wrap-up policy would have excluded coverage for the damages in question, had to assume its subcontractor’s defence costs. In the absence of a policy, the court ultimately concluded that such a policy would have typically covered the claims made by the owner.
When Sky Solar hired Marnoch Electrical Services Inc. to install two transformers as part of two solar energy projects, the latter agreed to name Sky Solar as an additional insured under its CGL. But coverage applied only to liability arising out of Manoch’s operations.
After the installation, a fire broke out at one of the locations involving the transformer. It was replaced, and Sky Solar eventually sold the projects to Firelight Solar Limited Partnership. Months later, there was another fire break out at the other location – again caused by the solar transformer. Firelight shut down both projects for investigations and repairs, and sued Sky Solar for remediation costs and loss of income. Sky Solar, in turn, made a claim against Economical for indemnity coverage under the policy for its losses on account of its liability to Firelight.
The insurer denied coverage based on this limitation, claiming that the loss did not arise from the contractor’s operations. The Ontario Court of Justice agreed, finding that the contractor was ordered to install the transformers in compliance with the solar energy developer’s directions. What’s more, accompanying instructions contributed to the loss – namely, the choice of specific transformers. It was therefore not enough for an insured to show that “but for” the operations, the loss would not have occurred if the policy provided coverage for liability arising out of operations.
The Court of Queen’s Bench of Alberta rejected an application for summary dismissal of an insured claim for coverage under a home policy because of possible misrepresentations by the insurer’s agent. A truck driver, Bradley Lynk, had insured his home and adjoining shop. When requesting insurance, Mr. Lynk disclosed that his business would make use of the property. Furthermore, he would keep the trucks in the shop and perform oil changes and minor repairs there.
There was a fire in the shop, and Mr. Lynk’s business filed an insurance claim for the resulting damages. But the insurer denied coverage denied based on a business use exclusion that removes damage coverage for business activities. The insured believed it had permission for business use of the property based on its dealings with the broker.
The court held that the onus of proving permission for business use rested with the insured, though it was unclear if it had been granted. The insurance had been secured through the insurer’s exclusive agent. That agent had submitted the application form to the insurer, stating only that the shop could not be insured, and did not mention a possible permission for business use. However, the truck driver denied having been told about this, and bought the policy thinking he was covered. Since the agent might have contractually bonded the insurer in its dealings with the insured, the court allowed the claim to proceed to trial.
The form requirements provision under B.C.’s Insurance Act must receive a strict application, the Supreme Court of British Columbia confirmed. Section 31 of the Act provides that insurance contracts with liability limits must have the following statement printed or stamped on it: “This policy contains a clause which may limit the amount payable”. Failing that, a deductible clause such as the one the insurer, in this case, relied on is not binding on the insured, and therefore not enforceable. Whether or not the insured knew of the deductible and had agreed to it is deemed irrelevant.
In a situation where two policies cover the same property and the same risks, there is no apportionment of the loss between insurers when one is specific and the other is general, as a recent Quebec Court of Appeal decision illustrates. The specific insurance is primary insurance, whereas the general covers the excess loss. In this particular case, Coop fédérée had been the victim of a $ US 5 million phishing and money-transfer scam. It made a claim to its insurers, Liberty International Underwriters and Co-operators General Insurance Company. Liberty, from who it had bought a fraud and misappropriation policy, paid the full coverage amount as per the policy, namely $1 million. Co-operators, with whom it had a policy covering all of its property up to $15 million, denied coverage. The insurer argued that it was up to the financial institution that had carried out the transfer to bear the loss. The court held that the electronic transfer executed by the financial institution at Coop Fédérée’s request made it liable to the bank for the corresponding disbursement from the pre-authorized margin. Coop fédérée loss was therefore a property risk covered by the Co-Operators’ policy.
Turning to the issue of loss allocation between insurers, the court first concluded that there was a plurality of insurance policies in this case. If the two policies could cover the same property and the same risks, Liberty’s insurance was specific. As such, it had to be considered as primary insurance. Therefore, no allocation of the loss among the insurers was possible. Liberty having already indemnified the insured, Co-operators was ordered to bear the excess loss, less the amount of retention and deductible.
Contracting parties may not benefit from a limitation of liability clause when they fail to fulfill essential obligations. That is the main takeaway from a Quebec’s Court of Appeal ruling in a case involving Prelco Inc., a glass transformation company parties who had hired the services of Créatech, a business optimization consultancy to implement an integrated management system. However, there were performance issues that led to errors in production orders and delays in the Prelco’s shipment of products.
It terminated the contract, hired another company to complete the work, and sued the Créatech for damages. Prelco alleged that the consultancy followed the wrong implementation approach for its needs. Créatech invoked the limitation of liability clause provided in the agreement and made a counterclaim for its unpaid balance.
The appeal court held that the service provider had not fulfilled its essential obligation to seek information about its client’s specific needs and operations. As a result, it failed to deliver on the main objective of the contract, and could not invoke the limitation of liability clause. Even so, the client, Prelco, shared some of the blame for the problems, the court ruled, fixing its portion of liability at 40%.
Also of interest, the Quebec Court of Appeal applied the continuous trigger theory to award damages among several liability insurers over multiple insurance periods. The case is noteworthy because the continuous trigger theory is an import from common law. To apply it, one must demonstrate that the damage occurred gradually over time, and that it is impossible to precisely identify when the damage occurred – an obvious challenge when trying to establish which insurance policy period applies. By applying the theory, the court can apportion damages on a pro-rata basis through the affected policy periods.
In this particular case, the dispute centred on a defective product, the Inex spacer, that was used to fabricate seal glass units for windows. It was alleged that, over the years, the white plastic spacer would turn yellow and cause chemical fog to appear on the inside surface of the sealed unit’s windows. There were several requests to replace the windows, but over a decade, a period in which different liability insurers insured the plaintiffs. The trial judge, whose decision was confirmed by the Court of Appeal, awarded damages among the insurers over time, since it was impossible to pinpoint when precisely the yellowing and chemical fogging had occurred, as it happened gradually.