June 14, 2024
Coverage Law Special Newsletter – June 2024
Introduction
By Michael Libby, K.C., Dolden Vancouver, and David Girard, Dolden Calgary
This newsletter highlights several recent Court of Appeal decisions from across Canada that have significant impact on the landscape of coverage law in Canada. Briefly, case summaries for the following decisions, including the key issues involved, are discussed in detail below:
First, in AIG Insurance Company of Canada v. Lloyd’s Underwriters, the Court of Appeal of Ontario provides some clarification on the use of extrinsic evidence on a duty to defend application and appellate standards of review applicable to policy interpretation.
Second, in 2102908 Alberta Ltd v Intact Insurance Company, the Alberta Court of Appeal provides greater clarity to the interpretive framework of insurance policies, and in particular, the principles of mutual exclusivity and ambiguity. This is further highlighted by the British Columbia’s Supreme Court in Tremblett v. TD Insurance Direct Agency Ltd.
Third, in Duri Homes Ltd v Quest Coatings Ltd, the Alberta Court of Appeal clarified that whether a party has an insurable interest is a question that depends on the factual expectancies of the parties, rather than a strict reading of the insurance policy or the construction agreement. This has important implications for whether surrogated claims can be pursued.
AIG Insurance Company of Canada v. Lloyd’s Underwriters
By Michael Libby, K.C., Dolden Vancouver, and David Girard, Dolden Calgary
AIG Insurance Company of Canada v. Lloyd’s Underwriters arises from a case where homeowners had commenced a claim against the City of Timmins, alleging that its negligence caused damage to their properties. AIG and Lloyd’s had in place consecutive policies insuring the City. AIG agreed and Lloyd’s denied that they had, respectively, a duty to defend the City. Both policies contained exclusions for expected or intended injury that the court found to be ‘functionally identical’. AIG brought a motion seeking a declaration that Lloyd’s had a duty to defend, and equitable contribution.
Lloyd’s argued that the City received a report that informed it of ways in which to remedy the cause of the property damage, and prevent further damage. According to Lloyd’s from the time the City received this report, any further damage was no longer ‘accidental’: the City had knowledge enabling it to prevent further damage. As a result, the ‘occurrence’ that was complained of in the underlying action terminated when the City received the report, which was before Lloyd’s was on risk.
The lower court held that Lloyd’s had a duty to defend, as the report was ‘preliminary’ and was accordingly not a crystallizing event beyond which the damage could no longer be considered accidental. Lloyds was ordered to pay for 50% of the previous and ongoing costs of defending the City.
The Court of Appeal upheld the decision, and highlighted some difficulties faced by courts on such applications: in Progressive Homes, the Supreme Court of Canada stated that an insurer’s duty to defend will arise as soon as an insured is able to show a ‘mere possibility’ that the substance of the claim, as pleaded, falls within coverage. On the other hand, in Monenco, the Court held that a court may consider ‘extrinsic evidence that has been explicitly referred to in the pleadings to permit an appreciation of the nature and scope of the insurer’s duty to defend’. However, Monenco also prohibited courts from conducting a ‘trial within a trial’ by making findings that would be ‘premature’: they would require findings that would affect the underlying action.
Here, both the lower Court and the Court of Appeal favoured an approach that did not require a consideration of facts. Rather, the Courts were both focused on whether a ‘mere possibility’ existed that the claim as pleaded fell within coverage.
Takeaway
When performing a duty to defend analysis it is important to remember the low threshold created by the Supreme Court of Canada in Progressive Homes: the facts as pleaded are the principal factor and extrinsic evidence will only be considered in narrow circumstances.
2102908 Alberta Ltd v Intact Insurance Company and Tremblett v. TD Insurance Direct Agency Ltd
By Michael Libby, K.C., Dolden Vancouver, and David Girard, Dolden Calgary
In these two cases, the key issue was policy interpretation. In 2102908 Alberta Ltd v Intact Insurance Company, the Alberta Court of Appeal was faced with an appeal from a decision that had upheld coverage following the overflow of a river that inundated a building in which the respondent’s business was located. An influx of surface water penetrated through the various openings in the walls and doors of the respondent’s premises, and other openings.
The policy contained a flood exclusion, as well as another water damage exclusion which removed coverage for damage:
2.3.1. by seepage, leakage or influx of water derived from natural sources through basement walls, doors, windows or other openings, foundations, basement floors, sidewalks or sidewalk lights, unless concurrently and directly caused by an insured peril not otherwise excluded in this Form;
2.3.2. by the backing up or overflow of water from sewers, sumps, septic tanks or drains, wherever located, unless concurrently and directly caused by an insured peril not otherwise excluded in this Form;
2.3.3. by the entrance of rain, sleet or snow through doors, windows, skylights, or other similar wall or roof openings, unless through an aperture concurrently and directly caused by an insured peril not otherwise excluded in this Form
The Policy also contained the following Extension:
61. SEEPAGE, LEAKAGE OR INFLUX OF WATER
This Form is extended to cover loss or damage caused by seepage, leakage or influx of water derived from natural sources through basement walls, doors, windows or other openings, foundations, basement floors, sidewalks or sidewalk lights. This Extension deletes Exclusion 2.3.1. of the EXCLUDED PERILS Section of
the Building and/or Contents – Broad Form.
The insured sought coverage for the resulting water damage, arguing that paragraph 61 of the Extension negated s. 2.3.1 of the Broad Form. As a result, the damage caused “by seepage, leakage, or influx of water” through basement walls was not excluded. Intact denied the claim, taking the position that the flood damage was excluded.
The Court found the insured was entitled to indemnity under the Extension, and disagreed with the insurer’s position that the flood exclusion applied. In coming to this conclusion, the Court reiterated that provisions granting coverage are to be read expansively and exclusions narrowly. This was especially important here because the reading suggested by Intact “would lead to the perverse result where the policy contains a clause that expressly deletes a specific exclusion of coverage, that coverage could still be excluded by ambiguous language found in another section”.
In arriving at its conclusion, the Court found there was ambiguity and highlighted the differences in language between the two provisions: para 61 referred to an “influx of water derived from natural sources” while s 2.2 was limited to “any natural or artificial body of water”.
The decision in Tremblett v. TD Insurance Direct Agency Ltd, however, demonstrates how slight differences in language can lead to a very different outcome. The insured’s property sustained damage as a result of subsidence caused by excessive water. The insured had purchased an extension of coverage for damage caused “directly” to the insured property by water “originating from escape, overflow, or backing up” of drains, sewers and similar.
Despite having the court’s sympathy, the insured’s policy only responded to damage caused “directly” by water, and the evidence established that water was only an indirect cause of the loss. The coverage was cause-dependent and the requisite cause was absent here. Moreover, the presence of water was not caused by escape, overflow, of backup of any of the enumerated components. Further, loss caused by erosion, or settlement was excluded.
The court found the policy wording to be unambiguous, including the exclusions, and concluded that there was no coverage for the loss.
Takeaway
These cases highlight the importance of unambiguous policy wordings that can be read harmoniously together, especially when it comes to extensions and exclusions: if these are not clear, courts are likely to find coverage. They also underscore the importance of carefully considering whether damage has been “directly” caused by a covered peril where the policy language requires it.
Duri Homes Ltd v Quest Coatings Ltd
By Michael Libby, K.C., Dolden Vancouver, and David Girard, Dolden Calgary
The recent decision in Duri Homes Ltd v Quest Coatings Ltd concerns the extent to which a contractor – who was performing work at the project owner’s request but without the general contractor’s knowledge or consent and contrary to the terms of the construction contract – may be said to have an insurable interest in a building and therefore enjoy the benefit of a waiver of subrogation under a builder’s risk policy.
The appellant Duri Homes Ltd is a builder who was hired by the owners of a lot in Calgary to construct a custom-built residential home pursuant to a construction management agreement which gave Duri “complete control over the work”.
One of the owners hired Quest Coatings Ltd to perform painting work that was within the scope Duri was responsible for under the Construction Agreement. The home was destroyed by a fire shortly after Quest provided its services. The builder’s risk insurer paid the loss and sought to subrogate against Quest on the basis that Quest had been hired contrary to the terms of the construction agreement and without Duri’s knowledge.
While the insurer conceded that the wording of the policy was broad enough to cover Quest, it argued that Quest did not have coverage, and therefore could not benefit from the subrogation waiver, because it did not have the requisite “special relationship” with the project to ground an insurable interest. It argued that to have the required special relationship, Quest needed to be part of the “owner – construction manager – trades” contractual chain, and in this case, it was not an actual subcontractor.
In upholding the decision below and finding the policy covered Quest, the Alberta Court of Appeal confirmed that neither the wording of the insurance policy nor the construction agreement will determine the question of insurable interest. Instead, insurable interest is determined by a “factual expectancy test”. Moreover, the court stated that the questions of whether a party is an insured and whether it has an insurable interest are analytically distinct and are not to be determined jointly.
In this case, regardless of who hired Quest, or whether Duri knew and approved it, or whether the construction management agreement had been breached, Quest had a “special relationship” with the project as a whole. It thus had an insurable interest in the home and enjoyed the benefit of the waiver of subrogation.
Takeaway
This decision determines that the role of a trade on a construction project is more important in determining insurable interest than are the fine details of the trade’s retainer. It affirms that if a loss occurs to a construction project, then any trade or contractor who has a relationship with the project (as opposed to any one person or entity involved in the construction) will be protected from subrogation.
For further information or if you have any questions about the above article, please contact the authors: Michael Libby, K.C., Dolden Vancouver, Email: [email protected], and David Girard, Dolden Calgary, Email: [email protected].
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| Cody Mann |
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