COURT OF APPEAL FOR ONTARIO

2012 ONCA 525

DATE: 20120802

DOCKET: C53139

Weiler, Armstrong and Rouleau JJ.A.

BETWEEN

General Electric Canada Company

Applicant (Appellant)

and

Aviva Canada, Inc. and The Dominion of Canada General Insurance Company

Respondents (Respondents)

Nina Bombier and Stephanie Couzin, for the appellant

Donald H. Rogers and David M. Rogers, for the respondent Aviva Canada, Inc.

John A. Campion and Rosalind H. Cooper, for the respondent The Dominion of Canada General Insurance Company

Heard: January 12, 2012

On appeal from the judgment of Justice Michael A. Penny of the Superior Court of Justice, dated January 4, 2011 with reasons reported at 2010 ONSC 6806, [2011] O.J. No. 2198.

Armstrong J.A.:

introduction

[1] General Electric Canada Company (“GE”) sought a declaration that its insurers had a duty to defend GE in respect of a request by the Ontario Ministry of the Environment (“MOE”) to provide certain information relating to the contamination of groundwater near an industrial property once owned by GE. It was GE’s position that the costs associated with its response to the MOE were “defence costs” which were fully funded under its relevant insurance policies with the respondents. Justice Penny of the Superior Court of Justice dismissed the application for the declaration and GE now appeals to this court. The application judge granted an order declaring that the respondents have a duty to investigate and defend GE in an action brought by the Toronto Transit Commission (“TTC”). That order is not in issue in this appeal.

[2] For the reasons that follow, I would dismiss the appeal.

THE FACTS

[3] The property in issue is located in Toronto and was known as the Ward Street site although its municipal address is apparently 224 Wallace Street. GE owned the property from 1903 to 1980. During this period, it carried on a manufacturing operation from which it produced a wide variety of products. During at least some of this period of time, it used the chemical trichloroethylene (“TCE”) as a degreasing agent. The record does not disclose when the use of TCE began or terminated.

[4] On February 11, 2004, the MOE wrote to GE and three other former owners of the property advising that it was reviewing potential TCE contamination of the groundwater within a two block area, which included the Ward Street site. The February letter requested the assistance and co-operation of GE and the other recipients of the letter asking them to provide any environmental assessments that they had in their possession.

[5] On April 16, 2004, the MOE sent a second letter to GE. This letter requested further information concerning the potential TCE contamination and required GE to take certain action. The letter in part stated:

On February 15, 2004 you received further information in regards to the TTC subsurface investigation in the area of 224 Wallace and south of this property. The data appears to support a TCE plume migrating from/ through the former GE property located at 224 Wallace.

As discussed you will be required to take action in delineating the source area on your former property. The delineation investigations are to determine the current levels and the full vertical and horizontal extent of all contamination within the soil and groundwater which are on site location. The delineation report shall include at minimum the following:

At this time the ministry is willing to enter into an agreement with GE to pursue the required action items voluntarily. If at any time the ministry determines there is unsatisfactory progress a Director’s Order will be issued to resolve the matter.

[6] GE responded to the MOE request by agreeing to co-operate. GE claims that by April 2009, responding to the MOE request had resulted in out-of-pocket expenses of $2.1 million for investigation costs, $1.86 million for remedial costs and $750,000 for legal costs. It is these costs that GE asserts are payable by its insurers pursuant to the terms of the relevant insurance policies.

the insurance policies

[7] The insurance policies in issue are the following:

(a) A comprehensive general liability policy issued by The Canadian General Insurance Company (a predecessor to Aviva) for the policy period of December 31, 1968 to December 31, 1971 with a policy limit of $1 million; and

(b) A comprehensive general liability policy issued by The Canadian Indemnity Company (“CIC”, a predecessor to The Dominion) for an initial policy period of December 31, 1971 to December 31, 1972 with a policy limit of $1 million. CIC issued further comprehensive general liability policies for the period from December 31, 1972 to December 31, 1982; the policy limits of those policies were $1 million in the early years, rising to $5 million by the end of this period.

[8] Under the Aviva property damage endorsement, the insurer agreed:

1. TO PAY on behalf of the Insured all sums which the Insured shall become obligated to pay [by] reason of the liability imposed upon the Insured by law... for damages because of damage to or destruction of property caused by an occurrence within the Policy Period...

2. TO SERVE the Insured by the investigation of claims on account of such damage to or destruction of property and occurrence alleged as the cause thereof, and by negotiations or settlement if deemed expedient and by negotiations for settlement, if deemed expedient by the Insurer of such claim whether groundless or not, and to pay the costs of such investigation.

3. TO DEFEND in the name and on behalf of the Insured any suit against the Insured alleging such damage to or destruction of property and seeking damages on account thereof, even if such suit is groundless, false or fraudulent.

4. TO PAY ... (b) the costs taxed against the Insured in any such defended suit,...(d) all interest accruing after the entry of judgment for damages Insured against hereunder until the Insurer has paid, tendered or deposited in court, such part of such judgment as does not exceed the limit of the Insurer’s liability thereon.

5. TO PAY the amounts of money incurred under the foregoing Agreements 2, 3, and 4, except settlements of claims and suits, in addition to the applicable limit of liability of this Endorsement.

[9] Under the Dominion of Canada policy in paragraph 1(b), the insurer agreed to pay on behalf of the insured:

PROPERTY DAMAGE – All sums resulting from the liability imposed by law upon the Insured ... for damage to or destruction of property, including loss of use thereof caused by an occurrence as defined herein.

[10] In para. 2 of the Dominion of Canada policy, the insurer agreed:

(a) To serve the Insured upon notice of such... damage to property of others, by investigation and by such negotiation or settlement of any resulting claims as may be deemed expedient.

(b) To defend in the name and on behalf of the Insured, suits which may be instituted against him alleging such... damage to property of others, and demanding damage on account thereof even if such suit is groundless, false or fraudulent.

(c) To pay (i) All costs taxed against the Insured in any such defended suit... and (iii) All expenses incurred by the [insurer] for investigation, negotiation or defence...

the reasons for judgment of the application judge

[11] The application judge, after reviewing the legal principles governing the interpretation of insurance policies and, in particular, the “pleadings rule” in respect of the insurer’s duty to defend, concluded that the application raised two questions:

(1) whether it is “possible” the MOE letter amounts to a claim that falls within the policies and thereby triggers the insurer’s duty to defend; and

(2) whether the applicant is seeking a defence to the MOE’s “claim” or, rather an indemnity for the cost of compliance with the MOE request.

[12] The application judge observed at paragraph 19 of his reasons:

Most of the argument on the MOE letter issue was directed at the question of whether the MOE letters and, in particular, the letter of April 16, 2004:

(1) with respect to the Aviva policy, constituted a “claim” for “damages because of damage to or destruction of property” or a “suit” against GE alleging damages on account of damage to or destruction of property; and

(2) with respect to the Dominion policy, constituted “notice” of “damage to property of others” or a “suit” against GE for damages alleging damage to property of others,

thereby engaging the duty to investigate and the duty to defend under those policies.

[13] In concluding that there was no duty to defend, the application judge’s reasons state:

[35] ...A duty to investigate and defend is only triggered in the context of these policies by a “claim” arising from an alleged liability for damage. Under the pleadings rule, one looks at the “claim” to determine whether it falls within the scope of the coverage afforded by the policy. There is a distinction in the policies between the obligation to investigate/defend and the obligation to indemnify. There is, in my view, also a distinction between the cost of investigation/defence of a claim and the cost of compliance with a claim.

[36] Here, the only evidence of a “claim” by the MOE was the April 16, 2004 letter in which the MOE requested GE “to take action in delineating the source area on your former property” (emphasis added). In the context of the MOE letter, therefore, any duty to investigate or defend could only arise with respect to that “claim.” Here, however, by GE’s own admission, GE did not “defend” against this claim nor did it “investigate” this claim.

[39] The cost of investigation or defence of a claim is distinct from the cost of compliance with a claim. GE argues that the steps taken by GE were “in the nature of” defence costs in that they sought to delineate and reduce any liability. The flaw in that argument, in my view, is that the only “claim” by the MOE entered into evidence on this application did not allege liability for cleanup costs to ameliorate damage to the property of others but simply an obligation to conduct a delineation exercise with respect to TCE contamination on GE’s former property at the Ward Site. What GE calls “defence costs” were not costs of defending against the MOE’s claim but, in fact, the costs of complying with the MOE’s claim. GE complied with the MOE’s request and performed the work on the basis that it was thought to be in GE’s best interests to do so.

[43] In coming to this conclusion, I make no finding on whether the matters alleged and requested in the MOE’s letter fall within the coverage language of the Aviva and Dominion policies from an indemnity perspective. I base my conclusion rejecting GE’s request for a declaration that Aviva and Dominion have a duty to investigate and to defend the MOE’s request solely on the fact that there was no investigation or defence of the MOE’s claim at all. What GE is seeking, in my view, is indemnification for its costs of complying with the MOE’s claim. This is not the time to make findings on the merits of GE’s indemnity claim in this regard. As the Ontario Court of Appeal said in Halifax Insurance, supra, the time to determine the insurer’s duty to indemnify is at the conclusion of the underlying litigation, not during the abbreviated application for defence costs. My conclusion, therefore, is without prejudice to the parties’ positions on whether the MOE letter is a “claim” or to GE’s right to seek these costs by way of an indemnity claim against Aviva, Dominion, or both, as well as the right of those insurers to argue against the existence of that obligation.

THE APPEAL

[14] GE raises the following grounds of appeal:

(i) Whether the application judge erred in limiting his analysis of the MOE’s assertion of liability to the literal text of the April Letter and in failing to consider the underlying statutory context and the broader liabilities it imposed on a PRP (“potentially responsible party”) like GE Canada.

(ii) Whether the application judge erred in concluding that costs incurred by GE Canada in response to the MOE’s assertion of liability were only “compliance costs” and not investigation or defence costs, such that he should not rule on whether the MOE made a sufficient “claim” to trigger the Primary Policies.

(iii) Whether the MOE’s assertion of liability against GE Canada triggered the Primary Policies and the Respondents’ duties to investigate and/or defend.

In order to dispose of this appeal, it is only necessary to deal with the first ground. The second and third grounds of appeal are simply a further elaboration of the first ground.

Did the application judge err in restricting his analysis to the literal text of the April letter?

[15] Counsel for GE argues that the application judge erred in ignoring the reality of what was being communicated in the April letter. He cites Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., 1993 CanLII 150 (SCC), [1993] 1 S.C.R. 252, at p. 275:

What is required, unless the policy expressly so stipulates, is a form of demand or assertion of liability, not a formal demand or assertion of liability. Under a policy such as the one in this appeal, which contains no express requirement of a formal demand or indeed any demand at all, what constitutes a claim “made” is a question to be resolved on the facts of the case. There is no magic formula. One must look to the reality of what the third party was communicating to the insured by words and conduct. If the message was clear, the fact that the third party through politeness refrained from stating its demand or intention to hold the insured liable in categorical legal terms should not preclude a finding that a claim has been made.

[16] Counsel for GE submits that the application judge’s focus on the strict language of the April letter led him to ignore a substantial potential liability for property damage imposed by the Environmental Protection Act, R.S.O. 1990, c. E.19 (the “EPA”). By concentrating on the delineation of the source of the contamination in the April letter, the application judge failed to appreciate that the letter involved the possibility of broader off-site liabilities.

[17] Counsel for GE further argues that the application judge failed to appreciate that the substance and reality of the April letter was much more than a claim to undertake the delineation of the source. The April letter should be read as an allegation that GE’s operations at the Ward Street site were responsible for a TCE plume that was the source of downstream contamination at a property owned by the TTC.

[18] Counsel for GE also submits that the application judge erred in failing to consider the underlying statutory scheme and the range of liabilities for property damage that would flow from GE being a responsible party under the EPA. The letter, in effect, was only the beginning of a potential adversarial process whereby GE would be required to undertake extensive remedial work, including off-site clean up. In respect of this submission, counsel relies on American jurisprudence such as Johnson Controls, Inc. v. Employers Ins., 665 N.W. 2d 257 where the Wisconsin Supreme Court said at page 26:

[The receipt of a regulator’s letter] marks the beginning of adversarial administrative legal proceedings that seek to impose liability upon an insured. A PRP letter significantly affects legal interests of the insured. Therefore, a reasonable insured would expect this letter to trigger its CGL insurers’ duty to defend.

analysis

[19] I start with reference to the relevant authorities.

[20] On the issue of whether a duty to defend arises depends upon the “pleadings rule”. The Supreme Court of Canada has articulated the rule in a number of cases. In Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699 at para. 28, the court said:

The starting premise for assessing whether an insurer’s duty to defend has been triggered rests in the traditional “pleadings rule”. Whether an insurer is bound to defend a particular claim has been conventionally addressed by relying on the allegations made in the pleadings filed against the insured, usually in the form of a statement of claim. If the pleadings allege facts which, if true, would require the insurer to indemnify the insured for the claim, then the insurer is obliged to provide a defence. This remains so even though the actual facts may differ from the allegations pleaded.

Although in most cases the “pleadings rule” applies to a statement of claim or similar pleading, it can apply to a letter that asserts liability for damages against an insured. Therefore, a careful analysis of the April letter must be the starting point in the case at bar.

[21] The Supreme Court of Canada also described the necessary requirements to establish a “claim” that would give rise to a duty to defend. In Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744 at para. 50, the court said:

The authorities establish that as a general rule, for a “claim” to be made there must be some form of communication of a demand for compensation or other form of reparation by a third party upon the insured, or at least communication by the third party to the insured of a clear intention to hold the insured responsible for the damages in question.

[22] With the above authorities in mind, I turn to the application judge’s treatment of the April letter. I can find no fault in the application judge’s approach to, and interpretation of, the April letter. I agree with him that the only evidence of a “claim” by the MOE in the April letter is the request, or requirement if you will, that GE take action in delineating the source of the TCE contamination. GE did not oppose, defend or investigate that request. GE, as it was invited to do in the letter, voluntarily complied with the request of the MOE. It cannot be said that it has suffered any defence or investigation costs recoverable under its insurance policies. As the application judge concluded, the costs incurred were compliance costs – not defence costs. The fact that GE provided a list of costs, which it has characterized as potential defence costs does not, in my view, change the analysis of whether the April letter triggers a duty to defend.

[23] I see no merit in GE’s position that the April letter was much more than a claim to undertake the delineation of the source of contamination. The application judge has read and understood the plain language of the letter and correctly applied the “pleadings rule” in arriving at a conclusion with which I fully agree.

[24] Similarly, I see no merit in the argument that the application judge erred in failing to consider the underlying statutory scheme of the EPA and the range of liabilities for property damage that might be imposed on GE. To do so would have been to invite speculation: it would not have served any useful purpose.

[25] The reliance of counsel for GE on American case law is not helpful. I accept the conclusion of the application judge and the submissions of counsel for the respondents that there are numerous American cases, which go in both directions concerning the effect of a regulator’s letter. GE submits that only a small number of American cases support the application judge’s conclusion. The number of cases is not the point. The American cases do not advance the argument.

[26] For the sake of completeness, I wish to refer to two Ontario cases, which were raised in both the written and oral submissions of counsel.

[27] GE relied on an Ontario Superior Court judgment in Bridgewood Building Corp. (Riverfield) v. Lombard General Insurance Co. of Canada 2005 CanLII 63763 (ON SC), [2005] O.J. No. 2083. In that case, certain general contractors built houses that were covered by the Ontario New Home Warranty Plan. The foundations of a number of houses crumbled as a result of defective cement. The foundations were constructed by subcontractors. The general contractors were obligated under the home warranty legislation to repair the defects. The issue in the case was whether the cost of repair was covered by the commercial general liability insurance policies of the general contractors. In holding that there was coverage, the court said at para. 36:

It is evident that the Act and ONHWP are in the nature of consumer protection legislation, designed to assist and protect the purchasers of new homes. In my view, this no-fault remedial and protective legislative scheme is akin to environmental protection legislation which requires pollution clean-up and the costs thereof to be carried out and absorbed by persons regardless of proof of negligence or fault. Coverage for these and attendant costs under CGL policies has often been considered by courts in the United States. [Case citations omitted.] Since 1990, most courts that have considered costs of cleaning up environmental damage, costs connected with compliance with the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) 42 U.S.C. s. 9601 et seq. Or state statutes, are covered by the standard language in CGL insuring agreements which pay “all sums which the insured shall become legally obligated to pay as damages” (see: Lathrop, M.L., Insurance Coverage for Environmental Claims, Volume 1, (2002) LexisNexis, at p. 3-27). In my view, the same approach should be taken in this particular case.

[28] The application judge in the case at bar distinguished Bridgewood on the basis that it “involved very different issues and the interpretation of a very different regulatory regime.” He also called into question Bridgewood’s reliance on U.S. authority.

[29] Although Bridgewood was upheld on appeal, this court made no reference to the lower court’s comments concerning environmental protection legislation. The court upheld the decision on the basis of the interpretation of the insurance contracts in issue. See (2006), 2006 CanLII 10205 (ON CA), 79 O.R. (3d) 494 (C.A.). I do not find Bridgewood helpful to the analysis here.

[30] Perhaps a more apt Ontario decision is found in Brockton (Municipality) v. Frank Cowan Co., [2000] O.J. No. 4455. The case was relied upon by counsel for both respondents. Brockton arose out of the E-coli contamination of Walkerton’s water supply. Walkerton, through amalgamation, had become part of the new Municipality of Brockton. The central issue in the case was whether Brockton had a right to take control of the defence of certain civil actions from its insurer by appointing its own counsel. Brockton also sought a declaration that its insurer had a duty to defend it, which included reimbursement of the following costs:

1. Legal fees for the compensatory damage claims;

2. Legal fees for responses made to regulatory and investigative authorities including the O.P.P., the coroner, the MOE, and the Public Inquiry;

3. Engineering expenses to respond to the MOE field order;

4. Public relations expenses;

5. Remediation expenses.

[31] The application judge rejected Brockton’s position concerning reimbursement for costs beyond the civil actions. Caswell J. of the Superior Court said at paras. 81 and 82:

It is my view, however, that the expenses incurred by Brockton with respect to the MOE and O.P.P. investigations, the engineering reports, remediation work, the public relations expenses and the Public Inquiry are simply too remote and are not covered by the liability policy.

The investigations of the MOE will not result in findings of liability and the imposition of damages. Brockton was required to obtain the engineering reports pursuant to the MOE field orders. The town was also required to undertake the remediation work as ordered. I do agree that prompt and efficient reaction by Brockton may ultimately impact on the ensuing litigation.

[32] The Brockton judgment was upheld in the Court of Appeal. See (2002), 2002 CanLII 7392 (ON CA), 57 O.R. (3d) 447 (C.A.). No reference was made to the above quotation of the application judge. Our court held that the insurance policy in issue obliged the insurer to reimburse the insured only for those reasonable expenses (other than loss of earnings), which were incurred at the insurer’s request. The court concluded that none of the expenses claimed were incurred at the request or authorization of the insurer.

[33] While Brockton, on its facts, is arguably closer to the case at bar, the decision in this court, and in the court below, turned on the precise language of the insurance policy in issue.

[34] In my view, neither of the two Ontario cases is determinative of the issue that the application judge had to decide. As already indicated, I am in agreement with the application judge’s analysis and I see no basis upon which this court should interfere.

disposition

[35] In the result, I would dismiss the appeal.

COSTS

[36] In accordance with the agreement of the parties, I would award partial indemnity costs of $35,000 each to the respondents. Such awards are to be inclusive of disbursements and applicable taxes.

Released: “AUG 02 2012” “Robert P. Armstrong J.A.”

“KMW” “I agree K.M. Weiler J.A.”

“I agree Paul Rouleau J.A.”