In the recent case of Greenwin Inc v St. Paul Fire and Marine Insurance Company,1 Justice Merritt of the Ontario Superior Court of Justice considered the interplay between various property and liability policies following fire damage to a building (the Property) owned by Toronto Community Housing Corporation (TCHC).

Justice Merritt had to determine whether one excess liability insurer had wrongfully denied coverage for a subrogated claim arising out of the fire and, consequently, whether the insurer was required to contribute to a settlement of the claim.

Ultimately, Justice Merritt determined that the insurer did not have to contribute to the settlement because they did not wrongfully deny coverage under their policy. In doing so, Justice Merritt provided valuable guidance about the need for clear communication of coverage expectations between insurers and their insureds.

Facts

In 2010, a fire damaged the Property, a high-rise building in Toronto owned by TCHC. The fire was caused by a hoarder tenant in the building. Greenwin Inc. (Greenwin) was the property manager of the building. Several insurers and policies became involved in responding to the loss.

TCHC's policies

TCHC held a composite insurance policy with AIG Insurance Company of Canada (AIG) that provided property coverage, primary general liability coverage and excess coverage. The parties agreed that Greenwin was an additional insured under AIG's liability coverage, but not the property coverage.

St. Paul Fire and Marine Insurance Company (St. Paul) had also issued an excess liability policy to TCHC that sat over AIG's primary liability and excess coverage. Greenwin was also an additional insured under St. Paul's policy.

Greenwin's policies

In addition to being an insured under AIG and St. Paul's respective policies, Greenwin purchased primary and excess liability insurance from Zurich Insurance Company Ltd. (Zurich) and the Chubb Insurance Company of Canada (Chubb), respectively.

AIG's subrogated claim and the settlement

AIG indemnified TCHC for the damage to the Building under the property coverage portion of its policy, and launched a subrogated claim against Greenwin in respect of the property damage (the Subrogated Claim).

In 2018, AIG and Chubb settled the Subrogated Claim for $25,000,000, and agreed to apportion liability 75 percent to Greenwin and 25 percent to TCHC (the Settlement). Consequently, Greenwin was liable under the settlement agreement for $18,750,000. AIG and Chubb agreed that Chubb would pursue St. Paul for half of Greenwin's $18,750,000 share of the settlement.

The application

Greenwin and Chubb (the Applicants) applied to the Ontario Superior Court of Justice for a declaration that St. Paul was obligated to contribute to the Settlement on behalf of Greenwin. St. Paul denied that it had to contribute to the Settlement, arguing that its policy gave it the right to approve or consent to any settlement, and that Greenwin had failed to obtain that consent in breach of the policy.

In turn, the Applicants argued that St. Paul wrongfully denied coverage to Greenwin and consequently had lost its right to approve the Settlement.

The law

A standard feature of liability insurance policies is a "no voluntary payment" provision that provides that the insured may not, except at their own expense, voluntarily make payments or assume obligations without the insurer's consent.

This means, among other things, that the insured cannot settle claims against it without the consent of the insurer. If the insured does, then the insurer does not have to pay for the settlement.

If an insurer wrongfully denies coverage, refuses to defend its insured or abandons its insured, the insured is entitled to settle a claim that would otherwise be insured under the policy for a reasonable amount and then recover the settlement amount from the insurer as damages for breach of contract. The insured has to prove:

  1. That there is coverage for the claim.
  2. That the insurer has breached the insurance contract by denying liability.
  3. That the settlement is reasonable.

If the insured is able to do so, they can recover the settlement amount from their insurer.2

Holding

Justice Merritt determined that St. Paul did not wrongfully deny coverage, and consequently, it still held its right to approve any settlement by Greenwin. Since Greenwin did not obtain St. Paul's consent, St. Paul did not have to contribute to the Settlement.

Change of legal landscape?

Parties are generally free to settle their litigation on terms as they see fit. However, a settlement or other agreement that changes the litigation landscape must be disclosed to all parties and the court or else the proceeding will be stayed.3

Justice Merritt decided that the agreement did not change the litigation landscape for several reasons, chief among them being that the Settlement was entered before Greenwin and Chubb launched the application to have St. Paul contribute to the Settlement. Since there was no litigation involving St. Paul at the time of the Settlement, there was no litigation landscape to change.4

Did St. Paul wrongfully deny coverage?

Justice Merritt found that Greenwin never sought coverage from St. Paul in the years following the fire. At the same time, there was no other document from St. Paul that denied coverage or indicated that St. Paul was refusing to defend Greenwin against the Subrogated Claim.

Greenwin argued that it had sought coverage by filing an application in 2013 that, among other things, sought an order that St. Paul be required to defend and indemnify Greenwin once the underlying policies were exhausted. In a factum on that application, St. Paul took the position that there was no coverage obligation under its policy.

However, the application was withdrawn before a judge could adjudicate it. Greenwin and Chubb argued that by taking a position that there was no coverage on the application, St. Paul had denied coverage, breached its contract with Greenwin and forfeited its rights under the policy.

Justice Merritt held that Greenwin's application did not constitute a demand for defence and indemnity to St. Paul. An insurer's challenge of coverage in an application by an insured is not a breach of the contract that forfeits an insurer's rights under the policy.5

Simply put, St. Paul was never asked for a defence to the Subrogated Claim by Greenwin and never refused to provide a defence. At the time of the application, the Subrogated Claim had not been settled and the limits of the underlying policies had not been exhausted.6

Justice Merritt held that if the underlying policies had been exhausted, then St. Paul would have had several options:

  1. Accept that its policy covered the Subrogated Claim as against Greenwin, and then defend and indemnify Greenwin against the Subrogated Claim.
  2. Deny coverage and allow Greenwin to deal with the claim on its own. However, if that denial of coverage was wrongful, Greenwin could later seek to recover its losses against St. Paul.
  3. Reserve its rights to deny coverage, but defend the Subrogated Claim.
  4. Apply to the Court immediately to determine whether the policy provided coverage to Greenwin.7

However, St. Paul never had to make this decision, because Chubb and AIG settled the Subrogated Claim before the underlying policy limits were reached. Since St. Paul did not breach the insurance contract with Greenwin by wrongfully denying coverage, it did not lose its rights under the policy, including the right to approve any settlement by Greenwin.

Sub-issues

Justice Merritt also considered a number of other sub-issues.

Anti-subrogation defence

A typical feature of insurance policies is that the insurer is unable to bring a subrogated claim against its own insured. Since in a subrogated claim the insurer "stands in the shoes" of its insured, it would effectively be bringing a claim against itself. Otherwise, an insurer could pay out the claim to one insured and then seek to recoup from another insured under the same policy.

St. Paul argued that AIG was not entitled to bring the Subrogated Claim against Greenwin because AIG's policy stated that AIG waived its right of subrogation against "any insured under this policy."

The Applicants argued that the anti-subrogation provision only applied to insureds under the property coverage portion of its policy. Since Greenwin was not an insured under the property portion of the policy, AIG could bring a property damage claim against Greenwin. St. Paul argued that the anti-subrogation provision applied to the entire policy.

Since Greenwin was an insured under the liability portion of the policy, it was an insured for the purposes of the entire policy. AIG could not then bring a subrogated claim against Greenwin, its insured, even though Greenwin did not have property coverage.8

Justice Merritt did not reach a final decision on this issue, but made the point that AIG would effectively be paying itself for a property damage claim by TCHC out of its own liability insurance issued to Greenwin in order to reach the St. Paul excess policy, a nonsensical result.9

Owned property exclusion

A common feature of liability policies is an exclusion for owned property. Liability insurance is designed to protect against third-party claims against the insured, not property damage to the insured's own property.

St. Paul argued that the owned property exclusion in its policy prevented Greenwin from obtaining coverage, because the purpose of the exclusion was to exclude claims for property damage to property owned by TCHC.

The Applicants argued that the owned property exclusion only applied to the named insured (TCHC), and in any event, it was not clear whether Greenwin "owned, occupied or rented" the Property.10

Justice Merritt found that the exclusion applied.

The Property was owned by a named insured under the policy, TCHC. Greenwin could not seek liability coverage for a claim for damage to property that was owned by its fellow insured.11 The owned property exclusion clearly excluded claims arising out of property damage to property owned by TCHC.

The fact that Greenwin was also an insured did not change the exclusion. Further, Greenwin had purchased its own liability insurance with Zurich and Chubb that did not exclude damage to TCHC's property.12

Other insurance and nullification

An issue that often arises in insurance litigation is when there are two policies that purportedly respond to the same risk but contain "other insurance" provisions. Other insurance clauses typically provide that if another policy covers the same risk, then the policy will be deemed to be excess of that other policy. If two policies contain such provisions, then they may be mutually repugnant, and both insurers will have to share equally in indemnifying the insured.13

The doctrine of nullification applies where an otherwise valid policy exclusion is not applied because it would result in virtually no coverage and be contrary to the very objective of the insurance contract.14

Justice Merritt found that the other insurance provisions of the two policies did not create an issue because St. Paul's policy did not cover the same risk as the Chubb's policy: it did not insure loss to property owned by TCHC, even if Greenwin was an insured under its policy and did not own the Property.15

Further, there was no nullification of coverage. St. Paul's policy created third-party liability coverage for Greenwin as an insured under the policy. It did not, however, allow for Greenwin to claim for damages to property owned by the named insured under the policy.16

Forfeiture

Greenwin made a final argument that it should be granted relief from forfeiture. Section 129 of the Ontario Insurance Act17provides that where an insured has imperfectly complied with a policy term relating to proof of loss, such that the insurance would be forfeited in whole or in part, a court may grant relief from this forfeiture.18

However, relief from forfeiture is not available where there has been non-compliance with a condition that an insured must fulfill before being able to obtain indemnity. The focus is on whether the breach of the condition is serious or substantial.19

Justice Merritt found that the breach of condition in this case was serious.

Greenwin did not obtain St. Paul's approval of the settlement, such that it breached a fundamental term of the insurance contract.20 There was no explanation for why the applicants did not require a response from St. Paul on the settlement, and there was great prejudice to St. Paul. St. Paul lost the right to participate in the settlement and determine whether it was actually obliged to provide coverage or not.

Key takeaways

Ultimately, St. Paul did not have to contribute to the Settlement.

The key takeaways from this decision are:

  1. Insurers and insureds must be careful to fully explain their position to each other when questions of coverage arise. Otherwise, an insured may find that an insurer has not actually denied coverage, and alternatively, an insurer may find that they failed to respond to what was properly a demand for coverage from their insured.
  2. It is unlikely that an insurer can bring a subrogated claim on behalf of a named insured against an additional insured for property damage, even where the additional insured is only insured for liability and not property under the policy.
  3. An owned property exclusion applies to claims in respect of property owned by the named insured; an additional insured cannot get around that exclusion by seeking liability coverage for damage it has caused to the named insured's property.
  4. An insured cannot obtain relief from forfeiture and be covered under their policy if they settle an action without obtaining their insurer's consent to do so.

Footnotes

1. Greenwin Inc v St Paul Fire and Marine Insurance Company, 2023 ONSC 5097 ["Greenwin"].

2. Greenwin at para 22. See also Jon Picken Ltd. v. Guardian Insurance Co. of Canada [1993] O.J. No. 1952 (CA)

3. Skymark Finance Corporation v Ontario, 2023 ONCA 234 at para 47.

4. Greenwin at para 17.

5. Greenwin at paras 30-31.

6. Greenwin at para 33.

7.Greenwin at para 34.

8.Greenwin at paras 59-60.

9. Greenwin at paras 62-63

10. Greenwin at paras 65-69.

11.Greenwin at paras 73.

12. Greenwin at paras 83-84.

13. Family Insurance Corp v Lombard Canada Ltd, 2002 SCC 48 at para 39.

14. Ontario v St. Paul Fire and Marine Insurance Company, 2023 ONCA 173 at para 31.

15. Greenwin at para 79.

16. Greenwin at para 83.

17. Insurance Act, RSO 1990, c I.8.

18. Insurance Act at s. 129.

19. Greenwin at para 93.

20. Greenwin at para 93.

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