“Bare Pleading” Negligence Claim Triggers Duty to Defend
Boland v. Allianz Insurance Co. of Canada, [2008] O.J. No. 3000 is an interesting insurance coverage decision recently made by the Ontario Court of Appeal. The Court found that a “bare pleading” negligence claim against an insured was viable enough to trigger an insurer’s duty to defend. The decision further illustrates the dichotomy between an insurer’s duty to defend and duty to indemnify and how the former is much broader in scope.
The issue on appeal was whether the insurer had a duty to defend the appellant against a claim made against him in his capacity as a director of a condominium corporation. The insurer provided directors’ and officers’ liability insurance to a condominium corporation and to its directors and officers for claims made during the policy period for “wrongful acts” that occurred during the policy period. The policy also contained an extension of coverage provision that covered: “any wrongful act which occurs prior to the Policy Period if claim or claims are made during the Policy Period and provided: (a) that the Directors and Officers of the Corporation, at the Effective Date of the Policy, had no knowledge of, and could not reasonably foresee, any circumstances which might result in a claim, and …”. The events that led to the claims in this case occurred during the 1990’s. The appellant was a developer of the condominium project along with Weldon. Each of them purchased a unit before the declaration date of the condominium. However, prior to the declaration, Weldon illegally enlarged his unit into the attic space as a third floor living space, although this space was designated as part of the common area. The appellant, who was a director of the corporation both in 1994 and again in 1997-1998, is alleged to have known about the illegal unit, failed to disclose it to the corporation, and stood by in January 1998, when Weldon sold the illegal unit to Orr. The corporation applied against Orr to direct her to comply with the declaration and return the unit to its original condition. Orr then sued the corporation, the appellant and others in 2001 for damages of $4.5 million. The corporation then issued a statement of claim dated June 1, 2005 against the appellant for a declaration that: (1) he intentionally or negligently breached his legal duties to the corporation while he was a director regarding the existence of the illegal unit, and (2) he is liable to indemnify the corporation in respect of the Orr claim. The application judge dismissed the appellant’s application and found that the insurer had no duty to defend on two bases: (1) the extension of the insuring agreement was not triggered and therefore the claim was not covered; and (2) the statement of claim alleged primarily deliberate conduct and that the allegation of negligent conduct was merely derivative. The Court of Appeal allowed the appeal and found there was a duty to defend.
Although the policy in issue on the application provided coverage for the 2005 policy year and the claim was made during that year, the 2005 policy was the next in a succession of policies with the same extension of coverage agreement, beginning with the first Allianz policy in September, 1994. Thus, the Court of Appeal found that the effective date of the policy for the purpose of looking at the knowledge of the insured director that could preclude the extension of coverage is the effective date of the first policy in succession, in this case, September, 1994. If the consideration of the appellant’s knowledge is limited to what he knew in 1994, the effective date of the policy, it could not be said that at that time he could reasonably foresee a claim. Further, the Court agreed with the application judge that the negligence claim was a bare pleading. It stated that it possibly would not survive a pleadings motion without an order for particulars. However, the Court went on to state that when the issue is whether an insurer has a duty to defend, one must take the pleading as it stands and determine whether there is a viable claim for negligence. In this case, although the force of the claim was for deliberate conduct, there was an alternative and independent claim that the appellant acted negligently. As this claim was available as a basis for the appellant’s liability to the condominium corporation, the insurer had a duty to defend that claim.