COURT OF APPEAL FOR ONTARIO
WEILER, GOUDGE and ARMSTRONG JJ.A.
B E T W E E N:
CELESTICA INC.
Lawrence G. Theall,
for the appellant/respondent on cross-appeal
Plaintiff/Appellant/Respondent on Cross-Appeal
- and -
ACE INA INSURANCE formerly known as Cigna Insurance Company of Canada
Martha S. Binks,
for the respondent/appellant on cross-appeal
Defendant/Respondent/Appellant on Cross-Appeal
Heard: November 14, 2002
On appeal from the order of Justice Arthur M. Gans of the Superior Court of Justice dated December 10, 2001.
1This is an appeal from the decision of the Honourable Justice Gans on a motion under Rule 21 of the Rules of Civil Procedure for determination of a question of law. The issues raised in the appeal relate to whether the comprehensive general liability insurance policy issued by ACE INA Insurance (“ACE Insurance”) covered Celestica Inc.’s costs to remedy a defect in the manufacture of an Electronic Control System Module (“ECS module”).
2The motions judge held that the loss suffered by Celestica was caused by an “occurrence” as that term is defined in the insurance policy. He further held that an exclusion clause in the policy excluded only the cost associated with the repair or replacement of the defective part of Celestica’s product.
3Celestica appeals the decision in regard to the application of the exclusion clause. ACE Insurance cross-appeals the decision in regard to the finding that the loss suffered by Celestica was caused by an occurrence as defined by the policy.
BACKGROUND
4A predecessor company of Celestica entered into an agreement with Xerox to manufacture and supply it with an ECS module for use in Xerox photocopiers sold worldwide. A transformer, which was manufactured by a subcontractor of Celestica and was incorporated into the ECS module, was defective. The transformer lacked double insulation, which created a risk of injury due to electrical shock for copiers sold outside of North America. In North America, there was no risk of electrical shock because a three-pronged plug grounded the copiers.
5Although there was no risk of injury in North America, regulatory standards in both Canada and the United States required that the copiers contain labels that warned that they were not double insulated. Labels were provided to comply with the regulatory standards.
6In all European countries, except France, the lack of double insulation was addressed by replacing the copier power cord with a new power cord that contained a ground fault interrupter.
7In France, it was necessary to replace the low voltage power supply (“LVPS”) board, which was an integral part of the ECS module. This involved a technician dismantling the copier, removing the original low voltage power supply board and replacing it with a new board which contained a double insulated transformer.
8Celestica sought to recover its costs from these remedial actions under its insurance policy with ACE Insurance. ACE Insurance denied the claim.
The Relevant Terms of the Policy
9The policy contained the following terms which are relevant to the disposition of the appeal and cross-appeal:
- INSURING AGREEMENT
The Insurer agrees to pay on behalf of the Insured all damages which the Insured shall become obligated to pay by reason of the liability imposed by law upon the Insured or assumed by the Insured under contract, because of:
(c) Property Damage;
Caused by an Occurrence during the policy period, subject to the Limits of Liability, Exclusions, Conditions and other terms contained herein.
- DEFINITIONS …
F. Property Damage
Property Damage means:
(1) injury to or destruction of tangible property which occurs during the policy period, including loss of use thereof at any time resulting therefrom; or
(2) loss of use of tangible property which has not been injured or destroyed, provided such loss of use is caused by an occurrence during the policy period.
H. Occurrence
- With respect to Bodily Injury and Property Damage, Occurrence means an accident including continuous or repeated exposure to substantially the same general harmful condition.
J. Products Hazards
10The policy contained the following exclusion:
5 (7.) This insurance under sub-section (c) of the Insuring Agreement, does not apply to claims for injury to, destruction or loss of use of:
(3) with respect to the Products Hazard, for Property Damage to;
(a) That particular component part of the Named Insured’s Products out of which the occurrence arises; or
The Reasons of the Motions Judge
11The motions judge had been asked to determine the following issues:
(i) whether the loss was caused by an “occurrence”; and
(ii) whether the loss was excluded under article 5, section (7) (3)(a) of the policy.
A third issue, whether a “product withheld” exclusion applied, was deferred until trial, if necessary.
12With respect to the first issue, as indicated above, the motions judge held that the loss was, in fact, caused by an “occurrence” as that term is defined in the insurance policy and that the policy’s insuring agreement applied to the claim advanced by Celestica.
13In arriving at his conclusion, the motions judge stated inter alia:
In the instant case, counsel for the defendant has conceded that the poorly manufactured transformer incorporated in the ECS module has notionally, at least, caused damage to the Xerox copiers and but for the remedial work, there would be a diminution in the value of the goods.
That damage being acknowledged, I am of the view that such could only have happened by misadventure for which the plaintiff was responsible to Xerox at law. Such must logically then come within the risk contemplated by the contract, albeit a risk, perhaps, subject to exclusion.
14In regard to the second issue, the motions judge held that section 7 (3)(a) excluded only the costs associated with the repair or replacement of the ECS module and all of its componentry for the French response, and did not apply to any part of the costs associated with the installation of a ground fault interrupter in other European countries or the application of required labeling in North America.
15There was an issue before the motions judge as to whether the term “particular component” should be applied to the complete ECS module or only the defective component supplied by the subcontractor. He concluded that it applied to the complete ECS module, including its component parts.
The Appeal and Cross-Appeal
16The appeal and cross-appeal deal with the same two issues that were before the motions judge, although in the reverse order.
17The appellant asserted that the motions judge erred in his application of the exclusion clause to the remedial action taken in regard to the photocopiers sold in France. After hearing from counsel for the appellant in oral argument, we determined that it was unnecessary to hear from counsel for the respondent and we dismissed the appeal. We were all satisfied that the motions judge correctly applied the exclusion clause with respect to the French remedial action.
18On the cross-appeal, the respondent asserted that the motions judge erred in finding that the losses claimed were caused by an occurrence. The respondent further argued that the motions judge erred in failing to find that the exclusion clause also applied to the costs associated with the European and North American responses and not solely to the French response.
19It is therefore the two issues raised in the cross-appeal which remain to be determined by this court.
Did the motions judge err in holding that the loss claimed was caused by an “occurrence”?
20The policy defined “occurrence” as “an accident”. Unfortunately, there is no definition of accident in the policy. The Supreme Court of Canada in Canadian Indemnity Co. v. Walkem Machinery and Equipment Ltd. (1975), 53 D.L.R. (3d) 1 at p. 6 has defined accident as “any unlooked for mishap or occurrence”. The New Oxford Dictionary of English, 1998 ed. defines accident as “an unfortunate incident that happens unexpectedly and unintentionally, typically resulting in damage or injury.”
21Before the motions judge, the respondent argued that the claim arose from the negligent manufacture of the transformer, which could not have occurred as a result of an unanticipated mishap or accident in manufacturing. The motions judge rejected that argument in the following words:
In my opinion, the decision of Pigeon J. in Canadian Indemnity Co. v. Walkem Machinery & Equipment Ltd., (1975), 53 D.L.R. (3d) 1 at p. 7 is a complete answer to that notion. In that case, his Lordship stated as follows:
However, I wish to add that, in construing the word “accident” in this policy, one should bear in mind that negligence is by far the most frequent source of exceptional liability which a businessman has to contend with. Therefore, a policy which would not cover liability due to negligence could not properly be called “comprehensive”. But foreseeability is an essential element of such liability. If calculated risks and dangerous operations are excluded, what is left but some exceptional cause of liability?
22With respect, I disagree with the motions judge’s reliance on Canadian Indemnity. The facts of that case are distinguishable from the case at bar and understandably give rise to a finding that there was coverage under the particular policy relevant to that case. In Canadian Indemnity, the insured was making a claim for recovery of damages awarded against it in a lawsuit brought by a plaintiff who had suffered property damage as a result of the collapse of a crane which the insured had negligently repaired. The issue in the case was whether an insured could recover under its policy for damages suffered by a third party as a result of its negligent repair. If the crane had not collapsed and the insured had simply carried out remedial repairs and claimed for the cost of the repairs under its insurance policy, I do not think the result would have been the same.
23Counsel for the respondent referred us to a number of cases which expressly deal with the terms “occurrence” and “accident” in circumstances similar to the case at bar. See Kitchener Silo Inc. v. CIGNA Insurance Co. of Canada, [1991] I.L.R. 1-2764 (Ont. Gen. Div.); Erie Concrete Products Ltd. v. Canadian General Insurance (1969), 2 O.R. 372 (H.C.); Carleton Ironworks Ltd. v. Ellis Don Construction Ltd., [1996] I.L.R. 1-3373 (Ont. Gen. Div.); Harbour Machine Ltd. v. Guardian Insurance Co. of Canada (1985), 10 C.C.L.I. 72 (B.C.C.A.); and Tsubaki of Canada Ltd. v. Standard Tube Canada, [1993] O.J. No. 1855 (Ont. Gen. Div.). These cases were cited for the proposition that a policyholder’s defective design or manufacture is not considered an accident under a policy of the type before the court.
24The motions judge considered this line of cases. While he found that the cases provided “more than a little judicial support for [the] notion that comprehensive general liability policies are intended to protect the insured from liability for injury or damage to the person or property of others,” he declined to apply them in the case at bar.
25The motions judge cited a case comment by Gordon Hilliker1 with respect to Tsubaki, supra, in which Mr. Hilliker cautioned against an “overly narrow interpretation” of the language of comprehensive general liability policies. Mr. Hilliker is of the view that Tsubaki was wrongly decided in that, contrary to the conclusion of Wilson J. in that case, there was both an accident and property damage sufficient to bring the claim within the insuring agreement.
26The motions judge found the analysis of Mr. Hilliker to be persuasive, which led him to conclude that the notional damage to the Xerox copiers “could only have happened by misadventure for which the plaintiff was responsible to Xerox at law.” With respect, I disagree with this analysis. In my view, this conclusion is both contrary to the decision in Tsubaki and to the settled line of authority represented by the cases referred to in paragraph 22. Also, the evidence which was before the motions judge does not support his conclusion.
27The court must find damage to the property of a third party. The acknow-ledgement of the respondent that the defective transformer resulted in notional damage to the Xerox copiers appears to concede that issue. However, the court must still find that such damage was caused by an accident.
28The motions judge proceeded on the basis of an agreed statement of facts that was excerpted from the statement of claim and statement of defence. There is nothing in those facts that, in my view, would lead a court to conclude that the failure to provide double insulation was an accident. The bald facts simply stated are:
(i) …the transformer/LVPS board were required to operate on global supply voltages and be double insulated; and
(ii) …the transformers incorporated into the LVPS board were not double insulated.
For the motions judge to conclude that the notional damage could only have happened by misadventure, which I take to mean accident, is in my view not supported by the agreed facts. I cannot conclude from the agreed facts that the event which triggered the alleged notional damage was anything other than defective manufacture, which the courts have held is not an occurrence or accident within the meaning of an insurance policy of the kind under consideration here.
29Support for the view that defective manufacture is not an accident can be found in Harbour Machine Ltd., supra. In that case, a supplier of marine engines installed two new engines in a boat in such a manner that when the engines were running they caused severe vibrations and ultimately one of two propellers fell off the boat. The boat owners sued the supplier, who sought to recover the costs under its insurance policy. Esson J.A. in addressing the issue of whether there had been an accident, stated at page 77:
Nor, apart from the matter of the propeller, could I see any possible basis for holding that there was either an accident or an occurrence. Essentially, the cost of remedying the defect arose out of the faulty planning and design of the installation and the poor workmanship in carrying it out. Apart from a minor matter of the propeller, there was nothing which could constitute a mishap or occurrence, the event which must happen before there can be said to be either an accident or an occurrence.
30I am aware that coverage provisions in an insurance policy should be construed broadly. See Reid Crowther Partners v. Simcoe and Erie General Ins. Co. (1993), 99 D.L.R. (4th) 741 at 752 (S.C.C.). However, in my view the interpretation of the motions judge extends the meaning of accident beyond its reasonable limits in the circumstances which obtain here. Indeed, the interpretation of the motions judge “would transform the policy into something akin to a performance bond”. See Ohio Casualty Ins. Co. v. Bazzi Construction Co. 815 F.2d 1146 (7th Cir. 1987).
31There are good policy reasons for refusing to find that defective design or manufacture can constitute an accident. In Privest Properties Ltd. v. Foundation Co. of Canada (1991), 6 C.C.L.I. (2d) 23 at 72 (B.C.S.C.), Drost J. stated:
There is a policy reason for this. If the insurance proceeds could be used to pay for the repairing or replacing of defective work and products, a contractor or subcontractor could receive initial payment for its work and then receive further payment from the insurer to repair or replace it. Equally repugnant on policy grounds is the notion that the presence of insurance obviates the obligation to perform the job initially in a good and workmanlike manner.
While Drost J. made the above statement during his consideration of a “work/product” exclusion, I believe the policy is equally apt when applied to the issue of coverage in the case at bar.
32During the oral argument, we were provided with a copy of this court’s judgment in Canadian Equipment Sales and Services Co. Ltd. v. Continental Ins. Co. (1975), 59 D.L.R. (3d) 333 (Ont. C.A.). In that case, Canadian Equipment Sales subcontracted part of the installation of a water pipeline for Dow Chemical. During the course of the work, the subcontractor permitted a portion of the wall of the pipeline (referred to as a coupon) to fall inside the water pipe and thus create a risk of future danger. The general contractor spent considerable time and money to locate the coupon in order to remove it but without success. Canadian Equipment Sales was held liable for those costs. Canadian Equipment Sales then claimed recovery of the costs under an insurance policy.
33It was necessary for the court to consider the following policy terms:
Property Damage Liability
To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of injury to or destruction of property, including loss of use, but when not caused by accident, the injury or destruction must be to tangible property.
In his consideration of the above clause, the trial judge concluded that the dropping of the coupon into the pipe was an accident and that conclusion was not challenged on appeal. See the judgment of Morden J. at 1974 805 (ON SC), 5 O.R. (2d) 220 at 226. From my reading of the trial judgment and the judgment of this court, the issue that is now before us was not raised in the Canadian Equipment Sales case, i.e. whether defective workmanship can be considered an accident.
CONCLUSION
34In the result, I would allow the cross-appeal and vary paragraph 1 of the order of the motions judge to read:
This court declares that the loss suffered by the plaintiff was not caused by an occurrence, as that term is defined in the insurance policy issued to the plaintiff by the defendant, and the policy’s insuring agreement does not apply to the claim advanced by the plaintiff.
35In view of the conclusion I have reached, it is unnecessary to deal with the cross-appeal in regard to the applicability of the exclusion clause to the European and North American responses.
COSTS
36Counsel for both sides agreed that costs should follow the event on a partial indemnity basis in the amount of $8,500.00. I would therefore award costs of the appeal in the aforesaid amount to the respondent. The motions judge awarded costs of the proceedings before him to the appellant in the cause. I would change that order to costs to the respondent in the cause.
RELEASED:
“JUL 11 2003”
“KMW” “Robert P. Armstrong J.A.”
“I agree Karen M. Weiler J.A.”
“I agree S. T. Goudge J.A.”
