ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: CV-14-0013
DATE: 2014-07-11
B E T W E E N:
The Thunder Bay Masonic Foundation, Fort William Lodge A.F. & A.M. #415, On the Grand Register of Canada, Grant Poulin, Ed Carr and Milan Thierry,
Brendan Hardick for the Applicants
Applicants
- and -
The Sovereign General Insurance Company,
Hugh Griffith-Jones, for the Respondent
Respondent
HEARD: July 4 , 2014,
at Thunder Bay, Ontario
Mr. Justice F. B. Fitzpatrick
Reasons On Application
[1] This is an application for declaratory relief. The Applicants seek a declaration that the Respondents have a duty to defend and indemnify them under a Directors & Officers Liability insurance policy in respect of an action commenced against them in the Superior Court of Justice.
Preliminary Issues
[2] At the outset of the hearing, the Applicants acknowledged that at the present stage of the litigation for which the Applicants seek a defence, this court is not in a position to grant declaratory relief specifically in regard to the claim for indemnification. There was also an issue as to the right of the Applicants Fort William Lodge A.F. & A.M. #415 and Mr. Milan Thierry to have the court make any declaration with respect to them, as they were not named insureds on the policy. The parties agreed the court need not deal with these particular issues at this time.
[3] The parties also agreed that in the event there was a finding of a duty to defend, the Respondent would provide a defence to the named insured from the date of the decision forward, and any issue of the costs of the Applicants’ defence to date could be addressed in further submissions to me.
The Facts
[4] The facts were not generally in dispute in this matter.
[5] On March 1, 2012, the Respondent issued a Director and Officer (“D & O – Extra Smart”) Liability Policy to the Thunder Bay Masonic Foundation. The Policy was renewed on March 1, 2013.
[6] Under the terms of the Policy, the Respondent agreed to pay, on behalf of an insured, a loss arising from a claim against an insured for a wrongful act subject to the terms and conditions of the Policy. More particularly, the insuring provisions of the Policy state as follows:
“WHAT WE AGREE TO INSURE
We will pay on behalf of an “Insured” a “Loss” arising from a “Claim” against an “Insured” for a “Wrongful Act” subject to the terms and conditions and exclusions contained herein. In consideration of the payment of the premium and in reliance upon the statements made in the application, the supplementary applications and any additional document(s) for this Insurance which are made a part thereof, the “Insurer” agrees to provide Insurance as follows:
- BASIC COVERAGE
a. If during the “Policy Period” any “Claim(s)” including “Employment Practices Liability Claim(s)” are made against any of the “Insured Person(s)” for “Wrongful Act(s)” and reported to the “Insurer” in accordance with Part IV, Item 13 – Notice of “Claim(s):, the “Insurer” shall pay on behalf of the “Insured Person(s)” all “Loss” for which the “Insured Person(s)” shall become legally obligated to pay, except for such “Loss” which the “Named Insured”(s)” is required by law, or agrees as permitted by law, to indemnify such “Insured Person(s)” unless and to the extent that the “Named Insured”(s)” is unable or unwilling to make actual indemnification solely by reason of its “insolvency”.
b. If during the “Policy Period” any “Claim(s)” (including “Employment Practices Liability Claim(s)”) are made against any of the “Insured Person(s)” for a “Wrongful Act(s)” and reported to the “Insurer” in accordance with Part IV, Item 13 – Notice of “Claim(s)”, the “Insurer” shall pay on behalf of the “Named Insured”(s)” “Loss” for which the “Named Insured”(s)” is required by law, or agrees as permitted by law, to indemnify such “Insured Person(s)”.
c. If during the “Policy Period” any “Claim(s)” (including “Employment Practices Liability Claim(s)”) are made against the “Named Insured(s)” for a “Wrongful Act(s)” and reported to the “Insurer” in accordance with Part IV, Item 13 – Notice of “Claim(s)” the “Insurer” shall pay on behalf of the “Named Insured(s)” all “Loss” for which the “Named Insured(s)” shall become legally obligated to pay.”
[7] Wrongful Act is defined in the Policy as:
“a) any actual or alleged error or misstatement or misleading statement, act or omission, neglect or breach of duty including fiduciary or statutory duty, or “Employment Practices Liability Wrongful Act(s)” by an “Insured Person(s)” in the discharge of their duties, individually or collectively in their capacity with the “Named Insured(s)”;
b) any actual or alleged error, misstatement, misleading statement act or omission, neglect or breach of duty, or “Employment Practices Liability Wrongful Act(s)” by the “Named Insured(s)” but only in respect to the Insuring Agreement.”
[8] The Policy also contained a number of exclusions, including an exclusion relating to commercial contracts entered by an Insured. Section 2 of the “Exclusions” states:
“2. Contractual:
Based upon, or arising out of any actual or alleged breach of contract or failure to proceed with a contract whether oral or written, however this exclusion will not be applicable to:
a) “Employment Practices Liability Claim(s)” made against the “Insured(s)” alleging wrongful or unjust dismissal, but only to the extent that such “Employment Practices Liability Claim(s)” is seeking damages arising from the manner in which the claimant was dismissed from employment by the “Insured(s)”; or
b) The “Costs, Charges and Expenses”, in respect of “Employment Practices Liability Claim(s)”; or
c) “Claim(s)” for which the “Insured(s)” would have liability in the absence of such contract but only to the extent that such liability arises in the absence of such contract.”
[9] Section 11 of the “Exclusions” excludes coverage under the Policy for claims where the underlying facts or circumstances occurred before the issuance of the Policy:
“11. Prior Knowledge:
Based upon, arising out of, relating to, directly or indirectly resulting from or in consequence of, or in any way involving any “Wrongful Acts”, prior and/or pending civil, criminal, administrative or investigative proceeding involving the “Insured(s)” and known to the “Insured(s)” or any fact, circumstance or situation underlying or alleged prior to the issuance of this coverage.”
[10] The action that triggered the claim for coverage in this application was commenced by Finn Way General Contractors Inc. (“Finn Way”) in May 2013. Finn Way seeks damages against the Applicants (and others) for breach of contract and on the basis of quantum meruit and unjust enrichment in the amount of $309,939.51. The claim arises from construction work Finn Way performed on a building owned by the Applicant Thunder Bay Masonic Foundation (the “Foundation”). Finn Way constructed a model suite to be used as a marketing tool in aid of the future development of the lands owned by the Foundation as a life lease housing development.
The Issues
[11] The parties agreed the issues to be determined in this application were as follows:
(a) Has a “wrongful act”, as defined by the Policy, been alleged in the Statement of Claim such that the insuring provisions of the Policy have been triggered?
(b) If yes, are the claims for unjust enrichment and quantum meruit derivative claims such that they are caught by the breach of contract exclusion contained in the Policy?
(c) If not, is coverage under the Policy excluded since the facts and circumstances underlying the allegations contained in the Statement of Claim developed prior to the issuance of the Policy?
Analysis
[12] In considering this matter, I am guided by several well-known legal principles dealing with cases where a duty to defend is at issue. Insurance contracts are to be interpreted through the application of the contra proferentem rule. Insurance contracts are to be given a broad interpretation in terms of coverage and a narrow interpretation in terms of exclusions. To determine if a claim falls under the policy coverage, the court must look to the pleadings in the action. However, the court is not bound by the plaintiff’s choice of labels but rather seeks to determine the true nature of the claim. As long as one theory of a plaintiff’s claim against an insured might trigger policy coverage, there is a duty to defend. The insurer has a duty to defend if the pleadings allege facts which, if true, would require the insurer to indemnify the insured. As the duty to defend is broader than a duty to indemnify, the court does not have to determine what theory is correct at this stage in the proceedings.
Issue #1
[13] The Applicants submit the “wrongful act” at issue is the alleged failure by the Applicants to provide restitution to Finn Way for its work and the lack of a jurisitic reason for the Applicants to benefit from this work. Also, the Applicants’ alleged failure to do these acts represents an “omission” within the definition of “wrongful act” contained in section 11 of the Policy noted above.
[14] The Applicants argue Finn Way’s claim has distinct aspects. While the Applicants acknowledge that any claim against them for breach of contract is rightfully excluded from coverage by the terms of the Policy, the claim for recovery either by way of a finding of unjust enrichment or by quantum meruit is based on a different act than that which underlies the breach of contract claim against them. That act is the receipt of valuable construction services in the face of no contractual arrangement not the wrongful act of breaching a contract to pay Finn Way.
[15] The Respondents submit the pith and substance of the allegations contained in the Statement of Claim are that the Applicants agreed to pay Finn Way for certain services and that the Applicants have failed to pay. At its essence, the claim is about the Applicants not paying an invoice.
[16] It is the Respondent’s position that the failure of the Applicant to pay the bills is not a “Wrongful Act” as defined by the Policy. The definition of “Wrongful Act” covers “any actual or alleged error or misstatement or misleading statement, act or omission, neglect or breach of duty including fiduciary or statutory duty”. The failure to pay is not a “wrongful act”.
[17] Based on the pleadings, the Respondent argues there has been no wrongful act committed by the Applicants. They are simply refusing a payment demand within the context of a business relationship. This is not the type of situation contemplated by the insurance policy and does not fit within the definition of “Wrongful Act”. As such, the Applicants are unable to demonstrate a “wrongful act” within the meaning of the policy
[18] The Respondents submit a Directors & Officers Liability Policy was never intended to underwrite an insured’s refusal to pay an outstanding invoice. It is meant to protect individual directors and officers of a company from the risk of liability incurred in the execution of their duties as directors and officers. It is not a liability policy generally protecting a business from the commercial disputes it encounters in the course of its operations.
[19] In my view, the most generous interpretation of the essence of the Finn Way claim would be to describe it as an allegation that the Applicants have committed the wrongful act of permitting work to be performed on their lands without giving any consideration back to Finn Way. The Applicants have been therefore unjustly enriched by the value of that work without a corresponding juristic reason. However, even with this most generous interpretation, it seems to me there is no way to avoid the reality that the true nature of the dispute between the parties that is set out in the pleading at issue is that Finn Way is asserting a claim for unpaid work. The Applicants seek to be defended from a collection action. I agree with the submission of the Respondent this type of claim is not what this particular Directors & Officers Liability Policy was designed to cover. I find the Finn Way claim does not make a claim that is a “Wrongful Act” within the meaning of the Policy.
[20] In answer to issue #1, I find that no “Wrongful Act”, as defined by the Policy, has been alleged in the Statement of Claim such that the insuring provisions of the Policy have been triggered.
[21] In my view, this finding is sufficient to resolve the application in the Respondent’s favour. The application will be dismissed with costs.
[22] If I am wrong with respect to issue #1, I also think the facts and law applicable to this case regarding issue #2 favour the respondent for the following reasons.
Issue #2
[23] The leading case on the issue of whether or not a particular claim is derivative of another is the decision of the Supreme Court of Canada in Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551 [Scalera]. That case involved the issue of whether or not a claim for negligence was derivative of a claim for an intentional tort. Neither party was able to supply the court with any cases that addressed the very specific issue here as to whether or not a claim for quantum meruit or unjust enrichment was derivative from a breach of contract claim.
[24] The Applicant submits, rightly in my view, that a claim should only be considered derivative if the claims are clearly inseparable. In this case, the Applicant argues that the Finn Way claim for unjust enrichment and quantum meruit are distinct claims pled in the alternative, which are not derivative of the claim for breach of contract.
[25] I agree with the Applicant’s submission that quantum meruit and unjust enrichment are claims which arise where there is no contract. I also am bound by the finding of the Divisional Court in 936464 Ontario Ltd. v. Mungo Bear Ltd. (2003), 2003 72356 (ON SCDC), 74 O.R. (3d) 45, 258 D.L.R. (4th) 754, that found that quantum meruit is a third class of the common law distinct from contract or tort.
[26] The Applicant further argues that as quantum meruit is only resorted to in cases where there is no contract to rely upon, by definition such a claim cannot arise from the same legal wrong, injustice, or course of conduct as breach of contract. I disagree with regard to the facts in this case.
[27] As noted above, the actions that are relied upon by the Applicants to found their claim are not different regardless if the claim is asserted by way of breach of contract or by quantum meruit. For Finn Way’s part, the act was the providing of construction services. For the Applicants’ part, the act was taking the benefit of the services without paying for them. In order to resolve whether or not the claims are derivative, one must return to the facts that underlie either claim. I can think of a claim that may be asserted in both contract and quasi-contract where the claims are distinct and therefore not derivative. For example, a construction case where a contractor agrees in writing to build one type of structure and then builds a massively different, larger and more expensive structure and seeks to be compensated for both its contract claim and its efforts which have unjustly enriched a defendant. However, any findings as to coverage in that type of case would depend on its facts.
[28] In Scalera, McLachlin J. wrote, at para. 51, “if the alleged negligence is based on the same harm as the intentional tort, it will not allow the insured to avoid the exclusion clause for intentionally caused injuries”. McLachlin J. also wrote at para. 85:
“[A] claim for negligence will not be derivative if the underlying elements of the negligence and of the intentional tort are sufficiently disparate to render the two claims unrelated. If both the negligence and intentional tort claims arise from the same actions and cause the same harm, the negligence claim is derivative, and it will be subsumed into the intentional tort for the purposes of the exclusion clause analysis.”
[29] Clearly Scalera calls for an analysis of the facts to determine if a particular claim is derivative. As I have noted above, the actions of Finn Way in this case are not sufficient to permit me to find that the particular claim of the plaintiff for damages for unjust enrichment and quantum meruit are distinct enough to find that the claims are not derivative of the breach of contract claim. Also, I find that the harm alleged in the Finn Way claim, the unjust enrichment and the non-payment, are factually the same harm. The plaintiff has quantified each equally. There is no differentiation in the plaintiff’s claim of the amount being sought either for breach of contract or unjust enrichment/quantum meruit. Therefore with respect to issue #2, I find that in this case, the claims for unjust enrichment and quantum meruit are derivative of the contract breach claim and are not covered by the terms of the policy.
Issue #3
[30] Neither party spent a great deal of time on this issue in argument or in their written facta. The particular clause of the insurance contract is entitled “Prior Knowledge”, but the actual clause contains language which the Respondent argues makes the date of the occurrence, rather than the knowledge of the insured, paramount in determining the applicability of this particular exclusion. Counsel for the Respondent candidly admitted he was not aware of any authority dealing with this particular policy language. Given my decision turns on the determination of issue #1, I make no particular finding with regard to issue #3 and the interpretation of the particular clause at issue.
[31] Both parties provided costs outlines at the commencement of the proceeding. The matter involved a technical issue of fact and law, and I can appreciate that given the nature of the organization at issue that the application was brought of necessity. The issue of whether or not the quantum meruit claim was derivative of the contract claim was a novel one. Despite the result, I am exercising my discretion in favour of not awarding any costs in this application.
[32] For all of the above reasons, the application is dismissed without costs.
________”original signed by”
The Hon. Mr. Justice F.B. Fitzpatrick
Released: July 11, 2014
2014 ONSC 4142
COURT FILE NO.: CV-14-0013
DATE: 2014-07-11
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
The Thunder Bay Masonic Foundation, Fort William Lodge A.F. & A.M. #415, On the Grand Register of Canada, Grant Poulin, Ed Carr and Milan Thierry,
Applicants
- and -
The Sovereign General Insurance Company,
Respondent
REASONS ON APPLICATION
Fitzpatrick J.
Released: July 11, 2014
/mls