Canada: On-Risk E-Bulletin @ Gowlings - April 14, 2011

Last Updated: April 19 2011

Edited by Paul Stein & Tanya Frizzell

Message From the Executive Editors

In this issue of Gowlings' On-Risk E-Bulletin, Gowlings' professionals examine:

  1. The Supreme Court of Canada's analysis of the duty to defend in the recent decision of Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada;
  2. The practical effect of without prejudice offers as discussed by the Alberta Court of Appeal in Mahe v. Boulianne;
  3. Coverage for fortuitous settlement in property damage claims and the application of a settlement exclusion clause as determined by the Alberta Court of Appeal in Engle Estate v. Aviva Insurance Company of Canada;
  4. The Ontario Court of Appeal's views on the preconditions to subrogation under a standard mortgage clause in Farmers' Mutual Insurance Company (Lindsay) v. Pinder; and
  5. The credit of settlement monies paid pursuant to a Pierringer agreement towards the damages awarded at trial in the Alberta Court of Appeal decision in Bedard v. Amin.

We hope you find this issue of On-Risk to be informative and look forward to any comments or questions you might have in respect of the topics discussed.  Please feel free to contact either of us or the authors of the articles below for further information.

Policy and Pleadings over Principles

By: Heather Gray, Toronto

Brief Background

Progressive Homes Ltd. ("Progressive") was hired as a general contractor to build four housing complexes for the British Columbia Housing Management Commission ("BC Housing").  The complexes leaked and, as a result, suffered significant rot, infestation and deterioration.  BC Housing sued Progressive for breach of contract and negligence.

Progressive submitted the claim to its CGL carrier, Lombard General Insurance Co. of Canada, who ultimately denied coverage on the basis that the claim did not trigger its duty to defend.  Lombard argued that the damages were the expected consequence of faulty workmanship and did not constitute "property damage" caused by "accident".  The British Columbia Supreme Court and Court of Appeal agreed, following a line of reasoning adopted in B.C. in Swagger Construction Ltd. v. ING Insurance Company of Canada and GCAN Insurance Company v. Concord Pacific Group Inc.  The Courts relied on general principles such as, "property damage" refers to damage to the property of a third party and that defective construction is not fortuitous.  To find otherwise, held the majority of the Court of Appeal, "flies in the face of the underlying assumption that insurance is assigned to provide for a fortuitous contingent risk".

The Supreme Court of Canada disagreed and overruled the decision.  In doing so, it reconciled B.C.'s jurisprudence with a divergent line of cases from Ontario and Saskatchewan, Bridgewood Building Corp. v. Lombard General Insurance Co. of Canada and Westridge Construction Ltd. v. Zurich Insurance Co., which favoured a broader reading of the coverage grant in similar liability policies.


While several different policy wordings were at issue, the basic features of the coverage grants were the same.  Lombard owed Progressive a duty to defend for property damage caused by an accident.

(i)         Property Damage

Lombard relied on prior jurisprudence for the proposition that "property damage" in a CGL policy cannot mean damage to one part of a building caused by the failure of another part of a building and, therefore, must mean damage to the property of a third party.  Justice Rothstein, speaking for a unanimous court, roundly rejected this interpretation holding:

I would construe the definition of "property damage" according to the plain language of the definition, to include damage to any tangible property.  I do not agree ... that the damage must be to third-party property.  There is no such restriction in the definition.

The pleadings described water leaking in through windows and a deterioration of the building components resulting from water ingress and infiltration.  The Supreme Court held that this met the low threshold in a duty to defend analysis of showing that the pleadings reveal a possibility of coverage.

(ii)        Accident

In this case, the definition of "accident" being considered was, generally:

"Accident" includes continuous or repeated exposure to conditions which result in property damage neither expected not intended from the standpoint of the Insured.

Lombard argued that a defective building is the result of defective workmanship and cannot be an "accident".  The Supreme Court held that absent policy language to the contrary, it could not be said that defective workmanship was never an accident.  Whether defective workmanship will be seen as accidental will depend on the alleged circumstances and the definition of "accident" in the policy.

The Supreme Court also rejected the suggestion that allowing for the possibility that defective workmanship could be accidental offended the concept of fortuity.  Where the pleadings do not make reference to intentional conduct, which would suggest that the damage was expected or intended, then there remains a possibility that the damage was fortuitous.

Though the decision in this case is not groundbreaking, it is a strong reminder of the primacy of the policy and the pleadings in a duty to defend analysis.  In that regard the decision serves as a signal to the industry to (a) ensure that its wording is in line with its underwriting intent; and (b) ensure that a claim is evaluated based on the pleadings and not principles.


By: Taryn Burnett, Calgary

The Alberta Court of Appeal addressed the effect of without prejudice offers in Mahe v. Boulianne.  In Mahe, the Alberta Court of Queen's Bench awarded the plaintiff $700,000 at trial for injuries sustained when he fell from a power pole.  On appeal, damages were reduced to $365,000.  After the trial judgment was rendered, the appellant offered the plaintiff $500,000, being the appellant's insurance policy limit.  The plaintiff rejected the offer.  The appellant sought double costs from the date of the offer.

The plaintiff argued that the offer does not attract double costs as it did not make reference to the Rules of Court dealing with formal offers, nor did it indicate that it was made as a Calderbank offer.  It was simply a settlement offer made on a "without prejudice" basis.

The Alberta Court of Appeal held that "without prejudice" offers can be referred to when the merits of the dispute have been decided.  At para. 10, the Court stated that:

...The Rules of Court do not specify that any particular form of offer is required to trigger its costs consequences, and an offer need not make reference to costs. The parties are presumed to know the law, including the provisions of the Rules of Court. In any event, even informal offers that arguably do not comply with the Rules can have an effect on costs: Fullowka v. Royal Oak Ventures Inc., 2008 NWTCA 9 (CanLII), 2008 NWTCA 9, [2008] 12 W.W.R. 60, 437 A.R. 390 at paras. 23-5. While informal offers do not restrict the court's discretion over costs, they are nevertheless a relevant consideration. The appellant made a generous offer that exceeded his eventual liability, and he is entitled to double costs of the appeal after the offer was made.

This decision stresses the importance of explaining to clients the risks and benefits associated with offers, whether they are formal offers under the Rules of Court or informal offers made on a without prejudice basis.  This decision further stresses the wide discretion exercised by the court in awarding costs.  Finally, this decision confirms that all settlement offers may be considered by a court in assessing costs.


By: Erin Runnalls, Calgary


In its decision in Engle Estate v. Aviva Insurance Company of Canada, the Alberta Court of Appeal addressed the interpretation of an insurance contract purporting to exclude damage to buildings caused by settlement.

The Court focused on finding an interpretation from the whole of the contract that promoted the parties' true intent at the time of entering into the contract.  On this basis, the Court held that the settlement exclusion clause was interpreted only to exclude damage to buildings caused by natural settlement forces and not damage to buildings caused by fortuitous causes, as the parties' reasonable intention in entering into the all-risk insurance policy was to insure against fortuitous circumstances.

Background Information

The respondent, Engle Estate, owned a commercial building and leased the premises to a number of commercial tenants.  The respondent secured an all-risk insurance policy with the appellant, Aviva Insurance Company of Canada.

After lot excavation commenced on a high-rise condominium adjacent to the respondent's building, the respondent's tenants began to notice cracks developing in the floors, walls and ceilings of the building.  The building had been in good condition prior to the commencement of the excavation activity on the adjacent lot.  The respondent's expert opined that the settlement damage to the respondent's building was caused by the excavation activity on the adjacent lot, and specifically by inadequate underpinnings and shoring together with vibrations, shaking and the destabilizing effects of the deep excavation.

The respondent reported the matter to the appellant insurer.  The insurer denied the respondent's claim on the basis that the all-risk insurance policy excluded loss or damage caused by settlement:


This form, except as herein provided, insures against all risks of direct physical loss of or damage to the property insured.

6.         EXCLUSIONS ...


This form does not insure against loss or damage caused directly or indirectly: ...

1)         to "buildings" by: ...

(iii)       settling, expansion, contraction, moving, shifting or cracking unless concurrently and directly caused by a peril not otherwise excluded in Clause 6.B. hereof;

The trial judge concluded that the exclusion clause did not apply.  The trial judge interpreted the settlement exclusion clause to apply only to settlement-related damages caused by natural forces and not to settlement which results from non-natural causes.

Interpretation of Settlement Exclusion Clause

The Court of Appeal framed the question on appeal as follows:  Does the exclusion clause exclude coverage for damages or loss from settlement no matter the cause, or only damage or loss that occurred naturally?

The insurer argued that the exclusion clause was not restricted only to settlement from natural forces and cited a number of Canadian cases that have interpreted settlement exclusion clauses to exclude settlement damages however caused.  The insured sought to distinguish the Canadian cases on the basis of the different wording of the settlement exclusion clauses at issue in those cases, and urged the Court to follow the American interpretation of similar provisions.  The Court noted that the Canadian cases relied upon by the insurer were distinguishable in that the exclusion clauses excluded settlement as a type of damage, whereas the exclusion clause at issue explicitly included the words "caused by".

The Court of Appeal cited the applicable principles governing the interpretation of insurance contracts, but focused almost exclusively on finding an interpretation from the whole of the contract that promoted the parties' true intent at the time of entering into the contract.

The Court agreed with the trial judge that "settling" is commonly understood to mean that which is expected and occurs naturally.  The Court found the wording of the settlement exclusion clause to be instructive as to the parties' intent in this regard, as the specific terms, namely "expansion, contraction, moving, shifting or cracking", suggested to the Court that the clause was meant to exclude damages for passive, gradual, or naturally occurring events.

The insurer argued that the language used, particularly the words "directly or indirectly", evidenced the parties' intent that the exclusion clause apply to both naturally occurring and fortuitous settlement.  However, the Court found that the words "directly or indirectly" were used elsewhere in the contract and, in a number of instances, qualified by words such as "whether natural or man-made".  Therefore, the Court held that the words "directly or indirectly" did not necessarily evidence the intent as argued for by the insurer, and the drafters could have employed more precise language to include fortuitous causes as was done elsewhere in the contract.

Finally, the Court concluded that the reasonable intention of the parties to such an all-risk insurance policy is that the settlement exclusion clause applies to naturally occurring settlement, but not settlement that occurs otherwise.  The Court found this interpretation to be consistent with the underlying purpose of all-risk insurance policies as understood by the parties to protect against fortuitous events.  If the parties had intended the anomalous result that the excavation activity on the adjacent lot causing damage to the respondent's building would be covered with the exception of settlement-type damage, then the parties should have expressly said so in the contract.


By: Tanya Rocca, Toronto


In Farmers' Mutual Insurance Company (Lindsay) v. Pinder, the Ontario Court of Appeal confirmed that there are two preconditions to an insurer's right to subrogation under standard mortgage clauses.  First, the insurer must make payment of the loss award, or part of it, to the mortgagee.  Second, the insurer must establish a claim that it has no liability to the mortgagor insured. 


The Pinders held an insurance policy on their home with Farmers' Mutual Insurance Company ("Farmers' Mutual").  The home was subject to a five-year mortgage with the Bank of Montreal.  After a fire damaged the Pinders' home, they submitted a claim to Farmers' Mutual for damage and repairs to the home, and additional living expenses.  Farmers' Mutual denied the claim on the grounds that the Pinders failed to notify the insurer of a material change in the risk, thereby voiding the policy, and that the Pinders made willfully false statements with respect to their claims, vitiating their right to recover.

Under the Standard Mortgage Clause of the insurance policy, the Bank of Montreal submitted a proof of loss seeking payment of the balance of the mortgage loan outstanding.  Farmers' Mutual paid the Bank the principal balance of the mortgage.

The Pinders initiated an action against Farmers' Mutual seeking a declaration that the insurance policy was valid and binding, and Farmers' Mutual commenced an action seeking recovery of the amount paid to the bank, relying on its right of subrogation under the Standard Mortgage Clause. 

Farmers' Mutual brought a motion for summary judgment in its action against the Pinders.  In response, the Pinders brought a motion for the consolidation of the two actions.  The motion judge granted summary judgment against the Pinders and stayed the Pinders' claim. 

The Pinders appealed the decision, seeking an order dismissing Farmers' Mutual's motion for summary judgment and an order directing that the two actions be tried together.

The Appeal

The issue on appeal was whether the sole precondition for the insurer's claim to a subrogation right under the Standard Mortgage Clause was the insurer paying the mortgagee any part of the loss award under the insurance policy.  The Court of Appeal rejected the cases relied upon by the motion judge and completed a general survey of the function and effect of the Standard Mortgage Clause within the policy. 

The court recognized that the Standard Mortgage Clause has been a standard part of insurance policies for well over a century, and cited the unanimous decision of the Supreme Court of Canada in Caisse populaire des deux rives v. Société mutuelle d'assurance contre l'incendie de la vallée du richelieu.

In that case, Justice L'Heureux-Dubé found that though part of the policy between the insurer and insured, the Standard Mortgage Clause constitutes a second and separate insurance contract between the insured and the mortgagee.  This two contract theory is firmly embedded in North American insurance practice and protects the mortgagee's interest in the insured property even when the insured has done something to void the policy.

After reviewing the preconditions to the right of subrogation, the purpose of the Standard Mortgage Clause, and the commercial atmosphere in which insurance is contracted, the court held that the second precondition in the Clause should be interpreted to require that the insurer establish a claim that the insured mortgagor has voided the policy.  This conclusion avoids a construction that would render the insurance coverage the insured mortgagor has purchased to cover the mortgage debt ineffective.  

The Ontario Court of Appeal recognized that this approach to the language of the Standard Mortgage Clause has been applied throughout the North American insurance industry for decades.  A review of Canadian and American jurisprudence and commentary reinforced the conclusion that there are two preconditions to the insurer's entitlement to subrogation under the Standard Mortgage Clause. 

The judgment granted by the motion judge was set aside and replaced with an order dismissing Farmers' Mutual's application for summary judgment and granting the Pinders' motion that Farmers' Mutual's action be consolidated or heard together with their action.   The Supreme Court of Canada refused to grant leave to appeal.


By: Lindsay Gluck, Calgary


The 2010 Alberta Court of Appeal decision in Bedard v. Amin deals with whether settlement funds paid by a settling defendant to a plaintiff pursuant to a Pierringer agreement should be deducted from the damages awarded at trial.  The question called for a balancing of competing policy objectives: public interest in encouraging settlement of multi-party litigation, versus the rule against double recovery in tort claims. 

The Court of Appeal held that the trial Judge did not err in coming to the conclusion that, on the current state of Canadian law, the rule against double recovery in tort claims must outweigh the public interest in encouraging settlement of multi-party litigation.  The appeal was dismissed, with the result that the amount of settlement monies paid under a Pierringer agreement, net of the cost incurred in the claim against the settling defendants, should be deducted from the damages awarded at trial.

Competing Public Interests

The Supreme Court of Canada has made it clear that the primary goal of tort damages is compensation of the injured person, not punishment of the tortfeasor.  In rare circumstances, courts have recognized exceptions to the rule against double recovery, primarily in the case of insurance proceeds and generally on the principle that the plaintiff has paid for the insurance and should not be deprived of the benefit for which he has contracted.  Like appellant courts in Ontario and British Columbia, the Court of Appeal declined to find a similar exception for settlement proceeds on the well accepted theory that the settlement monies received are directly related to the plaintiff's claim against both the settling and non-settling defendants for damages sustained.  In such circumstances a plaintiff is not entitled to receive more than the damages awarded by the court at trial. 

While the appellants argued that requiring settlement proceeds to be deducted from damage awards would discourage settlement, the Court of Appeal ultimately held that the rule against double recovery outweighed the risk of discouraging settlement.

The monies received by the plaintiff under the Pierringer agreement were credited to the damages awarded against the non-settling defendant at trial.  Only the net settlement proceeds, after an appropriate deduction for costs incurred in the claim against the settling defendants, were set off against the damage award at trial. This is a significant aspect of this decision, because the non-settling defendant was effectively exposed to the plaintiff's legal expenses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
8 Nov 2016, Seminar, Ottawa, Canada

The prospect of an internal investigation raises many thorny issues. This presentation will canvass some of the potential triggering events, and discuss how to structure an investigation, retain forensic assistance and manage the inevitable ethical issues that will arise.

22 Nov 2016, Seminar, Ottawa, Canada

From the boardroom to the shop floor, effective organizations recognize the value of having a diverse workplace. This presentation will explore effective strategies to promote diversity, defeat bias and encourage a broader community outlook.

7 Dec 2016, Seminar, Ottawa, Canada

Staying local but going global presents its challenges. Gowling WLG lawyers offer an international roundtable on doing business in the U.K., France, Germany, China and Russia. This three-hour session will videoconference in lawyers from around the world to discuss business and intellectual property hurdles.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.