Absence of Specific Wording in Insurance Policy Leads to Application of the Higher of Two Potential Policy Limits

In the recent decision, 202135 Ontario Inc., et al. v. Northbridge General Insurance, 2021 ONSC 4299, the Applicant Insured (“Insured”) sought a declaration, under rr. 14.05(3)(d) and (h) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, against the Respondent Insurer (“Insurer”) that they are entitled to further coverage under a provision of the Business Choice insurance policy (the “Policy”). The specific provision at issue can be referred to as the pandemic-related business income interruption/interference provision.

The Insurer had taken the position that the coverage under this provision was restricted to an aggregate maximum limit of $50,000, in total, for the policy period. The Insured sought a declaration that the maximum sum of $50,000 is payable for each of their seven locations, in the aggregate sum of $350,000.

On March 17, 2020, the Insured was required to shut down their seven daycare centres as a result of the COVID-19 pandemic outbreak and the resulting state of emergency declaration by the Ontario Government. The daycare centres remained closed until June 22, 2020.

The Insured made a claim under the Policy for income loss arising from the interruption or interference with its business operations.

The parties agree that the COVID-19 pandemic outbreak triggered coverage under the Policy as of March 16, 2020. The Insurer approved coverage in respect of the Insured’s business income losses under the Policy in the amount of $50,000.

The only issue in dispute was the limit of liability under the applicable endorsement in the Policy.

The Court’s analysis focused on the subject endorsement within the context of the Policy as a whole. The Court applied the “rules” of contractual interpretation, as applied to insurance contracts, pursuant to the Supreme Court of Canada’s decision in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23.:

1. a) The court must first determine whether the language of the insurance policy is unambiguous, within the contract as a whole. If there is no ambiguity, effect must be given to that clear language;
2. b) However, if the policy language at issue is ambiguous, the court must apply the general principles of contractual interpretation to resolve that ambiguity. This framework includes the principles that: the interpretation should be consistent with the reasonable expectations of the parties so long as that interpretation is supported by the language of the policy; the interpretation should not give rise to results that are unrealistic or that the parties would not have contemplated in the commercial atmosphere in which the insurance policy was entered into; and the interpretation should be consistent with the interpretation of similar insurance policies;
3. c) If the ambiguity is unresolved after the application of the general principles of contractual interpretation, then the court should apply the doctrine of contra proferentum to construe the policy against the insurer. This is a course of last resort. The corollary of this rule is that coverage provisions in insurance policies are to be interpreted broadly, whereas exclusion or limiting clauses are to be interpreted narrowly.

The Policy at issue provided insurance coverage for multiple perils, including business income interruption/interference coverage. The Policy is comprised of CBC 001 (containing the General Terms and Conditions, including the Declaration Page and attached Coverage Schedules), a renewal of the Policy effective February 3, 2020, for a term of one year, and Endorsement 3 -Association of Daycare Operators of Ontario Program Endorsement (the “ADCO Endorsement”).

The ADCO Endorsement was in force at the time of the loss and, the parties agree, applies to the Insured’s. It modified the coverage provided under Part II — Business Income found in CBC 001. In particular it deleted the coverage extension under Part II, ss. 6(e) Civil Authority, (j) Negative Publicity, and (k) Outbreak Extra Expense and replaced it with the Outbreak and Negative Publicity Extension. The Outbreak and Negative Publicity Extension was the relevant coverage provision at issue in this application.

Firstly, the Court analyzed whether there is an ambiguity in the wording of the Outbreak & Negative Publicity provision contained in the ADCO Endorsement. In particular, the meaning of “at your ‘scheduled risk location'” (s. (l)(i)), and “The most that we will pay under this Extension of Coverage in any one policy period is $25,000 [sic] or as otherwise indicated on the ‘schedule'” (s. (l)(iv)).

The Insured argued that when the Policy is read as a whole, “the most that we will pay” means calculated for each “scheduled risk location” consistent with “schedule” and not a total aggregate sum. In the alternative, this coverage provision is ambiguous, and cannot be resolved by the applicable rules of interpretation. Therefore, resort must be made to the doctrine of contra proferentum to resolve the dispute in the Insured’s favour. Notably, the Insured relied on the fact that the premium payable for this coverage was allocated on a per scheduled risk location basis.

The Insurer argued the opposite — the omission of the phrase “each” (or any similar word) from the “scheduled risk location” meant that the $50,000 limit of liability applied to all of the scheduled risk locations as an aggregate, when read within the context of the Policy as a whole. The Insurer reasons that if it intended the sum of $50,000 to be the maximum payable for each scheduled risk location, it would have inserted “each” before “scheduled risk location” rather than “your”. It did not. Therefore, the court ought to construe this “silence” or omission as meaning the $50,000 limit of liability was in the aggregate for all of the scheduled risk locations.

However, the Court noted that the Insurer’s position relied on an interpretation of the limit of liability clause, in isolation from other provisions of the Policy, that contains the general terms, conditions, and definitions applicable to the Policy (unless expressly changed in an Endorsement or another part of the Policy).

A review of the various endorsements showed that there was no uniform wording specifying the application of the limit of liability for each insured risk and whether it is in aggregate or applies separately to each individual “scheduled risk location”.

The Court stated “the limit of liability provision in the ADCO Endorsement is not clear when read in the context of the Policy as a whole. The fact that the limit of liability provision was silent as to whether it is on a per scheduled risk location basis, or on a total aggregate basis, leads to an uncertainty as to its meaning, beyond being “unclear” or “imprecise””

Further, the Court held that the ADCO Endorsement’s limit of liability as it relates to the Outbreak & Negative Publicity Extension coverage under Part II – Business Income, is ambiguous when read in the context of the whole Policy. The Insured asked the Court to effectively read into the provision “each” before the “scheduled risk location”. The Insurer asked the Court to effectively read into the provision “in the aggregate” after the phrase “scheduled risk location”.

However, when reviewing the Policy as a whole, and in particular the definition of “insured risk location”, including all seven daycare centres as per the Coverage Schedule, which is stated to prevail over the Coverage Summary of the ADCO Endorsement, the Court was persuaded by the Insured’s interpretation. The reasonable expectations of the parties, as reflected by the Policy as a whole, was that this coverage, like the majority of the other insured risks contained elsewhere in the Policy (which were specified to be either for each scheduled risk location or per occurrence), was to be subject to a limit of liability calculated on a per scheduled risk location, and not in the aggregate for one policy period.

Ultimately, the Court held that by applying of rules of contractual interpretation and reading the Policy as a whole to determine the reasonable expectations of the parties, or applying the doctrine of contra proferentum, yielded the same result: the limit of liability under the ADCO Endorsement is a maximum of $50,000 for each of the seven scheduled risk locations, for a maximum aggregate coverage of $350,000. Hence, the application for was granted.

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Recently, the Ontario Court of Appeal released a decision which opined on the novel interpretive issue of data exclusion clauses. In Family and Children’s Services of Lanark, Leeds and Grenville v. Co-operators General Insurance Company, 2021 ONCA 159, the appellate court unanimously allowed for the appeal of an application judge’s decision requiring an action be brought in order to deny the duty to defend.

In this case, the respondent, Family and Children’s Services of Lanark, Leeds and Grenville (“FCS”), hired the respondent, Laridae Communications Inc. (“Laridae”), to provide communication and marketing services, namely updating FCS’s website. Laridae obtained and was insured under both a professional liability policy and a commercial general liability policy (“CGL”) from the appellant, Co-operators General Insurance Company (“Co-operators”). FCS was an additional insured under the CGL.

In April 2016,  a password-protected portal on FCS’s website was hacked. After which, a hyperlink to a confidential report, which contained numerous clients’ personal information, was posted on a social media platform.

Subsequently, a class action was brought against FCS and others. As a result, FCS commenced a third-party claim against Laridae for breach of contract and negligence.

Both FCS and Laridae brought applications seeking a declaration that the appellant had a duty to defend them against the class action and third-party claim after their request was denied.

On the application, the appellant argued that coverage was excluded under both policies for any personal injury arising from the distribution or display of data (“data exclusion clause”). The respondents took the position that the data exclusion clause did not exclude all the claims against them. Moreover, the respondents argued that this was an important issue that should not be determined on an application

The application judge agreed with the respondents concluding that coverage should not be determined on an application. The judge also found that there is the possibility of coverage in this case. Lastly, the application judge concluded that the appellant would be obligated to fund both defences, if there was a conflict of interest between the two respondents and neither of which would report to appellant.

The appellant successfully appealed.

The Ontario Court of Appeal held that a determination regarding the appellant’s duty to defend could be made based on the application materials before the court. Through a coverage analysis, the court found that the exclusion clauses are clear and unambiguous. Moreover, the appellant court disagreed that some of the claims could be covered by the policy. Based on the substance of the claims pleaded in the class action, the allegations would fall directly within the policy exclusions. Therefore, the appellant owes no duty to defend either respondent.

Lastly, Appellate Court affirmed that the onus would be on the insured to establish a reasonable apprehension of a conflict of interest on the part of the insurer in order to remove their right to participate in the defence.

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In this case, the insureds-appellants owned a property that was damaged by fire in 2014. The homeowner’s policy was underwritten by Wawanesa Mutual Insurance Company (“Wawanesa”), obtained through the insured’s broker, Hub International Canada West ULC (“Hub”). Sometime between acquiring the policy and the fire, the insureds started a licensed medical marijuana grow operation in the outbuilding. The insureds also increased electrical service to the house. The initial policy was subsequently renewed for years following.

Despite reminders contained in the renewal letters for the policy, the insureds did not report the grow operation nor the electrical upgrade. After the fire, Wawanesa became aware of the change in use and voided the policy as it constituted a material change in risk. The fire, however, was not related to the grow operation. The insureds commenced a suit against Wawanesa for wrongfully voiding the policy and against Hub for negligence in failing to ensure adequate insurance coverage. The trial judge dismissed the insureds’ action.

On appeal, the Court upheld the lower court decision. On the issue of material change in risk, the trial judge and Court left open the question of whether, statutorily, the insurer had to prove the insureds’ subjective knowledge of materiality to constitute a material change in risk. Nonetheless, the Court relied on evidence that the insureds subjectively knew that the grow operation and electrical upgrade were material changes; thus, should have been disclosed. This was sufficient to justify voiding the policy. The Court also decisively held that no causal connection is required between the beach and the cause of loss, relying on an earlier Supreme Court case, Marche v. Halifax Insurance Co., 2005 SCC 6.Whether expressly communicated to the insured or causally related to the loss, grow operations are clearly a material change.

With regards to insurance brokers, the law was also clear in establishing that expert evidence or in the least, evidence of the industry standard and practice was required to determine the requisite standard of care of a reasonable insurance broker except when the breach is obvious or where the standard relates to matters within the knowledge of the layperson.

When acting for insurance brokers or insurers, Schellenberg should be kept within your arsenal of cases; not only does this case reaffirm the added challenge of expert evidence to establish negligence of insurance brokers, but it also makes clear that a loss need not be causally connected to the breach to justify voiding a policy. What remains to be seen is whether the courts will impose a greater burden on insurers to show the insureds’ knew what is material or not.

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Striking a Balance between Insurer and Insured

In the Estate of Donald Farb v Manulife, 2020 ONSC 3037, the Court balanced the interests of the insured and insurer in its interpretation of the statutory condition applicable to accident and sickness insurance.

The insured telephoned his insurer to renew his annual travel insurance as he had done in the prior four years. During the span of the 27-minute telephone interview, the insured answered a series of questions to determine his eligibility and premium. For the medical questions regarding prescribed medication and pre-existing health conditions, the insured answered “no”. Subsequently, the insured’s travel policy was issued. The confirmation of insurance including the medical questionnaire and insurance policy was emailed and mailed to the insured.

While in Florida, the insured became unexpectedly hospitalized and incurred significant expenses as a result. Thereafter, his claim for reimbursement was denied on the grounds of misrepresentation. The answers he provided to the medical questionnaire were incorrect, therefore the travel policy was voided ab initio.

After his passing, the insured’s estate brought an application to determine coverage. A central question before the Court was whether as part of the telephone application process, the insured was provided with a written copy of his application for his review.

The Court noted that though the written application was not provided during the telephone interview, the insured had been provided with a written copy and given ample opportunity to review its content and make any necessary corrections before the policy took effect. The evidence further illustrated that the insured had been repeatedly advised, verbally and in writing, that if any of his medical answers were incorrect, the policy would be rendered void.

The Court found in favour of the insurer. However, in doing so, the Court did reject the insurer’s argument that Statutory Condition 2 (Accident and Sickness Insurance) does not require an application to be made in writing. The Court stated that a telephone interview alone would be insufficient as it does not give the applicant the opportunity to review the written version and make the necessary changes thereby undermining the consumer protection objective of the Insurance Act. Thus, while a telephone application can be taken, it should always be followed up with a written copy and the insured must be provided the opportunity to review and amended, as needed.

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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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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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