Coverage for a Named Insured or Additional Insured

April 1, 2022

Coverage for a Named Insured or Additional Insured

DOES A COMMERCIAL GENERAL LIABILITY POLICY COVER A “NAMED INSURED” OR “ADDITIONAL INSURED” FOR PARTNERSHIP OR JOINT VENTURE ACTIVITIES?

Eric A. Dolden

April 2022

CONTACT LAWYER

Eric Dolden
604.891.0350
edolden@dolden.com

DOES A COMMERCIAL GENERAL LIABILITY POLICY COVER A “NAMED INSURED” OR “ADDITIONAL INSURED” FOR PARTNERSHIP OR JOINT VENTURE ACTIVITIES?

A.      THE BUSINESS CASE FOR PARTNERSHIPS & JOINT VENTURES

Over the past twenty years, commercial insureds are increasingly doing business as limited partnerships and joint ventures. Many of the larger real estate projects are done by limited partnerships. Many resource-based projects are undertaken by joint venture. For many commercial insureds, either a partnership or joint venture can offer significant business advantages when compared to a sole proprietorship or company.

The advantages can include:

1.      sharing the risk with other participants, so that any losses are shared rateably;

2.      overcoming the problem that not all commercial insureds have sufficient capital, equipment and           manpower to take on a contract;

3.      possibly allowing for tax advantages by maintaining separate ownership of property; and

4.      providing flexibility to organize resources for a particular project, without the need for a long term           financial commitment.

These alternative business vehicles also pose risk management challenges that the participants must understand and guard against with adequate, responsive liability insurance. From a liability standpoint, some of the disadvantages include the following:

1.      a general partnership entails each partner being jointly and severally liable for the other partners’ conduct.           If one’s partners become insolvent, the remaining partners may have to assume a joint and several liability           that entails a financial responsibility for 100% of the loss;

2.      partnership liabilities survive after the partnership dissolves and theoretically, in perpetuity, subject only           to the applicable limitation periods;

3.      a joint venture entails vicarious liability for the conduct of the other joint venture participants;

4.      a partnership or joint venture can result in legal liability for the conduct of partners and joint venturers           which, practically, you cannot control, manage or supervise; and

5.      a partnership, in particular, arises even if that legal relationship is not contemplated by the parties, if they           act collectively with a view to securing a common profit. Unwittingly, they can be visited with partnership           liability.

B.      UNDERWRITING PERSPECTIVE OF PARTNERSHIPS & JOINT VENTURES

The spectre of a commercial insured engaging in a partnership or joint venture poses the potential for “hidden risks” that cannot be fully understood unless there is full and complete disclosure by the insured working in conjunction with its broker.

If a company or an individual agrees to participate in a joint venture or a partnership, and does not disclose its existence to the liability insurer, the underwriter, in ways he or she will not appreciate, will be assuming a potential legal liability that reflects more than just the “moral hazard” incidental to the insured. If  a company or individual enters into a partnership, the insured could be jointly and severally liable for the acts and conduct of a wide variety of partners who pose their own “moral” and “physical” hazards, which are completely unknown to the underwriter. The problem is particularly acute for the commercial underwriter since he or she theoretically, would need to separately evaluate the underwriting profile of each participant in order to properly price the premium for a partnership or joint venture activity. If the insured does not disclose its involvement in either the joint venture or partnership, then the underwriter is bearing an added liability exposure without the commensurate premium that should go with that risk.

C.      EXAMPLE: THE “UNFORESEEN” UNDERWRITING RISK

A simple example will illustrate the extent to which an unknown risk can become an added hazard from an underwriting perspective. This example presupposes that a real estate developer is in the business of developing and constructing multi-unit residential buildings.

Historically the developer, using its own skilled tradespeople and financing, has developed in excess of twenty different residential buildings. The developer has a liability policy with $5 million in limits for its operations and additional “completed operations” coverage.

In 2005, the insured recognizes an opportunity to become involved in a 25-storey high-rise. The high-rise will require a capital commitment well beyond its means and a work force that exceeds its current capacity. The insured is reluctant to hire unskilled tradespeople for one job, knowing they would have to be laid off when the job is done. The developer, while having a healthy balance sheet, does not have the capacity to borrow monies needed to finance the project during construction.

Limited in personnel and financial means, the developer approaches another developer who has a history of developing residential highrise buildings and is flush with capital from its success on previous projects.

The two developers decided to embark upon a joint venture for the development of the high-rise tower. The project will involve monies and staff from both companies,  with each company contributing to the overall leadership of the project. The two developers agree that they will share any profits or losses 50/50.

Work starts in January 2006, and is completed by March 2007. Both during and following construction both developers maintain a general liability policy, but neither company advises their broker of the joint venture. As a result, the declaration page on both liability policies does not specifically enumerate:

The joint venture between ABC Developer Ltd. and CDE Developer Ltd. to develop a 25 storey highrise tower at [address].

In 2011, a fire hydrant on the 25th floor fails, causing water to flow down throughout the residential and commercial portions of the tower, resulting in water damage to residential units in the high-rise, as well as to commercial tenants in the bottom portion of the building.

The two developers are both sued in 2013, on the basis that each company is vicariously liable for the conduct of the construction site participants, including the trade that installed the fire hose system. It is also alleged that the two joint venture participants are directly liable for their failure to check and inspect the fire safety equipment when the building was completed. Many of the residents and commercial tenants commence lawsuits.

In the lawsuits, the plaintiffs allege that ABC Developer Ltd. and DEF Developer Ltd. formed a joint venture for the development of the building and are vicariously liable as joint venture participants.

Would these two companies have coverage for the losses that ensued? If the insurance broker did not Would these two companies have coverage for the losses that ensued? If the insurance broker did not ensure the declaration page specifically enumerated the joint venture, the liability insurer would be entitled to avoid any defence and indemnity obligation since the policy, by its terms, did not specifically insure the joint venture. The fact that in their own right each joint venture participant had liability insurance in its own name would not, in and of itself, mean that the joint venture is covered.

Why is this so? This is the result in the recent decision of the British Columbia Court of Appeal in Kingsway General Insurance Company v. Lougheed Enterprises Ltd et al.

The balance of this paper will discuss why, in the factual situation posed above, each of the developers would not have coverage under their respective general liability policies.

D.      THE FACTS IN KINGSWAY

Three companies, each with differing shareholders, agreed to build a three-storey condominium building in Richmond,  British Columbia, in 1983.  The three companies entered a general partnership specifically to build the project. The partnership agreement did not contemplate any “joint activity” other than the proposed development. Each of three corporate partners undertook other development projects, independently of the others.

All three partners contributed money and labour in differing degrees, and the partnership agreement provided for the division of profits based on relative contributions.  The building was constituted as a strata corporation.

Commencing in July 1997, Kingsway General Insurance Company insured two of the three corporate partners, primarily because they had common directors and officers and had purchased the insurance together using the same insurance broker. However, the development of the project entailed a third corporate partner, which made no monetary contribution to the project’s development, but which acted as the “Managing Partner” for supervising the trades doing the work.  The third corporate partner was unrelated to the other two corporate partners, at a shareholder level, and used a different insurance broker to purchase its own insurance.

Within several years of project completion, the residential units were sold and the partners disbanded the partnership having presumably withdrawn their profits.

While   Kingsway covered the first two corporate partners as “Named Insureds” on the same policy, it did not cover the third corporate partner as a “Named Insured” or “additional insured.”

Then two unfortunate events arose. On July 11, 1998, a year after Kingsway came on risk, a fire destroyed much of the building. It started in a balcony barbecue, but spread dramatically since the building did not have proper firewalls and fire separations, as required by the British Columbia Building Code.

To compound matters, a second fire occurred on October 9, 2000, in a different part of the building. Again, like the first fire, it spread very quickly, in view of the lack of proper fire protection as required by the Building Code.

The two corporate partners requested that Kingsway defend them in the lawsuits that had ensued by 2003. Kingsway denied coverage, relying upon the following provision in the commercial general liability policy:

1.      NAMED INSURED

The Named Insured is as stated in the Declarations.

2.      INSURED

The unqualified word “Insured” includes the Named Insured and also includes:

(a)       any partner, officer, director, employee or shareholder with respect to acts performed on behalf of             the Named Insured in that capacity.

(b)       any owner, person, firm, organization, trustee, estate or governmental entity to whom or to which             the Named Insured has contracted to effect insurance by virtue of a contract of agreement or by the             issuance or existence of a permit. But the Insurance provided for such additional Insured is restricted             to apply solely to liability arising out of operations performed under said contract and only to the             extent required by such contract;

It is understood and agreed however that the above extension (b) does not apply to subcontractors or contractors working on behalf of the Named Insured.

(c)       co-owners, joint ventures [sic] or partners having a non-operating interest with the Named Insured             in the operations insured hereunder.

(d)       all employee social clubs which manage, operate, control or supervise recreational activities under             the auspices of the Named Insured.

(e)       any organization you newly acquire or form other than a partnership or joint venture, and over which             you maintain ownership or majority interest will be deemed an Insured.

However:

(a)       The Insurance granted to such organization is excess to, and shall not contribute with, previously             arranged insurance of such organization;

(b)       Coverage under this provision is afforded only until the 90th day after you acquire or form the             organization or the end of the policy period, whichever is earlier;

(c)       Coverage does not apply to “personal injury” or “property damage” that occurred before you             acquired or formed the organization; and

(d)       Coverage does not apply to “personal injury” arising out of an offence committed before you             acquired or formed the organization.

No person or organization is an Insured with respect to the conduct of any current or past partnership or joint venture that is not shown as a Named Insured in the Declarations.

Nothing in this definition relieves the Named Insured of its obligation to make a full disclosure of matters material to the risk and to report to the [insurer] material change in the risk during the currency of the policy. [Emphasis added.]

Kingsway relied upon the explicit policy language that contemplates an absence of coverage for a partnership or joint venture not explicitly enumerated. Kingsway said, in effect “while we would cover you for your own activities as a developer, we do not cover you when you are sued solely because of your participation in a joint venture or partnership which you did not disclose to us.”

Kingsway filed a legal proceeding in the Supreme Court of British Columbia to determine whether its coverage position was correct.

E.      ISO/IBC TREATMENT OF PARTNERSHIPS AND JOINT VENTURES

Liability policy wordings in the United States have long excluded undisclosed partnerships and joint ventures from the definition of “Insured.” Uniform policy wordings in the United States are developed by the ISO (Insurance Services Office) and identical or similar versions are often adopted in Canada at the urging of the  IBC (Insurance Bureau of Canada).

Prior to 1990, the commonly used wording for “undisclosed partnerships and joint ventures” was in this form (the “Older Wording”):

This insurance does not apply to bodily injury or property damage arising out of the conduct of any partnership or joint venture of which the insured is a partner or member and which is not designated in this policy as a named insured.

Slightly different wording – identical to that in Kingsway’s policy discussed above, was later adopted in the United States, as follows (the “Current Wording”):

No person or organization is an insured with respect to the conduct of any current or past partnership, joint venture or limited liability company that is not shown as a Named Insured in the Declarations.

The Older and Current Wording differ in two respects, with the Current Wording broader in scope:

1.      The Older Wording only applies to existing partnerships and joint ventures, but the Current Wording           applies to both “current” and “former” partnerships and joint ventures; and

2.      The Current Wording’s phrase“ with respect to the conduct of” is broader than the Older Wording’s “arising           out of”, and so practically broadens the range of situations excluded from coverage.

Early United States insurance cases, decided on the Older Wording, make clear that the rationale for the limitation on “undisclosed partnerships and joint ventures” is to protect the liability insurer from hidden risks it did not consider in calculating the premium.

Even in the context of the Older Wording, United States courts have often concluded that the provision is clear and unambiguous, and is controlling as to the intent of the parties and governs the legal consequences of its provisions. The courts held that the parties’ intent, or “reasonable expectations,” was disclosed in the language of the Older Wording such that participation in a partnership or joint venture would terminate the duty to indemnity for damages sustained while so engaged.

The judicial interpretation is one of the few instances in which Unites States courts have used the doctrine of “reasonable expectations” against a commercial insured and in favour of the commercial liability insurer. 

American cases considering the Current Wording (i.e., as used in Kingsway) have also declared that the limitation on coverage is clear in its meaning and unambiguous.

An insurer that departs from the Current or Older Wording does so at its own peril. In Clarendon America Ins. Co. v. BGK Sec. Services, Inc., the Court compared the Older Wording to the wording of the policy, which stated:

We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies… we will have no duty to defend the insured against any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this insurance does not apply…

The Court found the Older Wording narrower than the language at issue in the policy because the Older Wording specifically referenced joint ventures.  The Court refused to apply the exclusion. 

F.       KINGSWAY AND THE BRITISH COLUMBIA COURT OF APPEAL

On these facts, Kingsway denied it owed a duty to defend any of the three partners against the underlying lawsuits or to indemnify them for the fire losses, for the following reasons:

(a)     The limitation on coverage for an “undisclosed partnership” applied equally to either a partner’s direct or           vicarious liability stemming from an “undisclosed partnership” since the the words in the limitation           exclude the partnership itself and its consequences, regardless of the           insured’s role in the           “undisclosed partnership”;

(b)     The underwriting rationale inherent to this limitation on coverage, as recognized by the United States           Courts which have examined this same issue, is to ensure that the underwriter is not confronted with a           materially increased risk, without the concomitant benefit of either the opportunity to decline the risk           posed by the partnership or to increase the premium; and

(c)     In this case, the undisclosed partnership included a corporate partner, not otherwise insured under the           policy, which acted as the “Manager” and “Development Manager” for the building at issue in the           underlying litigation. So, from an underwriting standpoint, the two insured corporate partners that           purchased this liability insurance now faced potential legal liability because of the acts and conduct           of the “non-insured” corporate partner, for whose acts the insurer had not received any premium.

The two corporate partners, who were admittedly “insureds,” demanded full coverage even though the Declaration Page did not expressly list the partnership. They pointed out that they could each be held liable in their own right, regardless of whether any of their other partners were sued, and that they should each have coverage for their “individual liability.”

Secondly, each of the corporate partners said that coverage should exist in their “individual capacity” even if they could be vicariously or jointly liable for any negligence or misconduct committed solely by one of their corporate partners.

As discussed below, the British Columbia Court of Appeal did not agree with the insureds’ arguments.

G.     KINGSWAY AND “UNDISCLOSED” PARTNERSHIPS & JOINT VENTURES

The Court stated that in circumstances where an “undisclosed” partnership or joint venture is sued, and where that partnership or joint venture is not specifically enumerated on the declaration page or added by suitable endorsement, there is no coverage as a matter of law if the lawsuit arises from the “undisclosed” activity.

The Court of Appeal concluded that the allegations underlying the lawsuits were allegations with respect to the conduct of the partnership: 

[24] In my view, the allegations made in the underlying lawsuit are in substance allegations “with respect to the conduct of” the [partnership] within the meaning of the “No person” clause.  … My conclusion in this regard is consistent with that reached in various U.S. cases to which we were referred, notably, Associated Metals and Minerals Corporation v. Hartford Accident and Indemnity Company, Fire & Casualty Cas. 907 (D.C.N.Y., 1977); Austin P. Keller Construction Company, Inc. v. Commercial Union Insurance Company,379 N.W. 2d 533 (Minn. S.C., 1986); Fireman’s Fund Insurance Company v. E.W. Burman, Inc.,391 A. 2d 99 (R.I.S.C., 1978); and the holding of the Court in Geoffrey H. Palmer v. Truck Insurance Exchange,78 Cal. Rptr. 2d 389 (Cal. Ct. App., 1998) with respect to the so-called “Truck primary policy” and policies issued by the defendants Continental Casualty Company and American Casualty Company in that case.

As I have already found, the allegations in this case did not make such distinction or purport to describe [the partners} in any capacity other than qua partners of the [partnership].

The Court rejected the argument that there was an obligation on the insurer to show that the partnership resulted in a material increase of risk: 

[27] Finally on this point, the appellants referred us to Maryland Casualty Co. v. Reeder, supra, and a case which recently followed it, Scottsdale Insurance Company v. Essex Insurance Company, 98 Cal. App. 4th 86 (Cal. Ct. App., 2002).  Those decisions place an obligation on the insurer to show that their risks were materially increased by the participation of the corporate insured in a partnership that was not a Named Insured.  With respect, I do not believe such an approach is justified under Canadian law, which more properly, in my respectful view, focuses on the wording of the policy in question.

The Court clarified the intent of the “No person” clause and that unless a party was a “Named Insured,” or was otherwise captured by the definition of “Insured,” the party was not an “Insured”:

[28] I return at last, then, to [the Insured’s] submission … that the “No person” clause read in context purports only to clarify who is not covered by the policy and does not affect or modify the rest of the definition of “Insured”.  [ Kingsway] makes two arguments in response.  First, it says that such an approach makes the “No person” clause superfluous.  In [counsel’s] words, “There is no need to ‘clarify’ what is already self-evident, that is, unless a party is a ‘Named Insured’ or otherwise falls within the extended definition of ‘Insured’, that party is not an Insured.”  Second, it is said that [the Insured’s] argument overlooks the fact that the “No person” clause applies to any “person or organization” – a broad term that in its face would include almost any Insured or Named Insured.  Again to quote from [counsel’s] argument on behalf of [ Kingsway]:

In order to give the clause meaning, it must be read as having the application evident on the face of the wording.  It is evident from sub-clause (e) of the definition of “Insured” that the term “organization” is of wide import and can include a “partnership”.  This is further support for [ Kingsway’s]  position that the impugned clause, given a proper, broad interpretation, operates to remove coverage from both an “Insured” and a “Named Insured” where full and proper disclosure has not been made.
The Intervenor’s interpretation fails to acknowledge the overall commercial approach to coverage in [ Kingsway’s] liability wording.  The insuring agreement states coverage is afforded to an “Insured”.  In the definition section who constitutes an “Insured” is segregated as between a “Named Insured”, which is a person or entity that is listed on the declaration page (or by means of a suitable endorsement) supplemented by those additional persons or entities that are treated as “Insureds” by virtue of sub-clauses (a) to (e) in the definition of “Insured”.  Then having stated that “Insured” includes both “Named Insureds” plus those additional “Insureds” deemed in effect to be an Insured, the penultimate sentence states that:

“No person or organization is an “Insured”……

By use of the broad terms “person” and “organization” the policy language necessarily makes clear that neither a “Named Insured” nor someone deemed to be an “Insured” by virtue of subclauses (a) to (e) attracts coverage for any undisclosed partnership or joint venture unless it is specifically enumerated on the declaration page.  To accede to the Intervenor’s interpretation is to “re-write” the penultimate sentence to instead read:

“No person or organization, except an Insured or Named Insured, is an insured with respect to the conduct or [sic] any current or past partnership…” [Emphasis in original.]

With respect, I agree with these arguments, which are also sufficient in my view to dispel any argument based on the larger principle of repugnancy, illustrated by Forbes v. Git,[1922] 1 A.C. 256 (J.C.P.C.), concerning which we sought and received written submissions from counsel.

The Court concluded that the intent of the “No person” clause was to ensure the insurer would not be bound to defend claims arising from the conduct of a partnership of which it was not aware and which was not a “Named Insured”:

[29] I am reluctant to give effect to what is really an exclusion clause that was misplaced in the “definitions” section of the policy, but the principles of construction require that effect be given to all words used in a contract, if at all possible and that the plain meaning of the words used should be given effect unless the result would be commercially unreasonable or absurd.  In my opinion, the intention of the “No person” clause was to ensure that the insurer would not be bound to defend claims arising from the conduct of a partnership of which it was not aware and which was not therefore also named as an Insured.  There was, then, a reasonable commercial purpose for the clause thus construed.  The allegations in the underlying action are properly characterized as  arising from the conduct of the [partnership], and it was not a Named Insured.  In my opinion, the “No person” clause does operate to qualify the coverage available to [the Insured].  I would dismiss the appeal.

While it has not been directly judicially considered, at least one case has implicitly challenged the reasoning of having an exclusion hidden in a definition. In Coleman v. Great American Insurance Co., the Court refused to give effect to a “definition” that ostensibly operated as an exclusion:

 [102] In concluding that the claims in the Underlying Action do not fall within the grant of coverage I have placed no weight upon Section V. of the Policy and have discounted the Insurer’s argument that the underlying claims are excluded as Related Wrongful Acts. In my view, if the Insurer could not establish that coverage was excluded by the wording that appears in Section IV. under the heading “Exclusions”, I would not have given effect to the insurer’s position that coverage is excluded by the wording that appears in Section V. under the heading “Limits of Liability”. In my view, if the Insurer had intended the definition of Related Wrongful Acts to have established a distinct exclusion from the coverage afforded by the policy it ought to have done so expressly in the exclusions.

H.      CAN THE COURT EXAMINE PARTNERSHIP AGREEMENTS?

Historically, Canadian judges have only examined the Statement of Claim to determine whether a liability insurer has a “duty to defend.” Essentially, it is a search to determine whether the pleadings, by their very nature, could give rise to a potential liability within the coverage granted by the liability insurer.

Since then, the courts have expanded the applicable considerations when determining whether there exists a “duty to defend.” In 2022, the Ontario Court of Appeal in IT Haven Inc. v. Certain Underwriters at Lloyd’s, London, by reference to Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada and Monenco Ltd. v. Commonwealth Insurance Company summarized the principles applicable to “duty to defend” cases:

  •    Insurers owe a duty to defend where there is a mere possibility that a claim falls within the insurance policy.
  •    In determining a duty to defend, the court should consider the allegations made against the insured and the    policy language.
  •    The onus is on the insured to first establish the possibility that the pleadings fall within the insurance    policy, at which point the onus shifts to the insurer to show that an exclusion clearly and unambiguously    excludes coverage for a claim against an insured.
  •    Extrinsic evidence explicitly referred to within the pleadings may be considered for the purposes of    ascertaining the substance and true nature of the claims.
  •    However, courts cannot look at “premature” evidence, or evidence that if considered, would require    findings to be made before trial that would affect the underlying litigation.
  •    Extrinsic evidence not mentioned in the underlying action, or not needed to ascertain the nature of the    claim, should not be considered by the court in the duty to defend application.

Applying that principle to the issue of “undisclosed” partnerships and joint ventures, it practically meant that in this case the British Columbia Court of Appeal could examine not only the Statement of Claim, but also the partnership agreement to determine the identity of the partners, the role each played and (indirectly) whether the nature of the partnership posed an “enhanced hazard” for which the underwriter would be unaware.

I.       APPLICATION OF EXCLUSION FOR UNDISCLOSED PARTNERSHIP & JOINT VENTURE

If two individuals form a partnership, one of two situations could arise. One of the two partners could be careless and their conduct could result in a loss that results in legal liability. In that situation the partner could be sued alone on the basis that they were careless and caused harm. Alternatively, both partners could be sued and the “innocent” partner could be liable, not because they did something wrong, but because they are said in law to be jointly and severally liable for the conduct of the other partner.

It is a “status liability” because it flows not from the conduct that gave rise to legal liability, but because the law “attributes” legal responsibility to other partners by operation of law, based on their status as partners.

A partnership is not a legal entity per se.  However, it can sue or be sued.

In British Columbia the Supreme Court Civil Rules, permit a partnership to be named by its partnership name in a lawsuit. The Rules also permit execution against both the partnership assets and the members of the partnership.

Partners may sue or be sued in firm name

20-1(1) Two or more persons claiming to be entitled, or alleged to be liable, as partners may sue or be sued in the name of the firm in which they were partners at the time when the alleged right or liability arose.

Execution against partners

20-1(7) Without limiting subrule (8), if an order is made against a firm, execution to enforce the order may issue against any person who

(a) filed a responding pleading or response to petition in the proceeding in the person’s own name as a partner,

(b) having been served with the originating pleading or petition as a partner, failed to file a responding pleading or response to petition in the proceeding,

(c) admitted in a pleading or affidavit that the person is a partner, or

(d) was adjudged to be a partner.

Similar wording is found in the rules of civil procedure for Alberta and Ontario. In Alberta, this is in the Rules of Court:

Actions by or against partners and partnerships

2.2    (1) An action by or against 2 or more persons as partners may be brought using the name of the           partnership.

(2) Subrule (1) also applies to an action between partnerships having one or more partners in common.

Virtually identical wording is found in the Ontario Rules of Civil Procedure:

8.01  (1) A proceeding by or against two or more persons as partners may be commenced using the firm name           of the partnership.

(2) Subrule (1) extends to a proceeding between partnerships having one or more partners in common.

Each of the provinces of British Columbia, Alberta and Ontario also have legislation that set out the substantive obligations of partners.

In British Columbia, this is set out in Sections 7, 11 and 12 of the Partnership Act:

Liability of partners

       (1) A partner is an agent of the firm and the other partners for the purpose of the business of the          partnership.

(2) The acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he or she is a member bind the firm and his or her partners, unless

(a) the partner so acting has in fact no authority to act for the firm in the particular matter, and

(b) the person with whom he or she is dealing either knows that the partner has no authority, or does not know or believe him or her to be a partner.

Liability of partners for firm debts

11      A partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred          while he or she is a partner, and after his or her death his or her estate is also severally liable in a due course          of administration for those debts and obligations, so far as they remain unsatisfied, but subject to the prior          payment of his or her separate debts. (emphasis added)

Liability of firm

12      If, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm          or with the authority of his or her partners, loss or injury is caused to any person who is not a partner in the          firm or any penalty is incurred, the firm is liable for that loss, injury or penalty to the same extent as the          partner so acting or omitting to act.

Similar provisions are found in Sections 11 and 13 of the Alberta Partnership Act:

Liability of partners

11      (1) This section is to be applied subject to section 12.

(2) Each partner in a firm is liable jointly with the other partners for debts and obligations of the firm incurred while that partner is a partner.

(3) When a partner dies, the partner’s estate is severally liable, in the due course of administration, for any debts and obligations of the firm incurred while the deceased partner was a partner that remain unsatisfied.

(4) The payment of debts and obligations under subsection (2) is subject to the prior payment of the separate debts of the deceased partner.

Liability of firm for wrongs

13      When, by a wrongful act or omission of a partner acting in the ordinary course of the business of the firm           or with the authority of the partner’s co-partners, loss or injury is caused to a person not being a partner in           the firm, or a penalty is incurred, the firm is liable for it to the same extent as the partner so acting or           omitting to act.

Likewise, in Ontario, this is set out in Sections 10, 11 and 13 of the Partnerships Act.

Liability of partners

10     (1)     Except as provided in subsection (2) every partner in a firm is liable jointly with the other partners for           all debts and obligations of the firm incurred while the person is a partner, and after the partner’s death           the partner’s estate is also severally liable in a due course of administration for such debts and obligations           so far as they remain unsatisfied, but subject to the prior payment of his or her separate debts.

Liability of firm for wrongs

11      Where by any wrongful act or omission of a partner acting in the ordinary course of the business of the           firm, or with the authority of the co-partners, loss or injury is caused to a person not being a partner of the           firm, or any penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or           omitting to act.

Liability of for wrongs joint and several

11      Except as provided in subsection 10(2) every partner is liable jointly with the co-partners and also severally           for everything for which the firm, while the person is a partner therein, becomes liable under section           11 or 12.

Lindley & Banks on Partnership (London: Sweet & Maxwell, 1990) at 13-14 summarizes the nature of joint and sever liability for the constituent partners of a partnership:

D. Extent of Liability in All Cases

A distinct feature of the law of partnership has always been the unlimited liability accepted by partners for the debts and obligations of the firm, as Lord Lindley explained:

By the common law of this country, every member of an ordinary partnership is liable to the utmost farthing of his property for the debts and engagements of the firm.  The law, ignoring the firm as anything distinct from the persons composing it, treats the debts and engagements of the firm as the debts and engagements of the partners, and hold each partner liable for them accordingly.  Moreover, if judgement is obtained against the firm for a debt owing by it, the judgement creditor is under no obligation to levy execution against the property of the firm before having recourse to the separate property of the partners; nor is he under any obligation to levy execution against all the partners rateably; but he may select one or more of them and levy execution upon him or them until the judgement is satisfied, leaving all questions of contribution to be settled afterwards between the partners themselves. 

Similarly, a joint venture can result in the attribution of legal responsibility notwithstanding a joint venture participant did not cause any harm. If two or more persons constitute a joint venture and one of the joint venture participants engages in careless behaviour that creates loss or damage to a third party then all of the joint venture participants can potentially bear a vicarious liability. In other words, they are attributed with legal responsibility for the actions of those that they involved with, notwithstanding they alone did nothing wrong.

The Court of Appeal stated that the limitation on coverage for joint ventures and partnerships does not operate merely to avoid indemnity for a “vicarious liability” or a “joint liability.” Even if the constituent partners could be liable individually for their conduct, they lose coverage if it arose because of a partnership or joint venture obligation.

That approach is consistent with the approach taken by the courts in the United States, which have examined this issue. United States courts have taken the view that the limitation in the definition of “Insured” applies to either a partner’s direct liability, or merely a “vicarious liability” stemming from an undisclosed partnership. The limitation in coverage uses words directed to excluding the conduct of the partnership itself and its consequences, regardless of the role played by the insured in the partnership or the theory of liability being advanced against the insured in the underlying litigation. (Associates Metals & Minerals Corp. v. Hartford Accident & Indemnity Co.).

However, that does not extend to any legal liability unrelated to the joint venture or partnership that is not disclosed. For example, assume that a developer built 20 projects over ten years. Only one of those 20 projects was done as a partnership. The fact of the partnership for the one project was not disclosed to the general liability insurer when the risk was bound. Later,  a fire occurs at on one of the 19 projects that did not involve a partnership arrangement.  The underwriter investigates the fire loss and determines, by accident, that one of the other historical projects involved a partnership that was not disclosed at the underwriting stage. That fact does not permit the liability insurer to avoid coverage for the project that had a fire but which was partnership free. The legal liability must flow from an “undisclosed” partnership or joint venture to avoid coverage.

J.       MUST NON-DISCLOSURE MATERIALLY INCREASE RISK?

The imposition of the limitation on coverage, in terms of the underwriting rationale, is to ensure that the underwriter is not confronted with a materially increased risk without the concomitant benefit of either the opportunity to decline the risk posed by the partnership or to increase the premium.

How does a court determine that the “undisclosed” partnership or joint venture posed an additional risk when the “duty to defend” is dictated solely by the allegations in the Statement of Claim, except to the limited extent it can examine the partnership or joint venture agreement? This is a perfectly valid question, since in some situations the fact that the liability flows from a partnership or joint venture may not inherently enhance the risk that the liability insurer confronts.

One can pose an example where a partnership may not have increased the risk of legal liability. Let’s assume two people decide to build a home. One of the partners has all of the money and no time nor skills in construction. The other partner has no money, but lots of time and is skilled in building a home. It is agreed that the “money partner” will pay for all of the building supplies and do nothing more. The partner with lots of time and skill, but no money, does not have to advance a single penny. Instead, he or she will build the entire home. Both partners agree that upon a sale of the home the profits will be split equally.

The home is built and the partners split the profits after paying for all of the building supplies.

One month after construction is completed, a fire occurs in the attic of the home. Subsequent investigation reveals that the partner with the so-called “skill” carelessly wired the electrical apparatus and so doing made a mistake that resulted in electrical arcing, heat buildup and then ignition.  In this situation the “deep pockets” partner, who only supplied financing, did not cause or contribute to the carelessness that gave rise to legal liability.

Arguably, if the “two-person partnership” was not disclosed to the liability insurer and the underwriter did not know of the so called “skilled tradesman,” how can it be said that the inclusion of a “deep pocket” in the circumstances of the loss has increased the moral or physical hazard. Furthermore, how can a court, on a “duty to defend” issue, which is largely confined to the pleadings, possibly determine whether the inclusion of the “deep pocket” financial partner materially contributed to an enhanced risk, such that the liability insurer can avoid its “duty to defend”?

To overcome the apparent inability of the court to evaluate whether the “undisclosed” partnership or joint venture materially enhanced risk, the Court of Appeal stated that a material increase in the risk could be assumed as a matter of law. In so doing the Court chose to not follow some United States cases that suggested a liability insurer must demonstrate that what was not disclosed materially enhanced the risk (for example, Scottsdale Insurance Company v. Essex Insurance Company).

K.     PRACTICAL LESSONS OF COVERAGE FOR PARTNERSHIPS & JOINT VENTURES

Kingsway is the leading case with respect to insurance coverage for partnerships and joint ventures, and remains a salutary warning to commercial insureds and brokers to take care when insuring partnerships and joint ventures. Several lessons emerge:

1.      If a commercial insured engages in partnerships or joint ventures, whether for a particular project, or          generally, the broker must ensure that full details of the partnership are explicitly enumerated either on          the declaration page or in a suitably worded endorsement.

2.      Practically, that means that an insurance broker should specifically ask on any commercial questionnaire          about the insured’s historical, current, or future partnership or joint venture activity.

3.      Joint venture and partnership agreements need not be in writing. Insureds who enter verbal arrangements          might still be held to be “partners,” and should disclose such agreements to the liability underwriter.

4.      When a commercial general liability policy needs to be renewed, the issue of any or emerging partnerships          or joint ventures should be canvassed with the commercial insured.

5.      Even though a partnership or joint venture may be completed or abandoned years ago, former partners          and joint venture participants can still be sued many years many years later. There is very little reason to          delete a partnership or joint venture from a declaration page or endorsement, unless the insured is          satisfied, with legal advice, that it can no longer be sued.

6.      The limitation on coverage operates even if the claimant elects not to sue all of the partners or joint          venture participants. Your insured could be the only one sued. However, if the basis of the allegations is          that they or it participated in a joint venture or partnership, and that fact was not disclosed and listed in          the policy, the claim against the insured is not covered.

7.      If an insured does reveal that it is involved or has been involved in partnerships or joint ventures, you need          to rationalize the insurance arrangements that are entered into. If three corporate bodies participate in a          partnership, it does not make business sense for each of them to gain additional coverage for the          partnership. Instead, the decision to buy liability insurance for that partnership should be borne by one of          the partners and, in turn, that partner should provide the others with proof of liability insurance which can          be used in the future.

8.      If obtaining liability insurance is entrusted to one partner or joint venture, be mindful that if that entity          ceases doing business or does not perform its insurance obligations, then the remaining partners must          ensure it is included in their liability policies in the years ahead.

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