Court of Appeal for Ontario
DATE: 20220516 DOCKET: C69317, C69328, C69344 & C69351
MacPherson, Paciocco and George JJ.A.
DOCKET: C69317
BETWEEN
GFL Infrastructure Group Inc. Applicant (Respondent)
and
Temple Insurance Company and Aviva Insurance Company of Canada Respondents (Appellants)
DOCKET: C69328
AND BETWEEN
Ashland Construction Group Ltd. Applicant (Respondent)
and
Temple Insurance Company and Aviva Insurance Company of Canada Respondents (Appellants)
DOCKET: C69344
AND BETWEEN
Rite-Air Mechanical Co. Ltd. Applicant (Respondent)
and
Temple Insurance Company and Aviva Insurance Company of Canada Respondents (Appellants)
DOCKET: C69351
AND BETWEEN
Distillery S.E. Development Corp., Cityscape Development Corporation and Dream Asset Management Corporation Applicants (Respondents/ Appellants by way of cross-appeal)
and
Temple Insurance Company and Aviva Insurance Company of Canada Respondents (Appellants/ Respondents by way of cross-appeal)
Counsel: Robert Emblem, Jamie Spotswood and Camille Beaudoin, for the appellants (C69317, C69328, C69344 & C69351)/respondent by way of cross-appeal (C69351) Temple Insurance Company and Aviva Insurance Company of Canada Jonathan D. Meadows and Emilie Leduc, for the respondents (C69317) GFL Infrastructure Group Inc. and (C69328) Ashland Construction Group Ltd. Josiah T. MacQuarrie and David Chung, for the respondent (C69344) Rite- Air Mechanical Co. Ltd. Jeffrey Brown and Dylan Cox, for the respondents/appellants by way of cross-appeal (C69351) Distillery S.E. Development Corp., Cityscape Development Corporation and Dream Asset Management Corporation
Heard: April 5, 2022
On appeal from the judgments of Justice Paul M. Perell of the Superior Court of Justice, dated March 23, 2021, with reasons reported at 2021 ONSC 1908 and 2021 ONSC 1909.
MacPherson J.A.:
A. Introduction
[1] This grouped appeal is from four applications seeking declarations that Temple Insurance and Aviva Insurance, the appellant insurers, have a duty to defend the respondent corporations. The respondent corporations were involved to varying degrees in the Clear Spirit Condominium Project which was subsequently purchased by a numbered condominium corporation.
[2] The condominium corporation sued one of the respondent corporations for deficiencies in the condominium construction and that respondent corporation commenced an action seeking contribution and indemnity from the other respondent corporations. All respondent corporations then sought coverage from the appellant insurers under an insurance policy issued for the condominium project, were denied coverage, and brought the present applications.
[3] The applications were heard together. The application judge granted the applications and issued a declaration that the insurers have a duty to defend the corporations. He found that the respondents established that there was a “mere possibility” that the claims fell within the insurance policy as claims for “Property Damage”. He also refused to make an ex ante allocation order for defence costs for covered and uncovered claims.
[4] The appellants appeal from both components of the application judge’s orders. They say that the appellants do not have a legal duty to defend the claims or, alternatively, that there is no duty to defend the entirety of the claims against the respondents.
B. Facts
(1) The parties and events
[5] Distillery S.E. Development Corp., Cityscape Development Corporation and Dream Asset Management Corporation (the “Distillery parties”) undertook the Clear Spirit Condominium Project to build a residential condominium tower in the Distillery District of downtown Toronto. The condominium tower came to be owned by Toronto Standard Condominium Corporation No. 2299 (“TSCC 2299”).
[6] The Distillery parties hired GFL Infrastructure Group Inc. (“GFL”) to complete temporary shoring work during the construction of the building, Ashland Construction Group Ltd. (“Ashland”) to supply and install asphalt for the floor surface of the parking garage, and Rite-Air Mechanical Co. Ltd. (“Rite-Air”) to perform the HVAC work. The construction was completed in 2013.
[7] An engineering firm retained by TSCC 2299 in accordance with section 44 of the Condominium Act, 1998, S.O. 1998, c.19, discovered several deficiencies in the construction of the condominium building. The retention of additional experts revealed further deficiencies. TSCC 2299 claimed that it brought the deficiencies to the attention of the Distillery parties who did nothing to fix them.
[8] In 2015, TSCC 2299 sued the Distillery parties for $9,913,169.25 for property damage caused by negligence and defects in the construction of the building. It alleged that (a) there were deficient workmanship and materials; (b) there were deviations from plans and specifications, building requirements and industry standards; and (c) there were design and construction deficiencies in the common elements, condominium units, and shared facilities and assets of the condominium corporation.
[9] In 2017, the Distillery parties commenced an action seeking contribution and indemnity from 38 contractors, including GFL, Ashland and Rite-Air, with respect to any liability the Distillery parties may have to TSCC 2299 in respect of the 2015 action.
[10] The Distillery parties are the named insureds on a policy issued by the appellant insurers, Temple Insurance and Aviva Insurance. GFL, Ashland and Rite-Air were additional insureds under a Specific Project Wrap-Up Liability Policy (the “Project Policy”) issued by the insurers for the condominium project. The Project Policy was intended to include all contractors, subcontractors, engineering and architectural consultants as “additional insureds”. It extended an additional 24 months for the “Completed Operations Hazard” which covered bodily injury or property damage resulting from an “occurrence” after the insured’s work was completed or abandoned.
[11] The Project Policy had several exclusions, including “work performed” or “own work” exclusions for the repair or replacement of defective work.
[12] Crucially, the Project Policy is subject to a deductible of $10,000 for “Property Damage”.
(2) The application judge’s decisions
[13] The application judge heard the four applications together. He released two decisions simultaneously. The first decision related to the Distillery parties and Rite-Air. The second decision related to GFL and Ashland.
(a) The Distillery parties and Rite-Air decision
[14] The application judge found that the insurers had a duty to defend both the Distillery parties and Rite-Air. In doing so, he rejected the insurers’ argument that there is no duty to defend when the claim falls within the Policy deductible.
[15] The application judge canvassed the legal principles applicable to a contract interpretation dispute involving the duty to defend. The insurer has a duty to defend if the pleadings filed against the insured allege facts which, if true, would require the insurer to indemnify the insured. If there is any possibility that the claim falls within the liability coverage, the insurer must defend. On the other hand, if it is clear from the pleadings that the suit falls outside the coverage of the policy by reason of an exclusion clause, the duty to defend is not triggered. Extrinsic evidence that has been explicitly referred to in the pleadings may be considered to determine the substance and true nature of the allegations.
[16] The parties agreed that no Canadian case directly addresses whether an insurer has a duty to defend against a claim whose amount falls below the deductible. The application judge thus resorted to first principles. He stated:
Applying those first principles, I conclude that based on the plain language and plain meaning of the words used in the insurance policy, the Insurer agrees to defend any civil action brought against the Distillery Parties on account of Property Damage regardless of whether the Property Damage may be below the deductible.
When TSCC 2299’s action is tried it may turn out that: (a) it suffered no damage; (b) the damage it suffered was not within insurance coverage; or (c) the damage it suffered was within insurance coverage but excluded by a policy exclusion to coverage. All of these instances, where there would be no insurance coverage, would not change the Insurer’s obligation to defend because at the outset there was the mere possibility that there may be coverage for Property Damage. It is commercially unreasonable to interpret the policy so that before there is a trial, there is no duty to defend because the Property Damages pled in the Statement of Claim arguably did not exceed $10,000.
(b) The GFL and Ashland decision
[17] In this application, the insurers argued that the claims, supplemented by expert reports incorporated into TSCC 2299’s pleadings by reference, clearly fell outside the scope of coverage. The application judge’s reasoning on this application covered much of the same ground as his reasoning in the Distillery parties/Rite-Air application. He concluded:
I agree with GFL’s and Ashland’s arguments that reading the pleadings, including the extensive incorporations by reference, reveal that there is the possibility of claims made against GFL and Ashland respectively for Property Damage and it has not been established that these claims are uncovered claims because of policy exclusions. All that is required to trigger the duty to defend is the mere possibility that a claim falls within the insurance policy. The pleaded claims against GFL and Ashland were well past that mere possibility threshold.
C. Issues
Appeal
[18] The insurers appeal from the application judge’s decisions on four grounds:
- Did the application judge err by concluding that the duty to defend was triggered?
- Did the application judge err by concluding that the appellants have a duty to defend all the Distillery parties’ claims against GFL, Ashland and Rite-Air?
- Did the application judge err in finding that there was a duty to defend claims entirely within the deductible?
- Did the application judge err by effectively ordering pre-notification defence costs?
Cross-appeal
The Distillery parties cross-appeal from the application judge’s decision on one ground:
- Did the application judge err in making the payment of past defence costs subject to the right of the appellants to have those costs assessed forthwith?
D. Analysis
The Appeal
[19] I propose to deal with the appeal issues in the order set out above in the Issues portion of these reasons.
(1) Duty to defend
[20] The appellants submit that the application judge erred in his duty to defend analysis by not considering the true nature and substance of the claims made in the TSCC 2299 actions. In duty to defend applications, say the appellants, the allegations must be taken as pleaded, irrespective of their length and level of detail. The application judge was bound to review the allegations in these actions in light of the documents explicitly referred to therein, including lengthy expert reports. He refused to do so on the basis that through a “fluke of pleading”, he had been asked to conduct a forensic analysis best left for trial.
[21] Further, the appellants contend that the application judge misstated the duty to defend test by concluding that the “mere possibility” test also accounts for the potential application of exclusions withdrawing coverage. He decided not to examine if any of the exclusions applied to the Distillery action, holding that it remained to be determined at the appropriate time. However, say the appellants, the duty to defend application is the correct time for such a determination where it is clear that the claim is excluded from coverage.
[22] I am not persuaded that the application judge made either of these errors.
[23] On the first point, while a court may consider documents incorporated by reference into the pleadings to assist in determining the true nature of the claims, the court should not prematurely assess evidence and make factual findings on matters in issue in the underlying litigation, including causation. As expressed by Iacobucci J. for a unanimous court in Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, at para. 37:
It should be recalled that the question whether an insurer is bound to provide defence coverage in an action taken against the insured arises as a preliminary matter. Of course, after trial, it may turn out that there is no liability on the insurer, and thus, no indemnity triggered. But that is not the issue when deciding the duty to defend. Consequently, we cannot advocate an approach that will cause the duty to defend application to become “a trial within a trial”. In that connection, a court considering such an application may not look to “premature” evidence, that is, evidence which, if considered, would require findings to be made before trial that would affect the underlying litigation.
[24] The application judge cited the test from Monenco and found that the pleadings established the mere possibility that the claims fell within liability coverage. He was entitled to do so.
[25] On the second point, there is nothing in the case law to support the argument that the “mere possibility” test must be abandoned when the issue in play is an exclusion clause. On the contrary, the “mere possibility” test is the anchor for consideration in all duty to defend cases: see Monenco, at para. 29; Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, at para. 19. Indeed, the Supreme Court of Canada has stated that a corollary to the “mere possibility” test is that any exclusion must “clearly and unambiguously” exclude coverage to negate the duty to defend: Progressive Homes, at para. 51.
(2) Duty to defend - allocation
[26] The appellants contend that if there is a duty to defend, which they deny, the application judge erred in holding that they have a duty to defend the entirety of the claims made against the various respondents. By failing to make an ex ante determination of which claims trigger a duty to defend and which do not, and in not ordering an allocation of defence costs or, alternatively, directing the parties to negotiate an allocation, the application judge erred in law.
[27] I do not accept this submission. Importantly, this issue was not raised before the application judge as against Ashland and GFL. Thus, this court does not have the benefit of records from these respondents prepared with this issue in mind or the benefit of the application judge’s consideration of the issue in his second decision. These are serious limitations.
[28] In any event, on the basis of the record the court now has for the appeal and the submissions we have heard, I would not give effect to this ground of appeal. There is nothing in the appellants’ position or submissions that demonstrates a fair and workable methodology for allocating defence costs in advance of the trial. The notion that potentially covered and uncovered claims can be identified at this juncture is illusory.
[29] For the same reasons, it makes no sense for this court to order that the parties negotiate on this issue at this stage. Such an order would be vague and difficult to supervise or enforce. In my view, in most cases a court can properly address the potential for allocation of defence costs only after the disposition of the underlying action, at which point there will be a concrete factual basis for determining which defence costs were expended in relation to which aspects of the claim.
(3) The deductible
[30] The appellants assert that the application judge erred in ruling that they had a duty to defend the Rite-Air and the Distillery parties claims falling entirely within the $10,000 deductible in the insurance policy.
[31] I do not agree with this submission. TSCC 2299’s claim for damages is for $9,913,169.25. The appellants concede that at least $8,507.66 of this claim comes within the insurance coverage. Therefore, the question is whether there is the possibility of another $1,492.35 of “Property Damage” in an almost $10 million claim. To state the question is to answer it. Accordingly, I agree with the application judge who, in his first decision, said:
In the immediate case, it is a fluke of five iterations of an overly particularized and detailed pleading by TSCC 2299 that the argument could even be made that the Property Damage did not exceed the $10,000 deductible.
Through a fluke of pleading, the court has been asked to undertake a forensic analysis that went far beyond the interpretation of the terms of the insurance policy measured against the Statement of Claim and would have taken the court into territory better and best explored at the trial. It is to be remembered that the duty to defend is engaged by the mere possibility that there may be coverage for Property Damage.
[32] Thus, I need not determine whether the deductible impacts the duty to defend as a general principle.
(4) Pre-notification defence costs
[33] In his judgment, the application judge ordered the appellants to pay $325,685.70 to the Distillery parties in past defence costs without prejudice to the appellants’ right to have these costs allocated ex post facto and assessed forthwith. These costs include at least $35,114.43 incurred before the claim was notified on September 8, 2017. The appellants submit that this component of the formal judgment was made in error because, per Condition 5(c) of the Project Policy, the Distillery parties were not to incur any expenses before notification.
[34] In my view, it would be unfair to allow the appellants to rely on this provision in a case where they deny their duty to defend the claim. The appellants do not argue that it could have retained less expensive counsel or pursued a different strategy had they been notified sooner. Moreover, the modest nature of the costs incurred by the Distillery parties pre-notification (about 11 per cent of total defence costs up to the time the application was heard) does not suggest that the appellants have been prejudiced.
The Cross-appeal
[35] The sole cross-appellant is the Distillery parties.
[36] The application judge’s formal judgment with respect to the Distillery parties includes this paragraph:
THIS COURT ORDERED the Respondents to pay $325,685.70, being the Applicant’s past costs to defend the Action, without prejudice to the Respondents’ right to move for an ex post facto allocation of defence costs following the disposal of the action and without prejudice to the Respondents’ right to have the past costs assessed forthwith. [Emphasis added.]
[37] The cross-appellant attacks the emphasized portion of this order. It says that the insureds’ claim for past defence costs amounts to damages for breach of contract which are not subject to review for reasonableness.
[38] I am not persuaded by this submission. Costs are costs, not damages. It was within the application judge’s discretion to determine the appropriate route for the assessment of past defence costs in this proceeding.
E. Disposition
[39] I would dismiss the appeal and the cross-appeal.
[40] In the appeal, I would award the respondents their costs on a partial indemnity basis inclusive of disbursements and HST, as follows: Distillery - $30,000; GFL - $21,000; Ashland - $21,000; Rite-Air - $19,000.
[41] In the cross-appeal, I would award Temple Insurance and Aviva Insurance their costs on a partial indemnity basis inclusive of disbursements and HST fixed at $5,000, payable by only the Distillery parties.
Released: May 16, 2022 “J.C.M.” “J.C. MacPherson J.A.” “I agree. David M. Paciocco J.A.” “I agree. J. George J.A.”
