DATE: 20031114

DOCKET: C39321

COURT OF APPEAL FOR ONTARIO

RE: TEMPLE INSURANCE COMPANY, CONTINENTAL CASUALTY COMPANY, CERTAIN UNDERWRITERS AT LLOYD’S UNDER CONTRACT NO. ENC-199, AS REPRESENTED BY ENCON GROUP INC. (Applicants/Respondents) – and – SIRMAN ASSOCIATES LIMITED, PROGRESSIVE ENVIRONMENTAL INC., IVAN A. SIRMAN, CYNTHIA STILES (Respondents/Appellants)

BEFORE: MCMURTRY C.J.O., WEILER AND SHARPE JJ.A.

COUNSEL: Harvey Stone for the appellants

Morris A. Chochla for the respondents

HEARD: November 6, 2003

On appeal from the order of Justice James M. Farley of the Superior Court of Justice dated December 5, 2002

E N D O R S E M E N T

[1] This appeal arises from an order of Farley J., which granted the respondents’ application for a declaration that they have no duty to defend the appellants under an “Errors and omissions liability insurance policy for environmental consultants”. The action for which the appellants assert an entitlement to a defence was brought by the Ontario Realty Corporation. The allegations in that action involve the appellants’ environmental consulting and remedial work on thirty-five different properties. At the heart of that action are allegations of deceit, secret commissions, bid rigging, and conspiracy. However, there are also claims advanced in breach of contract and negligence.

[2] The claims relating to sixteen of the thirty-five properties involve bid-rigging and secret commissions that, on their face, are excluded by the Fraudulent Act exclusion in the policy.

[3] With respect to the remaining nineteen properties, which are the subject of this appeal, Farley J. found:

(i) The claims in respect of seven properties were excluded pursuant to the Design/Build exclusion.

(ii) The claims in respect of six properties were derivative of the acts excluded by the Fraudulent Act exclusion and as such did not give rise to a duty to defend.

(iii) The claims with respect to six properties were not sufficiently clear, on the state of the pleadings, to determine whether or not the duty to defend arises.

In our view, Farley J. correctly determined each of these issues.

(i) Design Build Exclusion

[4] The appellants submit that the effect of the Design/Build exclusion is to deny coverage only where the insured does both consulting work and remediation work on the same property. Accordingly, with respect to the properties for which the appellants did only remediation work, the appellant submits that the Design/Build exclusion does not apply. We do not accept that argument. In our view, it is clear from the terms of the policy that the appellants are not covered for any claims arising from actual construction or remediation work. The Design/Build clause must be read in conjunction with the policy’s definition of “insured services” as “those services rendered by the Insured, while acting within the scope of the INSURED’S duties as an environmental consultant and customary to the practice of environmental consulting”. The combined effect of the “insured services” definition and the Design/Build exclusion is to exclude from coverage any claim arising from services involving physical performance of work on the property. These excluded services include any actual construction, installation, manufacturing, or clean-up work performed by the appellants. There is no ambiguity introduced by the use of the words “also performed” in the design build exclusion. Coverage is afforded for consulting services, but not when remediation work is “also performed”.

(ii) Derivative Claims

[5] In deciding whether the harm allegedly inflicted by the negligent conduct is derivative of intentional conduct excluded from coverage, the Supreme Court of Canada held in Non-Marine Underwriters, Lloyd’s of London v. Scalera. 2000 SCC 24, [2000] 1 S.C.R. 551 at 554:

A claim for negligence will not be derivative if the underlying elements of the negligence and of the intentional tort are sufficiently disparate to render the two claims unrelated. However, if both the negligence and intentional tort claims arise from the same actions and cause the same harm, the negligence claim is derivative, and it will be subsumed into the intentional tort for the purposes of the exclusion clause analysis.

[6] The plaintiff’s claims of negligence, as pleaded in the main action, arise from precisely the same allegations giving rise to the claims of fraud, conspiracy and dishonesty. Indeed, the plaintiff’s pleadings repeat the same factual allegations in support of both claims of fraud and alternative claims of negligence.

[7] The test to be applied here is stated by Iacobucci J. at 554 of Scalera: “A plaintiff cannot change an intentional tort into a negligent one simply by choice of words….when ascertaining the scope of the duty to defend, a court must look beyond the choice of labels, and examine the substance of the allegations contained in the pleadings.” That is the test applied by the application judge and we are not persuaded that he erred in his assessment of the substance of the claims and in his determination that the claims are derivative of the acts excluded by the Fraudulent Act exclusion.

(iii) Unclear Claims

[8] We agree with the application judge’s assessment of the claims relating to the 6 properties listed in Schedule D to the statement of claim. The statement of claim is virtually silent as to the facts alleged to support those claims, and on the present state of the pleading, it would be premature to make any determination of the duty to defend.

(iv) Conclusion

[9] We agree with the appellants’ submission that the declaration should conform with the relief sought by the respondents. Accordingly, the word “defend” should be inserted in the place of the words “cover/defend” in paragraphs 2 and 3 of the order under appeal. Otherwise, the appeal is dismissed. The respondents are entitled to their cost of the appeal fixed at $5,000 inclusive of GST and disbursements as agreed by the parties.

“R.R. McMurtry C.J.O.”

“K. Weiler J.A.”

“Robert J. Sharpe J.A.”