Canada: Ontario Court Rejects Well Established Rules For Interpreting Insurance Policy Exclusions

In Pembridge Insurance Company of Canada v Chu,1 a judge of Ontario's Superior Court of Justice recently concluded that insurance policies ought to be interpreted differently when multiple insurers are involved. In this problematic decision, the court deviated from the long-standing rule that exclusion clauses should be interpreted "narrowly". Remarkably, the court began with the assumption that one of the insurance policies must respond to the loss. Based on this assumption, the court decided that different rules of contractual interpretation would apply.

This case is problematic because (i) it conflicts with the well-established rules for policy interpretation; (ii) it suggests that a policy can be interpreted by looking outside the contract to its effect on a non-party; and (iii) the assumption that one policy must indemnify the insured was both irrelevant and an improper consideration on a duty to defend application. Absent appellate guidance, this decision may create confusion and unintended consequences on coverage applications involving multiple insurers.

Facts

The case in Pembridge involved allegations that Chu, after a motor vehicle accident, left his vehicle to engage in physical violence and threatening behavior. In a typical "road rage" incident, he allegedly hit the window of another vehicle, while yelling and making other gestures. Because of Chu's conduct, the underlying plaintiffs alleged that they feared for their lives. Chu was insured under a Pembridge homeowner policy which covered "bodily injury or property damages". The policy contained an exclusion for claims "arising from the ownership, use or operation of a motorized vehicle...".2 Dominion, Chu's auto insurer, accepted the duty to defend for allegations arising out of the use, ownership or operation of the vehicle. Dominion argued that that the allegations of Chu's conduct, after he left his vehicle, triggered a duty to defend under the Pembridge policy.3

A False Premise and Errors in Privity

The court began its analysis by correctly articulating the well-settled principles for interpreting insurance policies. The court acknowledged that, generally, coverage terms are to be interpreted broadly and exclusion clauses are to be interpreted narrowly.

However, when it turned to interpreting the exclusion clause in question, the court decided that the narrow interpretation rule need not apply because, in the court's view, the insured would have coverage no matter the outcome of the analysis. The court stated:

In this case, however, regardless of how the exclusion clause is interpreted, one of the insurers will be providing coverage to the insured in relation to the insured's actions after exiting the vehicle, and the other will not. If I were to interpret the exclusion clause more broadly, this would leave Dominion responsible for following through with the coverage. If I were to interpret the provision more narrowly, this would make Pembridge liable for the conduct.

This was a false premise that gave rise to numerous errors in this decision. Here, the court assumes that only one insurer can respond to a loss, when it is entirely possible that both policies could respond. The error in this analysis was further illustrated when the motion judge concluded in the next paragraph that "between Dominion and Pembridge, in light of the jurisprudence, it is more appropriate for Dominion to provide coverage in this case." In effect the court concluded that only one policy would respond, and that it was charged with deciding which appeared to be "more appropriate." The judge misdirected himself on what the issue was and how it should be determined.

It is well settled that a policy of insurance is to be interpreted by reference to the intent of the insurer and the insured alone – even if the dispute is "as between" insurers. For example, in dealing with an "other insurance" exclusion, the Supreme Court of Canada in Family Insurance Corp. v. Lombard Canada Ltd. ruled that the intentions of one insurer regarding another insurer was irrelevant. Justice Bastarache wrote:

[T]he interpretation exercise is concerned with determining the intentions of the insurers vis-à-vis the insured. ... In the case of an insurance contract, the entire agreement between the insurer and the insured is contained within the policy itself and evidence of the parties' intentions must be sought in the words they chose. ... In the absence of privity of contract between the parties, the unilateral and subjective intentions of the insurers, unaware of one another at the time the contracts were made, are simply irrelevant. [emphasis added]4

The Ontario Court of Appeal in TD General Insurance Company v. Intact Insurance Company recently affirmed and relied on the conclusion in Family Insurance Corp. The Court noted that in cases of overlapping insurance "...insurance policies themselves must be construed to determine the liability of each insurer, and the court should not refer to surrounding circumstances or look outside the policies. [emphasis added]"5

But the court in the Pembridge did just that when it began with the false assumption that, no matter the outcome, at least one insurer would have to indemnify Chu for the loss. As discussed in the section below, that false assumption distorted the motion judge's interpretation of the exclusion clause. As discussed later in this article, the false assumption also caused an improper finding on the ultimate responsibility for indemnity.

Errors in Interpretation

Informed by the improperly assumed result, the court proceeded with its analysis of the Pembridge policy. The exclusion in the Pembridge policy read:

You are not insured for claims made against you arising from:

The ownership, use, or operation of any motorized vehicles, trailer or watercraft, except those insured in this policy.

On reading this exclusion, the court concluded that Chu's road rage incident "arose from" the use or operation of a motor vehicle. In reaching that conclusion, the court relied on: (i) s. 239 of the Insurance Act which specifically requires that automobile policies provide coverage for loss or damage caused "directly or indirectly" in operation of a vehicle; and (ii) Amos v Insurance Corp. of British Columbia, which afforded a broad, liberal interpretation of the phrase, "arising from".6

The court found that cases interpreting the Insurance Act and following Amos have "very broadly construed" the phrase "arising from".7 In relying on this line of cases, the court specifically observed, but ignored, that the Pembridge policy did not contain the phrase "directly or indirectly". The court further specifically observed, but ignored, that the line of cases cited by Pembridge arose in the context of interpreting coverage grants rather than coverage exclusions. The motion judge reasoned that because the interpretation analysis was being conducted "as between" insurers, the typical rules of interpretation do not apply.

This approach contradicts well-established Supreme Court of Canada precedent, which has repeatedly affirmed that clauses granting coverage are to be construed broadly and clauses removing coverage are to be construed narrowly.8 The court offered no reason to deviate from this rule other than its improper conclusion that the Dominion's policy would respond if the Pembridge policy did not.

In fact, the Supreme Court of Canada dealt with this very issue in Derksen v. 539938 Ontario Ltd. In Derksen, the Court held that the Amos interpretation of "arising out of" ought not to apply to cases interpreting insurance exclusions:

It is clear however that Amos is distinguishable from the case at bar on the basis that the relevant provision in that case was a coverage clause, as opposed to an exclusion clause. It is well-established that, in the construction of insurance contracts, coverage provisions should be construed broadly and exclusion clauses narrowly. Amos is of no assistance in this appeal.9

By broadly construing the exclusion, the court in Pembridge applied Amos in direct contravention of the Supreme Court's ruling in Derksen.

In line with Derksen, the Dominion specifically relied on cases dealing with similar exclusions which show that road rage incidents "break the chain of causation" so they are deemed not to arise out of the use or operation of the vehicle.10 This characterization of road rage incidents has been relied on by the Supreme Court of Canada in Law Union & Rock Insurance Co. v Moore's Taxi Ltd.11 and has been reaffirmed by appellate courts.12 The court ignored these cases, preferring the broader interpretations afforded by the coverage (and not exclusion) analysis in Amos. As a result, the court maintained that Chu's actions after exiting the vehicle were "incident" to the ownership, use or operation of the vehicle.13 Accordingly, the court concluded that Pembridge had no duty to defend, and therefore no duty to indemnify.

Notably, toward the end of the decision, the court briefly acknowledged that an intentional act exclusion might also apply in this case.14 Although the court did not conduct the analysis, it is noteworthy that, given the underlying facts as pleaded, it is possible – but unclear, without a full factual record – that such an exclusion might apply. That analysis would be guided by the Supreme Court's ruling in Non-Marine Underwriters, Lloyd;s London v. Scalera, which dealt with intentional act exclusions and the intent to cause harm.

Errors regarding the Duty to Indemnify

Much of the analysis in Pembridge decision is centred upon the court's assumption that at least one insurer would ultimately be required to indemnify the insured. Because of this assumption, and given its ruling in favour of Pembridge, the court improperly went on to definitively rule on the Dominion's duty to indemnify. This ruling was inappropriate on a duty to defend application.

After deciding that the term "arising from" was broad enough to capture the road rage incident, and further deciding that the incident did not "break the chain of causation", the court held:

I am finding that as between Pembridge and Dominion, Dominion will be required to provide the requisite coverage. Dennis Chu's actions after exiting the vehicle is now deemed to be incident to the ownership, use or operation of a vehicle. This finding should not be revisited by the trial judge.

This finding contradicts well-established precedent that the duty to indemnify should not generally be determined on a duty to defend application. To find there is no duty to defend, a court must find there is not even a "mere possibility" of coverage under the policy.15 Therefore, the sole question on the application is whether the Court can conclusively rule out the "mere possibility" that an insurer might have to provide indemnity based solely on the pleadings. Where there is no "mere possibility" of coverage, it is appropriate to rule on the duty to indemnify. But where the duty to defend exists or is assumed – as was the case with Dominion – it is inappropriate to make a definitive finding on indemnity.

The policy reasons for this are clear and compelling. In most cases, the duty to indemnify will turn on the ultimate findings of fact at trial and the basis upon which liability is imposed on the insured. Without the benefit of a trial, the court is not in a position to make a finding that the insurer has a legal obligation to indemnify because the indemnity claim has not yet crystalized.

Conclusion

The decision in Pembridge is clearly problematic. The conclusion that an insurance policy ought to be interpreted differently because another insurance policy might respond is simply wrong.

The critical error in Pembridge occurred when the court assumed that only one insurer could, and must, provide coverage. That assumption gave rise to all of the other errors in this case. Because the court assumes there will be coverage for Chu, no matter the outcome, it wrongly concluded that the normal rules of policy interpretation do not apply. Absent the proper rules of interpretation, the court makes a ruling that Pembridge has no duty to defend. Based on the initial error that there must be coverage, no matter the outcome, the court goes further and decides that the Dominion must be responsible and imposes a duty to indemnify.

The court's initial assumption creates a false choice between insurers. In deciding that only one insurer can respond to the loss, the court narrows the scope of coverage that might otherwise be available. It is always possible to have two insurance policies that provide different coverage, but both cover the losses. In that case, the insured may very well have the benefit of additional limits of coverage, which would be lost by using the approach adopted in Pembridge.

The decision in Pembridge runs contrary to basic rules of contractual interpretation and conflicts with well-established precedent. If followed, this case could lead to commercially unreasonable results and could result in eroding the benefits of coverage available to an insured. It is our view that the decision was in error and should be treated as wrongly decided, as it directly contradicts prior decisions of both the Court of Appeal and the Supreme Court of Canada.

Footnotes

1. Pembridge Insurance Company of Canada v Chu, 2019 ONSC 1359, [Pembridge].

2. Pembridge at para 12.

3. Pembridge at para 16.

4. Family Insurance Corp v. Lombard Canada Ltd., 2002 SCC 48 [Family Insurance Corp.].

5. TD General Insurance Company v. Intact Insurance Company, 2019 ONCA 5.

6. Amos v Insurance Corp. of British Columbia, [1995] 3 SCR 405 at para 24 [Amos].

7. Pembridge at para 36.

8. Reid Crowther & Partners Ltd. V Simcoe & Erie General Insurance Co., [1993] 1SCR 252 at para 37; Amos v Insurance Corp. of British Columbia [1995] 3 SCR 405 at para 19; Progressive Homes Ltd. V Lombard General Insurance Co. of Canada at para 24.

9. Derksen v. 539938 Ontario Ltd., 2001 SCC 72 [Derksen].

10. Pembridge at para 42. See also, Trench v. Erskine (2006), 244 N.S.R. (2d) 55.

11. Law Union & Rock Insurance Co. v Moore's Taxi Ltd., [1959] SCR 80 at para 11.

12. Aetna Insurance Co. v Canadian Surety Co., [1994] 114 DLR (4th) 537 at para 70.

13. Pembridge at para 43.

14. Pembridge at paras 44-46.

15. Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801 (S.C.C.).

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 Mondaq.com.

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

Authors
Shaun Hashim
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions