In Morrow v. Zhang, 2009 ABCA 215, the Alberta Court of Appeal recently released its decision on the constitutionality of the Province’s monetary cap on non-pecuniary damages. Under the cap, car accident victims could only receive a maximum of $4,000 for pain and suffering. The trial judge ruled that the cap unjustifiably violated s. 15 of the Charter. In an unanimous decision, the Alberta Court of Appeal held that the cap did not violate s. 15 of the Charter, and upheld the trial judge’s decision that the cap did not violate s. 7 of the Charter.

The Appeal Court’s decision raises the recurring debate over the efficacy of threshold tort systems. Alberta took a fairly hard line on “minor injuries” by imposing the cap, and this approach has been vindicated by the Court. The evidence was that premiums had dropped by 18 % since the imposition of the cap. Ontario has its own threshold, but does not like Alberta impose a cap on non-pecuniary damages for minor injuries. It actually goes further and denies any claim for non-pecuniary damages for non-threshold claims and the same applies to any type of injury (i.e. soft tissue, orthopaedic, psychological). It appears that the Alberta Court of Appeal’s decision may be appealed to the Supreme Court of Canada. If upheld, it will be interesting to see if this influences future changes to Ontario’s tort regime, and whether it prompts the goverment to implement further retrictions on damages.

Raj K. Datt

Russo v. John Doe is a very recent decision from the Ontario Court of Appeal dealing with the recurring issue of coverage under the OPCF 44R for the negligence of an uninsured or inadequately insured motorist. The appellant was a tragic victim of a drive-by shooting. She brought an action against her insurer, the respondent, seeking compensation for her injuries. The insurer denied coverage, and argued that the accident did not arise as a result of the ownership, use, or operation of a car, but rather as a result of an intervening act, the shooting. The Court of Appeal agreed with the insurer. Following the recent decisions of the Supreme Court of Canada on this issue, the Court of Appeal stated that in order to trigger the OPCF 44R Endorsement, the at-fault defendant’s tort must be committed as a “motorist”. There are two aspects to this inquiry - the purpose test and the causation test. The Court of Appeal found that the purpse test had been met. It did not matter that the motorist intended to commit a criminal act. His subjective reasons for using the car were not relevant to the inquiry. The appellant, however, failed to meet the causation test. The Court of Appeal accepted the argument that the shooting was a distinct and severable act from the operation of the car. In order words, it was incidental that the car was used in the shooting. The Court of Appeal emphasized that it is not reasonably expected that automobile insurance will cover injuries or death arising from the joint act of a group of tortfeasors simply because one tortfeasor’s involvement in the tortious act consists of operating a motor vehicle.

The Court of Appeal’s decision is interesting in that it appears to apply a strict application of the decisions of the Supreme Court in Vytlingam and Herbison. In the latter cases, the tortfeasor had already exited the vehicle when the tort was committed. Arguably this would move the facts in Russo closer to the required threshold for causation. It will be interesting to see whether the courts continue to apply a more strict application of the causation test, or whether at some point in time there is a relaxing of the standard.  

Raj K. Datt

In GE Canada Equipment Financing G.P. v. ING Insurance
Co. of Canada, [2009] O.J. No. 748 (ONCA), GE appealed from the dismissal of its application for a declaration that its security interests had priority over those of ING, the insurer, in respect of two highway tractor trucks , and a declaration that it was entitled to the return of the vehicles or the proceeds of sale thereof. GE financed the two vehicles for a leasing and rental company (Brampton), and it registered its security interests in the vehicles. Brampton then leased the vehicles to third parties who obtained insurance from ING, with the third parties named as lessees and Brampton as lessor, with no mention of GE. GE had taken all necessary steps under the Personal Property Security Act (PPSA) to perfect its purchase money security interests (PMSIs) in the trucks and their proceeds. The vehicles were stolen. Brampton submitted proof of loss forms to ING in respect of the stolen trucks. After the vehicles were recovered, ING took possession and sold one of the trucks. In granting the appeal, the Court of Appeal held that Statutory condition 6(7) conferred on ING only those rights to salvage possessed by Brampton prior to ING’s payment of the actual cash value of the trucks. Absent express statutory language to the contrary, Statutory condition 6(7) was not to be interpreted so as to confer on Brampton’s insurer greater rights to salvage in the trucks than were held by Brampton. Subrogation is a derivative right that rests on the principle of indemnification. It contemplates that on full indemnification of an insured by an insurer for an insured loss, the insurer becomes entitled to exercise a right belonging to the insured. Under the principle of subrogation, the insurer succeeds only to the exact right otherwise enjoyed by its insured. An insurer’s exercise of the right of subrogation under statutory condition 6(7) recognizes that prior to the insurer’s election to trigger statutory condition 6(7), the right to salvage in an insured vehicle is a property right of the insured. Where, however, the insurer pays the insured’s total loss claim in respect of the insured vehicle, it becomes entitled to all the salvage rights that the insured possessed in respect of the insured vehicle. Brampton’s interests in the Trucks were subject to GE’s perfected PMSIs. Statutory condition 6(7) conferred on ING only those rights to salvage possessed by Brampton prior to ING’s payment of the actual cash value of the Trucks. Absent express statutory language to the contrary, statutory condition 6(7) should not be interpreted so as to confer on Brampton’s insurer greater rights to salvage in the Trucks than were held by Brampton.

Guy v. Toronto (City), [2008] O.J. No. 5126, concerns a slip and fall personal injury claim where the Plaintiff slipped on ice on a City owned laneway. The central question on liability was whether the laneway was simply a roadway for vehicles, or if it was also a footpath for pedestrians. A different standard of care would apply depending on the answer to this question.  A higher standard of care would apply if the laneway was also a footpath. The City admitted at trial that the laneway was a commercial roadway, but no more than that. Since it had become customary for pedestrians to traverse the laneway, the Court found that it was both a roadway and a footpath. However, the Plaintiff argued that the standard of “gross negligence” required under the Municipal Act did not apply since the laneway was not a sidewalk. She argued for negligence simpliciter. Nothwithstanding the dual use of the laneway, the Court decided to apply the higher standard of gross negligence.

Raj K. Datt

Canadian National Railway Co. v. Royal and Sun Alliance Insurance Co. of Canada is an important decision from the Supreme Court of Canada which grapples with defining the scope of the “faulty or improper design” exclusion within the context of an “all risks” insurance policy. An “all risks” policy was obtained by CNR from the respondent insurers in respect of the construction of a railway tunnel. A tunnel boring machine (TBM) was halted when dirt penetrated its cutting head and threatened the integrity of the main bearing that drove the machine forward.  The project was consequently delayed by 229 days and its costs thereby greatly increased. CNR had negotiated a builders’ risk policy with the insurers that insured them against “ALL RISKS of direct physical loss or damage … to … [a]ll real and personal property of every kind and quality including but not limited to the [TBM]” but excluding both  “the cost of making good … faulty or improper design” and “inherent vice”. The design engineers anticipated that the TBM would have to withstand 6,000 metric tonnes of pressure from the weight of the soil and water above as it progressed under the river.  The TBM was designed to accommodate those pressures. The trial judge found that  despite its failure, the innovative design did “accommodate”, within the then limits of the state of engineering knowledge, all foreseeable risks encountered in the digging conditions in the tunnel.  He acknowledged that the design proved in the result to be defective, but found that it was not “improper” or “faulty” according to the state of the art at the time the design was finalized.  He concluded that the design not only addressed all reasonably foreseeable risks but all foreseeable risks however unlikely or remote.  He therefore held the insurers liable to the CNR for $29,582,638.91 including pre-judgment interest, plus $1,150,837.35 in costs.

The Ontario Court of Appeal, by majority, allowed the appeal. In its view, a design error may, but need not, depend upon designer negligence.  A design must “‘take into account’, ‘accommodate’, ‘provide for’ and ‘withstand’ all foreseeable risks”  however unlikely or remote.  If, in these circumstances, there was a failure attributable to “design”, the exclusion applies.  In a 4:3 decision, a majority of the Supreme Court allowed the appeal and held that the Court of Appeal’s conclusion read the qualifying words “faulty or improper” out of the exclusion, and hence greatly expanded its scope. In the majority’s view, the “all risks” policy afforded the CNR greater protection than that which the majority in the Court of Appeal was prepared to allow.  At the time of contracting, all parties realized that this was to be the largest earth-balance TBM ever built.  Leading experts were enlisted to provide what was described as a “state-of-the-art machine”.  The “all risk” policy was written to cover physical damage to an innovative piece of equipment almost the length of a football field operating on a scale with which the state of the art had no previous experience.  The policy did not exclude all loss attributable to “the design”, but only loss attributable to a “faulty or improper design”.  The design exhausted the state of the art but left a residual risk.  Failure is not the same thing as fault or impropriety.  In the majority’s view, the insurers did not meet the onus of bringing the loss within the exclusion.  A design is not “faulty or improper” simply because it falls short of perfection in relation to all foreseeable risk. The majority of the Supreme Court distinguished a decision by the High Court of Austrailia (Queensland Government Railways v. Manufacturers’ Mutual Insurance, Ltd.) which holds that that the fact of failure not only speaks for itself but, once it is attributed to the design, it discharges the insurers’ onus of proof. The majority did not agree that a design can be said to be “faulty” if it conforms to the state of the art, as was found by the trial judge.

The minority, however, stated that the term “faulty or improper design” does not imply the introduction of a “state of the art” standard against which an impugned design is to be compared.  As explained in Queensland, the distinction that is relevant is between a design that is defective and design that is free from defect.  The question is whether or not the damage to the insured property was due to an inability of the design to fulfil its purpose in the foreseeable conditions of the property’s use. It was not appropriate to create a test akin to negligence when nothing in the term “faulty or improper design” in the insurance contract implied the introduction of the law of torts. The term “faulty or improper design” attaches to the thing that was designed, not to the work of the design engineers.  Whatever standard their work meets or does not meet, the thing designed either works for its intended purpose or it does not.

The Supreme Court’s decision is important for insurers as it poses the risk of transforming an “all risks” policy into a warranty. An insurer will be left covering a loss arising from the limitations of science. This may not exactly be the kind of risk the insurer signed up for. However, the case turns on a singular set of circumstances involving a highly complex and cutting edge piece of machinery. The case does not allow the insured to escape the exclusion simply because the machine was not negligently designed. Although not a standard of perfection, the majority’s “state of art” standard is still quite formidable.

Raj K. Datt

St. Jean (Litigation guardian of) v. Cheung, [2008] O.J. No. 4862 (ONCA) is a medical malpractice claim where the Plaintiff, after having become severely hypoglycaemic shortly after his birth, suffered severe brain damage allegedly as a result of a failure to properly treat the hypoglycaemia. Twenty years after his birth, a claim was commenced against the doctor and hospital who cared for the Plaintiff’s mother prior to his birth. The primary allegation was that as a result of the failure to diagnose and treat his mother’s gestational diabetes, the Plaintiff was born severely hypoglycaemic. Close to two years after the claim was commenced, Plaintiff’s counsel obtained a medical report indicating that the likely cause of the Plaintiff’s injury was the protracted hypoglycaemia that followed his birth which was inadequately treated. Further, the report stated that had the hypoglycaemia been treated more aggressively, the Plaintiff would not have suffered injury. Thus, a second action was commenced against the medical professionals who cared for the Plaintiff after his birth. The defendants in the second action successfully had the action struck on the basis that the limitation period had expired.

The Ontario Court of Appeal reversed the motion judge’s decision. The decision involved the application of s. 24(2) of the new Limitations Act. It was clear that the second action was based on acts or omissions which took place before the effective date of the new Act (Jan. 1, 2004). The dispute was over whether a proceeding had already been commenced prior to the effective date. If yes, then s. 24(2) applied to the second action. The Plaintiff argued that the first action counted as a proceeding. However, the Appeal Court rejected this since the first action did not concern any acts or omissions of the defendants in the second action. Thus, s. 24(2) was found to apply. The next issue was the correct application of s. 24(5) of the new Act. If the claim was discovered prior to the effective date, then the old limitation period applied. If it was not discovered before the effective date, then the new period applied and it would be assumed that the act or omission occurred on the effective date. The new defendants argued that the claim was not discovered prior to the effective date since the Plaintiff was mentally incompetent and could not have discovered the claim on his own. The Appeal Court disagreed and found that the Plaintiff’s litigation guardian had in fact discovered the claim before the effective date. The Court made a clear distinction between a litigation guardian’s ability to “discover” a claim vs. the triggering of the limitation period. It is settled law that even though the litigation guardian had discovered the claim, this did not trigger the limitation period in cases where the Plaintiff is incapacitated. The discovery of claims and the commencement of limitation periods are different, though related, notions and should not be conflated. Thus, the Court found the limitation period in the old Limitations Act applied. Since the old Act suspended the triggering of the limitation period due to mental incapacity, the second action was brought in time.

Raj K. Datt

Sekhon v. RBC General Insurance Co., [2008] O.J. No. 4999, concerns an appeal by an insurer from a decision requiring it to pay to the Respondent $37,000 for collision damage under her automobile insurance policy. The Respondent’s vehicle was damaged when the vehicle, driven by the Respondent’s daughter, struck a tree after having crossed three lanes of traffic and gone through a fence. It was an agreed fact that, immediately following the incident, the Respondent’s daughter said that she had caused the collision “on purpose” “to test her mortality” or “to test her immortality”. The issue at trial was whether the Respondent’s loss fell within the confines of “direct and accidental loss” under s. 7.1.1 of the standard Ontario Automobile Policy that governed the parties’ rights. The trial judge found on the totality of the evidence that, “on a balance of probabilities [the Respondent's daughter] was suffering from an acute psychiatric disorder, such that she had no conscious or deliberate physical control of the operation of the motor vehicle due to the absence of a sane and deliberating mind”. He concluded that the loss sustained by the Respondent as a result of the damage to her vehicle fell within the meaning of “direct and accidental loss” under s. 7.1.1.

This judgment was affirmed by the Ontario Divisional Court. The Court found that there was evidence upon which the trial judge could conclude on a balance of probabilities that the Respondent’s daughter had no conscious or deliberate physical control of the Respondent’s vehicle, despite her comments immediately following the event that she intended to test her mortality or immortality. Interestingly, the Court also dealt with the Respondent’s cross-appeal.  If the Appellant’s appeal were successful, the Respondent, on the cross-appeal, submitted that the trial judge erred in law in finding that the Respondent, the innocent owner of the vehicle that was damaged, was disentitled to compensation for loss under her standard automobile insurance policy as a result of an intentional act (if so found) of her daughter to whom the Respondent had innocently and without any negligence lent her vehicle. The Divisional Court held that since the loss was not intentional from the perspective of the Respondent, she could recover notwithstanding an intentionally caused loss. It would be interesting to see if such an argument would apply in other coverage situations, for instance in home owners’ or CGL policies. Typically these policies contain an exclusion for intentional or criminal acts of an insured. Depending on the wording of the exclusion, insurers often make the argument that the intentional or criminal acts of one insured excludes coverage for an innocent insured. Applying the reasoning in Sekhon would shift the focus to the perspective of the innocent insured, and thus provide an addtional argument for insurance coverage.

Raj K. Datt

Unique Labeling Inc. v. Gerling Canada, [2008] O.J. No. 4090, deals with the unique issue of attempting to enforce a jury award pursuant to s. 132(1) of the Insurance Act. The Plaintiff obtained a judgment against the Defendants in Oregon for damages arising  from the negligent supply of bottled water. The Plaintiff was ultimately awarded $1.5 million in damages by a jury. It then sought to recover the judgment in Ontario, under s. 132(1), against the Defendants’ commerical liability insurers. The insurers denied liability on the basis that the Oregon judgment did not impose liability for damage to property, as required by s. 132(1). Instead, they argued that the jury simply awarded damages for pure economic loss. The Plaintiff argued that the requirement in s. 132(1) of “injury or damage to property” creates a much lower threshold than “physical injury to tangible property”, the latter being a term relevant to the CGL policies. It further argued that injury or damage to property includes both tangible and intangible property. The Plaintiff submitted that there could be no dispute that its property was damaged. Its bottled water, supplied by the Defendants, was contaminated and had to be destroyed. 

The parties were unable to find any caselaw in which an Ontario court had determined a judgment creditor’s right to successfully invoke the provisions of s. 132(1) where the underlying judgment follows upon a jury verdict on liability and damages issues. The Court observed that the Oregon jury had issued no reasons; it simply answered the questions put to it following the completion of the trial. The Court stated that any review of evidence, of arguments by counsel and/or of directions given the jury by the trial judge would pre-suppose that such matters influenced the jury. One might thereby come to a firm but entirely inaccurate understanding of the outcome of the trial below. Thus, the Court held that a better approach would be to consider the judgment and the jury questions and answers within it in the context of the claims, as framed by the pleadings in the Oregon action. The Court ultimately found that the Oregon jury had indeed only awarded damages for economic losses, and thus not for damage to property. Without more in the way of clarity in the jury questions, the Court was not satisified that liability had been imposed for property damage. Thus, inter alia, the Court dismissed the action.

The Court in Unique Labeling Inc. was clearly troubled by the exact nature of the damages awarded by the Oregon jury. The decision is instructive as clearer jury questions and pleadings in the underlying action would have given the Court much more assistance in its analysis under s. 132(1). In trying an action before a jury, and in contemplation of a potential s. 132(1) proceeding, Unique Labeling Inc. illustrates that it is vital that an eye is kept on creating a record, specifically by way of clear jury questions, that will satisfy the requirements of s. 132(1).   

Raj K. Datt

Kopas v. Western Assurance Co., [2008] O.J. No. 4057, is a tragic case involving a young boy that was run over and killed by a car in a parking lot. The boy’s family sued the negligent driver, and the latter made a cross claim against the boy’s father and grandfather for failing to supervise the boy. The father was unloading his car trunk at the time of the accident, and the grandfather was standing next to the father’s car while keeping an eye on the boy. The parties settled and allocated 70% liability against the driver, and 30% against the father and grandfather. The father and grandfather then sought indemnify from their car insurer for their defence costs and settlement contribution. The insurer denied that its policy responded to the claim. It stated that the father’s car was not involved in the accident, and hence the accident did not involve the “use or ownership” of the father’s vehicle.

In deciding whether or not coverage was available, the motions judge applied the two recent Supreme Court of Canada decisions in Vytlingham v. Farmer (2007), 53 C.C.L.I. (4th) 31 and Herbison v. Lumbermans Mutual Casualty Co. (2007), 53 C.C.L.I. (4th) 31. These decisions deal extensively with the issue of the scope and meaning of the phrase “use and ownership”. For an insurer to be liable, the claim must be sufficiently connected to the use and operation of the motor vehicle for it to be concluded that the claim is based on a tort committed by a motorist. Where the use or ownership of the vehicle is merely incidental to the claim, then there will not be a duty to indemnify.

The court ultimately ruled that coverage was not available. The boy had safely exited out of his father’s car. He then left the vicinity of the car and walked to a fence in order to watch a train pass by. By the time he was returning from the fence, the duties owed to him by his father and grandfather were owed as guardians of children, and not as “motorists”. Kopas is a very useful decision in that it is quite thorough in its review of the caselaw. As well, it further demonstrates that the courts are applying a more strict approach, in light of Vytlingham and Herbison, in determining auto liability coverage. It marks a shift away from the more “results oriented” approach in the past which would likely have resulted in coverage.  

Raj K. Datt

Day v. Wood, [2008] O.J. No. 3296 is an interesting insurance coverage decision from the Superior Court. The insured was an owner of a property which was rented to a third party. The third party moved out after a month and complained of health problems due to the exposure to mould and yeast, as well as property damage due to a flood in the premises. The third party sued the insured for these damages. The insured sought coverage under a rental dwelling policy from his insurer, but the insurer denied coverage on the basis of a mould exclusion. The insured brought an application against the insurer and argued that since 3 out of the 4 theories of liability against him were covered under the policy, a duty to defend was owed. The mould exclusion specifically excluded claims arising from any losses or claims arising out of fungus “regardless of whether other causes acted concurrently or in any sequence with the fungus”.  Thus, since mould was a concurrent or contributing factor, under the wording of the policy, if another cause acted concurrently with the mould, there was no coverage. However, the motions judge rejected the insurer’s argument, and found that a duty to defend was indeed owed.

Key to the judge’s decision was the fact that it was possible that the damages arose solely from non-mould related circumstances (e.g. excessive moisture levels from flooding). Thus, though it may be that mould was a contributing factor, it was also possible that it was a non-factor. The continuing lesson from this line of cases is that the duty to defend will be interpreted more broadly than the duty to indemnify. Further, claimants would be wise to advance multiple theories of liability in order to negate the application of the mould exclusion. Insurers, in defending these insurance applications, may want to consider the availability of extrinsic evidence in determining the true nature of the allegations in the claim.

Raj K. Datt