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.  

Jim Davidson

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.

Jim Davidson

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.

Jim Davidson

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.  

Jim Davidson

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.

Jim Davidson

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.

Jim Davidson

Aviva v. Pizza Pizza, [2008] O.J. No. 2625 continues the recent trend in the courts of taking a firmer approach to the interpretation of the words “ownership, use, or operation” of an automobile in liability policies. Pizza Pizza was sued in relation to a car accident involving one of its delivery vehicles. Besides its alleged negligence, via its driver, arising out of the accident itself, it was also alleged that Pizza Pizza was negligent with respect to its business practice of (1) providing food free if delivered more than 30 minutes after it is ordered (this allegedly encourages its drivers to drive fast since they risk paying late fees themselves), (2) its failure to have safe driving policies in place, and (3) its failure to test or investigate the driving history of the driver who caused the collision for his propensity for speed. Pizza Pizza brought an application requiring Aviva to defend it in the personal injury action in relation to the allegations of negligent business practices. Its CGL policy with Aviva contained the usual exclusion excluding any claims arising out of the ownership, use, or operation of any automobile. Pizza Pizza succeded before the application judge and Aviva appealed to the Ontario Court of Appeal. On appeal, Aviva argued that the application judge erred in holding that the claim with respect to negligent business practices was independant of the claim arising out of the negligence of the driver. The Court of Appeal agreed and found that the exclusion clause did apply.

The Appeal court’s decision is important as it reinforces the growing judicial trend towards a more strict interpretation of such automobile exclusions. Up until recently, one could have arguably made the case (upon then existing caselaw) that such business practice claims were not caught by the automobile exclusion.

Jim Davidson

I have previoulsy commented on Leo Deluca v. Lombard, [2008] O.J. No. 1230, an insurance coverage case arising out of the hydro blackout in 2003. In that case, the motion judge denied indemnity under an All Risks policy on the basis of two exclusion clauses. However, in Caneast Foods v. Lombard, [2008] O.J. No. 1811, the Ontario Court of Appeal, interpreting the same two exclusions, came to the opposite conclusion. In Caneast, the hydro blackout caused the spoilage of a substantial quantity of the Plaintiff’s goods. The first exclusion clause excluded losses caused by changes in temperature. However, the clause contained an exception which stated that if the loss was caused directly by a peril insured and not otherwise excluded, then the exclusion did not apply. Since this was an All Risks policy, the blackout was a peril insured. As well, hydro blackouts were not expressly excluded in the policy. Hence, the Court of Appeal affirmed the motion judge’s decision that the exclusion did not apply. The motion judge’s decision in Leo Deluca only gives an excerpt of the change in temperature exclusion clause, but since both cases involved the same insurer, it would be surprising if the exclusion wordings were not similar. The second exclusion dealt with losses caused by mechanical or electrical breakdown or derangement. Unlike in Leo Deluca, the Court of Appeal held that this exclusion only applied to an internal problem in a machine, and not when the machine fails to operate due to an interruption in its power supply. In fact, the Court of Appeal remarked that the motion judge in Leo Deluca had erred in his interpretation.

Jim Davidson

In Boliden Ltd. v. Liberty Mutual Insurance Co., [2008] O.J. No. 1438, Liberty issued a liability policy to Boliden, which included coverage for its directors and officers. During the coverage period, the directors and officers were indemnified by Boliden for defence costs they incurred in connection with class actions brought against them by shareholders for prospectus misrepresentation. The class actions were commenced in the wake of an environmental disaster at a zinc mine in Spain that was owned by a Boliden subsidiary. Liberty denied coverage under the policy based on a pollution exclusion clause. The class actions settled, and Boliden brought an action against Liberty to recover its defence costs and applied for summary judgment. The motion judge found that the pollution exclusion clause applied to some but not all of the losses arising from the allegations of misrepresentation by the directors and officers. He awarded judgment in favour of Boliden for 80 per cent of the defence costs.

On appeal, Liberty argued that the class action represented a single claim for failing to disclose information in the prospectus about the dam deficiencies, which deficiencies involved the threat of the seepage or escape of pollutants. The class action, it submitted, was therefore a claim in respect of a pollution loss and the exclusion clause applied. The Court of Appeal rejected this argument. It upheld the motion judge’s finding that the pollution exclusion clause excluded pollution-related losses, not pollution-related claims. The clause was ambiguous concerning whether it applied to pollution related claims, and hence this was to be resolved in favour of the insured. The interesting part of the decision is the Appeal court’s rejection of Liberty’s characterization of the class action. The class actions, looked at broadly, essentially arose out of losses sustained from the escape of pollutants. However, the Court of Appeal agreed with the motion judge’s approach of looking at whether or not the pollution exclusion clause applied to each of the specific allegations in the claim.

Jim Davidson

Leo Deluca v. Lombard, [2008] O.J. No. 1230, is an interesting insurance coverage case arising out of the infamous hydro blackout in Aug. ‘03. The Plaintiffs commenced the claim as a class action, and sought coverage under an All Risks CGL policy. The Plaintiffs sought damages for the loss of their stock and for business interruption. Lombard denied coverage on the basis of two exclusions: damage caused by (1) changes of temperature or (2) mechanical or eletrical breakdown or derangement in or on the premises. The court held that both exclusions applied, and hence the action was dismissed. The court rejected the Plainitffs’ argument that clause (1) was restricted to only atmospheric changes in temperature.  It also rejected the argument that clause (2) only applied to when the Plaintiffs’ equipment itself did not work properly. The equipment itself was not faulty, and in fact continued working once power was restored. The court found that clause (2) applied regardless of the cause of the breakdown (i.e. external or internal).

The court’s decision demonstrates the point that although this was an All Risks policy, a fact that is sometimes used to justify a stricter reading of an exclusion clause, the court will endeavor to enforce the plain meaning of policy wording.    

Jim Davidson