Forest Hill Fine Homes Inc. v. Heartland Farm Mutual Insurance Co., 2023 ONCA 171

Court File and Parties

COURT OF APPEAL FOR ONTARIO DATE: 20230315 DOCKET: C70789

Pepall, Harvison Young and George JJ.A.

BETWEEN

Forest Hill Fine Homes Inc., Hugh Smith and Beverly Smith Applicants (Respondents)

and

Heartland Farm Mutual Insurance Co. Respondent (Appellant)

Counsel: Karim N. Hirani, for the appellant Josiah T. MacQuarrie, for the respondents

Heard: March 6, 2023

On appeal from the judgment of Justice Markus Koehnen of the Superior Court of Justice, dated May 17, 2022.

Reasons for Decision

[1] The appellant, Heartland Farm Mutual Insurance Co. (“Heartland”), appeals from the declaration that it owes the respondent builder Forest Hill Fine Homes Inc. (“Forest Hill”), and its officers and directors, the respondents Hugh and Beverly Smith, a duty to defend under the terms of the parties’ insurance contract.

[2] Between 2004 and 2007, Forest Hill built a boathouse and cottage for the Sullivans.

[3] In late 2013 or early 2014, the Sullivans notified Forest Hill of leaks in the boathouse. While denying responsibility for the leaks, Forest Hill performed repairs, which it completed in September 2014.

[4] The Sullivans subsequently commenced an action alleging that, in September 2018, they “for the first time, discovered that there were numerous deficiencies and instances of incomplete and negligent work in Forest Hill’s construction and repairs of the Boathouse and Cottage” that caused serious damage.

[5] Heartland insured the respondents pursuant to a Commercial General Liability policy of insurance (the “policy”). Coverage was in place as of February 10, 2016. However, relying on s. I-A(1)(b)(iii) of the policy, Heartland denied that it had a duty to defend the action brought by the Sullivans.

[6] The application judge concluded that Heartland does. He reasoned that the Sullivans’ statement of claim indicated that they did not believe the leaks were Forest Hill’s fault and they became aware for the first time in September 2018 of the deficiencies in Forest Hill’s original construction and in its repairs in 2013/2014. Moreover, even if it could be said that the 2013/2014 repairs amounted to knowledge by Forest Hill, those repairs were limited to the boathouse.

[7] The appellant submits that the application judge erred by misapprehending the policy, which it states is an occurrence-based policy, and by finding that the pleadings in this case fall within the term “occurrence”.

[8] The policy provided that:

(b) This insurance applies to “bodily injury” and “property damage” only if : i. the “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory”; and ii. the “bodily injury” or “ property damage” occurs during the policy period ; and iii. prior to the policy period, no insured listed under Paragraph (1) of Section II — Who Is An Insured and no “employee” authorized by “you” to give or receive notice of an “occurrence” or claim, knew that the “bodily injury” or “ property damage” had occurred, in whole or in part . If such a listed insured or authorized “employee” knew, prior to the policy period, that the “bodily injury” or “property damage” occurred, then any continuation, change or resumption of such “bodily injury” or “property damage” during or after the policy period will be deemed to have been known prior to the policy period. [Emphasis added.]

[9] The appellant submits that as the policy in issue is an “occurrence-based” policy and not a “claims-based” policy, discoverability does not apply. Counsel submits that the application judge only focused on when the Sullivans had knowledge of the “property damage” as opposed to considering the definition of “occurrence” and knowledge of the “occurrence”. Occurrence is defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” In addition, the policy speaks of knowledge of the occurrence in whole or in part. The appellant states that the respondents were deemed to have known that the property damage had occurred no later than 2014.

[10] The respondents submit that the application judge did not convert the policy to a claims-made policy. We agree.

[11] As Rothstein J. stated in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at para. 19, “the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify. What is required is the mere possibility that a claim falls within the insurance policy.”

[12] The application judge identified the correct legal principles. As he noted, grants of coverage are to be interpreted broadly. There was no evidence before the court as to the nature, cause or extent of the repairs performed in 2013/2014, which were limited in any event to the boathouse. Nor, as the respondents point out, was there any evidence that the damage repaired was the same damage being claimed to have been discovered in 2018. The question of precisely when the damage occurred, when it was discovered, and when it ought to have been discovered are live issues. To engage the appellant’s duty to defend, it is sufficient that the pleadings be drafted in such a way as to raise the mere possibility that damage occurred during the policy period.

[13] The application judge rejected the appellant’s argument that the alleged property damage “occurred” before 2016 and that the respondents had knowledge of the damage before 2016. There was a possibility that damage occurred after 2016 and as such, the appellant had a duty to defend.

[14] The appellant also takes issue with the application judge’s disposition on costs.

[15] The application judge fixed costs in the amount of $37,121.51 of which $21,312.37 was to be held in trust by the respondents’ lawyer pending resolution of the allocation of the defence costs incurred to May 17, 2022, among the respondents’ insurers.

[16] The appellant submits that past defence costs were not in issue on the application relating to the duty to defend. They assert that defence costs have already been paid by other insurers and the respondents are seeking double recovery.

[17] We see no basis on which to interfere with the application judge’s costs order. He observed that he had no evidence on what costs had been paid by other insurers. The trust arrangement was designed to facilitate costs sharing among the insurers. Moreover, the respondents are not seeking, nor would they be entitled to, double recovery.

Conclusion

[18] The appeal is dismissed.

[19] The parties agree that if full indemnity costs are ordered that they be fixed in the amount of $10,000. However, the appellant submits that full indemnity costs are not warranted. In the circumstances of this case, we see no reason to depart from the basic principle that, where an insurer breaches its duty to defend, it must pay the full indemnity costs incurred by the insured to enforce that duty: Godonoaga v. Khatambakhsh (2000), 50 O.R. (3d) 417 (C.A.); E.M. v. Reed (2003), 171 O.A.C. 145. Therefore, the appellant is to pay the respondents their costs of the appeal in the amount of $10,000, inclusive of disbursements and applicable tax.

S.E. Pepall J.A. A. Harvison Young J.A. J. George J.A.