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.

Raj K. Datt

The U.S. Supreme Court’s approach is quite different from the approach which has been followed in Canada. The leading Canadian case is the Supreme Court of Canada’s decision in Whiten v. Pilot Insurance Co. In Whiten, a jury award the Plaintiff $1 million in punitive damages due to Pilot’s unfounded allegation that the Plaintiff had set her own home on fire. The Plaintiff had sued Pilot under a home insurance policy, and was also awarded $318K in compensatory damages. The Ontario Court of Appeal reduced the punitive damage award to $100K, holding that the jury’s award was excessive. Before the Canadian Supreme Court, Pilot defended the reduction in the award, and warned against the “Americanization” of Canadian law (via high punitive awards) that, if adopted, would bring the administration of justice in this country into disrepute. The Supreme Court rejected this argument, and restored the original $1M punitive award. Although it would not have itself awarded such a sum, it nonetheless found that the award was within “rational limits”. However, central to this decision was the Supreme Court’s observation that in the U.S., ratios had not been adopted and typically punitive awards there were 3-4 times the award for compensatory damages. The $1 million award in Whiten  was within that range. Accordingly, the Canadian Supreme Court, desiring a more predictable method for assessing the quantum of punitive awards, established a verbal formula requiring that punitive damages be assessed in an amount reasonably proportionate to such factors as the harm caused, the degree of the misconduct, the relative vulnerability of the plaintiff and any advantage or profit gained by the defendant.

Given the U.S. Supreme Court’s decision in Exxon, particularly its rejection of a verbal formula and adoption of a 1:1 ratio between punitive and compensatory damage awards, it may be only a matter of time before Canadian courts are once again asked to look at the concept of ratios. Whiten was decided in 2002, and since then the U.S. has clearly trended towards ratios and tighter mathematical formulas. Exxon may provide Canadian insurers and corporate defendants with sufficient ammunition to re-visit the issue of ratios in relation to punitive damage awards.

The Whiten decision can be found at CanLII:

http://www.canlii.org/en/ca/scc/doc/2002/2002scc18/2002scc18.html 

Raj K. Datt

The action arose out of a bizarre accident which occurred on Highway 11 near Orillia. As the Plaintiff was driving her car underneath the Memorial Avenue overpass, a blue spider rope dropped from above and wrapped around her driver’s side mirror. While travelling 95 km/hr, she alleged that the rope wrapped around her mirror and caused her car to stop ”on a dime” approximately 80-100 feet north of the overpass. Even though her driver’s side mirror sustained only superficial damages, and the expert evidence that it was physically impossible for the rope to slow, let alone stop the car, the trial judge accepted the Plaintiff’s description of the accident and found that her injuries had been caused by the accident. Her damages were assessed at approximately $260,000.00.

The spider rope had been tied to a wooden guardrail post on the overpass by an Orillia Power work crew. The crew was in the process of installing new hydro lines in the area, and was using the spider ropes to string electrical conductors through the new hydro poles. On the day of the accident, the crew took its lunch break and tied four spider ropes to the post using bowline knots and a shackle. The trial judge specifically found that the rope had gotten loose not because it had been tied improperly, but because a vandal had tampered with the ropes and had allowed one to fall upon the highway. However, despite the fact that the accident was directly caused by the actions of an unknown vandal, the trial judge imposed liability on Orillia Power for failing to take better measures to prevent the actions of a vandal.

In an unanimous judgment, the Ontario Court of Appeal set aside the trial judge’s finding of liability, and dismissed the action with costs.  The Court found that the trial judge had erred in finding  that Orillia Power had breached its “own standards” since there was no evidence presented at trial of any industry standard for the securing of spider ropes when a work crew is absent from a job site. Further, the standard referred to by the trial judge was a general statement contained in the EUSA Rule book which simply stated the legal requirements for the standard of care at common law. Finally, even if there was such an industry standard (which was not proven), the trial judge erred by treating an industry standard as dispositive of a breach of the standard of care, thus amounting to a finding of strict liability.

The key to the Appeal Court’s decision was that nothing indicated the possibility, let alone the likelihood, of any acts of vandalism and hence the loss was not reasonably foreseeable. The Court noted that the act of mischief by the unknown vandal occurred in broad daylight, immediately beside a public roadway, and on a highway overpass frequently travelled by vehicles but rarely, if at all, by pedestrians. The project had been ongoing for several months without any previous acts of vandalism. Finally, the three Orillia Power lineman had a combined experience of over 60 years, and had never encountered any previous incidents of vandalism.

The Court of Appeal’s decision in Garratt is significant as it confirms that hydro utilities, and by extension construction companies, telecommunication companies, and other similarly situated entities, are not insurers against the acts of vandals. Further, it is a case of significance for the insurance bar in general, as it raises the bar with respect to the foreseeability of the acts of vandals and makes it clear that such a scenario will need to at least be a probable occurrence before the court will entertain a finding of liability.

At trial, Orillia Power was represented by myself. On appeal, it was represented by Alan Mark of Ogilvy Renault. The Court of Appeal’s decision can be found at: Garratt v Orillia Power OCA

Raj K. Datt

Raj K. Datt

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.

Raj K. Datt

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.    

Raj K. Datt

However, Lombard argued against coverage on the basis that it would be placed in an impossible position if it were obliged to defend the conflicting allegations. For example, in order to properly defend the claim for negligence against the contractor, it may plead and argue at trial that the contractor did fulfil its duties under the contract but that certain actions or omissions of RioCan were negligent or was in breach of its statutory obligations. To the extent that the claim against RioCan was factually based on the scope of work of the contractor, Lombard could defend by raising the obligations of RioCan as an occupier. It would be in the financial interest of Lombard to allege that any fault found falls outside the scope of work of the contractor. In this way Lombard would not be obliged to indemnify RioCan. If Lombard was responsible to defend RioCan on all the claims, it would be working against its own interest. Lombard relied upon D’Cruz v. B.P. Landscaping Ltd., [2007] O.J. No. 2704, a case with very similar facts to RioCan’s. In D’Cruz, the court held that the insurer did not have to defend the property owner as to order otherwise would require the insurer to defend the property owner for its own alleged acts of negligence. Further, since the insurer was already defending the contractor, it was not necessary for the insurer to also defend the property owner for neligligence arising from the contractor. 

The court in RioCan distinguished D’Cruz on the basis that the court did not have the benefit of the Ont. C.A. decision of Appin Realty Corp. v. Economical Mutual Insurance Co., [2008] O.J. No. 436. The potential conflict highlighted by Lombard could be dealt with, for example, by RioCan retaining its own separate counsel and paid for by Lombard. Accordingly, the court found that Lombard did owe RioCan a duty to defend and had to defend it against the “entire claim”. The court’s decision in RioCan  may raise some concern for insurers as it is debatable whether others in the insurance pool should be taxed with providing defences for matters which may clearly be outside the scope of the policy. As well, an insurer may understandably be reluctant to sign a”blank cheque” and cover whatever costs are borne by whatever lawyer is retained, no matter how expensive. These concerns were highlighted by the Supreme Court of Canada in Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801, where it was held that the practice should be for the insurer to defend only those claims which potentially fall under the policy, while calling upon the insured to obtain independent counsel with respect to those which clearly fall outside its terms.

Raj K. Datt

Raj K. Datt

This was an interesting argument given, as remarked by the Court of Appeal, it stands on its head the general proposition that the duty to defend is broader than the duty to indemnify. The key to the insurer’s argument was the existence of concurrent exclusion language, which precluded coverage even if there were any contemporaneous causes. The Court of Appeal ultimately rejected the argument since on another possible interpretation, the clause could be taken to mean that wherever injury from mould is alleged in a claim, even if it is ultimately established that the injury arose solely from a covered peril, such as bacteria, the claim would exclude both the duty to defend and the duty to indemnify. This would extend the exclusion to otherwise non-excluded perils. However, the Court of Appeal did leave the door open for an insurer to make its duty to defend more narrow than its duty to indemnify, though this would require more clear and less ambiguous language.

Raj K. Datt

Raj K. Datt