UPS Supply Chain Solutions, Inc. v. Airon HVAC Service Ltd., 2015 ONSC 1734

COURT FILE NO.: CV-13-486839

DATE: 20150318

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

UPS SUPPLY CHAIN SOLUTIONS, INC., UPS SUPPLY CHAIN SOLUTIONS GENERAL SERVICES, INC. and UNITED PARCEL SERVICE OF AMERICA, INC.

Applicants

– and –

AIRON HVAC SERVICE LTD., AIRON HVAC AND CONTROL LTD., HONEYWELL INTERNATIONAL INC., INDUSTRIAL TECHNICAL SERVICES (ITS) INC., ACE INA INSURANCE, NORTHBRIDGE INSURANCE and INTACT INSURANCE COMPANY

Respondents

Kathryn Podrebarac and Alan Melamud,

for the Applicants

David S. Young and Kevin Bridel, for the Respondents Airon HVAC Service Ltd. and Airon HVAC and Control Ltd.

Megan Shortreed and Emily Lawrence, for the Respondent Honeywell International Inc.

Dustin Milligan, for the Respondent Industrial Technical Services (ITS) Inc.

Douglas McInnis and Anthony Cole, for the Respondent ACE INA Insurance

David Mackenzie, for the Respondent Northbridge Insurance

Daniel Reisler, for the Respondent Intact Insurance Company

HEARD: June 2, 3, 2014, followed by written submissions

REASONS FOR DECISION

Justice W. MATHESON

[1] The applicants seek an order and declaration that the respondents have a duty to defend them and indemnify them for all reasonable legal costs arising from the defence of third party claims in Sanofi Pasteur Limited v. UPS SCS, Inc. et al. in the Ontario Superior Court (the underlying action or main action).

[2] The underlying action arose from the alleged malfunction of a UPS warehouse cooling system where Sanofi Pasteur vaccines were being stored in 2009. As required by the storage contract with UPS, Sanofi Pasteur insured its vaccines under an all-risks policy. After a weekend of storage allegedly below the required temperature, the vaccines were unsaleable. Sanofi Pasteur was fully indemnified by its insurer, which subrogated itself and commenced the underlying action. The claim was for about $8 million. The re-amended statement of claim is called, in these reasons, the statement of claim.

[3] The defendants in the underlying action included not only UPS SCS, Inc. but also Honeywell Limited and Honeywell International Inc. (together, Honeywell), Automation Components Inc., Airon HVAC Service Ltd. and Airon HVAC and Control Ltd. (together, Airon) and Industrial Technical Services Inc. (ITS). Generally, Honeywell was the manufacturer of the building automation system, Airon installed the system and performed limited ongoing preventative maintenance on it, Automation supplied the temperature and humidity sensors used in the warehouse and ITS tested those sensors.

[4] The Honeywell, Airon and ITS defendants defended the underlying action and brought cross-claims against their co-defendants. They also commenced third party proceedings against the applicants, which are United States UPS companies affiliated with the UPS defendant.

[5] The plaintiff then brought a motion to add the applicants as defendants. That motion has not been disposed of, but the proposed further amended statement of claim is in the record on this application.

[6] The applicants also commenced fourth party proceedings against, among others, the Commercial General Liability (CGL) insurers of Honeywell, Airon and ITS.

[7] The third party UPS companies are now the applicants in this proceeding. There are six groups of respondents to this application, as follows:

(i) Honeywell International Inc.;

(ii) ACE INA Insurance (CGL insurer of Honeywell);

(iii) Airon;

(iv) Northbridge Insurance (CGL insurer of Airon);

(v) ITS; and,

(vi) Intact Insurance Company (CGL insurer of ITS).

[8] The application relies upon both service contracts with the non-insurer respondents and insurance policies of the insurer respondents. There is no issue between the parties that it is appropriate to proceed by way of application to address the duty to defend. There is some dispute about the extent to which some other issues should be addressed now, as discussed below.

[9] Motions for summary judgment were brought by most of the defendants in the underlying action, on the footing that the insurance covenant in the storage contract between Sanofi Pasteur and UPS SCS, Inc., which required Sanofi Pasteur to maintain all-risk property insurance, defeated the claim. Those summary judgment motions were successful (2014 ONSC 2695, 119 O.R. (3d) 789), and were appealed (2015 ONCA 88). The Court of Appeal upheld the dismissal of the underlying action, subject only to an obligation on UPS SCS, Inc. to pay up to $100,000 where damage was “solely due to its negligent acts or omissions”. The Court of Appeal noted that UPS had previously tendered that amount, and if it was still prepared to pay it within 10 days, the appeal would be dismissed. I have since been advised that this step was taken, and the appeal dismissed. I have also been informed that leave to appeal will be sought.

Basis for claimed duty to defend and indemnification for legal costs

[10] The applicants rely on contractual provisions in service contracts with Honeywell, Airon and ITS as well as related insurance coverage, all of which they submit gives rise to duties to defend and to indemnify for legal costs. Each of the service contracts includes the following:

(i) a clause obliging the service provider (i.e., ITS, Airon and Honeywell) to add UPS companies to its own CGL policy as insureds; and,

(ii) a clause obliging the service provider to indemnify and hold UPS companies harmless from certain losses, including legal costs.

[11] In particular, the service contracts relied upon by the applicants each contain the following clauses:

8. Contractor shall carry: Workers’ Compensation Insurance…; Employer Liability limits…; Commercial General Liability Insurance with a minimum combined single limit of $1,000,000, and Automobile Liability Insurance…. Before commencing the Work, Contractor shall furnish appropriate certificates from its insurance carrier showing the above insurance is in force naming United Parcel Service, Inc., a Delaware corporation and each of its successors, subsidiaries and affiliates as additional insureds bearing the contractual indemnity endorsement below, and further providing that the insurance will not be cancelled or changed prior to at least thirty (30) days after written notice of such cancellation or change has been mailed to Owner. The commercial General and Automobile Liability policies in this paragraph shall be primary and noncontributory.

9. Contractor hereby assumes the entire responsibility and liability for all Work, labor and materials provided hereunder, including Contractor’s use of any equipment owned or leased by Owner. Contractor shall indemnify and hold harmless Owner against all costs, damages, or liability, including reasonable attorney fees and other costs of defense, arising out of: (a) the performance or non-performance of this Agreement by Contractor or its subcontractors, materialmen, agents and employees; or (b) injury to or death of any person (including Contractor’s employees), or for damage to or loss of tangible property, caused in whole or in part by Contractor’s negligence or that of its subcontractors, materialmen, agents, and employees, including Contractor’s use of any equipment owned or leased by Owner. Contractor shall also indemnify Owner for any liability arising out of Contractor’s failure to comply with applicable federal or international immigration law. The foregoing indemnity shall not extend to liability for injury to or death of persons or property damage caused by Owner’s sole negligence. The foregoing indemnity shall be construed in its broadest sense allowed by applicable state law.

The term Owner as used in paragraphs 7, 8, and 9 shall include Owner, its affiliated companies, including without limitation, United Parcel Service, Inc., a Delaware corporation, its successors, subsidiaries and affiliated companies, and the agents, servants, officers, shareholders and employees of any of the foregoing.

15. This Agreement shall be governed by the laws of the Province of Ontario, and the federal laws of Canada applicable therein.

[Emphasis added.]

[12] There is no issue that the applicants are UPS affiliates and are therefore entitled to enforce these contracts as third party beneficiaries.

[13] In argument, the applicants characterized this contractual arrangement as “belt and suspenders”, with the contractual obligation to indemnify and save harmless in clause 9 available if the CGL coverage under clause 8 is insufficient.

CGL insurance clause and related insurance

[14] Each of the three service providers, ITS, Airon and Honeywell, had CGL insurance. The insurer respondents have not accepted a duty to defend either fully, or at all.

[15] There is no issue about the general principles that apply to determine whether or not there is a duty to defend arising from an insurance policy. The Supreme Court of Canada has summarized the circumstances in which there will be a duty to defend in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at paras. 19 and 20, citing Nichols v. American Home Assurance Co., 1990 144 (SCC), [1990], 1 S.C.R. 801, as follows:

(a) An insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim.

(b) The onus is on the insured to establish that the pleadings fall within the initial grant of coverage.

(c) The pleadings govern the duty to defend. However, in examining the pleadings, the parties are not bound by the labels selected by the plaintiff. It is the true nature or substance of the claim that is determinative.

(d) It is irrelevant whether the allegations in the pleadings can be proven in evidence. That is to say, the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify. What is required is the mere possibility that a claim falls within the insurance policy.

(e) Where it is clear that the claim falls outside the policy, either because it does not come within the initial grant of coverage or because it is excluded by an exclusion clause, there will be no duty to defend.

[16] Further, where the pleadings are not framed with sufficient precision to determine whether the claims are covered by a policy, the insurer’s obligation to defend will be triggered where, on a reasonable reading of the pleadings, a claim within coverage can be inferred: Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, at para. 31.

[17] The widest latitude should be given to the allegations in the pleadings in determining whether they raise a claim within the policy: Nichols, at p. 812; Monenco, at para. 31.

[18] With respect to the pleadings analysis, the insurers each raise, with some differences in their positions, these two questions:

(i) In doing the pleadings analysis, should the court have regard to any pleadings other than the third party claims themselves?

(ii) Where the relevant pleadings make multiple claims/allegations, must the insurer defend the whole proceeding or only part of it?

(i) Which pleadings?

[19] The question of which pleadings the court should have regard to is not normally an issue. Normally, the Court need only have regard for a statement of claim and the allegations it makes against a defendant that asserts coverage. Here, the applicants are third parties. Some of the respondent insurers rely on phrases from cases where the issue of a third party claim did not arise to say that the pleadings analysis should be limited to the allegations made in the third party claim. In that regard, they rely on Monenco, which states as follows at para. 28:

Whether an insurer is bound to defend a particular claim has been conventionally addressed by relying on the allegations made in the pleadings filed against the insured, usually in the form of a statement of claim. [Emphasis added.]

[20] Third party claims have been considered, albeit infrequently. In Daher v. Economical Mutual Insurance Co., [1993] O.J. No. 2361 (Gen. Div.), Justice Salev addressed the question of what was meant by “pleadings” in a case involving a third party claim. He concluded that all the pleadings must be examined, although in most cases it would be the facts in the statement of claim and the third party claim that would determine the duty to defend: Daher, at para. 8. This decision was upheld on appeal without a focused consideration of the pleadings issue. By the time of the appeal, the insurer no longer disputed that the third party claim was within the policy; the only question was whether it was covered from the outset or only after an amendment was made to it: (1996), 1996 639 (ON CA), 31 O.R. (3d) 472, 96 O.A.C. 255, at paras. 11-12.

[21] The issue was expressly addressed by the Alberta Court of Appeal in Tarrabain v. Wawanesa Mutual Insurance Co., [2010] A.J. No. 50, 2010 ABCA 25, at paras. 13 and 21, which rejected the argument that the third party claim was to be considered in isolation. The Court held that the chambers judge correctly decided that both the third party claim and the statement of claim should be considered in determining whether or not there was a duty to defend. In doing so, the Court noted that the third party claim referred to the statement of claim, as required by the Alberta Rules of Court, and that those Rules also required that the statement of claim be appended to the third party claim.

[22] In Tarrabain, the Court distinguished the role of the statement of defence, given that an insured could, in its own statement of defence, attempt to manipulate the allegations in it to bring the claim within coverage.

[23] The Ontario Rules of Civil Procedure also underscore the connections between a third party claim and the main action. Under Rule 29.01, only a defendant in the main action can bring a third party claim. Further, the third party must allegedly be liable for all or part of the plaintiff’s claim (the ground applicable to the third party claims brought by the respondents here), or otherwise liable for a claim related to the claims made in the main action, or should be bound by the determination of an issue in the main action. Further, as set out in Rule 29.02(2), the third party claim must be served together with the statement of claim (and all other pleadings previously delivered in the main action or in any counterclaim, cross-claim or other third party claim). Rule 29.05 also allows a third party to defend the main action where appropriate, as it would be if the defendant that initiated the third party claim alleged that the third party was liable for all or part for the plaintiff’s loss (as they do here). As well, in Ontario the required Form under Rule 29 includes express reference to the underlying statement of claim.

[24] I conclude that the pleadings analysis in this application should focus on the statement of claim and the third party claims relevant to each insurer, which are interconnected. The applicants played no role in drafting the statement of claim or the third party claims. I have not, however, considered the applicants’ statements of defence to the third party claims. I do not think it is appropriate to have regard for the proposed re-amended statement of claim, as suggested by one of the insurers, and have not done so.

(ii) Duty to defend all or part of the claims

[25] The second issue arises only if there is a duty to defend. It raises the question of whether the insurer is obliged to defend the whole claim or just part of it where there are multiple claims, only some of which are potentially covered.

[26] The duty to defend is limited to defending claims that – if proven to be true – would fall within coverage under the policy: Papapetrou v. 1054422 Ontario Ltd. (2012), 111 O. R. (3d) 532, 2012 ONCA 506, at para. 41. It does not extend to the defence of independent claims. The court is required to assess the substance or the “true nature” of each claim contained within the pleadings to see if it falls within the scope of coverage: Papapetrou, at para. 44; Monenco, at paras. 29-35.

[27] Assessing the true nature of a particular claim is not an exercise to be undertaken in the abstract. It should be approached with a view to the specific limitations of the insurance coverage at issue: Papapetrou, at para. 47.

[28] Where there is an unqualified obligation to pay for the defence of claims covered by the policy, the insurer is required to pay all reasonable costs associated with the defence of those claims even if those costs further the defence of uncovered claims. The insurer is not, however, obliged to pay costs related solely to the defence of uncovered claims: Hanis v. Teevan, (2008), 92 O.R. (3d) 594, 2008 ONCA 678, at para. 2.

[29] As is illustrated by a series of “slip and fall” cases that confront this issue, the question of whether the duty to defend extends to the whole claim depends on the specific pleadings at issue and resulting determination of the true nature of the claims: e.g., Papapetrou; RioCan Real Estate Investment Trust v. Lombard General Insurance Co., 2008 16073 (ON SC), [2008] O.J. No. 1449, 91 O.R. (3d) 63 (S.C.J.); Atlific Hotels and Resorts Ltd. v. Aviva Insurance Co. of Canada, 2009 24634 (ON SC), [2009] O.J. No. 2005 (S.C.J.), 97 O.R. (3d) 233; Cadillac Fairview Corp. v. Olympia Sanitation Products Inc., 2010 ONSC 4309, 97 O.R. (3d) 233; Cadillac Fairview v. Jamesway Construction Ltd., 2011 ONSC 2633.

[30] As a result, I will address this issue below, after considering the true nature of the claims.

Policy interpretation

[31] Before considering the duty to defend under each insurance policy, I note that there is also no issue about the required approach to interpreting an insurance policy. The Supreme Court of Canada has summarized the interpretive principles for insurance policies in Progressive Homes at paras. 22-24, as follows:

(i) when the language of the policy is unambiguous, the court should give effect to clear language, reading the contract as a whole;

(ii) when the language is ambiguous, the court should rely on general rules of contract construction; and,

(iii) when the rules of construction fail to resolve the ambiguity, the court will construe the policy contra proferentem against the insurer − coverage provisions are interpreted broadly and exclusion provisions narrowly.

Intact (ITS’ CGL Insurer)

[32] A Certificate of Insurance issued to ITS by Intact’s predecessor showed that both Canadian and United States UPS companies were added as additional insureds to the ITS CGL policy, including as of the date of the relevant loss. Counsel to Intact confirmed this in writing in the course of the litigation; however, this confirmation was subject to the proviso that it was “only with respect to liability arising out of operations of named insured [ i.e., ITS]”.

[33] The main Intact CGL policy provisions are as follows:

COMMERCIAL INSURANCE POLICY NO. 5953316

…Throughout this policy the words “you” and “your” refer to the Named Insured shown in the Declarations. …

The word “insured” means any person or organization qualifying as such under SECTION II – WHO IS AN INSURED.

SECTION I – COVERAGES

COVERAGE A. Personal injury and property damage liability.

INSURING AGREEMENT We will pay those sums that the insured becomes legally obligated to pay as compensatory damages (including prejudgment interest) because of “personal injury” or “property damage” to which this insurance applies. No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for under SUPPLEMENTARY PAYMENTS – COVERAGES A, B AND D. This insurance applies only to “personal injury” and “property damage” which occurs during the policy period. The “personal injury” or “property damage” must be caused by an “occurrence”. The “occurrence” must take place in the “coverage territory”. We will have the right and duty to defend any “action” seeking those compensatory damages…

SECTION II – WHO IS AN INSURED?

4. Any person, firm or organization (other than an architect or engineering firm) for whom you have contracted to provide liability insurance. Coverage under this provision is afforded as per the present policy terms, limits and conditions and only with respect to your premises, your products or your “work”.

SECTION V – DEFINITIONS

1. “Action” means a civil proceeding in which compensatory damages because of “personal injury” or “property damage” to which this insurance applies are alleged. …

2. “Occurrence” means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

3. “Property damage” means:

a) Physical injury to tangible property, including all resulting loss of use of that property; or

b) Loss of use of tangible property that is not physically injured.

All such loss of use shall be deemed to occur at the time the “occurrence” that caused it.

17. “Your work” means:

a) Work or operations performed by you or on your behalf; and

b) Materials, parts or equipment furnished in connection with such work or operations.

“Your work” includes warranties or representations made at any time with respect to the fitness, quality, durability or performance of any of the items included in a. or b. above. [Emphasis added.]

[34] In addition, the certificate provides as follows:

It’s hereby agreed that United Parcel Service, Inc, a Delaware Corporation & United Parcel Service Canada Ltd, an Ontario Corporation & each of their successors, subsidiaries & affiliates are added as additional insured’s only with respect to liability arising out of operations of named insured. [Emphasis added.]

[35] It is apparent from the above provisions that the applicants are additional insureds on the Intact policy. Further, the policy provides insurance for “property damage” caused by an “occurrence” during the policy period. There is no dispute that there was property damage caused by an occurrence during the policy period.

[36] With respect to the duty to defend, the policy indicates that Intact has “the right and duty to defend any ‘action’” seeking compensatory damages that the insured becomes legally obligated to pay because of property damage to which the insurance applies. In keeping with this provision, “action” is defined as a civil proceeding seeking damages for property damage to which this insurance applies.

[37] With respect to the scope of the coverage, the certificate indicates that it is “only with respect to liability arising out of operations of [ITS]” and the policy indicates that it is “only with respect to … ‘your work’”, referring to ITS’s work. The definition of “your work” includes work or operations performed by ITS or on its behalf.

[38] Based upon the allegations in the statement of claim and third party claim, I find that the true nature of the claim is a claim for compensation arising from damage to Sanofi Pasteur vaccines stored in a temperature-controlled UPS warehouse in Burlington in 2009. The defendants are alleged to be jointly and severally liable for property damage in the amount of about $8 million. There are two essential categories of claims:

(i) Claims against UPS SCS, Inc. regarding representations made to Sanofi Pasteur and encompassed in the Master Services Agreement entered into between them, and claims regarding the general operation of the business, employee training, proper maintenance and supervision of the warehouse. The causes of action alleged are negligence, gross negligence, recklessness and/or fundamental breach of contract.

(ii) Claims against the other defendants, including ITS, as vendors, manufacturers, designers, installers and maintenance service providers of the components, equipment and systems that UPS SCS, Inc. had in place at the warehouse, including with respect to the sensor that allegedly failed. The causes of action alleged are again negligence, gross negligence, recklessness and/or fundamental breach of contract. However, the essential nature of these claims is in negligence.

[39] The particulars of negligence of ITS, among others in the second category, include allegations of failure to properly inspect and test the temperature sensors and failure to follow the manufacturer and industry-standard specifications for the inspection, installation and maintenance of the systems, equipment and components in the warehouse. The allegations, if proven to be true, are “with respect to” ITS operations and ITS work.

[40] The ITS third party claim expressly references the statement of claim and seeks “contribution and indemnity for any and all sums that ITS may be found adjudged owing to the plaintiff.” It expressly pleads the Sanofi action to “recover damages based in negligence, gross negligence, recklessness, willful misconduct and/or breach of contract”. It expressly pleads the plaintiff’s allegation that it sustained about $8 million in damages when vaccines were subjected to temperatures outside the requisite range at the relevant time in 2009. It expressly pleads that ITS is “entitled to contribution and indemnity” “for any amounts it may be found liable to pay the plaintiff in the main action”.

[41] In doing so, it includes the second category of claims described above. It proceeds to plead allegations of negligence against the third parties in support of its claim for contribution and indemnity. The ITS third party claim also pleads and relies on the Negligence Act, R.S.O. 1990, c. N.1. As set out in section 1 of that Act, it provides for the determination of degrees of fault where damages have been caused or contributed to by the fault or neglect of two or more persons (that is, in this case, the allocation of fault as between ITS, rising from the main action, and the applicants).

[42] Obviously, without the potential for a finding of fault against ITS, there would be no need for this third party claim.

[43] The allegations, if proven to be true, give rise to the possibility that there is coverage as set out in both the certificate and the policy, which broadly refer to insurance “with respect to” ITS operations and ITS work. There is therefore a duty to defend.

[44] As attested to by Intact’s affiant, by early March 2014, Intact had acknowledged a duty to defend three times, and had requested a discussion regarding costs sharing. Despite the prior confirmation of a duty to defend, in oral argument on this application Intact’s counsel submitted that the pleadings rule and the notice of application called for consideration of the third party claim only, and not the underlying action, and did not give rise to a duty to defend. There is some question about the impact of an insurer’s admission of a duty to defend and whether that admission is binding or should be taken into account in considering whether there is a duty to defend. However, I find that there is a duty to defend regardless of the insurer’s prior admission in that regard.

[45] Intact also raised the issue of whether it was required to defend the entire proceedings, or only part of it, submitting that it is not required to defend claims that fall outside the coverage. Based upon the two categories of claims described above and the terms in the policy and certificate regarding coverage, I conclude that the duty to defend extends only to the second category of claims. There is then the question of apportionment, which is addressed separately below.

Northbridge (Airon’s CGL Insurer)

[46] The Northbridge policy, providing CGL insurance to Airon, is similar to the Intact policy but not the same. It also provides insurance to organizations to which the main insured (here, Airon) contracted to provide liability insurance.

[47] The main Northbridge policy provisions are as follows:

POLICY NUMBER CBC 0626480 03

Throughout this Policy the words “you” and “your” refer to the Named Insured shown on the Declaration Page. …

GENERAL DEFINITIONS

APPLICABLE TO PART III AND V

12. “Action” means a civil proceeding in which damages because of “bodily injury”, “property damage” or “personal and advertising injury” to which this insurance applies are alleged.

13. “Property damage” means:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it. …

26. “Your work”:

a. Means:

(1) Work or operations performed by you or on your behalf; and

(2) Materials, parts or equipment furnished in connection with such work or operations.

b. Includes

(1) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of “your work”, and

(2) The providing of or failure to provide warnings or instructions.

PART III – COMMERCIAL GENERAL LIABILITY (OCCURRENCE BASIS)

SECTION I – COVERAGES

COVERAGE A. BODILY INJURY and PROPERTY DAMAGE LIABILITY

1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “action” seeking those damages. However, we will have no duty to defend the insured against any “action” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply. …

SECTION II – WHO IS AN INSURED

5. a. Any person, firm or organization (other than an architect or engineering firm) for whom you have contracted to provide liability insurance. Coverage under this provision is afforded as per the present policy terms, limits and conditions and only with respect to your premises, your properties or “your work”.

b. Any person or organization (hereinafter called “Additional Insured”) with whom you agree in a written equipment lease or rental agreement to name as an insured is an insured with respect to liability arising out of the maintenance, operation, or use by you of the equipment leased to you by such person or organization, subject to the following additional exclusions:

The insurance provided under 5. a. and b. above does not apply to: …

ii. “Bodily injury”, “property damage”, or “personal advertising injury” arising out of the sole negligence of the Additional Insured. [Emphasis added.]

[48] As with Intact, there is no issue that the applicants are insureds under the Northbridge policy, or that the policy provides insurance for property damage. In addition, there is an express duty to defend any action seeking compensatory damages that the main insured (that is, Airon) becomes legally obligated to pay because of property damage to which the insurance applies. Again, “action” is defined as a civil proceeding seeking damages for property damage to which the insurance applies.

[49] With respect to the scope of coverage, the policy indicates that it is “only with respect to… ‘your work’”, referring to Airon’s work. The definition of “your work” includes work or operations performed by Airon or on its behalf.

[50] The pleadings analysis of the true nature of the claim remains as set out above. While there are some differences between the third party claim of Airon and that of ITS, they do not change the true nature of the claims.

[51] Like the claims against ITS, the claims against Airon fall within the second category of claims. The particulars of negligence against the second category of defendants, including Airon, include alleged responsibility for the monitoring system and an alleged failure to follow the manufacturer and industry-standard specifications for the installation and maintenance of the systems, equipment and components in the warehouse.

[52] Like the ITS third party claim, the Airon third party claim seeks contribution and indemnity for any judgment obtained against it in the main action, and relies upon the Negligence Act. Further, the third party claim expressly pleads the plaintiff’s claim in the main action against the defendants, including Airon, again referring to alleged losses arising from damage to the vaccines in 2009. Again, without the potential for a finding of fault against Airon, arising from the main action, there would be no need for this third party claim.

[53] This third party claim further pleads that it repeats and relies on the allegations in its pleadings in the main action, which include the Airon statement of defence. That statement of defence pleads that Airon did do certain work in connection with the warehouse at the relevant time and admits that UPS contracted for the monitoring (controls) system with Airon.

[54] The allegations, if proven to be true, give rise to the possibility that there is coverage under the Northbridge policy. However, the Northbridge policy has an exception to its coverage that must be considered. The applicable coverage, which is in Section II, s. 5, does not apply to property damage “arising out of the sole negligence of the Additional Insured.” On the face of s. 5 of the policy, this exception does not apply because the defined term “Additional Insured” refers only to s. 5 b., which is inapplicable. However, even if that exception did apply, I would nonetheless conclude that there is the possibility of coverage and a duty to defend because, on the pleadings, the alleged negligence and resulting property damage did not arise out of the “sole negligence” of the applicants.

[55] As with Intact, I conclude that the duty to defend extends only to the second category of claims, giving rise to the question of apportionment, which is addressed below.

ACE (Honeywell’s CGL Insurer)

[56] The ACE policy, providing CGL insurance to Honeywell, is somewhat different than the other policies, and there is an issue with respect to the coverage under this policy that does not arise under the other two policies. ACE and Honeywell submit that the scope of coverage under the ACE policy is limited to the work performed on Cooler C, and the allegations here relate only to Cooler B.

[57] The main ACE policy provisions are as follows:

POLICY NO. CGL 323188

I. COVERAGES

B. PROPERTY DAMAGE LIABILITY

The Company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of property damage, to which this insurance applies, caused by an occurrence.

II. DEFENSE

The Company shall have the right and duty to defend any suit against the Insured seeking damages falling within the Coverages outlined in the Coverages above, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient, but the Company shall not be obligated to pay any claim or judgement or to defend any suit after the applicable limit of the Company’s liability has been exhausted by payment of judgements or settlements.

If the Company is not legally permitted to, or cannot for any other reason, defend any suit against the Insured, the Company will reimburse the Insured for the expense of such defense incurred with its consent.

VIII. DEFINITIONS

“INSURED”

(a) The Named Insured is the organization named in the declarations of this policy.

(b) The unqualified word Insured wherever used in this policy … includes not only the Named Insured but also:

(3) Any person, partnership, firm, corporation or government entity or other entity in whose name the Named Insured has by agreement contracted to effect insurance as provided by this policy, however the insurance provided for such additional unnamed Insured is restricted to apply solely to liability arising out of the Named Insured’s commitments under such agreement.

“PROPERTY DAMAGE” means (1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) the loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period.

ENDORSEMENT NO. 19

ADDITIONAL INSURED – WHERE REQUIRED UNDER CONTRACT OR AGREEMENT

THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.

This endorsement modifies insurance provided under the following:

COMMERCIAL GENERAL LIABILITY COVERAGE FORM

This endorsement modifies insurance provided under all coverage parts.

“Who Is An Insured” is amended to include as an Insured any person or organization from whom you have agreed under contract or agreement to provide insurance.

However, the insurance provided shall not exceed the scope of coverage and/or limits of this policy, notwithstanding the foregoing sentence in no event shall the insurance provided exceed the scope of coverage and/or limits by said contact [sic] or agreement. [Emphasis added.]

[58] The policy, under its definition of “INSURED”, extends coverage to entities that Honeywell contracted with for insurance, which extends to the applicants by virtue of the provisions in clause 8 of the services contract quoted above. However, the coverage is restricted. It applies solely to liability arising out of the Named Insured’s “commitments” under the contract pursuant to which Honeywell agreed to provide insurance.

[59] Thus, there is a need to consider the specific contract at issue in determining whether there is the possibility of coverage giving rise to a duty to defend.

[60] The Honeywell service contract relied upon by the applicants is an agreement signed in March 2009 under which Honeywell, the Contractor, agreed to provide services as follows:

Work to be Performed:

Contractor is to provide all services defined in the General Conditions to expand the existing Honeywell EBI Building Automation System to encompass the control, monitoring and alarming the newly constructed Freezer A & Cooler C environmentally controlled chambers. The documents defining this work is described in the attached Rider dated 3/6/09.

Date Work to Start:

3/16/09

Date Work to be Completed:

4/10/09

GENERAL CONDITIONS

1. Contractor agrees to provide all labour, supervision, materials, supplies, equipment, transportation, tools, permits, and services for the Work to be performed.…

2. Contractor shall carry Commercial General Liability Insurance …certificates…bearing the contractual indemnity endorsement below,…

3. … Contractor shall indemnify and hold harmless Owner against all costs, damages, or liability, including reasonable legal fees and other costs of defence, arising out of: (a) the performance or nonperformance of this Agreement by Contractor or its subcontractors, materialmen, agents and employees; or (b) injury to or death of any person (including Contractor’s employees), or for damage to or loss of tangible property, caused in whole or in part by Contractor’s negligence or that of its subcontractors, materialmen, agents, and employees, including Contractor’s use of any equipment owned or leased by Owner. Contractor shall also indemnify Owner for any liability arising out of Contractor’s failure to comply with applicable federal or international immigration law. The foregoing indemnity shall not extend to liability for injury to or death of persons or property damage caused by Owner’s sole negligence. ...

4. Owner may from time to time, by written instructions issued to Contractor, make changes in the Drawings or Specifications and issue additional instructions, require additional Work or direct the omission of Work previously ordered, and the provisions of this Agreement shall apply to all such changes, modifications, additions or deletions with the same effect as if they were embodied in the original Contract Documents. No extra or additional work shall be compensated unless authorized by prior written change order from Owner’s Authorized Representative.

5. This Agreement represents the entire and integrated agreement between the parties and supersedes all prior negotiations, proposals, representations, commitments, understandings or agreements between the parties, either written or oral, which are not included in the Contract Documents. This Agreement shall not be changed or modified by any oral agreement or any other agreement unless the same is in writing and signed by the party against whom enforcement of the change, modification or discharge is sought. If Contractor’s proposal is made a part of this Agreement and said proposal contains any terms or conditions inconsistent with the terms and conditions of this Agreement Form, then this Agreement Form shall govern.

RIDER TO AGREEMENT FORM, DATED AS OF 3/6/09, BETWEEN UPS SUPPLY CHAIN SOLUTIONS, INC. AND Honeywell

WORK TO BE PERFORMED CONTINUED:

Project Manual entitled:

UPS Supply Chain – Cooler C/Freezer A BAS System, dated 3/6/09

Attachment: User Requirements Specifications (URS) Document Number:…

DRAWINGS ENTITLED:

“Merck/Lilly Area, Cooler 3/Freezer 1 Location”

[Emphasis added.]

[61] Honeywell’s “commitments” under the above Service Contract were as set out under the heading “Work to be Performed” as elaborated upon in the General Conditions. However, as contemplated by clause 10, a change order was issued. The change order provided as follows:

Description of Work to be Performed:

Relocate existing controller, for one of the cooler #2 condenser units, to the area outside the footprint of the new cooler #3. The work is to be scheduled with the project manager and the QA group before proceeding. The current connection box will remain in place and a new connection box / housing will be installed to house the controller in the new location. The current connection box will be used as a pull through box for the cabling. All requirements necessary to complete the relocation of the controller to place in proper operation is included in this change order. [Emphasis added.]

[62] There is no dispute that cooler #2 is Cooler B and cooler #3 is Cooler C. It is Cooler B that is implicated in the statement of claim.

[63] As put by Honeywell, the work under the change order was “the only work undertaken by Honeywell under the [Service Contract] that had anything to do with Cooler B”.

[64] There is an issue between the parties about to what extent this contract should be construed now, and in that regard to what extent I should take into account extrinsic evidence that has been filed by Honeywell on the application. Honeywell has delivered an affidavit containing extensive extrinsic evidence. It describes in detail the work actually done by Honeywell, including pursuant to the change order. The affidavit refers to evidence that is not found in the pleadings either expressly or indirectly through the consideration of documents that are referred to in the pleadings. The affidavit includes conclusions to the effect that the work done by Honeywell under the change order, despite its reference to Cooler B, could not have actually caused Sanofi’s loss.

[65] The applicants dispute the propriety of this affidavit. They rely on Monenco, at para. 37 and Cooper v. Farmers Mutual Insurance Co., 2002 44938 (ON CA), [2002] O.J. No. 1949, 59 O.R. (3d) 417 (C.A.), at paras. 8-14, and more specifically on the principle that a judge hearing an insurance coverage application is precluded from fact-finding on matters at issue in the underlying tort litigation. A coverage application is not to be converted into “a trial within a trial”: Cooper, at para. 11.

[66] Honeywell relies upon Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, as well as earlier cases, to submit that it is appropriate for a court, when interpreting a contract, to have regard for the surrounding circumstances.

[67] To the extent that the service contract, as amended by the change order, is incorporated by reference into the insurance policy, it forms part of the insurance policy. It is the insurance policy that must be interpreted to reach a conclusion about whether there is the mere possibility of coverage under that policy. While I appreciate that there is an overlap between the two in the circumstances where the policy incorporates the scope of work in this way, I conclude that it does not change the essential task. The task is to analyze the pleadings, assuming the alleged facts are true, and determine whether there is the mere possibility of coverage under the policy.

[68] In considering the nature and scope of Honeywell’s “commitments” I have regard for relevant surrounding circumstances. However, I note that the nature and extent of evidence of the surrounding circumstances that may be considered in interpreting a contract is not unlimited. As set out in Sattva, at para. 50, 58:

The nature of the evidence that can be relied upon under the rubric of “surrounding circumstances” will necessarily vary from case to case. It does, however, have its limits. It should consist only of objective evidence of the background facts at the time of the execution of the contract…, That is, knowledge that was reasonably ought to have been within the knowledge of both parties at or before the date of contracting… [Emphasis added.]

[69] Some of the evidence in the Honeywell affidavit could properly be described as objective evidence of the background facts at the time of the execution of the service contract that was within the knowledge of both parties on or before that time. One significant example is the evidence that the reference in the contract to cooler #2 is Cooler B and cooler #3 is Cooler C. However, the Honeywell affidavit also describes how the work was actually done after the change order was made, and whether or not that work, in the view of the affiant, could have caused the problem with the Sanofi vaccines. That evidence is not permitted under the rubric of “surrounding circumstances”. And it is that evidence that leads to the conclusion that Honeywell and ACE argue for.

[70] I conclude that the “commitments” made under the Service Contract and related change order are as described under the heading “Work to be performed” and the Service Contract and “Description of Work to be Performed” in the change order, bearing in mind that cooler #2 is Cooler B. These commitments are incorporated by reference into the policy. The question is then whether the claims may fall within these “commitments” under the policy, based upon the pleadings, giving rise to the mere possibility of coverage.

[71] Turning to the pleadings analysis, based upon the allegations in the statement of claim and third party claim I find the true nature of the claim remains as set out above in the analysis of the Intact policy. While there are some differences between the third party claim of Honeywell and the others, they do not change the true nature of the claim. Upon a review of the statement of claim, I conclude that the allegations do relate to Cooler B in particular as is noted in a number of places in that pleading. However, it is accepted that the scope of work in the change order, incorporated into the policy, extends to Cooler B.

[72] Like the third party claims of ITS and Airon, the Honeywell third party claim seeks contribution and indemnity for all amounts, if any, for which Honeywell may be found to be responsible to the plaintiff in the main action. The third party claim expressly pleads the plaintiff’s claim in the main action. It further adopts the allegations made against the applicants in the pleadings of the other parties to the proceedings, incorporating the third party claims of both ITS and Airon. Further, it relies on the Negligence Act. Without the potential for a finding of fault against Honeywell arising from the main action, there would be no need for this third party claim of contribution and indemnity and allocation of fault.

[73] Moving to the interpretation of the insurance policy as regards the scope of coverage, the “commitments” made in the Honeywell Service Contract, and more specifically the change order, do include commitments as regards Cooler B at the relevant time. Taken at face value, the description of the Honeywell work includes the relocation of a Cooler B controller. Honeywell submits that the relationship between its work and Cooler B is small. That may be so, but it does not change the duty to defend analysis.

[74] Again, the claims against Honeywell fall within the second category of claims. The particulars of negligence against the second category of defendants, including Honeywell, include alleged responsibility for the monitoring system and an alleged failure to follow the manufacturer and industry-standard specifications for the installation and maintenance of the systems, equipment and components in the warehouse. These allegations, if proven to be true, give rise to the possibility of coverage under the ACE policy.

[75] There is an exception to coverage that must be considered, also incorporated from the terms of the service contract. Coverage does not apply to property damage caused by the “Owner’s sole negligence.” However, this exception does not remove the duty to defend because on the pleadings analysis, the alleged negligence and resulting property damage did not arise out of the “sole negligence” of the applicants.

[76] I do not accept the timing arguments that have been advanced. First, it was argued that absent a finding that the loss was actually caused by Honeywell’s negligence, the application was premature (since no fault had yet been found). This runs contrary to the express words of the policy, even bearing in mind the aspects of the service contract that are incorporated by reference. The policy expressly provides for a duty to defend where there is a suit against an insured seeking damages falling within the coverages, even if the allegations are groundless. More recently it was argued that the coverage was not triggered at all because the appeal has been dismissed by the Court of Appeal. This is subject to further appeal rights not yet run, but in any event would be highly problematic. An insurer could escape payment of defence costs already incurred because, in the meantime, the action was dismissed. The policy does not bear out this position. I further observe that here, the underlying action had already been dismissed before this application was even heard, yet the position at the time of the hearing was that the application was premature.

[77] Even Honeywell admits that there is a relationship between the work it did under the change order and Cooler B. It may be that Honeywell has a good defence to a claim on its merits, but that is not the issue before me.

[78] I disagree with the submission made by the respondents that there is an insufficient nexus with the true nature of claim, and more specifically the second category of claims, for the limited purpose of determining a duty to defend: University of Waterloo v. Scottish & York Insurance, 2014 ONSC 1125, at para. 28; RioCan, at para. 38.

[79] I therefore conclude that each of Intact, ACE and Northbridge have a duty to defend, but only in respect of the second category of claims.

Service Contracts

[80] The applicants also rely on the service contracts with ITS, Airon and Honeywell to found a duty to defend and related obligation to pay ongoing legal expenses.

[81] All three service providers advance the argument that service contracts, and more specifically clause 9, create a duty to indemnify, not a duty to defend, even if the service contract does apply.

[82] In the narrow context of the alleged duty to defend and pay ongoing legal expenses, the applicants submit that the proper approach to determining the issue is the same pleadings analysis that applies to insurance policies. The only difference is that the rules of contract interpretation are not precisely the same.

[83] In Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, 85 O.R. (3d) 254, the Court of Appeal summarized the principles applying to the interpretation of commercial contracts as follows:

[24] Broadly stated … a commercial contract is to be interpreted,

(a) as a whole, in a manner that gives meaning to all of its terms and avoids an interpretation that would render one or more of its terms ineffective;

(b) by determining the intention of the parties in accordance with the language they have used in the written document and based upon the “cardinal presumption” that they have intended what they have said;

(c) with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties; and (to the extent there is any ambiguity in the contract),

(d) in a fashion that accords with sound commercial principles and good business sense, and that avoids a commercial absurdity. [Footnotes omitted.]

[84] These principles have not been displaced by the more recent decision of the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, which call for me to read the service contracts “as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract”: at para. 47. As mandated by Sattva, I have taken a practical, common sense approach not dominated by technical rules of construction, with due regard for proper evidence of surrounding circumstances: at para. 47.

Interpretation of Clause 9

[85] The applicants rely on this language in clause 9:

9. … Contractor shall indemnify and hold harmless Owner against all costs, damages, or liability, including reasonable attorney fees and other costs of defense, arising out of: (a) the performance or non-performance of this Agreement by Contractor...; or (b) … for damage to or loss of tangible property, caused in whole or in part by Contractor’s negligence… [Emphasis added.]

[86] This clause appears in the UPS standard form “General Conditions” in each of the service contracts relied upon.

[87] The applicants’ position is that the inclusion of the words “and hold harmless” means that there is a duty to defend notwithstanding that express “duty to defend” language does not appear in clause 9. In support of this position, the applicants rely upon Stewart Title Guarantee Co. v. Zeppieri, 2009 2329 (ON SC), [2009] O.J. No. 322, 94 O.R. (3d) 196 (S.C.J.). In that case, the court concluded in a different context that an agreement to “indemnify and save harmless from and against any claims arising under [title insurance]” imposed a duty to defend as well as to indemnify.

[88] The respondents’ position is that clause 9 does not create a duty to defend – it creates only an obligation to indemnify the applicants if the service provider’s negligence caused or contributed to Sanofi’s loss. They rely on the lack of any reference to “claims” in clause 9, in contrast to the wording of the clause in Stewart Title. The differences do not stop there.

[89] Stewart Title involved arrangements under which members of the Law Society of Upper Canada (LSUC) could qualify for an exemption from an insurance levy otherwise payable to LAWPro by real estate practitioners. Stewart Title offered title insurance. It agreed with LAWPro that it would comply with certain terms and conditions in order that LSUC members who used its title insurance would get the exemption from the levy surcharge.

[90] The real estate practitioners arranging for title insurance were not themselves insured under the title insurance. An issue then arose regarding whether Stewart Title had a duty to defend a practitioner against claims relating to its title insurance.

[91] The letter agreement between Stewart Title and LAWPro provided an indemnity in favour of all members of the LSUC that read, in part, as follows:

… where a title insurance policy(ies) is(are) issued in favor of all of the transferees and chargees obtaining an interest in or a charge against the land which is the subject of a real estate transaction, we agree to:

(i) indemnify and save harmless the member of the Law Society of Upper Canada and the member’s law firm (“the member”) acting as solicitor(s) … from and against any claims arising under the title insurance policy(ies), except for the member’s gross negligence or wilful misconduct; and

(ii) release our right to maintain a negligence claim against the member(s) acting as solicitor(s) for the transferee(s) chargee(s), and/or the title insurer(s), except for the member’s gross negligence or wilful misconduct. Stewart Title, at para. 12 [Emphasis added.]

[92] In construing this section, the Court applied the principles of contract interpretation as set out in Ventas, including the language used in the contract, the business sense underpinning it and the reasonable expectations of the parties. The court observed that the above clause “passed on the risk of the costs of defending claims, as well as indemnifying against potential settlements or judgments in title-insured transactions. That was the ‘quid pro quo’ for securing an exemption from the levy surcharge, thereby enhancing the competitiveness in the marketplace of products offered by title insurers such as Stewart Title.”: at para. 26.

[93] The Court held that the obligation to “indemnify and save harmless the member of the [LSUC]... from and against any claims arising under the title insurance” must have some meaning beyond the obligation to indemnify, finding that it required Stewart Title to fund, on an ongoing basis, the reasonable defence costs of a LSUC member facing a third party claim. As put by the Court, “a LSUC member should never have to put his hand in his pocket in respect of a claim covered by the terms of the 2005 Indemnity Agreement.”: at para. 17.

[94] The applicants also rely upon Kelly v. Eldridge, 2006 NBQB 426, [2006] N.B.J. No. 543 (Q.B.), another case in which the contracting party seeking a defence (a homeowner) was not otherwise insured under the terms of the contract. That contract provided that the contractor “shall protect itself and indemnify and save the Owner harmless from any and all claims which may arise from the Contractor’s operations under the Contract…”: at para. 4. The contract required that the Contractor maintain insurance coverage, but did not require that the homeowner be added as an insured. As a result, the homeowner did not have the benefit of a duty to defend arising from that insurance.

[95] The terms in the contracts in both Stewart Title and Kelly related only to claims against the party seeking a duty to defend, and did not provide access to insurance and its duty to defend. That is not the case here.

[96] The question of whether the service contracts at issue here impose a duty to defend must be determined based upon an interpretation of those agreements in particular. The service contracts each include two related clauses – that is, clauses 8 and 9 – under which the service provider is obligated to add UPS to its CGL insurance as well as provide its own indemnity. The insurance requirements in clause 8 expressly incorporate the contractual indemnity endorsement in clause 9.

[97] Clause 8 therefore provides a duty to defend under the CGL insurance. Under Sattva, this duty to defend is properly taken into account as an objective background fact about CGL insurance that ought reasonably to have been known by the parties at the time of entering into the service contract.

[98] Having contracted for a duty to defend in clause 8 makes it more difficult to suggest that clause 9 should be interpreted to include such a duty when not expressly stated. Common sense and good business sense suggest that if it was intended that both the contractor and the insurer have a duty to defend, the service contract would set out how those concurrent duties were meant to be deployed. It does not.

[99] However, the more significant challenge with the applicants’ argument arises from what clause 9 does say. Unlike Stewart Title and Kelly, it is not restricted to claims made against UPS and its affiliates. It includes any damages arising out of performance or non-performance of the agreement and damages caused in whole or in part by the contractor’s negligence. It would include, for example, damage caused to UPS’s own property. UPS could bring its own claim against the service contractor under clause 9, without any claim first being made against UPS. Bearing this in mind, it belies common sense to suggest that the phrase “and save harmless” imposes a duty to defend in favour of UPS when advancing its own claim.

[100] The applicants submit that “save harmless” must mean something more than “indemnify”, given the ordinary rules of contract interpretation. However, the common sense approach mandated by Sattva also emphasizes that words do not have an immutable or absolute meaning: at para. 47. “The meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement”: at para. 48.

[101] Clause 9 does use the phrase “indemnify and save harmless”, but bearing in mind its entire wording and structure, it also includes back-references to the “foregoing indemnity”. Read as a whole, this clause treats the two as one and the same. In any event, if “save harmless” must mean something more, it does not mean a duty to defend given that the clause is not limited to claims against UPS. Whether those words have a role in another context is not before me. This application is limited to the question of a duty to defend, not the ultimate scope of the rights under clause 9. Other issues about the scope of the clause are not to be determined on this preliminary application: Monenco, at para. 37.

[102] I therefore conclude that the service contracts at issue do not impose a duty to defend upon ITS, Airon or Honeywell.

Apportionment

[103] I have concluded that each of Intact, ACE and Northbridge have a duty to defend, but only in respect of the second category of claims. In all the circumstances, I conclude that the second category of claims represents half the claims and that all three insurers shall have an equal obligation to defend those claims. If there is a final adjudication of the duty to indemnify and a reallocation is called for, these parties may seek reimbursement at that time.

Choice of counsel

[104] Given my ruling that the duty to defend is only in respect of the second category of claims, there is an inherent conflict of interest that requires the appointment of independent counsel to defend the applicants. While I have received some general submissions about the terms that ought to be imposed in relation to the appointment of new counsel, those submissions were not made with the benefit of this decision. In the circumstances, I will give the parties an opportunity to come to an agreement on terms regarding the appointment of counsel, failing which I will receive written submissions with proposed terms on the same schedule as submissions on costs as set out below.

Abuse of process

[105] One of the respondents, Airon, also advanced the argument that this application is an abuse of process because the applicants have already defended the third party claims, made counterclaims and commenced fourth party claims against the insurers. Having reviewed those pleadings, while there is potential overlap with the fourth party claims, I conclude that this application is the appropriate manner of proceeding on the issues advanced and not an abuse of process. Any arguments about unnecessary overlap can be addressed within the context of costs.

Costs and form of order

[106] This application is therefore granted in part. If the parties cannot agree on costs, brief written submissions and costs outlines may be delivered on or before April 17, 2015, and any responding submissions on or before April 30, 2015, or in accordance with such other timetable as the parties may agree on. Written submissions on the draft form of order shall be submitted on the same timetable. If the parties do agree to change the above timetable, the revised timetable shall promptly be communicated to me by email to my assistant.

W. Matheson J.

Released: March 18, 2015

CITATION: UPS Supply Chain Solutions, Inc. v. Airon HVAC Service Ltd., 2015 ONSC 1734

COURT FILE NO.: CV-13-486839

DATE: 20150318

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

UPS SUPPLY CHAIN SOLUTIONS, INC., UPS SUPPLY CHAIN SOLUTIONS GENERAL SERVICES, INC. and UNITED PARCEL SERVICE OF AMERICA, INC.

Applicants

– and –

AIRON HVAC SERVICE LTD., AIRON HVAC AND CONTROL LTD., HONEYWELL INTERNATIONAL INC., INDUSTRIAL TECHNICAL SERVICES (ITS) INC., ACE INA INSURANCE, NORTHBRIDGE INSURANCE and INTACT INSURANCE COMPANY

Respondents

REASONS FOR DECISION

Justice W. Matheson

Released: March 18, 2015