Sky Clean Energy Ltd., formerly known as Sky Solar (Canada) Ltd. v. Economical Mutual Insurance Company et al.

[Indexed as: Sky Clean Energy Ltd. v. Economical Mutual Insurance Co.]

Ontario Reports

Court of Appeal for Ontario

Strathy C.J.O., Lauwers and van Rensburg JJ.A.

September 9, 2020

152 O.R. (3d) 159 | 2020 ONCA 558

Case Summary

Construction law — Liability — Of owner — Additional considerations — Liability insurance — Appeal by plaintiff from dismissal of its claim against respondent insurer dismissed — Appellant entered into contracts with Marnoch Electrical Services for construction of two solar energy projects — Marnoch named appellant as insured under its comprehensive general liability insurance policy with respect to liability arising out of Marnoch's work on projects — Fires at projects originated from transformers chosen by appellant — Trial judge did not err in interpreting insurance policy and in finding appellant's liability did not arise out of Marnoch's operations — He did not err in finding insurer had not breached its duty of good faith.

Insurance law — Insurers — Duties — Appeal by plaintiff from dismissal of its claim against respondent insurer dismissed — Appellant entered into contracts with Marnoch Electrical Services for construction of two solar energy projects — Marnoch named appellant as insured under its comprehensive general liability insurance policy with respect to liability arising out of Marnoch's work on projects — Fires at projects originated from transformers chosen by appellant — Trial judge did not err in interpreting insurance policy and in finding appellant's liability [page160] did not arise out of Marnoch's operations — He did not err in finding insurer had not breached its duty of good faith.

Insurance law — The insurance contract — Interpretation — Coverage provisions and exclusion clauses — Appeal by plaintiff from dismissal of its claim against respondent insurer dismissed — Appellant entered into contracts with Marnoch Electrical Services for construction of two solar energy projects — Marnoch named appellant as insured under its comprehensive general liability insurance policy with respect to liability arising out of Marnoch's work on projects — Fires at projects originated from transformers chosen by appellant — Trial judge did not err in interpreting insurance policy and in finding appellant's liability did not arise out of Marnoch's operations — He did not err in finding insurer had not breached its duty of good faith.

Insurance law — Liability insurance — Construction projects — Appeal by plaintiff from dismissal of its claim against respondent insurer dismissed — Appellant entered into contracts with Marnoch Electrical Services for construction of two solar energy projects — Marnoch named appellant as insured under its comprehensive general liability insurance policy with respect to liability arising out of Marnoch's work on projects — Fires at projects originated from transformers chosen by appellant — Trial judge did not err in interpreting insurance policy and in finding appellant's liability did not arise out of Marnoch's operations — He did not err in finding insurer had not breached its duty of good faith.

Appeal by the plaintiff from the dismissal of its claim against the respondent insurer. The appellant entered into contracts with Marnoch Electrical Services for the construction of two solar energy projects. On completion of the projects, the appellant sold them to Firelight. Under the contracts, Marnoch agreed to indemnify the appellant against Marnoch's failure to perform its contractual obligations. Marnoch also agreed to name the appellant as an insured under its comprehensive general liability insurance policy with the respondent only with respect to liability arising out of Marnoch's work on the projects. Fires occurred at both projects that originated in the electrical transformers. The appellant incurred liabilities to Firelight for remediation costs and loss of revenue. In arbitration between the appellant and Marnoch, the arbitrator dismissed the appellant's claims, finding the transformers had been selected by the appellant and Marnoch had played no role. The parties had agreed the findings of fact made by the arbitrator would be binding on the trial judge. The trial judge fixed the costs payable by the appellant at $356,452.

Held, the appeal should be dismissed.

The language of the contracts between the appellant and Marnoch did not affect the interpretation of the insurance policy. The trial judge did not err in interpreting the insurance policy and in finding that the appellant's liability did not arise out of the operations of Marnoch. The trial judge did not adopt an unduly narrow construction of the policy. He did not err in finding the appellant's approval of the transformers took its liability to Firelight outside the scope of coverage. As found by the trial judge, Marnoch's connection with the failure of the transformers was merely incidental. Marnoch's operations under the contracts did not require it to select the transformers, which was done by the appellant. The trial judge did not err in finding the insurer had not breached its duty of good faith. The insurer's initial rejection of coverage did not [page161] amount to bad faith. The trial judge's conclusion that there was no reason to continue to investigate when there was an objectively reasonable basis on which to deny coverage was entitled to deference. The costs award was fair and reasonable.

Cases referred to

702535 Ontario Inc. v. Non-Marine Underwriters, Lloyd's of London, 2000 5684 (ON CA), [2000] O.J. No. 866, 184 D.L.R. (4th) 687, 130 O.A.C. 373, [2000] I.L.R. I-3826, 95 A.C.W.S. (3d) 556; Amos v. Insurance Corp. of British Columbia, 1995 66 (SCC), [1995] 3 S.C.R. 405, [1995] S.C.J. No. 74; Boucher v. Public Accountants Council for the Province of Ontario (2004), 2004 14579 (ON CA), 71 O.R. (3d) 291, [2004] O.J. No. 2634; Citadel General Assurance Co. v. Vytlingam, [2007] 3 S.C.R. 373, [2007] SCJ No 46, 2007 SCC 46; Clements v. Clements, [2012] 2 S.C.R. 181, [2012] S.C.J. No. 32, 2012 SCC 32; Co-operators Life Insurance Co. v. Gibbens, [2009] 3 S.C.R. 605, [2009] S.C.J. No. 59, 2009 SCC 59; Fidler v. Sun Life Assurance Co. of Canada, [2006] 2 S.C.R. 3, [2006] S.C.J. No. 30, 2006 SCC 30; Great Atlantic & Pacific Co. of Canada Ltd. v. Economical Mutual Insurance Co., [2013] O.J. No. 5419, 2013 ONSC 7200, [2014] I.L.R. I-5541, 28 C.C.L.I. (5th) 191, 235 A.C.W.S. (3d) 799; Kinnear v. Canadian Recreational Excellence (Vernon) Corp., [2012] B.C.J. No. 1337, 2012 BCCA 291, 325 BCAC 50, [2012] 11 W.W.R. 423, 35 B.C.L.R. (5th) 142, 352 D.L.R. (4th) 57, 11 C.C.L.I. (5th) 1, 5 B.L.R. (5th) 35; Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., [2016] 2 S.C.R. 23, [2016] S.C.J. No. 37, 2016 SCC 37; Lumbermens Mutual Casualty Co. v. Herbison, [2007] 3 S.C.R. 393, [2007] S.C.J. No. 47, 2007 SCC 47; Non-Marine Underwriters, Lloyd's of London v. Scalera, [2000] 1 S.C.R. 551, [2000] S.C.J. No. 26, 2000 SCC 24; Oliveira v. Aviva Canada Inc. (2017), 139 O.R. (3d) 618, [2017] O.J. No. 5457, 2017 ONSC 6161, 284 A.C.W.S. (3d) 617, 73 C.C.L.I. (5th) 58, [2018] I.L.R. para l-6011; Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, [2010] 2 S.C.R. 245, [2010] S.C.J. No. 33, 2010 SCC 33; Saanich (District) v. Aviva Insurance Co. of Canada, 23 B.C.L.R. (5th) 272, [2011] B.C.J. No. 1835, 2011 BCCA 391, 87 C.C.L.T. (3d) 89, [2011] I.L.R. I-5198, 311 B.C.A.C. 117, 1 C.C.L.I. (5th) 1, 207 A.C.W.S. (3d) 330; Sky Solar (Canada) Ltd. v. Marnoch Electrical Services Inc., [2016] O.J. No. 955, 2016 ONSC 1295; Waterloo (City) v. Economical Mutual Insurance Co., 2006 43498

Statutes referred to

Courts of Justice Act, R.S.O. 1990, c. C.43, s. 98 [as am.]

Insurance Act, R.S.O. 1990, c. I.8, ss. 129, 239(1)(a)

Rules and regulations referred to

Rules of Civil Procedure, RS.O. 1990, Reg. 194, rule 57.01(1) (0.b)

Authorities referred to

Cheifetz, D., and W.T. McGrenere, "Aspects of Commercial Insurance" in Insurance Law: Special Lectures of the Law Society of Upper Canada (Don Mills, Ont.: Richard De Boo Publishers, 1987)

Hilliker, Gordon, Liability Insurance Law in Canada, 6th ed. (Markham, Ont.: LexisNexis, 2016)

Lichty, Mark G. and Snowden, Marcus B., Annotated Commercial General Liability Policy, looseleaf (Aurora, Ont.: Canada Law Book, 2019)

APPEAL from the judgment of Cavanagh J. and from the costs order, [2019] O.J. No. 3641, 2019 ONSC 4165 and [2019] O.J. No. 5167, 2019 ONSC 5835 (S.C.J.).

Rebecca Huang, for appellant. [page162]

Marcus B. Snowden and Pearl Rombis, for respondent.

The judgment of the court was delivered by

STRATHY C.J.O.: —

[1] This appeal concerns a form of insurance commonly used in the construction industry. It permits a contractor to add the project owner as an additional insured under its liability insurance policy, to cover the owner's liability "arising out of the operations" of the contractor. This appeal focuses on the requisite connection between the contractor's operations and the owner's liability.

A. Overview

[2] The following overview will provide context to the issues. I will add detail later, as required.

[3] The appellant, Sky Clean Energy Ltd. ("Sky"), is a developer of solar energy projects, including rooftop solar systems that supply electricity to the power grid. Marnoch Electrical Services Inc. ("Marnoch") is an electrical contracting company. Sky entered into contracts with Marnoch for the construction of two such projects. On completion of the projects, Sky sold them to Firelight Solar Limited Partnership ("Firelight").

[4] Under these contracts, Marnoch agreed to indemnify Sky against Marnoch's failure to perform its contractual obligations and for the negligent acts of Marnoch, its subcontractors, or other parties for whom it was liable. Marnoch also agreed to name Sky as an insured under its comprehensive general liability insurance policy with the respondent, Economical Mutual Insurance Company ("Economical"), but "only with respect to liability, other than legal liability arising out of [Sky's] sole negligence, arising out of the operations of [Marnoch] with regard to the Work". Marnoch's insurance broker, Firstbrook, Cassie & Anderson Ltd. ("FCA"), issued two insurance certificates to Sky, confirming that it was entitled to coverage pursuant to an "Additional Insured Endorsement" under Marnoch's commercial general liability policy. That endorsement provided that Marnoch's liability insurance applied to Sky "but only with respect to liability arising out of the operations of [Marnoch]".

[5] Fires occurred at both installations. They originated in the electrical transformers and resulted in damages to both transformers. A third transformer, identical to the other two, was replaced because it was considered to be too great a risk to remain in service. As a result of these events, Sky incurred liabilities to Firelight for remediation costs and loss of revenue. It settled with [page163] Firelight and then sought to recover those damages, first against Marnoch, then against Economical.

[6] Sky commenced an arbitration against Marnoch, as required by their contract. The claim was based on both the contractual indemnity and on warranties given by Marnoch. The arbitrator, C.C. Lax, Q.C., dismissed Sky's claims. He found that the transformers had been selected by Sky and that Marnoch had played no role in the choice of either the supplier of the transformers or the transformers themselves: "Marnoch's role was simply to implement Sky's decision." The arbitrator dismissed Sky's warranty claims for similar reasons: Sky did not rely on Marnoch's skill and judgment with respect to the suitability of the transformers and "Sky cannot hold Marnoch responsible or liable for the consequences of Sky's own decisions." An appeal to the Superior Court from the arbitration award was dismissed: Sky Solar (Canada) Ltd. v. Marnoch Electrical Services Inc., [2019] O.J. No. 5167, 2016 ONSC 1295.

[7] Sky then commenced this action against Economical and against Marnoch's insurance broker, FCA. To simplify the proceedings, the parties agreed that the findings of fact made by the arbitrator would be binding on the trial judge. After a ten-day trial, the trial judge dismissed the claim against FCA, an order Sky does not appeal.

[8] The trial judge also dismissed Sky's claim against Economical. I will explain his reasons, with which I am in substantial agreement, in the "Analysis" section, below. In summary, he found that the design of the solar systems, including the wiring and the choice of equipment, were Sky's responsibility. Marnoch played no role in the decisions to purchase or install the transformers used at the two project locations. He concluded that Sky's liability did not "arise out of the operations" of Marnoch.

[9] The trial judge also found that Sky had breached Condition Four of the insurance policy by settling with Firelight without Economical's consent and that Sky was not entitled to relief from forfeiture. Finally, the trial judge dismissed Sky's claim against Economical for punitive damages for breach of the duty of good faith.

B. Issues on Appeal

[10] Sky raises the following grounds of appeal:

(1) the trial judge erred in interpreting the insurance policy and in finding that Sky's liability did not "arise out of the operations" of Marnoch;

(2) the trial judge erred in finding that Sky's claim was barred [page164] by a breach of Condition Four of the policy or, alternatively, in failing to grant relief from forfeiture;

(3) the trial judge erred in finding that Economical had not breached its duty of good faith and declining to award punitive damages; and

(4) the trial judge erred in awarding excessive costs.

[11] For the reasons that follow, I would dismiss the first ground of appeal. Given my conclusion on the first ground, it is not necessary to consider the second ground. I would also dismiss the third ground. Finally, I would not grant leave to appeal costs.

C. Analysis

(1) First issue: Did the trial judge err in interpreting the insurance policy and in finding that Sky's liability did not "arise out of the operations" of Marnoch?

[12] The analysis of this issue requires a more detailed explanation of the events giving rise to Sky's claim under Economical's insurance policy and an examination of the relevant provisions of both the policy and the construction contract.

(a) The events giving rise to Sky's claim

[13] In 2010, Sky entered into contracts with Ontario Power Authority to provide electricity generated by rooftop solar projects to be constructed on two buildings, one on Whybank Street in Brampton, Ontario ("Whybank") and the other on Manchester Street in Bolton, Ontario ("Manchester").

[14] In February and April 2012, Sky contracted with Marnoch to construct the two projects.

[15] In November and December 2012, Sky transferred ownership of the projects to Firelight. The sale agreements contained warranties and indemnities given by Sky to Firelight. The agreements also assigned to Firelight the benefits of the warranties given by Marnoch to Sky in the construction contracts.

[16] In explaining the events giving rise to the claim, the trial judge set out the findings of the arbitrator, at para. 48 of his reasons. I will summarize those findings, borrowing from the arbitrator's language.

[17] The initial scope of Marnoch's work under the two contracts was limited to the installation of a solar power system that had been designed by Sky using equipment that had been selected and sourced by Sky. Sky contracted with equipment [page165] suppliers to provide the main components for the system, including two critical components, the inverter and the transformer. It was Marnoch's responsibility to install the components in the projects.

[18] Whybank was the first of the two sites to be prepared for construction. Before commencing the installation, Marnoch's foreman noticed that the transformer delivered to the site by Sky's supplier did not conform to the design parameters specified in Sky's drawing.

[19] The delivery of the wrong type of transformer to Whybank (with another scheduled for delivery to Manchester) threatened the construction schedules for both projects. The manufacturer advised that it would need approximately six weeks to build the appropriate transformer. The delay was unacceptable to Sky, which had sold the projects and their income streams to Firelight and was anxious to get them operating.

[20] Faced with the risk of a significant delay, Sky asked Marnoch for assistance in sourcing replacement transformers for the two project locations.

[21] While not contractually obligated to source the transformers, Marnoch agreed to ask its own equipment supplier to search for a suitable replacement. Sky provided Marnoch with the technical description of the correct transformer and with this information in hand, Marnoch's supplier located a transformer manufactured by Marcus Transformers of Canada Ltd. ("Marcus"). Marcus could deliver a transformer that met Sky's specifications within five days of receipt of approved shop drawings.

[22] It was Sky's decision whether or not to accept the Marcus transformer. Marnoch was not asked for its opinion on the suitability of the Marcus transformer, nor did it have the technical expertise to make that assessment. Marnoch was neither an electrical engineer nor an electrical consultant, but an electrical contractor with considerable experience as an installer, trying to assist its client, Sky, out of a jam that Marnoch had no role in creating.

[23] Sky confirmed its approval of the Marcus transformer for the Whybank and Manchester projects, and the construction contracts for both projects were amended to provide for the supply and installation of the Marcus transformers by Marnoch.

[24] The Whybank project was the first to be completed. It was connected and energized on August 16, 2012. As the arbitrator noted, when that occurred, representatives of Sky and its supplier "witnessed what should have been a disturbing phenomenon". The Marnoch electrician at the site recorded that with no power flowing from the solar panels, the transformer was still drawing [page166] power. This could only have originated from the hydroelectric grid. The Marnoch electrician suggested to the Sky representative that the system should be shut down until a satisfactory explanation for the anomaly could be determined. But the Sky representative, apparently concerned about the loss of revenue if the system were shut down, decided to leave the system energized for "observation" and Sky formally took over control of the facility from Marnoch.

[25] Unfortunately, three days later, the transformer overheated and burned.

[26] The arbitrator found that the Whybank fire was due to Sky's decision to leave the system energized. Marnoch was contractually responsible to indemnify Sky for Marnoch's own negligence and for the negligence of any other party for whom Marnoch might be liable. But Marnoch was not required to indemnify Sky for matters that were not within Marnoch's control or for which it was not responsible. It was not required to indemnify Sky "for Sky's own foolhardy decision".

[27] After investigating the Whybank fire, Sky determined that the Marcus transformer was suitable for the projects, as long as a technical adjustment was made to one of its connections. Sky approved a change order to authorize Marnoch to replace the Whybank transformer with another Marcus transformer. Marnoch also supplied and installed a Marcus transformer at the Manchester project.

[28] The Manchester project was completed in October 2012. In November and December 2012, Sky transferred ownership of the Whybank and Manchester projects to Firelight.

[29] On March 14, 2013, after the transfer to Firelight, a fire broke out at the Manchester project and the transformer was destroyed. As a result, the two systems were temporarily shut down for investigation and repair. Sky decided to use another manufacturer to provide replacement transformers at both sites and retained Marnoch to undertake the work.

[30] Firelight made claims against Sky for lost revenues due to the shutdowns at the projects and for remediation costs. Sky agreed to pay for the remediation costs and loss of revenue, in the total amount of $591,596.22. Firelight then reassigned its warranty claims against Marnoch to Sky. Sky's claim against Economical in this action includes the amounts it paid to settle Firelight's claim.

[31] Sky then commenced arbitration against Marnoch for indemnity under the construction contracts, as well as pursuant to Marnoch's warranties. It also commenced a product liability action against the manufacturer, Marcus. [page167]

[32] The arbitrator found that the decision to acquire the Marcus transformer was solely that of Sky: "Marnoch played no role in the decision to initially purchase the Marcus transformer for Whybank, or in the subsequent decision to use the Marcus transformers at Manchester and as the replacement at Whybank." Marnoch's role was simply to implement Sky's decision. Merely implementing Sky's choice of the Marcus transformer did not make Marcus a supplier of Marnoch within the meaning of the construction contract, nor could any alleged negligence of Marcus be imputed to Marnoch. The arbitrator dismissed Sky's claim against Marnoch, concluding: "Sky cannot hold Marnoch responsible or liable for the consequences of Sky's own decisions." The arbitrator made no finding concerning the cause of the March 14, 2013 fire at Manchester.

[33] There was no evidence before the trial judge concerning the outcome of Sky's action against Marcus.

(b) The contractual provisions

[34] The construction contracts between Sky and Marnoch for the Whybank and Manchester projects were stipulated price contracts, based on the standard CCDC2 form of the Canadian Construction Documents Committee, with some modifications.

[35] The parties amended the standard indemnification clause in the CCDC2 form, clause 12.1.1, to provide as follows:

Contractor shall defend, indemnify and hold harmless the Owner . . . against any suits, claims, damages, losses, liabilities, judgments, costs, or expenses . . . . caused by (i) the Contractor's failure to perform its obligations under this Agreement or (ii) the negligent acts or omissions of Contractor, its employees, agents, Subcontractors, Sub-subcontractors, or suppliers or any other party for whom the Contractor may be liable, in the Contractor's performance of the Work under this Agreement, provided that such Loss results from bodily injury, sickness, disease or death or damage to property, including loss of use resulting therefrom.

(Emphasis added)

[36] As the arbitrator noted, the inclusion of the words "for whom the Contractor may be liable" suggests that "there could be suppliers for whom Marnoch may not be liable, otherwise the agreement would simply have referred to 'all suppliers'".

[37] Marnoch also issued written warranties to Sky on June 6, 2012, warranting materials and labour required to replace or repair any faulty electrical material due to the manufacturer's defects or caused by defective installation by Marnoch.

[38] In addition to the indemnity in clause 12, the CCDC2 contract provided, in clause 11.1.1, that Marnoch was required to "provide, maintain and pay for" various types of insurance, [page168] as set out in another CCDC standard form (Form CCDC 41, Insurance Requirements), including:

General liability insurance in the name of the Contractor and include, or in the case of a single, blanket policy, be endorsed to name, the Owner and the Consultant as insureds but only with respect to liability, other than legal liability arising out of their sole negligence, arising out of the operations of the Contractor with regard to the Work.

(Italics in original; underlining added)

(c) The insurance provisions

[39] Economical issued an "Expert Contractors Policy" to Marnoch on September 20, 2011, providing, among other things, commercial general liability coverage for the period in question.

[40] Subsequently, FCA, as it had been authorized by Economical to do, issued two certificates of insurance to Sky, one dated January 30, 2012 and the other September 19, 2012. The certificates identified the insurance policies issued by Economical to Marnoch, including a commercial general liability policy with limits of $5 million per occurrence. They also identified Sky as an additional insured under that policy. Economical acknowledges that Sky was entitled to coverage pursuant to an "Additional Insured Endorsement" to the policy, which provided that

This insurance applies to those stated on the Declaration as "Additional Insureds" but only with respect to liability arising out of the operations of the Named Insured.

(Emphasis added)

[41] This endorsement did not precisely track the language of clause 11.1.1 of the CCDC2 contract, as it omitted the qualification, "other than legal liability arising out of [Sky's] sole negligence".

[42] Policy Condition Four required that the insurer be given prompt notice of any claim and prohibited the insured from voluntarily making a payment, assuming any obligation, or incurring any expense, except with the insurer's consent. Economical claimed Sky breached this condition by settling Firelight's claim against it without Economical's consent.

(d) The trial judge's reasons

[43] The trial judge observed that the arbitrator made no findings as to the cause of the March 14, 2013 fire at Manchester, noting that Marcus was not a party to the arbitration and that, in its absence, the arbitrator was unable to determine ultimate responsibility. However, both parties adduced expert evidence on the issue at trial. Sky's expert concluded that the Marcus [page169] transformer had an inherent defect, while Economical's expert opined that it was unreliable and inappropriate for use in the solar power systems at issue. The trial judge held that it was unnecessary to determine the precise cause, as it was sufficient to simply conclude that the fire was caused by a failure of the Marcus transformer.

[44] The trial judge noted that Sky had the burden of proving that its liability to Firelight fell within the coverage for liability "arising out of the operations of the Named Insured" in the Additional Insured Endorsement. He accepted that this language must be read broadly. Coverage under the Additional Insured Endorsement was not limited to Sky's vicarious liability arising from the negligence of Marnoch.

[45] Referring to other decisions involving additional insured coverage, he observed, at para. 70 of the reasons, that "the degree of proximity between the event giving rise to the liability of the additional insured and the operations of the named insured falls along a spectrum": referring to Waterloo (City) v. Economical Mutual Insurance Co., 2006 43498 (Ont. S.C.J.); Great Atlantic & Pacific Co. of Canada Ltd. v. Economical Mutual Insurance Co., [2013] O.J. No. 5419, 2013 ONSC 7200, 28 C.C.L.I. (5th) 191, aff'd 2014 ONCA 350; Oliveira v. Aviva Canada Inc. (2017), 139 O.R. (3d) 618, [2017] O.J. No. 5457, 2017 ONSC 6161, , aff'd 2018 ONCA 321, 79 C.C.L.I. (5th) 65; and Kinnear v. Canadian Recreational Excellence (Vernon) Corp., [2012] B.C.J. No. 1337, 2012 BCCA 291, 352 D.L.R. 57.

[46] Referring specifically to Vernon, the trial judge noted that "arising out of" means more than simply a "but for" test and requires an "unbroken chain of causation" and "a connection that is more than merely incidental or fortuitous". As I will explain below, at para. 79, the determination of causation in the insurance coverage context sometimes differs from its determination in negligence. While the terminology is sometimes common, its application is not necessarily so.

[47] Applying this test, he found that

-- the scope of Marnoch's operations included ordering, supplying and installing the Marcus transformers, which had been selected by Sky, in accordance with Sky's directions;

-- after the fire at Whybank, Sky made the decision to continue to use the Marcus transformers and this decision was not part of Marnoch's operations;

-- the failure of the Marcus transformer at Manchester and the fire on March 14, 2013 was not caused by any decision [page170] taken by Marnoch in the course of its operations or by any action of Marnoch in the discharge of its contractual obligations;

-- the event that gave rise to Sky's liability to Firelight was Sky's decision to continue to use the Marcus transformer at the Whybank and Manchester locations after the Whybank fire, a decision in which Marnoch had no involvement;

-- the fact that the Manchester fire would not have occurred but for the installation of the Marcus transformer, was not, in itself, sufficient to establish that Sky's liability to Firelight was liability arising out of the operations of Marnoch; and

-- there was insufficient proximity between Sky's decision to continue to use the Marcus transformer and the failure on March 14, 2013, on the one hand, and Marnoch's operational actions to order and install the Marcus transformer, on the other hand, to allow him to conclude that Sky's liability to Firelight arose out of Marnoch's operations.

[48] The trial judge thus found that the fact that the Manchester fire would not have occurred "but for" the installation of the Marcus transformer was not, in itself, sufficient to establish that Sky's liability to Firelight arose out of Marnoch's operations. Using the language of the British Columbia Court of Appeal in Vernon, he found that Marnoch's connection with the failure of the Marcus transformer and the fire at the Manchester location on March 14, 2013 was "merely incidental". Sky had failed to establish that its liability to Firelight fell within the grant of coverage under the Additional Insured Endorsement.

[49] Although not required to do so in light of this conclusion, the trial judge went on to find that, in any event, Sky had breached Condition Four of the policy by admitting liability to Firelight, settling Firelight's claim, and voluntarily paying its remediation costs and loss of revenue without Economical's consent. He also found that Sky was not entitled to relief from forfeiture, under either s. 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43 or s. 129 of the Insurance Act, R.S.O. 1990, c. I.8. Even if Sky were entitled to coverage under the Additional Insured Endorsement, it had breached Condition Four and was not entitled to coverage.

[50] The trial judge also dismissed Sky's claim for breach of the duty of good faith in the investigation and assessment of the claim.

[51] He also dismissed Sky's claim against Marnoch's broker, FCA. [page171]

(e) Analysis

(1) Standard of review

[52] This appeal focuses on the interpretation of the words "arising out of the operations" in the Additional Insured Endorsement. This language is a common feature of insurance arrangements in construction and other businesses. Such contracts are usually in the insurer's standard form and are generally not negotiated. In this case, the contractual matrix between Sky and Marnoch did not play a role in the formation of the insurance contract.

[53] The interpretation of the standard form contract is a question of law and is subject to a correctness standard of review: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., [2016] 2 S.C.R. 23, [2016] S.C.J. No. 37, 2016 SCC 37, at para. 4. The interests of certainty and predictability require that such policies be interpreted consistently: Co-operators Life Insurance Co. v. Gibbens, [2009] 3 S.C.R. 605, [2009] S.C.J. No. 59, 2009 SCC 59, at para. 27; Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, [2010] 2 S.C.R. 245, [2010] S.C.J. No. 33, 2010 SCC 33, at para. 23.

(2) Principles of interpretation

[54] The principles of interpretation applicable to insurance policies are well settled. The primary principle is that when the language of the policy is unambiguous, the court should give effect to its clear language, reading the policy as a whole: Progressive Homes, at para. 22, referring to Non-Marine Underwriters, Lloyd's of London v. Scalera, [2000] 1 S.C.R. 551, [2000] S.C.J. No. 26, 2000 SCC 24, at para. 71.

[55] Where the policy language is ambiguous, the general rules of contract interpretation provide guidance, including the rule that effect should be given to the reasonable expectations of the parties, as long as the interpretation is supported by the text of the policy: Progressive Homes, at para. 23. Similar insurance policies should be construed consistently. These rules should be applied to resolve an ambiguity, not to create one.

[56] Where ambiguity remains after the application of these rules, the contra proferentem rule applies to construe the policy against the maker, the insurer. This gives rise to the precept that coverage provisions are interpreted broadly and exclusion clauses narrowly: Progressive Homes, at para. 24. [page172]

(3) The context -- the CCDC2 construction contract

[57] While the insurance contract at issue was not the product of negotiation, it is appropriate to consider the commercial setting in which it was procured -- pursuant to the contractor's obligations under the CCDC2 form, a construction contract in wide use.

[58] As noted above, the CCDC2 form contains both an insurance clause (clause 11) and an indemnification clause (clause 12). Clause 11 requires the contractor to provide, among other things, general liability insurance, "but only with respect to liability, other than legal liability arising out of [the Owner's] sole negligence, arising out of the operations of the Contractor with regard to the Work". That clause contemplates that the contractor's policy will be endorsed to name the owner as an additional insured under the policy.

[59] Clause 12, specifically clause 12.1.1, contains a reciprocal indemnity against losses suffered by either party and against claims by third parties "that arise out of, or are attributable in any respect to their involvement as parties to this Contract", provided that the claims are caused by (1) the negligent acts or omissions of the other party or anyone for whose acts that party is liable; or (2) a failure of the other party to fulfill the terms of the contract.

[60] In the present case, Marnoch and Sky modified clause 12.1.1, such that it was only the contractor, Marnoch, which was required to indemnify the owner, Sky, provided that the liability was caused by Marnoch's failure to perform its obligations under the agreement, its own negligence, or the negligence for those whom they were liable.

[61] In the case of losses that are covered by the insurance required by clause 11, clause 12.1.2.1 limits the indemnity obligation. In these circumstances, the indemnity obligation is limited to the amount of the insurance referred to in the CCDC41 form at the time of bid closing. Where clause 11 insurance applies, the insurance serves, in part, as a backstop to the contractor's contractual commitment in clause 12 to indemnify the owner against losses or third-party claims.

[62] The inclusion of the owner under the contractor's commercial general liability policy is an efficient and cost-effective way of allocating risks that arise out of the contractor's operations under the contract. Being named as an additional insured allows the owner to claim under the insurance policy irrespective of the contractor's potential breach of the policy conditions: D. Cheifetz and W.T. McGrenere, "Aspects of Commercial Insurance" [page173] in Insurance Law: Special Lectures of the Law Society of Upper Canada (Don Mills, Ont.: Richard De Boo Publishers, 1987), 43, at p. 48. This is accomplished through a "separation of interests clause" or "severability of interest clause", as there was in this case, providing that the insurance applies as if each named insured were the only named insured.

[63] If a third party claim arises, the owner can obtain a defence and indemnity under the contractor's policy, eliminating the need to claim under its own liability insurance. Both parties can be defended by the same insurer against third party claims arising out of the contractor's operations. This avoids disputes and potential litigation between the owner and the contractor and allows them to proceed with the construction work without interruption or disruption of their commercial relationship.

(4) Additional insured coverage

[64] It is common for additional insureds to be added by an endorsement to the policy, setting out the risks for which the additional insured is covered: Gordon Hilliker, Liability Insurance Law in Canada, 6th ed. (Markham, Ont.: LexisNexis, 2016), at para. 6.34. When this occurs, the broker may issue a certificate of insurance to the additional insured. But the certificate is typically evidence of the policy only. The actual terms of the policy govern: Hilliker, at para. 6.36.

(a) The relationship between the named insured, additional insured and insurer

[65] As between the additional insured and the insurer, it is the language of the insurance policy that governs. If that coverage is not as broad as what the contract called for, the owner's remedy may be against the contractor, either for indemnity under the contract or for breach of the contractual promise to obtain the specified coverage.

[66] The appellant submits that the trial judge erred in his interpretation of the policy by failing to consider the language of the insurance provision in clause 11 of the underlying CCDC2 contract, which referred to "liability, other than legal liability arising out of their sole negligence, arising out of the operations of the Contractor with regard to the Work". "Work" is a defined term under the CCDC2 contract and means "the total construction and related services required by the contract documents". Specifically, the appellant argues that since the CCDC2 only carved out liability arising out of the owner's "sole negligence" and Sky has not been found negligent, there must be coverage. [page174]

[67] Similar arguments are made by Mark G. Lichty and Marcus B. Snowden in Annotated Commercial General Liability Policy, looseleaf (Aurora, Ont.: Canada Law Book, 2019) who state, at para. 35:20.7(2):

Where parties have agreed to a form of risk transfer through an insurance clause and for other methods in an underlying contract, it is necessarily the underlying contract which best discloses the insuring intent, not the policy wording.

[68] While this statement may be true as between the owner and the contractor, the insurer is not privy to the construction contract. It typically does not know what the particular parties agreed to and does not underwrite different risks with each new contract entered into by its insured. While an insurer could, if asked to do so, create bespoke language to reflect the insured's contractual undertaking in a particular case, there is no evidence it was requested here. It follows that I reject the appellant's submission that the language of the contract between Sky and Marnoch should affect the interpretation of Economical's policy, other than to explain the commercial context.

[69] That said, the Additional Insured Endorsement in the present case does provide insurance with respect to liability arising out of the operations of the named insured. The contractor's contractual obligations, including the scope of the work, are part of the inquiry into whether the owner's liability arises out of the contractor's operations. The work the contractor actually performs or is alleged to have failed to perform, may also be part of that inquiry.

(b) Common conflicts arising from additional insured endorsements

[70] The reported cases demonstrate that contractual insurance obligations and additional insured endorsements are a frequent source of litigation between owners, contractors, and their insurers.

[71] Conflicts may occur because the contractor obtained insurance that does not track the language of the contractual indemnity. The wording of the insurance policy may either be broader or more restrictive than what the contractor agreed to obtain. Another source of conflict may arise when the additional insured fails to obtain and read the policy of insurance and simply relies on the receipt of the insurance certificate, which simply confirms that the contractor has insurance without providing evidence of the terms that protect the owner. An owner who expects to be an additional insured should obtain a copy [page175] of the insurance policy and the endorsement to ensure that the appropriate coverage has been obtained: Cheifetz and McGrenere, at p. 48. And if a potential claim arises, the owner should ensure that it complies with the policy's requirements.

[72] Disputes have also frequently arisen because of uncertainty concerning the requisite connection between the liability incurred by the owner and the operations of the contractor in the additional insured endorsement. I turn to that issue, which is at the core of this appeal.

(5) Arising out of the operations

[73] The appellant submits that the trial judge adopted an unduly narrow construction of the words "arising out of the operations" and that his interpretation is out of step with Ontario precedent in cases such as Waterloo, Great Atlantic and Oliveira. It submits that the trial judge erred in finding that Sky's approval of the Marcus transformer took Sky's liability to Firelight outside the scope of coverage.

[74] For the reasons that follow, I do not accept this submission. First, the trial judge applied the correct approach to the issue of whether Sky's liability to Firelight arose out of the operations of Marnoch. He properly followed the approach set out by Finch C.J.B.C. in Vernon, which I respectfully agree with and adopt. Second, the cases relied upon by the appellant are consistent with the trial judge's conclusion.

(a) The approach in Vernon

[75] In Vernon, the plaintiff had attended the "Multiplex" arena in Vernon, British Columbia to watch a hockey game. The game was hosted by a hockey club called the "Vernon Vipers" (the "Vipers"). The plaintiff left the game to buy refreshments at a store across the street. On his return, he slipped and fell in what was described as the "Boulder Zone", a strip of land abutting the arena's parking lot. He sued the owner and the manager of the Multiplex facility (the "defendants").

[76] The defendants had been named as additional insureds on the Vipers' comprehensive liability policy. They brought third party proceedings against the Vipers and their liability insurer, contending that they were entitled to a legal defence, as well as contribution and indemnity for any amounts found owing to the plaintiff, who had not sued the Vipers. The defendants argued that the comings and goings of spectators at a hockey game were part of the "operations" of a hockey club. The Vipers and their insurer then applied to summarily dismiss the third party [page176] proceedings and sought a declaration that they had no duty to defend or indemnify.

[77] The application judge dismissed the claim and the Court of Appeal affirmed her decision. Finch C.J.B.C. identified the key issues as the same ones in this case: (i) the meaning to be given to "arising out of"; and (ii) the meaning of the word "operations" in this context.

####### (i) Interpreting "arising out of"

[78] Finch C.J.B.C. considered several leading Supreme Court decisions that interpreted the words "arising out of" and "arising from", including: Amos v. Insurance Corp. of British Columbia, 1995 66 (SCC), [1995] 3 S.C.R. 405, [1995] S.C.J. No. 74; Lumbermens Mutual Casualty Co. v. Herbison, [2007] 3 S.C.R. 393, [2007] S.C.J. No. 47, 2007 SCC 47; and Citadel General Assurance Co. v. Vytlingam, [2007] 3 S.C.R. 373, [2007] S.C.J. No. 46, 2007 SCC 46. In those cases, the Supreme Court consistently interpreted "arising from" and "arising out of" to require more than a "but for" connection between the liability of the additional insured and the operations of the named insured. While a "but for" test is necessary, it is not sufficient. Specifically, there must be "an unbroken chain of causation" and a connection that is more than "merely incidental or fortuitous". While those cases involved automobile insurance legislation, Finch C.J.B.C. determined that the words "arising from" and "arising out of" should be interpreted the same way when they appear in the context of insurance contracts, such as additional insured endorsements.

[79] To be clear, while the language of "but for" and "causation" originally emerged from the law of negligence, these concepts have since developed separately in the context of interpreting insurance coverage. In the field of negligence, the "but for" test of causation is used to determine whether the loss suffered occurred as a result of the wrongdoing of the defendant: Clements v. Clements, [2012] 2 S.C.R. 181, [2012] S.C.J. No. 32, 2012 SCC 32. But in the insurance interpretation context, fault is not required for coverage to be engaged, unless specified in the policy. In fact, many insurance policies provide coverage for losses even when no party is identified as being at fault, as is the case here.

[80] I will now explain how these principles were developed and how they came to be applied in the context of interpreting insurance contracts.

[81] In Amos, the Supreme Court interpreted the scope of coverage provided by no-fault motor vehicle insurance, as set out in British Columbia's insurance legislation. The legislation [page177] stipulated that insurance benefits would be paid for death or injury "caused by an accident that arises out of the ownership, use or operation of a vehicle" (emphasis added). The Supreme Court set out a two-part test for interpreting that provision, at para. 17:

1. Did the accident result from the ordinary and well-known activities to which automobiles are put?

2. Is there some nexus or causal relationship (not necessarily a direct or proximate causal relationship) between the appellant's injuries and the ownership, use or operation of his vehicle, or is the connection between the injuries and the ownership, use or operation of the vehicle merely incidental or fortuitous?

(Underlining in original; italics added)

[82] The Supreme Court then extended the principles set out in Amos to two subsequent companion cases involving automobile liability insurance: Herbison and Citadel. In these cases, the Supreme Court interpreted s. 239(1)(a) of the Insurance Act, which stipulates that motor vehicle insurance policies will cover loss or damage "arising from the ownership or directly or indirectly from the use or operation of any such automobile" (emphasis added).

[83] Again, the Supreme Court interpreted "arising from" to mean an unbroken chain of causation, which is more than merely incidental or fortuitous: Citadel, at para. 12; Herbison, at para. 12. In Citadel, the insured used his vehicle to transport a boulder onto a highway overpass, he then dropped the boulder onto oncoming traffic. The claimant was struck and injured. In Herbison, the insured drove his truck to a hunting site. On the way, he got out of the truck to shoot what he thought was a deer. Unfortunately, he shot another hunter, who sought indemnity from the driver's insurer.

[84] In both cases, the Supreme Court found that the injuries did not arise from the operation of the vehicles. While the vehicles were necessary in the "but for" sense -- neither insured would otherwise have been at the location of the accident -- the injuries arose from other distinct acts. In Citadel, the injury arose from the insured throwing the boulder, and in Herbison, the injury resulted from the insured shooting into the distance.

[85] Given the Supreme Court's consistent interpretation of "arising from" and "arising out of" in this line of authority, Finch C.J.B.C. concluded that these words should carry the same meaning, regardless of whether they appear in a statute or in a contract. He explained that "it would not further the objectives of certainty and consistency in the law if the terms 'arising from' or 'arising out of' were to carry different meanings in analogous circumstances": at para. 42. [page178]

[86] Finch C.J.B.C. went on to consider the diverging authorities in the United States, noting that some states found a "but for" link between the liability in question and the named insured's operations to be sufficient, while others required a greater connection.

[87] Having considered both Canadian and American authorities, Finch C.J.B.C. concluded that the phrase "arising out of" imposes a greater requirement than a "but for" test; it "should be construed as requiring 'an unbroken chain of causation' and a connection that is more than 'merely incidental or fortuitous'": at para. 52.

####### (ii) The meaning of "operations"

[88] Finch C.J.B.C. then considered the meaning of "operations" and, at para. 54, found that it "is a word of sufficiently broad meaning as to include the creation of a situation, or circumstance, that is connected in some way to the alleged liability. It does not necessarily imply an active role by the named insured in creation of the liability event" (emphasis in original).

[89] He also explained that "operations" is broader than "activities", which was the term used in Saanich (District) v. Aviva Insurance Company of Canada, 23 B.C.L.R. (5th) 272, [2011] B.C.J. No. 1835, 2011 BCCA 391. Specifically, "[o]perations can include the occupation and use of premises or other 'passive' conduct that might not be included within the meaning of the word 'activities'": at para. 54.

####### (iii) Application to the facts in Vernon

[90] Applying the test, Finch C.J.B.C., at para. 65, determined that the link between the plaintiff's injuries and the hockey club's operations were too tenuous. At most, the hockey club's operations caused the plaintiff to be in a place where, for unrelated reasons, he was injured.

[91] Overall, the judgment of Finch C.J.B.C. commends itself as a thoughtful and comprehensive analysis of the jurisprudence, which sets a practical and predictable standard. While it is highly persuasive in its own right, I also note the desirability, identified earlier, of consistency in the interpretation of standard forms of insurance.

(b) Ontario precedents are consistent with the trial judge's approach

[92] The approach in Vernon, which the trial judge adopted, is also consistent with the authorities relied on by the appellant. [page179] I do not accept the appellant's submission that the trial judge's approach was too narrow and contrary to Ontario precedents, such as (i) Waterloo; (ii) Great Atlantic; and (iii) Oliveira. I will now consider each of those cases in turn.

####### (i) Waterloo

[93] In Waterloo, the City of Waterloo (the "City") was named as an additional insured on the commercial general liability policy of the operator of an "Oktoberfest" parade. The plaintiffs were injured at a train crossing near where they were watching the parade. The City sought an order compelling the insurer to provide a defence to the plaintiffs' action. The additional insured endorsement provided coverage for the City as an additional insured "but only with respect to liability arising out of the operations of the named insured".

[94] The court held that there were no factual allegations in the pleadings to suggest that the City's liability "arose out of" the operations of the parade operator, using that term in the sense of "originating from", "growing out of", "flowing from", "incident to" or "having connection with". The plaintiffs had not even sued the parade operator and the parade was only the site or occasion of the plaintiffs' accident. The parade operator's insurer had no duty to defend the City.

[95] This result is consistent with Vernon. At its highest, but for the parade, the plaintiffs would not have been standing near the railway tracks and the accident would not have happened. This was not, however, sufficient. What was lacking was a connection between the operation of the parade and the City's alleged liability to the plaintiffs that was more than incidental or fortuitous.

####### (ii) Great Atlantic

[96] In Great Atlantic, a grocery store customer was injured when she slipped on an allegedly wet floor. The store owner had contracted with a janitorial service to wash the floors and keep them clean. A&P, the store owner, was added as an additional insured on the contractor's policy, but "only with respect to liability arising out of the operations of the Named Insured". The judge described it as a "simple slip and fall alleged to have occurred as a result of negligent janitorial operations": at para. 49. The plaintiff alleged that A&P had breached its obligation to keep the floor safe. The trial judge held that the insurer had a duty to defend the store owner. The factual allegations of negligence against A&P were in respect of unsafe conditions left by the floor-cleaning operator. There were no other allegations of negligence against A&P. Therefore, A&P's liability resulted [page180] from the contractor's alleged failure to perform its contractual obligations.

####### (iii) Oliveira

[97] In Oliveira, the hospital's insurance policy covered employees as additional insureds while "acting under the direction of" the hospital, but "only in respect of liability arising from the operations of" the hospital. A patient brought a claim against a nurse, claiming that she had improperly accessed her medical records. The policy in question covered claims for invasion of privacy. The nurse sought a declaration that the hospital's insurer had a duty to defend. The insurer argued, however, that the claim did not arise from the operations of the hospital; rather, it arose from the nurse allegedly accessing the medical records of a patient who was not under her care. The trial judge found that the policy insured claims for breach of privacy and that the collection and maintenance of medical records was part of the operations of the hospital. The judge, adopting the definition of "operations" in Vernon, found that the insurer had a duty to defend. This court affirmed the decision.

[98] Again, Oliveira is a case in which there was a clear connection between the plaintiff's allegations against the nurse and the hospital's operations, which included the keeping of medical records. This connection was bolstered by the terms of the insurance policy, which specifically provided coverage for invasions of privacy -- the very act that the nurse was alleged to have committed.

(c) The appropriate interpretation of "arising out of the operations"

[99] The "arising out of the operations" issue can be addressed by answering the question: "why did the additional insured's liability arise?"

-- In Great Atlantic, the claim was a slip and fall arising out of the condition of the floor, and the cleaner (the named insured) hired by the store owner (the additional insured) did not keep the floor clean.

-- In Oliveira, the claim was for intrusion into the privacy of medical records and the hospital (the named insured) collected and maintained records, which the nurse (the additional insured) was able to access in the course of her employment.

-- In Waterloo, in contrast, the claim against the City (the additional insured) was in respect of its failure to keep people safe and not in respect of the operation of the parade (the named insured). [page181]

[100] In sum, I agree with the articulation in Vernon of the requisite connection between the named insured's operations and the liability of the additional insured, in respect of which it seeks insurance coverage. It provides certainty and predictability for all parties by requiring more than an incidental or fortuitous connection between the liability of the additional insured and the named insured's operations. This limitation is consistent with both the reasonable expectations of the parties to the construction contract and that of their liability insurers.

[101] To summarize, the phrase "arising out of the operations" requires more than a "but for" connection between the liability of the additional insured and the operations of the named insured. There must be "an unbroken chain of causation" and a connection that is more than "merely incidental or fortuitous": Vernon, at para. 52. Furthermore, the word "operations" includes "the creation of a situation, or circumstance, that is connected in some way to the alleged liability. It does not necessarily imply an active role by the named insured in creation of the liability event": Vernon, at para. 54.

(6) Application to this case

[102] I agree with the trial judge that Marnoch's connection with the failure of the Marcus transformer was "merely incidental". The trial judge found that the fire was caused by the failure of the Marcus transformer. The fire would not have occurred but for the fact that Marnoch ordered and installed the transformers "in the course of" Marnoch's operations under its contracts with Sky. But Vernon requires a stronger connection. Marnoch's operations under the contracts did not require it to select the transformers to be installed in the projects. That was up to Sky. And Sky chose the Marcus transformers that failed.

[103] Marnoch's position in this case is similar to that of the hockey club in Vernon and of the operators of the Oktoberfest parade in Waterloo. It was effectively a bystander to the decisions of the additional insured. Its operations had a "but for" connection to Sky's liability, but nothing more.

[104] For these reasons, I would not give effect to the appeal regarding the first issue.

(2) Second issue: Did the trial judge err in finding that Sky's claim was barred by a breach of Condition Four of the policy or, alternatively, in failing to grant relief from forfeiture?

[105] As a result of my conclusion on the first issue, it is unnecessary to consider whether the trial judge erred with [page182] respect to the breach of Condition Four and in denying relief from forfeiture.

(3) Third issue: Did the trial judge err in finding that Economical had not breached its duty of good faith and declining to award punitive damages?

[106] Sky contended that Economical breached its duty of good faith by (a) initially denying coverage without conducting an investigation; (b) interpreting the Additional Insured Endorsement too narrowly and ignoring the judicial interpretation in cases like Great Atlantic; and (c) failing to follow its own claims procedures, as it did not appoint an adjuster or investigate Sky's losses. This is a separate cause of action, distinct from the coverage claim. In my view, however, the trial judge did not err in dismissing the claim for punitive damages.

[107] First, the trial judge found that Economical's delay of 13 days in acknowledging that Sky was an additional insured did not rise to the level of bad faith.

[108] Second, he found that the Great Atlantic case, relied upon by the appellant, was materially different from this case, and that Economical did not act in bad faith in interpreting that decision. Great Atlantic involved allegations of negligence against the additional insured and the named insured. In the present case, Sky does not allege negligence against Marnoch, the named insured.

[109] Third, he found that Economical did not act in bad faith in denying coverage to Sky without appointing an adjuster or investigating Sky's claim. By the time Sky made a claim under the policy, Economical knew that the transformers had been selected by Sky and that Marnoch had not made the decision. Economical had an objectively reasonable basis on which to deny coverage and was not required to make further investigations.

[110] In addressing the issue of good faith, the trial judge referred to the decision of this court in 702535 Ontario Inc. v. Non-Marine Underwriters, Lloyd's London England, 2000 5684 (ON CA), [2000] O.J. No. 866, 184 D.L.R. (4th) 687 (C.A.), at paras. 27-33, leave to appeal refused, [2000] S.C.C.A. No. 258. The Supreme Court of Canada referred to 702535 Ontario with approval in the leading case of Fidler v. Sun Life Assurance Co. of Canada, [2006] 2 S.C.R. 3, [2006] S.C.J. No. 30, 2006 SCC 30. In Fidler, the Supreme Court quoted from the decision of O'Connor J.A. in 702535 Ontario, at paras. 29-30, as follows:

The duty of good faith also requires an insurer to deal with its insured's claim fairly. The duty to act fairly applies both to the manner in which the insurer investigates and assesses the claim and to the decision whether or not [page183] to pay the claim. In making a decision whether to refuse payment of a claim from its insured, an insurer must assess the merits of the claim in a balanced and reasonable manner. It must not deny coverage or delay payment in order to take advantage of the insured's economic vulnerability or to gain bargaining leverage in negotiating a settlement. A decision by an insurer to refuse payment should be based on a reasonable interpretation of its obligations under the policy.

This duty of fairness, however, does not require that an insurer necessarily be correct in making a decision to dispute its obligation to pay a claim. Mere denial of a claim that ultimately succeeds is not, in itself, an act of bad faith.

[111] I have concluded, as the trial judge did, that Economical was entitled to deny Sky's claim under the policy. This conclusion takes some of the wind out of the sails of Sky's claim for punitive damages. I agree with the trial judge that Economical's initial rejection of coverage, while perhaps precipitous, was soon corrected and did not amount to bad faith. As in Fidler, the trial judge had the benefit of a fairly lengthy trial, which included evidence from Economical's claims adjuster. The trial judge found that there was no reason to continue to investigate when there was an objectively reasonable basis on which to deny coverage. He considered all the evidence and his conclusions are entitled to deference.

[112] I would therefore dismiss this ground of appeal.

(4) Fourth issue: Did the trial judge err in awarding excessive costs?

[113] The appellant seeks leave to appeal the trial judge's costs award to Economical and, if leave is granted, asks that it be substantially reduced.

[114] Costs were addressed by all parties in lengthy written submissions after the trial judge released his reasons dismissing the action against both defendants. The trial judge's costs reasons were timely, thorough, and lengthy: Sky Solar (Canada) Ltd. v. Economical Mutual Insurance Company, [2019] O.J. No. 5167, 2019 ONSC 5835. He fixed the costs payable by Sky to Marnoch at $356,452.49, comprised of $275,000 for fees, HST on the fees of $35,750, and disbursements inclusive of HST of $45,702.49. He fixed FCA's costs at $183,979.82, comprised of fees of $150,380 plus HST of $19,549.40, and disbursements inclusive of HST of $24,050, with $10,000 deducted for costs owed by FCA according to another order.

[115] The appellant submits that the fee portion of the costs award should not have exceeded $150,000, approximately the amount awarded to FCA. [page184]

[116] A trial judge's award of costs is entitled to a high degree of deference and "should not be taken lightly by reviewing courts": Boucher v. Public Accountants Council for the Province of Ontario (2004), 2004 14579 (ON CA), 71 O.R. (3d) 291, [2004] O.J. No. 2634 (C.A.), at para. 19, referring to Canadian Pacific Ltd. v. Matsqui Indian Band, 1995 145 (SCC), [1995] 1 S.C.R. 3, per Lamer J., at p. 32. Unless the trial judge considered irrelevant factors, failed to consider relevant factors, or reached an unreasonable conclusion, an appellate court must respect the decision: Boucher, at para. 19.

[117] There is good reason for deference to a trial judge's award of costs. The trial judge lives the trial experience, hears the evidence, considers the issues and arguments as they unfold, and is in a better position than this court to answer the ultimate question: what award of costs is fair and reasonable in the circumstances?

[118] The trial judge addressed this very issue at paras. 30-32 of his reasons on costs, observing, at para. 31:

This was a relatively complex action involving insurance coverage issues and claims based on allegations of bad faith and professional negligence. The action was vigorously prosecuted and defended. The issues were clearly important to the parties. The trial was held over ten days and, although in hindsight some of the evidence may not have been needed, I do not consider that any party's conduct tended to shorten or unnecessarily lengthen the duration of the action or that any step in the action was improper, vexatious or unnecessary, or taken through negligence, mistake or excessive caution.

[119] The trial judge appropriately considered the reasonable expectations of the parties, one of the most important factors in the assessment of costs: see rule 57.01(1)(0.b) of the Rules of Civil Procedure, R.S.O. 1990, Reg. 194 and Boucher, at para. 37. As the trial judge noted, the issues were clearly important to the parties, and the claim was prosecuted and defended with vigour.

[120] A plaintiff that advances a claim for indemnity/ compensatory damages of $750,000, aggravated damages of $100,000, and punitive damages of $1,500,000 can reasonably expect the defendant to take the claim very seriously and to mount a thorough defence. Just as the plaintiff can expect to receive substantial costs if successful on those claims, it can expect to pay a substantial costs award if unsuccessful.

[121] The costs awarded to FCA is not an appropriate comparator. The appellant's claim against Economical was far more complex, raised a wider range of issues, and understandably required considerably more effort and resources.

[122] It is not the responsibility of this court to engage in an issue-by-issue and step-by-step analysis of success, as the appellant invites us to do. The trial judge was plainly aware of the evolution [page185] of the litigation and the trial and considered the big picture as well as the details.

[123] The trial judge's costs award was based on his assessment of the relevant factors and was fair and reasonable. I would not grant leave to appeal costs.

D. Disposition

[124] For these reasons, I would dismiss the appeal, with costs to the respondent in the agreed amount of $45,000, inclusive of disbursements and all applicable taxes.

Appeal dismissed.

End of Document