Boland v. Allianz Insurance Co. of Canada, [2008] O.J. No. 3000 is an interesting insurance coverage decision recently made by the Ontario Court of Appeal. The Court found that a “bare pleading” negligence claim against an insured was viable enough to trigger an insurer’s duty to defend. The decision further illustrates the dichotomy between an insurer’s duty to defend and duty to indemnify and how the former is much broader in scope.

The issue on appeal was whether the insurer had a duty to defend the appellant against a claim made against him in his capacity as a director of a condominium corporation. The insurer provided directors’ and officers’ liability insurance to a condominium corporation and to its directors and officers for claims made during the policy period for “wrongful acts” that occurred during the policy period. The policy also contained an extension of coverage provision that covered: “any wrongful act which occurs prior to the Policy Period if claim or claims are made during the Policy Period and provided: (a) that the Directors and Officers of the Corporation, at the Effective Date of the Policy, had no knowledge of, and could not reasonably foresee, any circumstances which might result in a claim, and …”. The events that led to the claims in this case occurred during the 1990’s. The appellant was a developer of the condominium project along with Weldon. Each of them purchased a unit before the declaration date of the condominium. However, prior to the declaration, Weldon illegally enlarged his unit into the attic space as a third floor living space, although this space was designated as part of the common area. The appellant, who was a director of the corporation both in 1994 and again in 1997-1998, is alleged to have known about the illegal unit, failed to disclose it to the corporation, and stood by in January 1998, when Weldon sold the illegal unit to Orr. The corporation applied against Orr to direct her to comply with the declaration and return the unit to its original condition. Orr then sued the corporation, the appellant and others in 2001 for damages of $4.5 million. The corporation then issued a statement of claim dated June 1, 2005 against the appellant for a declaration that: (1) he intentionally or negligently breached his legal duties to the corporation while he was a director regarding the existence of the illegal unit, and (2) he is liable to indemnify the corporation in respect of the Orr claim. The application judge dismissed the appellant’s application and found that the insurer had no duty to defend on two bases: (1) the extension of the insuring agreement was not triggered and therefore the claim was not covered; and (2) the statement of claim alleged primarily deliberate conduct and that the allegation of negligent conduct was merely derivative. The Court of Appeal allowed the appeal and found there was a duty to defend.

Although the policy in issue on the application provided coverage for the 2005 policy year and the claim was made during that year, the 2005 policy was the next in a succession of policies with the same extension of coverage agreement, beginning with the first Allianz policy in September, 1994. Thus, the Court of Appeal found that the effective date of the policy for the purpose of looking at the knowledge of the insured director that could preclude the extension of coverage is the effective date of the first policy in succession, in this case, September, 1994. If the consideration of the appellant’s knowledge is limited to what he knew in 1994, the effective date of the policy, it could not be said that at that time he could reasonably foresee a claim.  Further, the Court agreed with the application judge that the negligence claim was a bare pleading. It stated that it possibly would not survive a pleadings motion without an order for particulars. However, the Court went on to state that when the issue is whether an insurer has a duty to defend, one must take the pleading as it stands and determine whether there is a viable claim for negligence. In this case, although the force of the claim was for deliberate conduct, there was an alternative and independent claim that the appellant acted negligently. As this claim was available as a basis for the appellant’s liability to the condominium corporation, the insurer had a duty to defend that claim.

Raj K. Datt

Aviva v. Pizza Pizza, [2008] O.J. No. 2625 continues the recent trend in the courts of taking a firmer approach to the interpretation of the words “ownership, use, or operation” of an automobile in liability policies. Pizza Pizza was sued in relation to a car accident involving one of its delivery vehicles. Besides its alleged negligence, via its driver, arising out of the accident itself, it was also alleged that Pizza Pizza was negligent with respect to its business practice of (1) providing food free if delivered more than 30 minutes after it is ordered (this allegedly encourages its drivers to drive fast since they risk paying late fees themselves), (2) its failure to have safe driving policies in place, and (3) its failure to test or investigate the driving history of the driver who caused the collision for his propensity for speed. Pizza Pizza brought an application requiring Aviva to defend it in the personal injury action in relation to the allegations of negligent business practices. Its CGL policy with Aviva contained the usual exclusion excluding any claims arising out of the ownership, use, or operation of any automobile. Pizza Pizza succeded before the application judge and Aviva appealed to the Ontario Court of Appeal. On appeal, Aviva argued that the application judge erred in holding that the claim with respect to negligent business practices was independant of the claim arising out of the negligence of the driver. The Court of Appeal agreed and found that the exclusion clause did apply.

The Appeal court’s decision is important as it reinforces the growing judicial trend towards a more strict interpretation of such automobile exclusions. Up until recently, one could have arguably made the case (upon then existing caselaw) that such business practice claims were not caught by the automobile exclusion.

Raj K. Datt

The U.S. Supreme Court just released its decision in Exxon Shipping Co. v. Baker (see http://www.supremecourtus.gov/opinions/07pdf/07-219.pdf), an appeal by Exxon in respect of a $5 billon award of punitive damages made against it by a civil jury arising from the infamous 1989 oil spill near Alaska.  The $5 billion award was reduced to $2.5 billion by the Ninth Circuit, and Exxon argued before the Supreme Court that the award should be reduced further. The Court agreed and found that the award was excessive as a matter of maritime common law. Thus, the punitive damages award was reduced to an amount equal to the sum awarded in compensatory damages ($507.5 million). In general, the Supreme Court found that a growing problem with punitive damage awards is their “stark unpredictability”. Courts are concerned with fairness as consistency, and the available data suggested that the spread between high and low individual awards was unacceptable. The spread in state civil trials was great, and the outlier cases subjected defendants to punitive damages that dwarfed the corresponding compensatories. The Supreme Court further stated that a penalty scheme ought to threaten defendants with a fair probability of suffering in like degree for like damage. In response to this unpredictability, the U.S. Supreme Court established a standard for assessing maritime punitive damages. It rejected a standard based on verbal formulations or by setting a hard-dollar cap. Instead, it opted to peg punitive awards to compensatory damages using a ratio. In maritime cases, the Court held that a 1:1 ratio was a fair upper limit.  

The U.S. Supreme Court’s approach is quite different from the approach which has been followed in Canada. The leading Canadian case is the Supreme Court of Canada’s decision in Whiten v. Pilot Insurance Co. In Whiten, a jury award the Plaintiff $1 million in punitive damages due to Pilot’s unfounded allegation that the Plaintiff had set her own home on fire. The Plaintiff had sued Pilot under a home insurance policy, and was also awarded $318K in compensatory damages. The Ontario Court of Appeal reduced the punitive damage award to $100K, holding that the jury’s award was excessive. Before the Canadian Supreme Court, Pilot defended the reduction in the award, and warned against the “Americanization” of Canadian law (via high punitive awards) that, if adopted, would bring the administration of justice in this country into disrepute. The Supreme Court rejected this argument, and restored the original $1M punitive award. Although it would not have itself awarded such a sum, it nonetheless found that the award was within “rational limits”. However, central to this decision was the Supreme Court’s observation that in the U.S., ratios had not been adopted and typically punitive awards there were 3-4 times the award for compensatory damages. The $1 million award in Whiten  was within that range. Accordingly, the Canadian Supreme Court, desiring a more predictable method for assessing the quantum of punitive awards, established a verbal formula requiring that punitive damages be assessed in an amount reasonably proportionate to such factors as the harm caused, the degree of the misconduct, the relative vulnerability of the plaintiff and any advantage or profit gained by the defendant.

Given the U.S. Supreme Court’s decision in Exxon, particularly its rejection of a verbal formula and adoption of a 1:1 ratio between punitive and compensatory damage awards, it may be only a matter of time before Canadian courts are once again asked to look at the concept of ratios. Whiten was decided in 2002, and since then the U.S. has clearly trended towards ratios and tighter mathematical formulas. Exxon may provide Canadian insurers and corporate defendants with sufficient ammunition to re-visit the issue of ratios in relation to punitive damage awards.

The Whiten decision can be found at CanLII:

http://www.canlii.org/en/ca/scc/doc/2002/2002scc18/2002scc18.html 

Raj K. Datt

The Ontario Court of Appeal has released its decision in the case of Garratt v. Orillia Power Distribution Corporation on May 29, 2008 . The decision is significant as it deals with the analytical approach required in determining the issue of reasonable foreseeability in negligence actions.

The action arose out of a bizarre accident which occurred on Highway 11 near Orillia. As the Plaintiff was driving her car underneath the Memorial Avenue overpass, a blue spider rope dropped from above and wrapped around her driver’s side mirror. While travelling 95 km/hr, she alleged that the rope wrapped around her mirror and caused her car to stop ”on a dime” approximately 80-100 feet north of the overpass. Even though her driver’s side mirror sustained only superficial damages, and the expert evidence that it was physically impossible for the rope to slow, let alone stop the car, the trial judge accepted the Plaintiff’s description of the accident and found that her injuries had been caused by the accident. Her damages were assessed at approximately $260,000.00.

The spider rope had been tied to a wooden guardrail post on the overpass by an Orillia Power work crew. The crew was in the process of installing new hydro lines in the area, and was using the spider ropes to string electrical conductors through the new hydro poles. On the day of the accident, the crew took its lunch break and tied four spider ropes to the post using bowline knots and a shackle. The trial judge specifically found that the rope had gotten loose not because it had been tied improperly, but because a vandal had tampered with the ropes and had allowed one to fall upon the highway. However, despite the fact that the accident was directly caused by the actions of an unknown vandal, the trial judge imposed liability on Orillia Power for failing to take better measures to prevent the actions of a vandal.

In an unanimous judgment, the Ontario Court of Appeal set aside the trial judge’s finding of liability, and dismissed the action with costs.  The Court found that the trial judge had erred in finding  that Orillia Power had breached its “own standards” since there was no evidence presented at trial of any industry standard for the securing of spider ropes when a work crew is absent from a job site. Further, the standard referred to by the trial judge was a general statement contained in the EUSA Rule book which simply stated the legal requirements for the standard of care at common law. Finally, even if there was such an industry standard (which was not proven), the trial judge erred by treating an industry standard as dispositive of a breach of the standard of care, thus amounting to a finding of strict liability.

The key to the Appeal Court’s decision was that nothing indicated the possibility, let alone the likelihood, of any acts of vandalism and hence the loss was not reasonably foreseeable. The Court noted that the act of mischief by the unknown vandal occurred in broad daylight, immediately beside a public roadway, and on a highway overpass frequently travelled by vehicles but rarely, if at all, by pedestrians. The project had been ongoing for several months without any previous acts of vandalism. Finally, the three Orillia Power lineman had a combined experience of over 60 years, and had never encountered any previous incidents of vandalism.

The Court of Appeal’s decision in Garratt is significant as it confirms that hydro utilities, and by extension construction companies, telecommunication companies, and other similarly situated entities, are not insurers against the acts of vandals. Further, it is a case of significance for the insurance bar in general, as it raises the bar with respect to the foreseeability of the acts of vandals and makes it clear that such a scenario will need to at least be a probable occurrence before the court will entertain a finding of liability.

At trial, Orillia Power was represented by myself. On appeal, it was represented by Alan Mark of Ogilvy Renault. The Court of Appeal’s decision can be found at: Garratt v Orillia Power OCA

Raj K. Datt

I have previoulsy commented on Leo Deluca v. Lombard, [2008] O.J. No. 1230, an insurance coverage case arising out of the hydro blackout in 2003. In that case, the motion judge denied indemnity under an All Risks policy on the basis of two exclusion clauses. However, in Caneast Foods v. Lombard, [2008] O.J. No. 1811, the Ontario Court of Appeal, interpreting the same two exclusions, came to the opposite conclusion. In Caneast, the hydro blackout caused the spoilage of a substantial quantity of the Plaintiff’s goods. The first exclusion clause excluded losses caused by changes in temperature. However, the clause contained an exception which stated that if the loss was caused directly by a peril insured and not otherwise excluded, then the exclusion did not apply. Since this was an All Risks policy, the blackout was a peril insured. As well, hydro blackouts were not expressly excluded in the policy. Hence, the Court of Appeal affirmed the motion judge’s decision that the exclusion did not apply. The motion judge’s decision in Leo Deluca only gives an excerpt of the change in temperature exclusion clause, but since both cases involved the same insurer, it would be surprising if the exclusion wordings were not similar. The second exclusion dealt with losses caused by mechanical or electrical breakdown or derangement. Unlike in Leo Deluca, the Court of Appeal held that this exclusion only applied to an internal problem in a machine, and not when the machine fails to operate due to an interruption in its power supply. In fact, the Court of Appeal remarked that the motion judge in Leo Deluca had erred in his interpretation.

Raj K. Datt

In Boliden Ltd. v. Liberty Mutual Insurance Co., [2008] O.J. No. 1438, Liberty issued a liability policy to Boliden, which included coverage for its directors and officers. During the coverage period, the directors and officers were indemnified by Boliden for defence costs they incurred in connection with class actions brought against them by shareholders for prospectus misrepresentation. The class actions were commenced in the wake of an environmental disaster at a zinc mine in Spain that was owned by a Boliden subsidiary. Liberty denied coverage under the policy based on a pollution exclusion clause. The class actions settled, and Boliden brought an action against Liberty to recover its defence costs and applied for summary judgment. The motion judge found that the pollution exclusion clause applied to some but not all of the losses arising from the allegations of misrepresentation by the directors and officers. He awarded judgment in favour of Boliden for 80 per cent of the defence costs.

On appeal, Liberty argued that the class action represented a single claim for failing to disclose information in the prospectus about the dam deficiencies, which deficiencies involved the threat of the seepage or escape of pollutants. The class action, it submitted, was therefore a claim in respect of a pollution loss and the exclusion clause applied. The Court of Appeal rejected this argument. It upheld the motion judge’s finding that the pollution exclusion clause excluded pollution-related losses, not pollution-related claims. The clause was ambiguous concerning whether it applied to pollution related claims, and hence this was to be resolved in favour of the insured. The interesting part of the decision is the Appeal court’s rejection of Liberty’s characterization of the class action. The class actions, looked at broadly, essentially arose out of losses sustained from the escape of pollutants. However, the Court of Appeal agreed with the motion judge’s approach of looking at whether or not the pollution exclusion clause applied to each of the specific allegations in the claim.

Raj K. Datt

Leo Deluca v. Lombard, [2008] O.J. No. 1230, is an interesting insurance coverage case arising out of the infamous hydro blackout in Aug. ‘03. The Plaintiffs commenced the claim as a class action, and sought coverage under an All Risks CGL policy. The Plaintiffs sought damages for the loss of their stock and for business interruption. Lombard denied coverage on the basis of two exclusions: damage caused by (1) changes of temperature or (2) mechanical or eletrical breakdown or derangement in or on the premises. The court held that both exclusions applied, and hence the action was dismissed. The court rejected the Plainitffs’ argument that clause (1) was restricted to only atmospheric changes in temperature.  It also rejected the argument that clause (2) only applied to when the Plaintiffs’ equipment itself did not work properly. The equipment itself was not faulty, and in fact continued working once power was restored. The court found that clause (2) applied regardless of the cause of the breakdown (i.e. external or internal).

The court’s decision demonstrates the point that although this was an All Risks policy, a fact that is sometimes used to justify a stricter reading of an exclusion clause, the court will endeavor to enforce the plain meaning of policy wording.    

Raj K. Datt

RioCan Real Estate Investment Trust v. Lombard Insurance Co., [2008] O.J. No. 1449, concerns whether an insurer has a duty to defend claims which are partly excluded under the policy. RioCan operated two malls and had been sued in two separate actions for injuries sustained from falls on ice or snow in the mall parking lots. RioCan had hired a winter maintenance contractor to remove the snow and salt in the lots, and required the contractor to add RioCan as an additional insured in the contractor’s policy with Lombard. This was done and the policy covered RioCan for the negligence of the contractor only, and not for RioCan’s negligence. The Statements of Claim in the actions alleged (a) that RioCan did not have an adequate system of inspection in place, and (b) it failed to clear the lots of snow and ice. Allegation (a) dealt solely with RioCan’s actions, whereas (b) dealt with actions which could be attributed to the contractor. Thus, RioCan was partly covered by the Lombard policy.

However, Lombard argued against coverage on the basis that it would be placed in an impossible position if it were obliged to defend the conflicting allegations. For example, in order to properly defend the claim for negligence against the contractor, it may plead and argue at trial that the contractor did fulfil its duties under the contract but that certain actions or omissions of RioCan were negligent or was in breach of its statutory obligations. To the extent that the claim against RioCan was factually based on the scope of work of the contractor, Lombard could defend by raising the obligations of RioCan as an occupier. It would be in the financial interest of Lombard to allege that any fault found falls outside the scope of work of the contractor. In this way Lombard would not be obliged to indemnify RioCan. If Lombard was responsible to defend RioCan on all the claims, it would be working against its own interest. Lombard relied upon D’Cruz v. B.P. Landscaping Ltd., [2007] O.J. No. 2704, a case with very similar facts to RioCan’s. In D’Cruz, the court held that the insurer did not have to defend the property owner as to order otherwise would require the insurer to defend the property owner for its own alleged acts of negligence. Further, since the insurer was already defending the contractor, it was not necessary for the insurer to also defend the property owner for neligligence arising from the contractor. 

The court in RioCan distinguished D’Cruz on the basis that the court did not have the benefit of the Ont. C.A. decision of Appin Realty Corp. v. Economical Mutual Insurance Co., [2008] O.J. No. 436. The potential conflict highlighted by Lombard could be dealt with, for example, by RioCan retaining its own separate counsel and paid for by Lombard. Accordingly, the court found that Lombard did owe RioCan a duty to defend and had to defend it against the “entire claim”. The court’s decision in RioCan  may raise some concern for insurers as it is debatable whether others in the insurance pool should be taxed with providing defences for matters which may clearly be outside the scope of the policy. As well, an insurer may understandably be reluctant to sign a”blank cheque” and cover whatever costs are borne by whatever lawyer is retained, no matter how expensive. These concerns were highlighted by the Supreme Court of Canada in Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801, where it was held that the practice should be for the insurer to defend only those claims which potentially fall under the policy, while calling upon the insured to obtain independent counsel with respect to those which clearly fall outside its terms.

Raj K. Datt

In CUMIS General Insurance Co. v. 1319273 Ontario Ltd. (c.o.b. Done Right Roofing), [2008] O.J. No. 1268, a motorcyclist was struck by a ladder when it flew off a Done Right truck, causing injuries. The motorcyclist sued, claiming that Done Right’s employees had negligently stored the ladder on the truck. Done Right sought coverage under a CGL policy with CUMIS. However, CUMIS denied a duty to defend on the basis of two exclusions: (1) bodily injury arising out of the ownership, use or operation by Done Right of any automobile; (2) bodily injury with respect to which any motor vehicle liability policy is required by law to be in effect. The application judge agreed with CUMIS and held that exclusion #2 applied.

Before the Court of Appeal, Done Right conceded that the case law under s. 239 of the Ontario Insurance Act had established that the the loading and storage of a ladder on a truck comes within the scope of the “use or operation” of a truck. Instead, it sought to avoid exclusion #2 by arguing that it defeated its reasonable expectations. The Court disagreed. Done Right sought to avoid the application of exclusion #1 by arguing that it did not expressly exclude the loading of an automobile. It pointed to watercraft and aircraft exclusions in the policy which did expressly exclude “loading or unloading”. Done Right’s argument was based on the implied exclusion maxim, which states that the express mention of one thing means the exclusion of others not expressly mentioned. It was an interesting argument given that this maxim is typically applied in cases of statutory interpretation. The application judge found the argument to be “attractive” (though moot given the application of exclusion #2), and rejected CUMIS’s argument that the maxim could not be applied to exclusion clauses in an insurance policy. However, the Court of Appeal did not agree that the maxim was of any assistance to Done Right. It held that it was unnecessary for exclusion #1 to expressly exclude loading or unloading since the case law was clear that this waswithin the scope of the “use or operation” of a truck anyway. This could not be said for boats or airplanes. However, it appears that the Court of Appeal accepted that the implied exclusion maxim could, in general, be used to interpret exclusion clauses contained in insurance policies.

Raj K. Datt

Appin Realty Corp. v. Economical Mutual Insurance Co., [2008] O.J. No. 436, is an interesting decision by the Ontario Court of Appeal dealing with the age old issue of an insurer’s duty to defend. The insured had been sued for bodily injury arising from exposure to mould and/or bacteria. The insurer relied upon an exclusion clause which excluded coverage for bodily injury caused by mould. The motions judge found that the exclusion did not apply since bacteria was a non-excluded peril and had been plead by the plaintiff. On appeal, the insurer argued that the presence of the word “alleged” in the exclusion absolved the insurer of a duty to defend, even though a non-excluded peril was also alleged. The effect of this interpretation would be that the insurer would have a duty to indemnify (if, after a trial, it was proven that the injury was caused solely by bacteria), but its duty to defend would not be triggered.

This was an interesting argument given, as remarked by the Court of Appeal, it stands on its head the general proposition that the duty to defend is broader than the duty to indemnify. The key to the insurer’s argument was the existence of concurrent exclusion language, which precluded coverage even if there were any contemporaneous causes. The Court of Appeal ultimately rejected the argument since on another possible interpretation, the clause could be taken to mean that wherever injury from mould is alleged in a claim, even if it is ultimately established that the injury arose solely from a covered peril, such as bacteria, the claim would exclude both the duty to defend and the duty to indemnify. This would extend the exclusion to otherwise non-excluded perils. However, the Court of Appeal did leave the door open for an insurer to make its duty to defend more narrow than its duty to indemnify, though this would require more clear and less ambiguous language.

Raj K. Datt