The Ontario Superior Court of Justice recently held that an
additional insured was covered by a policy, where there was no
direct claim against the named insured, even though the coverage
was limited to claims arising from the negligence of the named
insured.1 The most common additional insured
endorsements are generally speaking very restrictive in their
application. As this case demonstrates, such an endorsement may
still provide protection to an additional insured even where the
plaintiff has no direct claim against the named insured.
The plaintiff hired Davis Systems of North Bay Nipissing
("Davis Systems") to repair damage to a hotel that was
caused by a fire. Davis Systems in turn subcontracted that work to
Crystal Clean Carpet & Upholstery Specialist ("Crystal
Clean"). Crystal Clean allegedly left a window open in the
middle of winter, causing the pipes to freeze and burst.
The plaintiff sued both Davis Systems and Crystal Clean for
damages resulting from Crystal Clean's alleged negligence.
Davis Systems cross claimed against Crystal Clean and brought a
third party action against Crystal Clean's insurer, Economical
Insurance Group ("Economical"). Under the policy of
insurance Davis Systems was listed as an additional insured.
While the plaintiff eventually consented to a dismissal of the
action against Crystal Clean, the cross claim and third party claim
continued. Economical and Crystal Clean together brought a Rule
21.01(1)(b) motion seeking a dismissal of the third party claim on
the basis it disclosed no reasonable cause of action.
In order for Economical to have a duty to defend the action
against Davis Systems, there must be the possibility of a duty to
Economical and Crystal Clean argued that since the action
against Crystal Clean had been discontinued, the true nature and
substance of the claim was with respect to Davis Systems'
negligent acts and not with respect to liability arising out of the
operations of Crystal Clean. It argued that the discontinuance was
an acknowledgement by the plaintiff that the factual allegations
could not support its claim; accordingly coverage for Davis
Systems' omissions relating to Crystal Clean's operation
could not be triggered.
The court did not accept Economical and Crystal Clean's
argument for the following reasons. First, the court did not know
the reasons why the plaintiff discontinued its claim against
Crystal Clean. Second, even if the discontinuance could be said to
be an admission, it was not binding on Davis Systems. Third, the
discontinuance could only be said to be an acknowledgment that the
plaintiff's claim against Crystal Clean could not succeed. It
was not an acknowledgment in respect of the plaintiff's claim
against Davis Systems.
The pleadings alleged that Davis Systems was liable to the
plaintiff for breach of contract as a result of Crystal Clean's
negligence. This allegation was, in the court's view, within
the coverage provided by the policy. Notably, the exclusion in the
additional insured clause was restricted solely to Davis
Systems' own negligent acts. The clause read as follows:
[..] Davis Systems are hereby added to the policy as additional
Insureds but only with respect to liability arising out of the
operations performed by or for the named insured but excluding
any negligent acts committed by such additional Insured.
(Emphasis in original)
As there was no other factual basis for Davis System to be
liable other than Crystal Clean's negligence, the
discontinuance against Crystal Clean did not change the factual
basis upon which the plaintiff was seeking to find Davis Systems
liable. The policy covered damages for Crystal Clean's
negligence when those damages were sought from Davis Systems.
Accordingly, the motion was dismissed.
In this case, there was real value added by the additional
insured endorsement even though the language of the clause itself
was restrictive. Additional insured endorsements should be
carefully reviewed by your counsel to ensure that your interests
are being protected.
1. Innvest Real Estate Trust (o/a Travelodge Airport
North Bay) v. 1328151 Ontario Inc. (o/a Paul Davis Systems of North
Bay Nipissing) et al., 2014 ONSC 5891
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