Message From the Executive Editors
In this issue of Gowlings' On-Risk E-Bulletin, Gowlings' professionals examine:
- 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;
- The practical effect of without prejudice offers as discussed by the Alberta Court of Appeal in Mahe v. Boulianne;
- 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;
- 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
- 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.
INSURER'S DUTY TO DEFEND:
Policy and Pleadings over Principles
PROGRESSIVE HOMES LTD. v. LOMBARD GENERAL INSURANCE CO. OF
By: Heather Gray, Toronto
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.
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.
THE POWERFUL EFFECT OF INFORMAL OFFERS
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,  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.
FORTUITOUS SETTLEMENT NOT EXCLUDED BY SETTLEMENT EXCLUSION CLAUSE
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.
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:
5. PERILS INSURED
This form, except as herein provided, insures against all risks of direct physical loss of or damage to the property insured.
6. EXCLUSIONS ...
B) PERILS EXCLUDED
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.
PRECONDITIONS TO SUBROGATION UNDER STANDARD MORTGAGE CLAUSES
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 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.
MONIES RECEIVED PURSUANT TO PIERRINGER AGREEMENT CREDITED AGAINST DAMAGES AWARDED AGAINST NON-SETTLING DEFENDANT
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.