COURT OF APPEAL FOR ONTARIO

CITATION: Parkhill Excavating Limited v. Royal & Sunalliance Insurance Company of Canada, 2016 ONCA 832

DATE: 20161108

DOCKET: C61276

LaForme, Hourigan and Pardu JJ.A.

BETWEEN

Parkhill Excavating Limited

Plaintiff (Appellant)

and

Royal & Sunalliance Insurance Company of Canada

Defendant (Respondent)

AND BETWEEN

Parkhill Excavating Limited,

Arthur Thomas Barker and Randy Arthur Barker

Plaintiffs (Appellants)

and

Economical Mutual Insurance Company

Defendant (Respondent)

AND BETWEEN

BGS Homes Inc. and B.G. Scugog Inc.

Plaintiff

and

Board of Health for the Haliburton,

Kawartha, Pineridge District Health Unit,

The Corporation of the City of Kawartha Lakes,

Parkhill Excavating Limited,

Arthur Thomas Barker and Randy Arthur Barker

Defendants (Appellants)

and

Northbridge General Insurance Corporation

Third Party (Respondent)

Lawrence G. Theall and Camille Dunbar, for the appellants, Parkhill Excavating Limited, Arthur Thomas Barker and Randy Arthur Barker

Marcus B. Snowden and Sébastien A. Kamayah, for the respondent, Economical Mutual Insurance Company

Mark M. O'Donnell, for the respondent, Royal & Sunalliance Insurance Company of Canada

Emily Stock, for the respondent, Northbridge General Insurance Corporation

Heard: September 29, 2016

On appeal from the judgments of Justice Susan E. Healey of the Superior Court of Justice, dated October 13, 2015.

Hourigan J.A.:

Introduction

[1] The issue for determination on this appeal is whether the respondent insurance companies are obliged to provide a defence to Parkhill Excavating Limited (“Parkhill”), Arthur Thomas Barker and Randy Arthur Barker (together the “appellants”) under their respective Commercial General Liability (“CGL”) insurance policies to an action commenced by BGS Homes and B.G. Scugog Inc. (“BGS”).

[2] The motion judge ruled that the respondents are not obliged to provide a defence to the litigation. For the reasons that follow, I am of the view that the motion judge erred in law in her analysis of the issue, and that the respondents do have an obligation to provide a defence. Accordingly, I would allow the appeal, set aside the judgment below, and grant the appellants a declaration compelling the respondent insurers to provide a defence under their CGLs, subject to a determination of whether coverage is excluded under the Professional Services Exclusion and excluding a defence regarding the allegations of fraud, deceit and dishonesty as against Arthur Barker.

Facts

[3] In 2004, BGS retained Parkhill to design, install and supervise the construction of 36 septic systems in homes it built and sold. Parkhill performed the work from 2004 to 2010.

[4] In May 2010, the local health unit wrote to 25 homeowners warning them of potential problems with their sewage septic systems installed by Parkhill. Between May and August 2011, the health unit issued Orders to Comply under the Building Code Act, 1992, S.O. 1992, c.23 to 36 homeowners, which identified various contraventions, including: non-compliant filter medium, inadequate area of sand fill, improper grading in the vicinity of the sewage system, deficient pump chambers, and inadequate tank sizes. BGS and Tarion Warranty Corporation replaced the 36 septic systems in August 2011.

[5] In 2012, BGS sued Parkhill for negligence and breach of contract relating to deficiencies arising from Parkhill’s design and installation work on the 36 septic systems (the “Underlying Action”). BGS alleges that from 2004 to 2010 the appellants supplied and installed incorrect and non-compliant filter mediums, also known as filter sand, in the septic systems of all 36 homes. As well, BGS alleges that the calculations and designs Parkhill used to obtain the permits for the septic systems in 11 of the homes did not conform to the features of the houses, as larger tanks and septic beds were required under the Building Code Act.

[6] The appellants have defended the Underlying Action and have commenced a third party claim against Robert E. Young Construction Ltd. (“Young Construction”). Young Construction is a wholesaler of sand and gravel products, including septic filter mediums. Young Construction supplied the allegedly deficient filter sand used in the septic systems in issue.

[7] Parkhill carried CGLs from three insurance companies from 2004 to 2010. The policies issued by Economical Mutual Insurance Company (“Economical”) covered the period from October 10, 2003 to October 10, 2006; the policies issued by Royal & Sunalliance Insurance Company of Canada (“RSA”) covered the period from October 10, 2006 to October 10, 2007; and the policies issued by Northbridge General Insurance Corporation (“Northbridge”) covered the period from October 10, 2007 to October 10, 2010.

[8] The appellants allege that each of the respondent insurers was on risk for a share of the relevant time and has a duty to defend them in the Underlying Action. The insurers deny that they have a duty to defend the appellants, relying on various exclusion clauses in their policies.

Judgment Below

[9] The appellants commenced an action seeking an order or alternatively a declaration compelling the three respondent insurers to provide a defence to the Underlying Action. They then brought a motion for summary judgment. The motion judge found that the claim as pleaded fell within the coverage afforded by the CGLs. She held, at para. 43: “The allegations in this case are of defective or faulty workmanship or materials, and therefore may constitute ‘property damage caused by an occurrence’, thereby triggering coverage”.

[10] Economical argued that it was not on risk during the relevant time and, therefore, there was no coverage under its policy. However, the motion judge found that Economical was on risk at the time of the occurrence. She reasoned that the Underlying Action seeks damages for costs incurred to remedy the defective septic systems installed. The faulty and defective workmanship in designing and installing the septic systems was the “occurrence” giving rise to the claim. Since the design and installation of the septic system occurred from 2004 to 2010, and Economical was on risk from October 2003 to October 2006, the claim fell within the policy period.

[11] Once the appellants proved that the claim fell within the coverage, the onus shifted to the respondent insurers to establish that an exclusion applied to preclude coverage. The motion judge found that the Your Work Exclusion in the respondents’ policies applied.

[12] There are two versions of the Your Work Exclusion in the relevant policies. Version “A” is in Economical’s policy and in Northbridge’s policy for 2007-2010. It provides: “Insurance does not apply to […] [p]roperty damage to “your work” arising out of it or any part of it and included in the products-completed operations hazard”.

[13] Version “B” is set out in RSA’s policy and in Northbridge’s policy for 2010-2012. That exclusion states: “Insurance does not apply to […] [p]roperty damage to that particular part of “your work” arising out of such work or any part of such work and included in the products completed operations hazard”.

[14] The motion judge held, at para. 48, that “the definition of “your work” in the policies applies to Parkhill’s work, and is captured within the definition of “products-completed operations hazard.”

[15] With that ruling, the onus shifted back to the appellants to prove that the Subcontractor Exception to the Your Work Exclusion brought the otherwise excluded claim back into coverage. This exception to the exclusion states that the “exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”

[16] The motion judge found that the exception did not apply because the appellants had failed to discharge the burden necessary to demonstrate that Young Construction was a subcontractor, rather than a supplier. In making this determination, the motion judge relied on the characterization and nature of the relationship between Parkhill and Young Construction set out in the third party pleadings against Young Construction.

[17] Given her finding on the Your Work Exclusion, the motion judge did not consider the alternative argument advanced by the respondents that coverage is also excluded under the Professional Services Exclusion in their respective CGLs.

Issues

[18] This appeal raises the following issues:

(i) Whether the motion judge erred in not finding that the mere possibility that consequential damages are claimed in the Underlying Action triggered a duty to defend?

(ii) Whether the motion judge erred in holding that the Your Work Exclusion applies?

(iii) Whether the motion judge erred in holding that the Subcontractor Exception does not apply?

[19] It is common ground among the parties, and I accept, that the standard of review on the motion judge’s analysis of the standard form insurance contracts in issue is correctness: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, and MacDonald v. Chicago Title Insurance Co. of Canada, 2015 ONCA 842, 127 O.R. (3d) 663, leave to appeal refused October 21, 2016 (S.C.C.).

[20] The parties also agree that if the motion judge erred in her analysis of issue (i) above, then it is unnecessary to consider the remaining issues. As will be discussed below, it is my view that the motion judge did err in her consideration of issue (i). It is, therefore, unnecessary to consider issues (ii) and (iii).

[21] In their factum the appellants seek an order allowing them to retain their own defence counsel at the expense of the respondent insurers. This relief was not requested on the motion below and was not addressed by the motion judge in her reasons. Accordingly, it will not be considered on this appeal.

Analysis

(i) Legal Principles

[22] The legal principles governing an analysis of whether an insurer has a duty to defend are well established. The insured has the initial onus of establishing that the allegations made by a plaintiff against it, if proven, would bring the claim within the insurance policy. The duty to defend is not dependent on the insured actually being liable or the insurer actually being required to indemnify. All that is required to trigger the duty is the mere possibility that a claim falls within an insurance policy: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at para. 19. In considering this question, the pleadings shall be given the widest latitude to determine whether the mere possibility of a claim within the policy exists: Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801, at p. 812.

[23] Once the insured has satisfied the initial burden, the onus shifts to the insurer to establish that the claim falls outside of coverage as a consequence of the operation of an exclusion clause. Exclusion clauses preclude coverage when the claim otherwise falls within the initial grant of coverage: Progressive, at para. 27.

[24] If the insurer can bring the claim within an exclusion, the burden then shifts back to the insured to establish that its claim falls within an exception to the operative exclusion clause. Exceptions do not serve to create coverage; they only bring an otherwise excluded claim back within coverage where the claim initially fell within the coverage: Progressive, at para. 28.

[25] With respect to Your Work Exclusions, the case law generally establishes that where the claim is limited to the direct costs of repairing or replacing the defective work, such exclusions apply: March Elevator Co. v. Canadian General Insurance Co., [1995] I.L.R. 1-3227 (Ont. Gen. Div.), at para. 27, Alie v. Bertrand & Frère Construction Co., (2002) 2002 CanLII 31835 (ON CA), 62 O.R. (3d) 345 (C.A.), at para. 27. However, if consequential damage is alleged, the exclusion applies only with respect to the cost of repairing the insured’s faulty work, and there is coverage for the consequential damage: Progressive, at para. 63.

(ii) Principles Applied

[26] The respondent insurance companies submit that the true nature of the Underlying Action is that the plaintiff is attempting to recover the costs it was forced to incur in correcting the deficiencies in Parkhill’s work. They submit that there is no allegation of any consequential damage, whether express or implied, in the Underlying Action.

[27] This submission is inconsistent with the motion judge’s finding at para. 37 of her reasons:

The damages sought in the underlying action are approximately four times what Parkhill was paid to install the septic systems. The plaintiffs in the underlying action claim losses arising from deficiencies in the septic system. At para. 44 of the claim, it is alleged that the “[b]uilder has incurred costs and continues to incur costs performing remedial work necessary to satisfy the orders to comply”. Paragraph 51 of the claim alleges that the plaintiffs “are expected to have to perform further remedial work at their own expense”. Paragraph 82 refers to the cost of remedial work “including the higher cost of remedying work once the homes had been sold”. Accordingly, in addition to the question of whether defective work can be an accident, which has been answered affirmatively by Progressive Homes at paras. 42-50, it is not at all clear from the claim that the damages sought are restricted only to the replacement of the allegedly deficient systems due to the work performed by Parkhill. [Emphasis added.]

[28] The motion judge’s finding that the damages claimed in the Underlying Action may not be restricted to the cost of replacing the allegedly deficient systems was well grounded in the pleadings. As she noted, the statement of claim makes repeated reference to remedial work. In particular, the claim for the increased cost of remedying work once the homes have been sold by implication engages consequential damages claims. There is no basis for appellate interference with this finding.

[29] Having made that finding, the motion judge should have concluded that there was a mere possibility that claims for consequential damages were being asserted in the Underlying Action. That should have ended the analysis. The duty to defend would have been established as the potential consequential damages claims could not be excluded by the Your Work Exclusion (see Progressive, at para. 63). The motion judge erred in going on to consider the applicability of the Your Work Exclusion because the exclusion could not apply to the consequential damages claims. It was, of course, also unnecessary to go on to consider the Subcontractor Exception to the exclusion.

Disposition

[30] The motion judge erred in her analysis of the duty to defend. She should have concluded, based on her own factual findings, that there was a mere possibility that claims for consequential damages were being asserted in the Underlying Action, and thus the duty to defend had been established. Accordingly, I would allow the appeal, set aside the order below and grant a declaration that the respondent insurance companies are obliged to provide a defence to the Underlying Action.

[31] There are two caveats to the foregoing. First, the motion judge did not consider the respondent insurance companies’ alternative argument that coverage is excluded by the Professional Services Exclusion. The declaration granted herein does not affect the rights of the respondents to advance that argument in this action or on a summary judgment motion.

[32] Second, on the motion it was conceded that there is no obligation to defend Arthur Barker with respect to the allegations of fraud, deceit and dishonesty as against him.

[33] The parties agreed that if successful the appellants are entitled to costs of the motion below on a full indemnity scale and I would so order. If there is any issue on the quantum of those costs, the parties may make brief written submission to this court. With respect to the costs of the appeal, the appellants are entitled to costs in the agreed upon amount of $15,000, inclusive of fees, disbursements, and taxes.

Released: November 8, 2016 “CWH”

“C.W. Hourigan J.A.”

“I agree H.S. LaForme J.A.”

“I agree G. Pardu J.A.”