An insurer's duty to defend an action against its insured is triggered by the mere possibility that a claim could be made under the insured's policy. Traditionally, a court's analysis of whether this duty is triggered is based solely on the pleadings. However, in some limited circumstances the courts have permitted a consideration of "non-controversial" evidence.
A recent decision of the Ontario Superior Court provides a good illustration of when such extrinsic evidence is and is not appropriate. While higher authorities have opened the door to extrinsic evidence, the court stops short of permitting insurers to engage in adversarial fact-finding inquiries.
In Aquatech Logistics et. al. v. Lombard Insurance et. al.,1 the applicant, Aquatech Logistics, held three insurance policies: Aviva provided an automobile policy, Lombard Insurance provided a comprehensive general liability policy, and ACE INA provided a pollution incident liability policy.
In July 2012, Aquatech was involved in an unfortunate incident that took place at a public pool in St. Catharines. Aquatech delivered chlorine which was accidentally poured into a container of hydrochloric acid. The chemical reaction which quickly ensued produced a poisonous cloud of potentially deadly chlorine gas which infiltrated the public areas of the pool and surrounding area.
Two actions were commenced against Aquatech in which the plaintiffs advanced claims under the Environmental Protection Act , R.S.O. 1990 c. E.19, in nuisance, and in negligence.
Aquatech sought a declaration from the Ontario Superior Court of Justice stating that two of its three insurers (Lombard and ACE INA) had a duty to defend the actions against it for damages arising out of the accident. The third insurer (Aviva) had already assumed a defence of the claims. As of the date of Aquatech's application, none of the underlying claims had been proven.
The Exclusion Clause
The test to establish the duty to defend is whether there is a "mere possibility" that the claim alleged could succeed.2 Both non-defending insurers sought to rely on exclusion clauses in their policies and extrinsic evidence to assert that there was no possibility of coverage.
Lombard lost a procedural motion prior to the hearing and was unable to produce extrinsic evidence as a result. It therefore conceded that it had no basis to dispute its duty to defend.
ACE INA relied on an exclusion clause which would deny coverage if the accident arose out of the use or operation of a motor vehicle, including the use of accessories and equipment attached to the vehicle. This exclusion only applied if there was coverage under an existing motor vehicle policy. In this case, Aviva provided that coverage. Therefore, if ACE INA could establish that a motor vehicle was involved in the incident, coverage could be excluded.
Justice Dunphy noted that the starting point of the analysis were the pleadings in the underlying claim. In this case, the pleadings in both actions made no reference to a motor vehicle.
However, ACE INA sought to rely on extrinsic evidence. In particular, it intended to establish, that the chlorine was brought to the site by Aquatech in a truck (i.e. a motor vehicle under the policy). ACE INA relied on an admission from the cross-examination of the President of Aquatech that the delivery was indeed conducted via truck.
On the basis of appellate authority, Justice Dunphy recognized that extrinsic evidence of this sort is admissible where the evidence is "non-controversial, affected only coverage, and did not affect the issues of liability in the litigation."3 In this case, he was prepared to accept that the delivery was conducted using a motor vehicle. Justice Dunphy noted:
While I might have been prepared to consider taking judicial notice of the exceptional rarity of commercial bulk transport of chemicals by oxcart or horse, at least in the City of St. Catharines, the admission by the applicants that motor vehicles are used by Aquatech in the delivery of pool chemicals avoids that issue and strikes me as just the sort of non-controversial matter that the Court of Appeal ... was referring to.4
However, despite accepting this non-controversial fact, Justice Dunphy was not prepared to dismiss the application. He went on to consider a series of questions which called into doubt whether the motor vehicle was directly involved in the incident. He asked:
- Was the chlorine brought in a single trip or more than one?
- If a single load, was the chlorine unloaded directly from the tank in the insured's truck into the wrong tank at the pool storage room or was there an intermediate step?
- If unloaded directly into the acid tank, was it unloaded by means of a pump?
- If by pump, was it a pump powered by the customer/pool operator or one powered by the systems of the truck?
- If by pump, was the pump portable or permanently affixed on to the truck?
- In light of the answers to (d) and (e) above, can the pump or other unloading device be qualified as "accessories and equipment while attached to or mounted on such vehicle" as defined in the exclusion clause of the policy?
In short, by asking these questions Justice Dunphy illustrated that the involvement of the truck was not conclusive. Instead, that non-controversial fact raised controversial issues.
Answers to the above questions would require a factual inquiry by the trial judge hearing the claims on their merits. To conduct a fact-finding process to answer those questions would convert the application to a "trial within a trial" which has been admonished by our Court of Appeal.5 For example, Justice Dunphy noted that even if the truck driver were examined and provided affirmative answers to the questions above, it could not be assumed that his or her evidence would be accepted "as the last word" by the court.6 If it were shown, for example, that the pool owner's equipment was used or involved in the unloading process, the question of liability would be impacted.
Justice Dunphy concluded that the "true nature" of the claim before him was that of a pollution incident. The pleadings did not disclose the "exact means" by which the incident occurred and did not venture further than to allege that the defendant's employee caused the mixture of the two chemicals.7 For this reason, and as a result of the inconclusive nature of the evidence permitted, the court granted the application and held that all three insurers had a duty to defend.
This decision is a well-reasoned application of the rules regarding when extrinsic evidence may or may not be permitted when considering an insurer's duty to defend.
On one hand, the court permitted the "non-controversial" evidence that a truck was involved in the delivery of chemicals. On the other hand, the court stopped short of permitting the insurer to investigate and challenge the extent of the involvement of the truck, as that would require an adversarial fact-finding process.
In short, applications regarding the duty to defend remain an analysis conducted at the pleadings level with limited admission of non-controversial evidence. This decision shows that the pleadings and such evidence must be conclusive on their own to deny coverage. An insurer cannot use a few preliminary facts to launch into an adversarial inquiry into matters that would otherwise be determined at trial.
1. Aquatech Logistics et. al. v. Lombard Insurance et. al. , 2015 ONSC 5858 [Aquatech Logistics ].
2. McLean (Litigation Guardian of) v. Jorgenson, 78 O.R. (3d) 308 (Ont. C.A.).
4. Aquatech Logistics, supra note 1, at para. 31.
5. Ibid .
6. Ibid at para. 34.
7. Ibid at para. 35.
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