DATE: 20030515

DOCKET:C37898

COURT OF APPEAL FOR ONTARIO

MACPHERSON, SIMMONS and CRONK JJ.A.

B E T W E E N:

TRANSCANADA PIPELINES LIMITED

Warren H.O. Mueller, Q.C.

for the appellant

Commonwealth Insurance

Plaintiff (Respondent)

Company of Canada

• and -

Richard H. Krempulec, Q.C.

for the respondent

POTTER STATION POWER LIMITED PARTNERSHIP

TransCanada PipeLines Limited

Robert Kennaley

Defendant (Respondent)

for the respondent Potter Station Power Limited Partnership

• and -

Mark M. O’Donnell

for the respondent

THE ROYAL INSURANCE COMPANY OF CANADA LIMITED and COMMONWEALTH INSURANCE COMPANY OF CANADA LIMITED

Royal & Sun Alliance Insurance Company of Canada

Third Parties

(Commonwealth Appellant and Royal Respondent)

Heard: October 25, 2002

On appeal from the order of Justice Dennis G. Lane of the Superior Court of Justice dated February 7, 2002. Reported at [2002] O.J. No. 428.

SIMMONS J.A.:

[1] Commonwealth Insurance Company of Canada Limited (“Commonwealth”) appeals from an order dismissing a summary judgment motion.

[2] Commonwealth moved for summary judgment to dismiss a third party action brought against it by Potter Station Power Limited Partnership (“Potter Power”).

[3] Potter Power commenced the third party action after it was sued by TransCanada Pipelines Limited (“TCPL”). In the third party action, Potter Power claimed indemnification under an insurance policy issued by Commonwealth and a declaration requiring Commonwealth to defend TCPL’s claim. However, Commonwealth contended that its policy did not cover Potter Power’s claims and moved to dismiss the third party action.

[4] The motion judge found that the insurance coverage issues forming the subject matter of the summary judgment motion were not yet “ripe” for determination. Accordingly, he dismissed the summary judgment motion and ordered that Commonwealth provide Potter Power with a defence to TCPL’s claim.

[5] The main issues on this appeal are: (1) did the motion judge err in concluding that the coverage issues forming the subject matter of the summary judgment motion were not yet ready for determination; and (2) did the motion judge err in ordering that Commonwealth provide Potter Power with a defence to the main action?

[6] I have concluded that the motion judge did not err. Accordingly, I would dismiss this appeal.

I. Background

[7] TCPL operates a natural gas pipeline between Alberta and Ontario as well as a series of natural gas compressor stations that produce exhaust gas (“waste heat”) during the gas transmission process.

[8] On May 21, 1993, Potter Power’s predecessor (both entities will be referred to as “Potter Power”) entered into an agreement (the “Agreement”) with TCPL granting Potter Power the exclusive right to purchase the waste heat produced by TCPL compressor station 102 (“Station 102”).

[9] The Agreement permitted Potter Power to build an electrical power generating plant on the lands adjacent to Station 102 and to install a duct system connecting Station 102 to its plant (the plant and duct system are referred to collectively as the “Facility”).

[10] Potter Power began operating the Facility in November 1994. It used the waste heat that it purchased from TCPL to convert water into steam, and it used the steam to power a turbine to generate electricity.

[11] On August 16, 1995, the lands upon which Station 102 sit subsided, damaging Station 102 and the Facility.

[12] On May 26, 1998, TCPL sued Potter Power for damages caused by the subsidence. However, rather than asserting a cause of action in tort, TCPL relied on a clause in the Agreement that requires Potter Power to indemnify it for damages arising out of “the operation and maintenance of the Facility”. In particular, TCPL claimed that Potter Power caused the subsidence by removing groundwater from an underlying aquifer “for use in the operation or maintenance of the Facility”.

[13] After it was sued by TCPL, Potter Power submitted an insurance claim to Commonwealth. Potter Power was named as an Additional Insured under a “Construction Wrap-Up Liability” policy that Commonwealth issued to the contractor who built the Facility. The policy contained a “Completed Operations Hazard” clause, which provided extended coverage for a period of thirty-six months following completion of construction.

[14] Commonwealth denied coverage, claiming that the Completed Operations Hazard clause is restricted to completed construction operations, in the sense of problems arising from construction defects, and that it does not cover claims arising from the ordinary operation of the Facility.

[15] Accordingly, Potter Power filed a defence and third partied both of its insurers, Commonwealth and Royal & Sun Alliance Insurance Company of Canada (“Royal”)[^1]. In particular, Potter Power claimed a declaration that the insurers were required to defend TCPL’s claim, indemnification for the damages that it suffered and, if necessary, an indemnity against TCPL’s claim.

[16] In addition to the summary judgment motion forming the subject-matter of this appeal, Commonwealth brought a summary judgment motion to dismiss TCPL’s action, claiming that the indemnity TCPL relies on relates only to third party claims and that it does not cover direct damages suffered by TCPL.[^2]

[17] Commonwealth advanced six arguments on the summary judgment motion to dismiss the third party claim. First, if its summary judgment motion to dismiss TCPL’s action was successful, there was no basis for Potter Power’s claim for an indemnity relating to TCPL’s claim. Second, the Completed Operations Hazard clause in the Construction Wrap-Up Liability policy is restricted to claims arising from completed construction operations. Third, the well from which the water was drawn did not form part of the construction project on which the policy was issued. Fourth, even if the well formed part of the construction project, the policy contained a design exclusion clause that would preclude any claim for negligence on the part of the Commonwealth or its forces in calculating water usage. Fifth, Commonwealth’s policy is a liability policy covering third party claims; it does not cover Potter Power’s claim for its own damages. Sixth, because its policy does not cover Potter Power’s claim, it has no duty to defend.

II. The Motion Judge’s Reasons

[18] The main thrust of the motion judge’s reasons for dismissing Commonwealth’s motion relating to the third party claim was that the insurance coverage issues were not yet ready for determination. There were three prongs to this finding.

[19] First, extrinsic evidence could be required to interpret the Completed Operations Hazard clause in the policy. The motion judge found that the clause was ambiguous because it was not clear that “completed operations” referred to completed construction operations, as claimed by Commonwealth.

[20] Second, extrinsic evidence could be required to determine whether the well formed part of the construction project that was covered under Commonwealth’s policy. The policy covers “all sums which Potter shall become legally obligated to pay as damages, but only with respect to the Project”. However, the “Project” is described only generally in the policy and Commonwealth disputes Potter Power’s claim that the well is part of the “Project”, creating the potential for using extrinsic evidence to interpret the policy.

[21] Third, Commonwealth obtained a consent order from the motion judge to amend its statement of defence to plead the design exclusion. However, that exclusion would only be relevant in the event of a claim for negligence in calculating water usage. As of the date of the summary judgment motion, no such claim had been made.

[22] By way of summary, the motion judge said that he was not satisfied that he had all of the relevant evidence before him. Accordingly, he concluded that none of the coverage issues were “ripe for determination”.

[23] In addition, because he had dismissed Commonwealth’s motion to dismiss the TCPL action in concurrent reasons, the motion judge found that Commonwealth was required to provide Potter Power with a defence to TCPL’s action.

III. The Relevant Provisions of Commonwealth’s Insurance Policy

[24] In order to determine the issues on this appeal, it is necessary to review some of the specific terms of the policy. I have highlighted the terms that are particularly significant:

COMMONWEALTH INSURANCE COMPANY

CONSTRUCTION WRAP-UP LIABILITY POLICY

DECLARATIONS

1. NAMED INSURED MONENCO AGRA INC.

2. PROJECT INSURED: Potter Co-Generation Project, located near Potter, Ontario

3. POLICY PERIOD

Termination Date: Shall be the date the project is physically completed…

Extended Operations: As respects the “Completed Operations Hazard” … the Policy shall nevertheless continue to apply for a period of Thirty-Six (36) months following the termination date.

INSURING AGREEMENTS

The insurer agrees to pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages, but only with respect to the Project stated on the Declarations Page.

2. PROPERTY DAMAGE LIABILITY

because of damage to or destruction of or loss of use of tangible property caused by an occurrence during the Policy Period …

3. DEFENSE, SETTLEMENT, INVESTIGATION AND NEGOTIATION

With respect to such insurance as is afforded by this Policy, the Insurer shall:

(a) If claim is made or suit is brought … defend any such claim or suit against the Insured . …

DEFINITIONS

2. ADDITIONAL INSUREDS

Additional Insureds include:

(e) …Potter Station Power Limited Partnership …

5. COMPLETED OPERATIONS HAZARD

“COMPLETED OPERATIONS HAZARD” includes …Property Damage arising out of operations on the Project, but only if the … Property Damage occurs after such operations have been completed. Operations include materials, parts or equipment furnished in connection therewith. Operations shall be deemed completed at the earliest of the following times:

(a) when all operations to be performed by or on behalf of the Insured under the contract have been completed;

(b) when all operations to be performed by or on behalf of the Insured at the site of the operations have been completed;

(c) when the portion of the work out of which the … Property Damage arises has been put to its intended use by any persons or organization other than another contractor or subcontractor engaged in performing operations for a principal as part of the same project.

Operations which may require further service or maintenance work or correction, repair or replacement because of any defect or deficiency, but which are otherwise complete, shall be deemed completed.

The Completed Operations Hazard shall not include:

(a) operations in connection with the pick up and delivery of property;

(b) the existence of tools, uninstalled equipment or abandoned or unused materials.

(c) operations in connection with Maintenance Operations Hazard as defined.

6. MAINTENANCE OPERATIONS HAZARD

“MAINTENANCE OPERATIONS HAZARD” includes … Property Damage arising out of Maintenance Operations, but only if the … Property Damage occurs after operations have been deemed complete in accordance with the Completed Operations Hazard Clause.

“MAINTENANCE OPERATIONS” include all operations which are required because of further service or maintenance work or correction, repair or replacement arising from the original construction operations on the Project, but in no event shall include routine maintenance activities usual to the operation of the completed project.

IV. Grounds of Appeal

[25] Commonwealth raised several grounds of appeal. In my view, the relevant issues can properly be disposed of under two headings:

i. did the motion judge err in finding that the insurance coverage issues were not yet ready for determination; and

ii. did the motion judge err in declaring that Commonwealth is obliged to provide Potter Power with a defence to TCPL’s action?

V. Analysis

i) Did the motion judge err in finding that the insurance coverage issues were not yet ready for determination?

[26] It is important to note that there are two distinct coverage issues: (1) the coverage issue arising from TCPL’s claim against Potter Power and; (2) the coverage issue arising from Potter Power’s claim for its own damages. Although the motion judge dealt with these issues separately, he relied on his reasons for concluding that the TCPL coverage issue was not yet ready for determination in reaching the same conclusion concerning Potter Power’s claim for its own damages. I will accordingly deal with both issues under the same heading.

[27] As already noted, there were three prongs to the motion judge’s finding that the coverage issues were not yet ready for determination. The first prong was the motion judge’s conclusion that the Completed Operations Hazard clause is ambiguous. In my view, the motion judge’s conclusion on this issue alone justifies his finding that the coverage issue arising from TCPL’s claim was not yet ready for determination.

[28] Commonwealth claims that, in the context of construction insurance, its Completed Operations Hazard clause is clearly restricted to completed construction operations and that the motion judge erred by creating an ambiguity in the interpretation of this clause when, in fact, none exists. Relying on an insurance text, the language of a completed operations clause contained in a standard form construction liability policy, and various authorities Commonwealth asserts that the coverage provided by this clause is restricted to construction problems that first manifest themselves in damages following the completion of construction, that it requires a causal link between construction and the consequent damages and that it clearly does not extend to damages arising from the ordinary course of day-to-day operations, which is the basis of TCPL’s claim.

[29] Moreover, referring to the specific language of the policy, Commonwealth relies on the heading “Construction Wrap-Up Liability Policy”, the overall tenor of the policy (which relates to construction) and the numerous references in the Completed Operations Hazard clause to the operations being “completed” or “performed”, in support of its claim that the plain meaning of “completed operations” is completed construction operations.

[30] In the alternative, Commonwealth claims that the motion judge erred by leaving open the possibility of Potter Power adducing additional evidence to assist in construing the policy. Commonwealth relies on the well-established principle that a responding party on a summary judgment motion must put its best foot forward and cannot rely on the possibility of further evidence.

[31] I do not accept Commonwealth’s submissions for two reasons.

[32] First, I agree with the motion judge’s conclusion that, while Commonwealth may well be proved correct in its interpretation of the Completed Operations Hazard clause, the language of the clause is ambiguous, creating the possibility that extrinsic evidence will be required.

[33] In order to interpret the Completed Operations Hazard clause, it is necessary to focus on the language of the policy. In that respect, Commonwealth is quite correct in noting that there are several factors that favour its interpretation, including the heading of the policy and certain specific references in the definition of the Completed Operations Hazard coverage. I will repeat the main body of the Completed Operations Hazard clause for ease of reference:

5. COMPLETED OPERATIONS HAZARD

“COMPLETED OPERATIONS HAZARD” includes …Property Damage arising out of operations on the Project, but only if the … Property Damage occurs after such operations have been completed. Operations include materials, parts or equipment furnished in connection therewith. Operations shall be deemed completed at the earliest of the following times …

[34] The references here and later in the clause to operations being completed imply that the operations must have been part of the construction; otherwise they could not be “completed”. Further, the reference to damage “arising out of operations on the Project” imports a concept of causal connection.

[35] Nevertheless, in my view, the phrase, “‘Completed Operations Hazard’ includes … Property Damage arising out of operations on the Project, but only if [it] occurs after such operations have been completed” is ambiguous, because it conveys the meaning that there is general liability coverage for operations and that the coverage arises at a specified time. The motion judge expressed that time as being “the date on which the portion of the work out of which the loss arises has been completed and put into service”. I agree with his description.

[36] Moreover, in my view, the motion judge’s conclusion is supported by an examination of the language of the “Maintenance Operations Hazard” clause. Again, I will repeat the relevant portion of that clause for ease of reference:

6. MAINTENANCE OPERATIONS HAZARD

“MAINTENANCE OPERATIONS” include all operations which are required because of further service or maintenance work or correction, repair or replacement arising from the original construction operations on the Project, but in no event shall include routine maintenance activities usual to the operation of the completed project [emphasis added].

[37] The highlighted portion of the Maintenance Operations Hazard clause makes it clear that that coverage relates to matters “arising from the original construction operations on the project”. Commonwealth claims that this language confirms that the focus of the policy is construction, and therefore, that coverage is limited to claims arising from construction operations. However, in my view, the absence of similar clear language clarifying what was meant by “operations” in the second line of the Completed Operations Hazard clause supports the interpretation advanced by Potter Power.

[38] In summary, I agree with the motion judge’s finding that the Completed Operations Hazard clause is ambiguous and that, as a result, extrinsic evidence could be required to determine its meaning.

[39] Second, I am not persuaded that Commonwealth can rely on Potter Power’s failure to adduce extrinsic evidence relating to its proposed interpretation of the policy in this case.

[40] In summarizing his conclusions on the coverage issues, the motion judge stated:

… I have no assurance that all relevant evidence is before me, indeed it is obvious that it is not. The meaning of the provisions in question is far from clear….

[41] Aside from the policy itself, the only evidence Commonwealth led that was relevant to the interpretation of the policy consisted of certain exhibits appended to the affidavit of a law clerk. In my view, it is apparent that the motion judge was not satisfied that Commonwealth had met its evidentiary burden of bringing forward the evidence necessary to interpret the Completed Operations Hazard clause in the face of an ambiguity. I see no basis for interfering with his conclusion.

[42] On this ground alone, I conclude that the motion judge was correct in holding that the coverage issue relating to TCPL’s claim was not yet ready for determination.

[43] The second prong of the motion judge’s reasons for holding that the coverage issue relating to TCPL’s claim was not yet ready for determination was his conclusion that the status of the well as part of the Project was a disputed question of fact, requiring additional evidence.

[44] Commonwealth claims that the trial judge erred in making this finding, because, although Commonwealth actually raised the “semantic question” of whether the well forms part of the Project, there were no disputed underlying facts relating to this issue. In particular, Commonwealth points out that the parties were agreed that the well was constructed in 1965, but that it was connected to the Facility by pumps and pipes during the construction phase of the Project.

[45] Once again, I do not accept Commonwealth’s submission. The motion judge was fully aware of when the well was built and how it was connected to the Facility. He said at para. 13:

TransCanada’s claim does not differentiate between the well and the rest of Potter’s facility. There can be no doubt that, as operated, the well is part of that facility. Whether it was part of the construction project which was the subject of Commonwealth’s policy is a disputed question of fact. The well was built originally in 1965 by TransCanada, then the owner of the land, and was connected to the new Potter construction by placing pumps and piping in it and connecting them to the remainder of the facility. The parties do not agree whether it was thereby part of the project.

[46] The motion judge’s finding that there was a disputed issue of fact did not relate to the physical construction of the well; it related to the parties’ intentions concerning whether the well, and its subsequent operation, come within the scope of the Project covered by the policy. I see no error in the motion judge’s finding nor in his conclusion that extrinsic evidence could be required to determine this issue.

[47] The third prong of the motion judge’s reasons for holding that the coverage issue relating to TCPL’s claim was not yet ready for determination was his observation that he had just been asked to permit an amendment to Commonwealth’s statement of defence to plead the design exclusion, which would be relevant to a potential claim that the subsidence was caused by negligence in calculating water usage.

[48] Commonwealth claims that this finding was irrelevant to the determination of the issues on the motion because, at that point, TCPL had not advanced any claim based on negligence.

[49] On my reading of his reasons, the motion judge was well aware of the claims that had been advanced. He simply noted that, in addition to raising factual issues, the party moving for summary judgment had requested leave to amend its pleading to respond to an issue that had not been raised by the other parties. This supported his conclusion that this case had not yet reached a stage where any final decisions should be made.

[50] In my view, the motion judge’s finding that the coverage issue relating to TCPL’s claim was not yet ready for determination was correct.

[51] As for the coverage issue relating to Potter Power’s claim for its own damages, the motion judge stated at para. 10:

For reasons expressed in the next section, it is not appropriate to deal with the coverage issues at this stage of this action and in the summary judgment context.

[52] In effect, the motion judge relied on his findings that the Completed Operations Hazard clause was ambiguous and that extrinsic evidence would be necessary to resolve the question of the parties’ intentions concerning the scope of the coverage. In these circumstances, I see no basis for interfering with his conclusion that it was premature to deal with any coverage issues at that stage of the proceedings.

ii) Did the motion judge err in declaring that Commonwealth is obliged to provide Potter Power with a defence to TCPL’s action?

[53] I have concluded that the motion judge did not err in declaring that Commonwealth has an obligation to provide Potter Power with a defence to TCPL’s action for three reasons.

[54] First, Commonwealth’s submissions on this issue depended on two main points and I have not accepted either of them. Commonwealth’s first point was that TCPL has no viable cause of action against Potter Power because the indemnity TCPL relied on in its action against Potter Power does not cover damages that it suffered directly. I rejected this position in reasons released concurrently with these reasons.

[55] Commonwealth’s second point was that, even if TCPL has a cause of action against Potter Power, its Construction Wrap-Up Liability policy does not cover damages caused by the ordinary operation of the Facility. On this issue, I concluded that the motion judge was correct in holding that the Completed Operations Hazard clause is ambiguous and that the coverage issue requires a trial.

[56] Second, Commonwealth did not take any real issue with Potter Power’s assertion that the insurer has an obligation to defend where the coverage is unclear.

[57] Third, the caselaw dealing with the duty to defend appears to support imposing a duty to defend except in cases where coverage is clearly excluded. For example, in Jon Picken Ltd. v. Guardian Insurance Co. of Canada (1993), 66 O.A.C. 39 at 42 this court said the following:

The duty to defend arises where the action against the named insured (or any unnamed insureds) alleges acts, or omissions for which damages are claimed which might be payable under the policy. The widest latitude should be given to the allegations in the claim to determine whether the claim made raises claims within the policy. Any uncertainty as to whether the claim makes allegations which, if established, could give rise to an award of damages within the coverage provided by the policy ought to be resolved in favour of the respondents. See Nichols, supra, at p. 329 [Nichols v. American Home Assurance Co. (1990), 1990 144 (SCC), 68 D.L.R. (4th) 321, [1990] 1 S.C.R. 801.]

[58] I am mindful of the fact that in Nichols, McLachlin J. (as she then was) identified two policy reasons for holding that the duty to defend is not independent of the duty to indemnify. First, a free-standing duty to defend would mean that insurers would have to pay defence costs for claims not covered by the policy, raising questions concerning “whether others in the insurance pool should be taxed with providing defences for matters outside the purview of the policy”[^3]. Second, an independent duty to defend could raise conflict of interest issues because “[i]f the insurer is defending claims for which it owes no duty to indemnify, there is a strong incentive simply to settle the claim as quickly as possible”[^4].

[59] Given that there has been no determination that TCPL’s claim as pleaded falls outside the scope of coverage, imposing a duty to defend here does not contravene either policy concern.

[60] In this case, it was Commonwealth who requested that the duty to indemnify and defend be clarified prior to trial. Had there been clear evidence that the reasonable expectations of the parties were that there be no coverage for damages caused by the ordinary operation of the Facility, it was open to Commonwealth to bring that evidence forward. It did not do so, leading to a finding that coverage cannot be excluded at this stage of the action.

[61] In these circumstances, I see no basis for concluding that the motion judge erred in declaring that Commonwealth has an obligation to provide Potter Power with a defence to TCPL’s claim.

VI. Disposition

[62] Based on the foregoing reasons, I would dismiss this appeal with costs. I would permit the respondents file brief written submissions on costs within seven days following the release of these reasons. I would permit the appellant to respond within seven days thereafter.

Released: May 15, 2003 “JCM”

“Janet Simmons J.A.”

“I agree J.C. MacPherson J.A.”

“I agree E.A. Cronk J.A.”

[^1]: Royal was incorrectly described in these proceedings as The Royal Insurance Company of Canada. Potter Power is the named insured under a comprehensive general commercial liability policy issued by Royal. After being sued by Potter Power, Royal cross-claimed against Commonwealth, claiming that Commonwealth had the primary duty to defend and indemnify. As part of its summary judgment motion, Commonwealth requested that Royal’s cross-claim be dismissed. That aspect of the motion was also dismissed and forms part of the subject matter of this appeal. My proposed disposition of the appeal applies to Commonwealth’s appeal against the dismissal of all aspects of its summary judgment motion. [^2]: In reasons released concurrently with these reasons, I dismissed Commonwealth’s appeal against the motion judge’s order dismissing that motion. [^3]: Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551 at 594, 185 D.L.R. (4th) 1 at 32-3, citing Nichols at S.C.R. 811-12. [^4]: Scalera at S.C.R. 594, D.L.R. 33, citing Nichols at S.C.R. 812.