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The Duty to Defend

Presented by Julie Lamb and Neil MacLean

Guild Yule LLP

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General Overview

Under third party liability coverage, the insurer agrees to indemnify its insured for damages the insured is legally obligated to pay to a third party for personal injury or property damage caused by an accident or occurrence

Insurer also agrees to defend claims against the insured that fall within coverage

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The duty to defend is broader than the duty to indemnify, and the duty to defend is not dependent on insured being liable for a claim for which the insurer is liable to indemnify the insured under the policy

Prudential Life Insurance Co. v. MPIC (1976), 67 D.L.R. (3d) 521 at 524

The mere possibility that the claim falls within the scope of the policy gives rise to duty to defend

Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801 at 810

Where claim clearly falls outside scope of the policy, there is no duty to defend

Opron Maritimes Const. v. Canadian Ind. Co. (1986), 19 C.C.L.I. 168

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Pleadings RuleThe pleadings govern the duty to defend – not the insurer’s view of the validity or nature of the claim or of the possible outcome of the litigation. If the claim alleges a state of facts which, if proven, would fall within the coverage of the policy the insurer is obliged to defend the suit regardless of the truth or falsity of such allegations. If the allegations do not come within the policy coverage the insurer has no such obligation

Bacon v. McBride (1984), 6 D.L.R. (4th) 96 at 99

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Guidelines for Reviewing PleadingsPleadings are to be read generously

Nichols

Where the pleadings lack precision, the duty to defend will be triggered if claim falls within coverage on a reasonable reading of pleadings

Monenco Ltd. v. Commonwealth Insurance Co., [2001] 2 S.C.R. 699

Court does not need to rely on labels or causes of action identified by the plaintiff to determine if there is a duty

Unger v Unger, 2003 CanLii 57446 (Ont. C.A.)

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Any doubt as to whether the pleadings bring the claim within coverage should be resolved in favour of the insured.

Opron

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1. A court should determine which of the plaintiff’s legal allegations are properly pleaded.

not bound by the legal labels chosen by the plaintiff; examine the substance of the allegations contained in the

pleadings to determine the true nature of the claims;

2. A court should determine if any of the claims are derivative in nature.

If alleged negligence is based on same harm as intentional tort, then intentional act exclusion will not be avoided

3. A court must decide whether any of the properly pleaded, non-derivative claims potentially trigger the duty to defend.

Non-marine Underwriters, Lloyd’s of London v. Scalera, 2001 SCC 24

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Summary of Pleadings Analysis

Is there a possibility that any of the properly pleaded, non-derivative claims would, if proven, obligate the insurer to indemnify the insured under the terms of the policy?

Next step is to look to the terms of the policy

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Principles of Policy Interpretation

Insurance policies are contracts

Courts will try to give words their ordinary meaning, reading the contract as a whole (Scalera) - context matters

Court should not look for or create ambiguities where there are none

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“It is necessary to interpret insurance contracts as they would be understood by the average person applying for insurance, not as they might be perceived by persons versed in the niceties of insurance law.”

National Bank of Greece (Canada) v. Katskionouris, [1990] 2 S.C.R. 1029 at 1043

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Where there are ambiguities,

Court will interpret the policy consistent with the reasonable expectation of the parties

Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888

Avoid interpretations that would give unrealistic results or would not have been in contemplation of parties when contract entered into

Consolidated-Bathurst, Scalera

Courts should try to construe similar policies in same manner

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when all else fails, courts will construe the policy against the drafter (contra proferentum)

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Reading the PolicyGrant of coverage

Subject to exclusions

Exceptions to exclusions

Onus on insured to prove claim within coverage (construed broadly)

Onus on insurer to prove exclusion applies (construed narrowly)

Onus on insured to prove exception

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Insurer must show that an exclusion clearly and unambiguously excludes claim

Nichols

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Progressive Homes Ltd. v. Lombard

B.C. Housing hired Progressive as general contractor to build several housing complexes

B.C. Housing sued Progressive for breach of contract and negligence claiming damages for water leaking through walls and windows, improper and incomplete construction, deterioration of the building components resulting from water ingress and infiltration

B.C. Housing alleged rot created unsafe and hazardous environment and health risk

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Pleadings alleged that Progressive failed to ensure that building was built in good and workmanlike manner, in compliance with building codes, Progressive failed to inspect, and Progressive failed to warn of defects

Pleadings identified that subcontractors were involved in the project

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B.C.S.C. and C.A. found no duty to defend

S.C.C. reversed and found insurer owed a duty to defend

S.C.C. relied on established guidelines for determining whether there is a duty to defend and principles of policy interpretation

S.C.C. emphasized that court must decide based on policy wording in issue

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COVERAGE B – Property Damage Liability (1st policy) 

To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of property damage caused by accident.

“Property damage” means (1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an accident occurring during the policy period.

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“Accident” includes continuous or repeated exposure to conditions which result in property damage neither expected nor intended from the standpoint of the Insured. (1st policy)

 In 2nd and 3rd policies, definition of “property damage” deleted “destruction” of property.

Coverage in 2nd and 3rd policies was for liability arising from property damage caused by an “occurrence”. “Occurrence” means an accident, including continuous or repeated exposure to substantially the same general harmful conditions. (2nd and 3rd policy)

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Do pleadings allege property damage?

Onus on insured to bring allegations within grant of coverage

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Insurer’s Position

Property damage does not result from damage to one part of the building arising from another part of the building

Drawing on tort law, such damage to other part of the building is pure economic loss, not property damage

Property damage is limited to damage to property of third party and not to damage to insured’s own work

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S.C.C.’s ViewThe focus of insurance policy interpretation should first and foremost be on the language of the policy at issue.  General principles of tort law are no substitute for the language of the policy. (par. 35)

No limitation in policy definition to damage to third party property

Plain and ordinary meaning of “property damage” not limited to third party property

Ontario and Saskatchewan C.A.’s had reached same conclusion

Alie v. Bertrand & Frère Construction Co. (2002), 222 D.L.R. (4th) 687 (Ont. C.A.); Bridgewood Building Corp. (Riverfield) v. Lombard General Insurance Co. of Canada  (2006), 266 D.L.R. (4th) 182 (Ont. C.A.); Westridge Construction Ltd. v. Zurich Insurance Co., 2005 SKCA 81

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To restrict “property damage” to third party property would give little scope to “work performed” exclusion => consistency with exclusion clauses is further confirmation of plain meaning

Progressive conceded that “property damage” did not include defects, but S.C.C. suggested it may, at least as loss of use (par. 39) => avoids redundancy with exclusion for defects

Pleadings allege property damage: deterioration of building components resulting from water ingress, defects – whether specific property falls within definition of “property damage” will depend on evidence at trial but meets the threshold for a duty to defend application

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Do pleadings allege an accident?

Progressive has onus to show that property damage was caused by accident

Progressive argued that “accident” includes the negligent act that caused damage that was neither expected nor intended by Progressive

Insurer disagreed and said that when a building is constructed in a defective manner, what results is a defective building, not an accident – relied on C.A.’s finding that Progressive’s interpretation would offend the assumption that insurance provides for fortuitous contingent risk – would convert CGL to a performance bond

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S.C.C.’s Ruling

Whether defective workmanship is an accident is a case-specific determination: turns on allegations in pleadings and definition of “accident” in the policy

Disagrees with C.A.: fortuity is built into definition of “accident” – when event is unlooked for, not expected or intended, then it is fortuitous

There is a difference between a performance bond (which ensures work is brought to completion) and CGL (which covers damage to insured’s work once completed)

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Accident should be given definition ascribed to it by the policy: an event that causes property damage not expected nor intended by the insured, including repeated exposure to conditions

Pleadings in this case sufficiently allege “accident”: no suggestion that Progressive intentionally constructed buildings in faulty manner – allegation of negligence suggests fortuity – establishes possibility of coverage under the policy

Insured met the burden of bringing claim within the grant of coverage

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Consideration of Exclusions

Insurer failed to discharge burden that “work performed” exclusion clearly and unambiguously excluded coverage

Depending on policy version, there is a possibility of coverage for damage to work completed by a subcontractor, for damage resulting from work by a subcontractor, or for damage resulting from a particular part of Progressive’s work that was defective

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Original exclusion (1st policy)This insurance does not apply to: … (i) property damage to work performed by or on behalf of the Named

Insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith

Clause (i) replaced by clause Z in the Broad Form Extension Endorsement

(Z)  With respect to the completed operations hazard to property damage to work performed by the Named Insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith. [Emphasis added.]

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Clause Z is limited to work performed by the insured – it does not apply to work performed on behalf of the insured

Clause Z does not exclude property damage caused by the subcontractor’s work or property damage to the subcontractor’s work (regardless who caused it)

Fits with narrow interpretation

Different meanings for Clauses (i) and (Z) consistent with different wording

Purpose for upgrading to Broad Form Extension Endorsement (relying upon U.S. case, article in industry publication, Annotated CGL text)

Pleadings allege involvement of subcontractors => still possibility of coverage under 1st policy

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“Work performed” exclusion in 2nd policy:

J. ‘Property damage’ to ‘that particular part of your work’ arising out of it or any part of it and included in the ‘products - completed operations hazard.’

 “Your work” means:

a. Work or operations performed by you or on your behalf; and

b. Materials, parts or equipment furnished in connection with such work or operations

Lombard is correct that there is no subcontractor exception

But all that is excluded is defects: unlike standard exclusion, this wording contemplates dividing work into component parts => coverage for resulting damage is not excluded

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If entire building is wholly defective, then exclusion applies and no duty to indemnify

However, pleadings allege resulting damage: deterioration of building components resulting from water ingress and infiltration => duty to defend under 2nd version of policy

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“Work performed” exclusion in 3rd policy:

j. “Property damage” to that particular part of “your work” arising out of it or any part of it and included in the “products-completed operations hazard”.

 This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

Combination of 1st and 2nd policy exclusions

Coverage for defects is excluded but coverage for resulting damage remains

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Explicit subcontractor exception: allows for coverage for defective work where it is work by a subcontractor

=> possibility of coverage under 3rd policy wording

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Significance of the Case

Reaffirmed emphasis of interpretation of policy and pleadings in issue

Overruled broad statement from Swagger that defective building is not an “accident” unless it causes damage to third party property: depends on wording of the policy in issue

B.C. insurance law now consistent with Ontario and Saskatchewan regarding interpretation of similarly worded definition of “property damage” (i.e.. not limited to third party property)

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Tort theory cannot be imported into general principals of insurance law and relied upon in preference to wordings of policy in issue

“Property damage” may include defects

Arguments based on insurer’s intention or implications of certain result will be superceded by plain reading of policy wordings: insurers must ensure that the policy says what they think it says

Leaky condo cases, properly pled, may fall within CGL coverage

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Saanich v Aviva Insurance Company2010 BCSC 1321 (under appeal)

District of Saanich was named as additional insured under a CGL policy issued to the BC Lacrosse Association and the Pacific Rim Field Lacrosse Association

Saanich and Lacrosse defendants were sued when Mr. Wright was struck by an errant lacrosse ball as he was on his way to dog training class – both lacrosse practice and dog training class were taking place in a rec centre owned and operated by Saanich

Saanich sought defence under the policy

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Policy covered Saanich and other additional insureds “solely with respect to the liability which arises out of activities of the named insured”

S. 11 of the policy (entitled “who is an insured?”) states that coverage extended to additional insureds is “only for their vicarious liability arising out of” the named insured’s operations

BCLA’s operations described as “lacrosse activities”

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Statement of Claim allegations against Saanich:

(a)Failing or neglecting to provide a means of access to the dog obedience class through its premises that did not pass through the area being used by the members of the Lacrosse Association for lacrosse practice;

(b)Failing or neglecting to have its reception staff direct persons attending dog obedience class through the premises by way of a safe route that would not bring them into proximity to lacrosse practice;

(c)Failing or neglecting to provide nets, barriers, walls or other physical protection to prevent persons on the premises from being hit by lacrosse balls;

(d)Failing to post any, or in the alternative adequate, warning signs to advise persons entering on to the premises of the danger of errant lacrosse balls.

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Statement of Claim allegations against BCLA:

(a)Failing or neglecting to instruct players to cease projecting or launching lacrosse balls while non-lacrosse players were present in their practice area;

(b)Failing or neglecting to supervise the lacrosse players adequately so as to ensure that lacrosse balls were not projected or launched towards non-lacrosse players in the practice area;

(c)Failing to provide lacrosse players with adequate instruction as to safety and the control of lacrosse balls when non-lacrosse players were present [and so on]

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Main Issues

Is it possible that Saanich's potential liability in the action “arises out of the activities of the named insured”?

Is Saanich's potential liability “vicarious liability” arising out of the named insured’s operations?

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Chambers judge reviewed basic legal principles to be applied when considering the duty to defend

Saanich argued that its potential liability clearly arises out of

the activities or operations of Aviva’s named insured (ie. Lacrosse)

Plaintiff does not allege an injury arising independently of the lacrosse activities

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Aviva arguedClaims against Saanich involve liability which is

distinct from and not attributable to the activities of the Lacrosse Defendants

True nature of claim against Saanich is failure to provide safe access route to dog obedience class

Claim arises from 2 distinct causes: Saanich’s failure to provide safe access and BCLA’s failure to supervise lacrosse players while non-players were in the area

Aviva did not insure Saanich for its provision to patrons of safe access to non-lacrosse-related activities

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In reply, Saanich asked “safe from what?”Only answer could be “safe from errant lacrosse

balls”No claim against Saanich in the absence of

lacrosse activities

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Judge’s Conclusions Insurer’s argument rejected:

“The claim brought by Mr. Wright does not allege that his injuries were caused by anything other than the errant lacrosse ball. The pleadings do not disclose a cause of injury independent of the lacrosse activities….But for the lacrosse activity, there would have been no obligation on Saanich to provide alternate access to the patrons of the dog obedience class.”

Allegations do not need to be the same as those against the named insured, as long as the potential liability arises out of the activities of the named insured

There is a clear nexus or causal connection between the possible liability of Saanich and the activities of the named insured.