The Appellants’ house was located within the jurisdiction of the Mississippi Valley Conservation Authority (“MVCA”), which imposed additional costs to rebuild.

The parties agreed that the physical damage and replacements were covered under the policy. The issue arose regarding if additional costs relating to compliance with the local conservation authority were excluded. The Appellants believed that Trillium was responsible for covering the entirety of costs. Trillium took the position that it was not responsible for covering the entire cost of the rebuild due to the By-Law exclusion clause.

The Application Judge issued a Declaration that the GRC endorsement entitled them to recover the total costs of rebuilding the house, with no limitation of coverage for the cost of complying with the legal requirements. The Court of Appeal allowed Trillium’s appeal, holding that recovery under the Policy did not include the compliance costs, other than $10,000 extended under an exception in the Additional Coverages section of the Policy.

The majority of the Supreme Court of Canada (“SCC”) dismissed the appeal, concluding that the Appellants were not entitled to recover the increased compliance costs, other than the $10,000 under the applicable exception. Relying on the contractual interpretation principles in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, the SCC held that the contested language could only bear one reasonable meaning: the compliance cost exclusion applies to the increased costs of complying with the conservation authority’s requirements, despite the GRC endorsement.

Justices Karakatsanis and Côté dissented in part, concluding that the Policy and GRC endorsement were ambiguous.

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Nicole’s dedication and hard work have demonstrated a sustained commitment to our clients and to the professional liability industry across Canada through her position as the National Chair of PLUS Canada.

Congratulations, Nicole!

The post Nicole McAuley wins PLUS 2022 Emerging Leader Award appeared first on FCL LLP.

Insurers Beware: Coverage for Business Interruption Losses Could Include Partial Cessation of Business Activity

In the recent Ontario Court of Appeal decision, Le Treport Wedding & Convention Centre Ltd. v. Co-operators General Insurance Company, the court reaffirmed the relevant principles for interpreting insurance policies, including coverage for business interruption losses.

Background

In this case, the plaintiff-insured operated a banquet hall that had suffered significant damage following a severe rainstorm. Among others, the policy included a sewer back up endorsement, flood endorsement, and indemnity for business interruption losses. Shortly following the date of loss, the insurer advised the plaintiff to cease business operations to complete the necessary repairs. The plaintiff declined to do so.

The insurer paid out its policy limits under the terms for sewer back up but denied coverage for flood and business interruption losses as the insured had failed to cease business operations. The plaintiff sued for coverage.

The trial judge held that losses due to sewer back up losses had been paid to its limits; the flood endorsement did not apply based on an application of a surface water exclusion which effectively precluded the plaintiff recovery; and dismissed all other claims. The plaintiff appealed and the appeal was allowed in part for coverage per the flood endorsement. Interestingly, though the appeal court affirmed the trial judge’s decision to deny the plaintiff coverage for business interruption losses, the court came to its conclusion based on a different understanding of the applicable law and policy term.

Ruling with Regards to Coverage for Business Interruption Losses

The relevant term of the policy stipulated that the “insurer agrees to indemnify the insured against loss directly resulting from necessary interruption of business.” The trial judge denied coverage on two grounds: first, the trial judge was not convinced the evidence supported an actual loss of profits. Second, and importantly, the trial judge adopted a narrow view of the term ‘necessary interruption of business’ as requiring a total cessation of activity for a period of time for coverage to arise. In the absence of the word, ‘interfere’, the trial judge concluded that business ‘interruption’ must mean total cessation of business activity to trigger coverage based on analogous cases.

The ONCA disagreed. Instead, the court held that though analogous cases may be useful for purposes of interpretation, the focus must nonetheless be on the specific language of the policy at issue. The ONCA relied instead on other portions of the policy to inform ‘interruption’ of business activity as including interference with or partial cessation of business activity.

This case thus serves as a reminder that coverage under policies must first and foremost be determined in view of the contract as a whole and its surrounding circumstances. Under a different set of facts, the policy for business interruption losses would have interpreted to include partial cessation of business activity though not expressly stated in the actual clause itself.

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by Samah Rahman

The Ontario Superior Court of Justice recently ruled on an insurer’s duty to defend under an errors and omissions policy, where coverage for an insured’s breach of contract was excluded.

In this case, Panasonic Eco Solutions Canada Inc., the insured sought a declaration that its insurer, XL Specialty Insurance Company, owed it a duty to defend an arbitration pursuant to an errors and omissions policy that Solar Flow-Through Fund (“Solar Flow”) commenced against it. The arbitration claim was based on two monetary demands: one for liquidated damages of $92,309.62 arising out the insured’s failure to substantially complete the project; and the second for damages estimated at $1,300,000 arising out of what the parties referred to as the Proceeds Agreement.

The subject policy, excluded coverage for claims arising out of Panasonic’s assumption of liability in a contract or for breach of contract, unless the liability was one that the insured would have in the absence of the contract. XL denied coverage and asserted that Solar Flow’s claims against Panasonic were a result of its breach of contract, and fell within the exclusion, absolving the insurer of its duty to defend the claim. Panasonic in turn, argued that the plaintiff in the underlying action had named various causes of action, including negligent misrepresentation and unjust enrichment; and those were not captured under the ambit of the breach of contract exclusion.

The Court granted the application in part, finding that the insurer had a duty to defend the claim for liquidated damages, while dismissing the duty with respect to the Proceeds Agreement.

In its decision, the Court reaffirmed the following principles applicable to the duty to defend:

(a) The duty to defend is distinct from, and broader than, the duty to indemnify. There may be a duty to defend even if the insurer may not ultimately be required to indemnify the insured.

(b) The Court assumes that the pleaded facts are true.

(c) The Court applies the pleaded facts to the policy wording.

(d) The duty to defend arises if the underlying complaint alleges any facts that might fall within coverage under the policy.

(e) Where pleadings are not precise enough to determine whether the claims are covered by a policy, the insurer’s obligation to defend will be triggered where, on a reasonable reading of the pleadings, a claim within coverage can be inferred.

Notably, the Court clarified that a duty to defend analysis should focus on facts alleged in the underlying pleading and not on the pleading’s legal characterization of the claim.

Applying these principles to the demand for liquidated damages, the Court held that the damages sought for failure to sufficiently complete the project, could may well be attributable to the insured’s negligence, and thus require coverage. On the other hand, damages with respect to the Proceeds Agreement would not be accrued in the absence of a contract, and thus arose out of a breach thereof. Although the claim was also characterized as negligent misrepresentation, the misrepresentation was pertaining to the intention to pay under the contract. Therefore, the claim pertained to the insured’s assumption of liability in the contract and fell squarely within the contractual exclusion under the policy. In deciding this, the Court relieved the insurer of its duty to defend on this issue.

This case serves as a potent reminder that courts will not necessarily stay bound to a plaintiff’s potentially arbitrary characterization of the claim in determining whether the insurer has a duty to defend, but instead look to the facts of the case to assess whether the duty is triggered.

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An Insurer’s Duty to Defend

In Développement les Terrasses de l’Îles inc. v. Intact, Compagnie d’assurances, 2019 QCCA 1440, the Court of Appeal of Quebec enforced Intact Insurance Company’s duty to defend, by overturning the Superior Court’s decision absolving the Insurer of its duty.

In this case, the Insureds purchased a commercial general liability insurance policy from Intact Insurance Company. An action was brought against the Insureds for damages and defects caused during the construction of a building. The claim was later amended to include damages resulting from structural issues, mould and water infiltration. The Insureds brought a claim against Intact when their Insurer declined to defend the action on the grounds that the damages claimed were not covered by the Policy.

The Superior Court held that the damages claimed did not result from a “loss” pursuant to the Policy, but instead, from construction and design errors attributed to the Insureds. Thus, the damages claimed were not covered by the Policy.

In a unanimous decision, the Court of Appeal overturned the ruling. The court reiterated a long standing principle that an Insurer’s duty to defend is triggered if the Insureds can demonstrate that material damages may be recoverable under the scope of the Policy. The Insurer can then resort to deferring liability if it can prove that a clear and unambiguous exclusion clause can preclude the claim. Intact had not proven that an exclusion clause excluded coverage, so it would be required to compensate for material damages, but not for the cost of remedying the consequences flowing out of those damages, such as water infiltration.

While there was some contention in discerning whether the damages occurred as a result of the defect, or were defects in and of itself, the court concluded that the duty to defend had been triggered nonetheless.

The court also advised that coverage provisions were to be interpreted broadly while exclusion clauses were to be interpreted restrictively. The court held that the lower court interpreted “loss” too narrowly. The design defects had caused unforeseen material damage and this was sufficient in triggering the Insurer’s duty to defend.

This case provides interesting dicta about an Insurer’s duty to defend and opines on the limits of this duty. While this decision may be persuasive, it is not binding on the courts of Ontario.

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In Van Huizen et al. v. Trisura Guarantee Insurance Company, 2020 ONCA 222, the Ontario Court of Appeal allowed an appeal of the lower courts decision with respect to an insurer’s duty to defend, because the motion judge overlooked the difference between an insurance policy and an insurance contract. The motion judge found that the appellant insurer had a duty to defend the respondents under the policy of professional liability insurance. The motion judge erred by effectively treating a master policy as the entire insurance contract for all members of the Appraisal Institute of Canada (the “AIC”). This caused the motion judge to conflate two insurance contracts that shared standard terms set out in a master policy.

In this case, the respondent VH, was a professional appraiser and a member of the AIC. He carried on business through a corporation operating under the business style of the other respondent, Hastings Appraisal Services (“Hastings”). The appellant, Trisura Guarantee Insurance Company, issued a master professional liability policy to the AIC, as well as an individual certificate of insurance to VH (“VH Contract”). DB was another professional appraiser and a member of the AIC. He was also insured under the master policy and his own individual certificate of insurance (“the DB Policy”). Under the auspices of Hastings, DB appraised a property. Three claims were brought against him for negligent appraisal, two of which held the respondents vicariously liable for DB’s negligence, as they were employers of DB.

The respondents brought this underlying action against the appellant after it refused to defend and indemnify the respondents with respect to the three proceedings. The appellant moved for summary judgment to dismiss the action on the basis that the VH Contract did not provide coverage to the respondents for the negligence of DB. The motion judge dismissed the motion and held that the appellant had a duty to defend the respondents because the terms, “Member” and “Insured”, were broad enough to include both VH and DB who were insured under the same master policy. As a result, the motions judge concluded that coverage included VH’s individual actions as well as those that flowed from his status as an employer.

Trisura appealed and the appeal was allowed, in part.

The Court of Appeal found that the motion judge erred in finding that the appellant had a duty to defend by limiting his inquiry to the language of the master policy. In doing so, the motion judge treated the master policy as the insurance contract between VH and the appellant, which in turn, led the judge to conflate the VH Contract with the DB Contract. As a result, the motion judge incorrectly treated the master policy as a binding contract between the appellant and all members who had been issued an individual certificate.

The Court clarified the difference between an insurance contract and an insurance policy by demarking that a policy may prove the existence of a contract, but it is the contract itself that gives rise to the legal consequences by setting out terms that govern the relationship between the parties to the contract. It is therefore the insurance contract that must be the subject of interpretation when decoding a party’s obligations under a policy. In this case, each member was required to apply for coverage pursuant to the terms set out in the master policy, but coverage was issued only after assessing each member’s individual risk, and after each paid their own premium. Therefore, each member was bound by the terms in the master policy, but also by the unique terms held within their own individual certificates.

Although the appeal was allowed, the Court held that summary judgment should not be granted to the appellant because there were outstanding triable issues. This case serves as a helpful guide to navigate the common error of conflating multiple policies and contracts in insurance law. Litigators must look to both to determine whether the policy is applicable to each individual pursuant to their distinctive contract.

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Withholding Material Information Vitiates Life Insurance Policy

The Ontario Court of Appeal recently released a decision which opined upon when a life insurance policy is deemed void for failure to divulge material information. In Mohammad v. Manufacturers Life Insurance Co., 2020 ONCA 57, the insured purchased life insurance in 1987 but did not disclose that many years prior, he had been convicted for various criminal and terrorist offences in Greece. He entered Canada fraudulently using an alias and obtained a Social Insurance Number. In 2013, he was discovered by Canadian authorities and deported. Two years thereafter, he passed away. The deceased’s wife claimed a death benefit under the policy, and commenced an action against the insurer when her claim was rejected. The insurer moved for summary judgment given that the deceased failed to reveal material facts.

The motion judge dismissed the insurer’s motion and ordered the payment of the death benefit. She found that, in providing his social insurance number, the deceased did not misrepresent his immigration status, and further noted that the policy application form did not contain questions concerning the deceased’s citizenship or criminal history. To the judge, the absence of such questions signaled that these issues were not material. The insurer appealed.

The Court of Appeal allowed the appeal and granted summary judgment in favour of the insurer. The court held that the motion judge made a palpable and overriding error in finding that the deceased’s failure to reveal his past activities did not constitute a failure to reveal material facts that vitiated the policy. The deceased was aware that his past activities could have put him at risk of physical harm. This triggered an obligation to reveal such information in his application, even if the application did not explicitly ask about these issues. The court found that the insurer had no reason to suspect that information related to the deceased’s past would be relevant, and therefore, could not be faulted for not having inquired about it. The fact that the deceased intentionally hid his past activities was sufficient to establish fraud.

This case reiterates a long standing principle that an applicant for insurance has an independent obligation to reveal to the insurer any information that is material to the application. The applicant cannot simply rely on the extent of questions asked to demonstrate that they discharged their disclosure duties fully. Conversely, it is unreasonable to expect an insurer to inquire about all aspects of an applicant’s life if its relevance is not apparent or within the reasonable contemplation of the insurer.

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With the unprecedented evolution of COVID-19, businesses are anticipating that Canada’s property and casualty insurance industry will begin introducing pandemic business interruption coverage. However, due to the grand size and scale of pandemic exposure, along with the distinctive characteristics of each pandemic, it would make it nearly impossible for the industry to offer blanket pandemic coverage to businesses at affordable rates.

Business interruption coverage is usually an add-on to an existing commercial policy of insurance, that covers continuing expenses or replaces lost profits, in the event that a business is forced to temporarily shut down or slow down.  There are three types of business interruption policies, and the coverage afforded by each vary:

1. Gross Earnings Policy: the policy will respond until property or damage is replaced or repaired and/or stock is replaced;
2. Profits from Policy: the policy will respond until a business resumes its normal, pre-interruption level, in accordance with the policy limits; and
3. Extra Expense Policy: the policy will respond during the period that extra expenses are required, as the business can remain operational, though being affected by loss and/or damage.

It is no surprise that most industries are facing financial deficits due to COVID-19 and the central question surrounding all is whether business interruption losses as a result of COVID-19, in any one of the aforementioned policies, would trigger insurance coverage for those losses.

On March 30, 2020, the Honourable Madam Justice Wilson released her decision  in MDS Inc. v. Factory Mutual Insurance Company (FM Global) 2020 ONSC 1924 (hereinafter “MDS”), which included an analysis of the definition of “physical damage” with respect to an all-risks property insurance policy. In this case, it was argued that the loss of use of a premise without any actual damages to the premise or a component of the premise should not qualify as physical damage under the policy as physical damage requires tangible damage.

This argument generally forms the basis for decisions to deny insurance coverage, as the interruption has led to what would be classified as a “loss of use” rather than “property damage.” However, this argument was rejected in MDS with the Court finding that loss of use could be considered property damage so as to trigger the business interruption coverage.    

Madam Justice Wilson emphasized that there is no definitive meaning of resulting physical damage in all-risks policies in Canada and there are conflicting lines with respect to the interpretation. Her Honour explicitly rejected the notion that physical tangible damage be apparent and instead adopted a broad interpretation, which would treat the loss of function or use of premises as physical damage. Accordingly, Madam Justice Wilson concluded that all-risks property insurance is meant to provide broad coverage and as such, said interpretation is in accordance with that principle. To simply interpret physical damage to be tangible would deprive policyholders of a vital aspect of coverage for which they contracted, which would undoubtedly be in direct contrast of the commercial purpose of all-risks coverage.

It is important to note that MDS did not deal with COVID-19.  However, this decision could be used to eliminate a significant hurdle that businesses would have had to overcome with respect to claiming business interruption losses arising from COVID-19 under traditional commercial policies.

Without a doubt, this landmark decision will have an impact on business interruption loss claims as they relate to COVID-19, as both businesses and insurance companies strive to assess coverage.

Should you require any assistance with coverage, investigation and defending of any such claims, please feel free to contact FCL LLP.

The post MDS Inc. v. Factory Mutual Insurance Company (FM GLOBAL) 2020 ONSC 1924, and COVID-19 Business Interruption Claims appeared first on FCL LLP.

In the Absence of Force Majeure Clauses, Frustration Pays Off

Last week we examined force majeure clauses within contracts that may relieve a party’s contractual obligations during unforeseen emergencies, often referred to as “Acts of God”. In this article, we will discuss what happens when a force majeure clause is not expressly provided in the contract.

Canadian courts have not implied a force majeure provision in the absence of one, despite the occurrence of a force majeure event. In such circumstances, the doctrine of frustration also known as the doctrine of discharge, may be relied upon to vacate a contract altogether. This equitable remedy accounts for unforeseen events which have irreparably altered the basis of the contract. The doctrine of frustration can be applied broadly to all types of contracts including commercial or employment disputes. The standard to prove frustration is higher than force majeure, and the implications are also different: a force majeure clause will freeze the contractual obligation as it relates to the unforeseen event, whereas, a finding of frustration will effectively end the contract.

Doctrine of Frustration

The Supreme Court of Canada in Naylor Group Inc. v Ellis-Don Construction Ltd., 2001 SCC 58, describes the appropriate use of frustration where: “a situation has arisen for which the parties made no provision in the contract and the performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract.’”

To establish frustration, the relying party must prove that an unforeseen event has radically changed or interrupted the performance of the agreement, making it impossible, or impractical to execute the contract as originally intended. The new event must have been beyond the reasonable contemplation of the parties when they were contracting, and therefore it would be unjust to hold the parties to the agreement under these altered circumstances.

Considerations when applying the doctrine of frustration

• Is there a Force Majeure clause in the contract?
  The doctrine of frustration operates as a last resort, only to be utilized in the absence of a force majeure clause. In other words, parties cannot double dip to rely on both a force majeure clause and the doctrine of frustration, it must be one or the other.

• Was there a supervening event that occurred?
  The event must not have been foreseeable or within the contemplation of either party when the contract was executed. There may also be cases where the non-performance of an integral party to the contract, frustrates the entirety of the agreement.
• Did the event cause a radically different performance of the contract?
  The event must have rendered the performance of the contract substantially different than what the parties initially anticipated. Courts will consider events: that have rendered the performance of the contract impossible; where performance is possible but the purpose of the contract has been undermined; or, where the temporary impossibility has frustrated the contract itself. The courts have established a threshold of a minimum level of radical difference, for example, a task that has simply become more onerous or expensive since it was originally contemplated will not activate the doctrine of frustration.

Successfully establishing frustration terminates the contract from the date of the supervening event. Additionally, Ontario’s Frustrated Contracts Act, R.S.O. 1990, c. F.34 provides for other recourses such as the recovery of past benefits conferred after a contract has been frustrated. The doctrine of frustration is particularly topical in these days of uncertainty when clients are confronting situations that were beyond their contemplation when finalizing their contracts. At this time, it is incumbent on lawyers to be well versed in these contractual defences so damages are well mitigated.

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An insurer’s reservation of rights is a useful tool to insulate from potential liability arising from its insured’s loss. But, to rely on this defence, an insurer must formally trigger these rights by executing a non-waiver agreement or a reservation of rights letter. Absent these key formalities, an insurer may not retroactively rescind its position to defend; in fact, they are estopped from doing so. This was the decision in The Commonwell Mutual Insurance Group v. Campbell, 2019 ONCA 668.

In this case, the plaintiff brought an action against the defendant insured after a dirt bike accident. The insured made claims through both his automobile and home policies. The auto-insurer denied coverage, but not before presenting a non-waiver agreement and a reservation of rights letter. Commonwell Mutual Insurance Group (CMAG), did neither. CMAG continued to defend this action for ten months and on the brink of discoveries, took the position that it erred in defending the action because there were policy exclusions that should have been relied on to relieve any liability. CMAG took the position that it was no longer obliged to the defend the action.

The application judge held that absent the non-waiver agreement and a reservation of rights letter, CMAG was estopped from denying to defend the insured at this late stage. CMAG appealed.

The Court of Appeal dismissed the appeal after deliberating on three issues:

1.Did the application judge fail to distinguish between a waiver and an estoppel?

• The court found no such failure. The application judge expressly declared that “either waiver or estoppel” would apply in preventing CMAG to withdraw its defence; the disjunctive use of both doctrines proved the application would fail on either basis.

2. Did the application judge err in applying each of the waiver and estoppel doctrines?

• The court found no error. On the issue of estoppel, the judge supported the decision of the lower court that the insured would suffer a detriment should the insurers be allowed to deny coverage late into the action. This was sufficient to evoke the principles of estoppel.

3. If the doctrines of waiver and/or estoppel were properly applied, would CMAG be obligated to defend the insured only, or would it also be responsible for indemnifying the insured?

• The Court of Appeal held that the principles were correctly applied and as such, estoppel precluded CMAG from relying on the exclusions to dispute both a duty defend as well as a duty to indemnify.

This case is an important reminder that reservation of rights letters and non-waiver agreements can serve as the insurer’s insurance if circumstances should change and an insurer needs to alter their original position.

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