CITATION: Versa Fittings v. Berkley Insurance Co., 2015 ONSC 1756

COURT FILE NO.: CV-13-491427

DATE: 20150319

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Versa Fittings & Manufacturing Inc.

Plaintiff

– and –

Berkley Insurance Company and Continental Insurance Company and Krause Edwards Insurance Brokers Limited

Defendants

Roger Chown, for the Plaintiff

Marcus B. Snowden and Sébastien A. Kamayah, for the Defendant Berkley Insurance Company

Thomas J. Donnelly, for the Defendant Continental Casualty Company

Roderic McLauchlan and Daniel Zacks, for the Defendant Krause Edwards Insurance Brokers Limited

HEARD: 16 January 2015, at Toronto

MEW J.

(Motions brought under Rule 21 of the Rules of Civil Procedure)

[1] The plaintiff, Versa Fittings & Manufacturing Inc., is a manufacturer and distributor of valves. Its valves were components in heating, ventilation and air-conditioning (“HVAC”) units assembled by Unilux VFC Corp. Unilux supplied HVAC units which were installed in newly-built condominium towers. There have been floods in some of those condominium towers, allegedly as a result of valve failures in the HVAC units. Versa has been sued in a series of actions arising from floods said to have been caused by the failure of its valves.

[2] These motions involve insurance coverage issues arising from the alleged failure of Versa’s valves. One of Versa’s liability insurers, Continental Insurance Company, seeks determination of the issue of whether it is required to defend six of the actions which have been commenced against Versa.

[3] Continental provided commercial general liability insurance coverage to Versa from 28 May 2008 until 28 May 2010. Berkley Insurance Company then came on risk. Berkley’s policy was in force from 28 May 2010 until 28 May 2013.

[4] Both policies cover liability for property damage (as defined) occurring while the policy in question was in force.

[5] Versa, in a separate motion, seeks a determination of whether the “property damage” in question occurred during the Continental policy period, the Berkley policy period, or both.

[6] Continental’s position is that its policy only covers property damage that occurred while it policy was in effect and that leaks which took place after the Continental policy expired are not covered. Continental seeks a declaration that it has no duty to defend or indemnify Versa with respect to the six underlying actions in issue.

[7] Berkley takes the position that the motions are premature, since the question of coverage under its policy turns on material facts in dispute, and that, accordingly, resolution of the coverage issues raised by Versa should not be determined at this stage. Alternatively Berkley argues that any property damage alleged to have been caused by Versa occurred prior to Berkley’s time on risk.

[8] To put these coverage issues in context, Continental is already providing a defence to Versa for claims which it accepts as raising the possibility of property damage having occurred during its time on risk. In that regard, Continental also concedes that, for the purpose of determining its defence obligations, where the pleadings in the underlying actions are silent on dates of supply or installation, it should be assumed that property damage may have occurred during the Continental coverage period.

[9] Berkley, having initially assumed the defence of some of the actions against Versa under reservation of rights, subsequently discontinued its funding of the defence after a coverage investigation. It concluded that any claims presented to Berkley during its time on risk were for property damage caused by an occurrence that took place prior to its policy period. Berkley also pleads that as a result of misrepresentations made by Versa to Berkley, Versa has waived its right to a defence or indemnity from Berkley or is estopped from pursuing its claims against Berkley.

The Duty to Defend

[10] An insurer’s duty to defend its insured is determined by reference to the pleadings in the underlying claims made against an insured, documents referred to in the pleadings, and the terms of the policy. A court generally cannot consider facts that are not contained in the pleadings: R.W. Hope Ltd. v. Dominion of Canada General Ins. Co. (2001), 57 O.R. 93d) 425 (C.A.), at para. 22; Halifax Ins. Co. v. Innopex Ltd. (2004) 2004 33465 (ON CA), 72 O.R. (3d) 522 at paras 32, 35-37.

[11] The duty to defend is not dependent on the insured ultimately being liable and the insurer actually being required to indemnify the insured under the policy. What is required is the “mere possibility” that a claim falls within the coverage provided by the insurance policy: Progressive Homes Ltd. v. Lombard General Insurance Co., 2010 SCC 33 at para 19.

[12] The six underlying actions against the insured demonstrate a range of different pleading styles and techniques. Although in those six actions there are no obvious examples of manipulative pleadings designed to generate the maximum possible insurance coverage, the level of detail and the framing of allegations in the pleadings in the underlying action varies, presenting an additional challenge in the search for a consistent application of the relevant principles. That said, the parties to an insurance contract are not necessarily bound by a plaintiff’s choice of labels. Thus, insurers are not left “defenceless against inaccurate or manipulative pleadings”: Lloyd’s Underwriters v. Scalera, 2000 SCC 24 at paras 81-86.

[13] The guidance provided by Supreme Court in Scalera notwithstanding, the parties seeking to establish a duty on the part of Continental to defend its insured ask the court to draw various inferences from the facts and to resolve any doubts as to the availability of coverage in favour of the insured. When pleadings are not framed with sufficient precision to readily determine whether the allegations made against an insured would be covered by a policy, a duty to defend may nevertheless arise if, 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 per Iacobucci J. at para 31.

The Policies

The Continental Policy

[14] The pertinent provisions of the Continental policy include the following:

SECTION I - COVERAGES

COVERAGE A. BODILY INJURY AND PROPERTY DAMAGE LIABILITY

1. Insuring Agreement

We will pay those sums you become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies.

This insurance applies only to bodily injury and property damage which occurs during the policy period. The bodily injury and 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 damages.

[15] The term “occurrence” is defined in Section IV of the policy. It means:

… an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

[16] “Property damage” is defined as:

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.

[17] Continental refers to a number of exclusions contained in its policy:

“Your Product” Exclusion

This insurance does not apply to … [p]roperty damage to your product arising out of it or any part of it.

“Your Product” is defined as:

a. Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by:

(1) You;

(2) Others trading under your name; or

(3) A person or organization whose business or assets you have acquired; and

b. Containers (other than vehicles), materials, parts or equipment furnished in connection with such goods or products.

Your product 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) and (b) above.

“Product Recall” Exclusion

This insurance does not apply to …

Recall of Products, Work or Impaired property

Any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of:

(1) Your product;

(2) Your work; or

(3) Impaired property;

if such product, work, or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.

“Impaired property” Exclusion

This insurance does not apply to …

Property damage to impaired property or property that has not been physically injured arising out of:

(1) A defect, deficiency, inadequacy or dangerous condition in your product or your work …

This exclusion does not apply to the loss of use of other property arising out of sudden accidental physical injury to your product or your work after it has been put to its intended use.

“Impaired property” is defined as:

Impaired Property: tangible property, other than your product or your work, that cannot be used or is less useful because:

a. It incorporates your product or your work that is known or thought to be defective, deficient, inadequate or dangerous; or …

If such property can be restored to use by:

(1) The repair, replacement, adjustment or removal of your product or your work …

The Berkley Policy

[18] The Berkley and Continental policies are very similar. However, because of the alternative position taken by Berkley (namely that any property damage alleged to have been caused by Versa occurred prior to Berkley’s time on risk) it is appropriate to also recite pertinent provisions of the Berkley policy. The grant of coverage in the Berkley policy includes the following language:

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 “compensatory damages” because of “bodily injury” or “property damage” to which this insurance applies.

b. This insurance applies to “bodily injury” and “property damage” only if:

(1) The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory”; and

(2) The “bodily injury” or “property damage” occurs during the policy period…

[19] The term "occurrence" is defined as an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

[20] The policy defines “property damage” as:

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.

The Allegations

[21] The claims advanced in the six underlying actions can be summarised as follows:

a. 25 Telegram Mews, Unit 3205

It is alleged that each of the defendants are liable “in relation to the loss and damage to the plaintiff’s property.” On 23 June 2011, a ball valve failed in unit 3205 that was connected to the return water line of the HVAC system from the building’s main riser, causing a water escape which flooded and was so significant as to entirely soak the 32nd and the majority of the 31st floor of the high rise and leak into each floor below. This resulted in significant and substantial water damage to the condominium building including to its structural interior, ceilings, walls, flooring, carpet, drywall, garbage chute, and elevator system. The claimant alleges that “under normal use the air conditioning system and/or its components should not spontaneously fail.”

b. 25 Telegram Mews, Unit 3108

It is alleged that on 6 October 2012, a ball valve failed in unit 3108 that was connected to the return water line of the HVAC system from the building’s main riser, causing a water escape and flooding on several floors. The claimant again pleads that “under normal use the air conditioning system and/or its components should not spontaneously fail.”

In both of the 25 Telegram Mews actions, in addition to compensation for damage to the building and its contents, the claimant seeks damages relating to the need to replace 1,328 ball valves in the building before those valves crack and fail, thereby causing additional damage.

c. Chevalard and Benoist

Diane Chevalard and Christopher Benoist are tenants in unit 3108 of 25 Telegram Mews in Toronto. They claim that on 6 October 2012 they returned home and discovered extensive water damage in their apartment, rendering it uninhabitable. The cause of the extensive water damages was a burst valve in the fan coil unit of their apartment.

In addition to the damage caused to their unit and its contents, the claimants seek replacement of the defective valves and compensation for lodging expenses incurred while their home was uninhabitable.

d. 21 Carlton Street

A third party claim by Unilux for defective products supplied by Versa on 5 February 2008 and 3 May 2008. In main action it is alleged that on 20 August 2011 a valve in the HVAC system came apart while it was being serviced, causing water to flood throughout the property. It is alleged that Unilux “knew or ought to have known that the Valve contained a manufacturing defect that led to premature failure of the Valve through stress corrosion cracking.”

e. 4850 Glen Erin Drive, Units 806 and 507

In the first of two actions brought by Peel Standard Condominium Corporation No. 862, it is alleged that on 12 March 2013, a valve in the fan coil unit of condominium unit 806 failed, causing flooding and resulting in damage to common areas and to the other condominium units and their contents. In addition, on 17 October 2013 a valve in the fan coil unit of condominium unit 507 failed, also causing flooding and resulting in damage to common areas and to other condominium units and their contents.

f. 4850 Glen Erin Drive

In the second Glen Erin action, it is also alleged that in March, 2013 water escaped from a fan coil unit as a result of the failure of the valve causing damage to a unit, the units below, and the common elements and that on 17 October 2013 a second valve failed in a fan coil unit in a different residential unit leading to water escape and resultant damage. The claimant asserts that the valve failures occurred as a result of material and manufacturing defects, specifically that the valves were forged from a high-zinc brass alloy susceptible to dezincification and stress-corrosion cracking.

The relief sought does not include compensation for damage to the common areas and to other condominium units and their contents, but does seek damages for the cost of replacing the valves, which are alleged to be susceptible to failure because of defects discovered following the floods as well as compensation for property management time and out-of-pocket expenses.

Issues

[22] Three issues are presented for determination:

a. Whether, in the circumstances, relief under Rule 21.01(1)(a) – determination, before trial, of a question of law raised by a pleading – is appropriate;

b. Whether there was “property damage” in the above referenced underlying claims which occurred during the Continental policy period, the Berkley policy period, or both; and, if so,

c. Whether Continental has a duty to defend Versa in the six actions in question.

Suitability of Determination of Issue Before Trial

[23] Rule 21.01(1)(a) provides an appropriate mechanism for parties to seek a timely and relatively inexpensive determination of an insurer’s duty to defend its insured. Such motions require the court to look at the pleadings, documents referred to in the pleadings, and the terms of the policies. The existence of a duty to defend is a point of law, the determination of which will dispose of an issue raised in the statement of claim: see Longarini v. Zuliani (1994), 1994 1283 (ON CA), 17 O.R. (3d) 527 (C.A.) at para. 16

[24] Where a duty to defend exists, an insurer will, subject to the terms, conditions and limits of the applicable policy, be required to bear the cost of defending lawsuits against its insured. “Duty to defend” policies relieve an insured of the burden of funding its own defence (in contrast to “defence cost reimbursement” policies which require the insured to arrange and initially fund its own defence and then seek reimbursement form the insurer). Given the expense and longevity of many lawsuits, the benefit of a duty to defend policy can be seriously undermined if, upon a coverage dispute arising, an insured is put in the position of having to fund its own defence for a protracted time.

[25] Berkley’s objection to a determination of the “property damage” issue on a Rule 21 application is predicated on the well-established principle that Rule 21.01(1)(a) is not designed to answer questions of law where material facts are in dispute: Portuguese Canadian Credit Union Ltd. (Liquidator of) v. CUMIS General Insurance Co., 2010 ONSC 6107 at para 28.

[26] In submitting that the applications brought by Versa and Continental should not be granted, Berkley refers to:

a. its assertions that Versa made misrepresentations when applying for insurance with Berkley;

b. its allegation that Versa waived, or is estopped from asserting any right to, defence or indemnity from Berkley because it was represented to Berkley that Continental had accepted liability for all existing and future claims related to Versa’s alleged product defect;

c. material facts in dispute which bear on whether the requisite degree of fortuity exists for there to be coverage for the claims made under its policy.

[27] In respect of the third of these points, Berkley argues that any misrepresentations potentially affect whether the failures were accidental, in the sense of being fortuitous incidents “neither expected of intended from the standpoint of the Insured”. Because an “occurrence” must be fortuitous, if, as Berkley alleges, Versa knew by about the defects in its valves before Berkley came on risk, then there could be no “property damage” during the term of the Berkley coverage.

[28] It is worth repeating that Versa does not at this time seek an order requiring Berkley to defend it. Rather it seeks a determination of an issue of law, namely whether the pleadings in the six underlying actions against it assert “property damage” which occurred during the policy period of Continental, Berkley or both. Of course, any finding that the allegations include the occurrence of “property damage” under the Continental policy will also have application to Continental’s motion for a declaration that it has no duty to defend Versa.

[29] The effect of the relief sought by Versa against Berkley does not prejudice its ability to run the defences it has raised based on estoppel, waiver and misrepresentation as well as the effect of any policy exclusions.

[30] The just, most expeditious and least expensive resolution of the issue of whether the pleadings raise issues of property damage under the policies requires that both insurers should be bound by a single determination of that issue. Such an approach avoids a duplication of effort and resources as well as the possibility of inconsistent findings. A pragmatic response to Berkley’s submissions is to specify that any determination of whether “property damage” has occurred during its time on risk is without prejudice to any subsequent determination of Berkley’s defences based on the estoppel, waiver, misrepresentation and lack of fortuity.

[31] With that caveat, I am of the view that the determination before trial of the issues raised on these motions is appropriate.

Are There Allegations of “Property Damage”?

[32] A common feature of the six underlying actions is that the failure of the valves in question and the consequent flooding occurred after Continental was on risk (with the exception of the 17 October 2013 incidents at 4850 Glen Erin Drive, each of these incidents occurred while the Berkley policy was in force).

[33] Continental’s position is that its policy only covers property damage which takes place during the policy period:

When the loss consists of an identifiable event, such as a flood, or fire, it is very easy to determine when the property damage occurred.

In this case, the flooding that is the subject of all of the actions took place after the last [Continental] policy expired in 2010. Pursuant to the clear wording of the policy, there is no coverage. Since there is no possibility of coverage, there is no duty to defend.

[34] It will be recalled that the policies contain the following definitions of “property damage”:

Continental Policy

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.

Berkley Policy

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.

[35] The definition of “occurrence” is identical in both policies:

[A]n accident, including continuous or repeated exposure to substantially the same general harmful conditions.

[36] A layperson would likely think that it would be easy to pinpoint when property damage occurred in the case of a flood caused by the failure of a valve. But such an approach is criticised by one of the parties as oversimplifying a complex series of allegations. The proponents of a more holistic approach to the duty to defend point to a growing body of jurisprudence which recognises that in many product liability cases “property damage” is progressive and the culminating (and often cataclysmic) event represents but the last stage of a process of deterioration.

[37] Versa advances the following argument in its factum:

16. The policy states: “This insurance applies only to ... property damage which occurs during the policy period.” Continental states that the property damage in this case did not occur during the policy period. It is true that the pleadings in all six of the subject actions describe building damage which occurred after the [Continental] policy period, and during the Berkley policy period. However, the Supreme Court of Canada held in Progressive Homes Ltd. v Lombard General Insurance Co. of Canada that defective property may also be property damage. The court listed “improperly built walls, inadequate ventilation system, poorly installed windows” as examples that fit within the term “property damage.” Thus, the manufacture of the defective valves, the installation of the defective valves in the HVAC units, the installation of the HVAC units in the buildings, and the deterioration of the valves due to stress corrosion cracking each amount to property damage and it can be inferred from the pleadings that these are all alleged to have occurred during the [Continental] policy period.

Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33….

17. Progressive Homes also stands for the proposition that defective workmanship can be an “accident” and therefore an occurrence. The Supreme Court noted that an accident is “an unlooked-for mishap or an untoward event which is not expected or designed.” Versa submits that, on the same basis, the manufacture, sale, supply or installation of a defective valve is an accident and therefore an occurrence within the meaning of the policy. That is, the manufacture, sale, supply or installation of a defective valve would be an untoward event which is not expected or designed.

Progressive, supra para 16 at para 46-50

18. … The allegedly defective valves were installed during the time period of the Continental policy and deteriorated until they failed during the time period of the Berkley policy. It is not beyond question that the appropriate trigger is the failure of the valves. There is a possibility that the trial judge will consider that the property damage occurred during the Continental policy period.

[38] To similar effect is the argument advanced by the plaintiff’s brokers, Krause Edwards Insurance Brokers Limited (some references omitted):

25. The claims in issue contain a multitude of allegations and alternative theories as to the cause or causes of the defect in and/or damage to the valves, the problems with the HVAC systems, and the water leakage.

26. Notably, as identified above, the underlying claims allege that the parties which installed the HVAC systems and the valves were negligent and failed to take reasonable care. Certain plaintiffs also allege that the installers damaged the valves themselves.

27. It is reasonable to consider the supply of defective valves, and the improper installation of the valves and the HVAC systems that incorporate or are connected to them, an Occurrence.

Progressive, …, at paras. 46-50 …

28. Furthermore, if there was damage to the valves at the time of installation, and/or damage to the HVAC systems when they incorporated or were connected to the valves, this could reasonably be found to be Property Damage as defined in both the Continental and the Berkley policies.

29. The actual cause of the problems will only be established at trial. Accordingly, it is possible that the trial judge will conclude that Property Damage occurred during the HVAC systems’ installation and before the water leaks. None of the claims specifies this date conclusively. This gives rise to at least a “mere possibility” that the trial judge will conclude that the harm occurred during the time Continental was on-risk.

Royal & Sun Alliance Insurance Company of Canada v. Meridian Construction Inc., 2012 NSCA 84 at para. 18 …

30. … the claims are not a simple matter of water leaks occurring spontaneously. The allegations in the underlying claims allow the inference that the claims’ true substance is that the valves deteriorated progressively over time.

Romlight Inc. v. AXA Insurance (Canada), 2004 19929 at para. 40 (Ont. Sup. Ct.) …

31. In effect, the underlying claims are, or at least can reasonably be interpreted as a situation of “continuous or progressive damage” where the beginning and terminal dates are unclear, and where all insurers on-risk during the period have a duty to defend

[39] All of parties make reference to Alie v. Bertrand & Frere Construction Co. (2002), 2002 31835 (ON CA), 62 O.R. (3d) 345 (C.A.), a case involving faulty concrete residential foundations poured by a ready-mix contractor (Bertrand), which included cement powder supplied by Lafarge. The damage to the concrete foundations spanned a number of years. There was evidence of deterioration of the concrete, acted on by outside influences such as the cycle of freezing and thawing of the ground in which the foundations had been poured. The plaintiff homeowners sued Bertrand and Lafarge and sought damages with respect to the faulty foundations. The liability insurers of these parties had policies which only responded to property damage which occurred during the relevant policy period. It had to be determined when property damage had taken place in order to decide which of the liability policies had been triggered. The Court of Appeal contrasted a situation of long term deterioration to one where property damage occurs suddenly (as in a fire) at paras 91-92:

Bertrand and Lafarge both had primary and excess insurance policies in place for each of the policy periods from 1986 to 1992. Once having found that the plaintiffs had suffered a loss because of property damage caused by an occurrence, in order for any particular insurance policy to be required to respond and cover the loss on behalf of the insured, the property damage must have taken place during the policy period. The policies are “triggered” to respond to the claim only when there is an occurrence resulting in property damage suffered during the policy period, no matter the timing of the initial precipitating cause or event. The issue, therefore, is when did the property damage occur in this case?

That question is easily answered when the precipitating event and the damage are effectively simultaneous, for example, where property is destroyed by fire. However, where the precipitating event is the introduction of a defective product into a structure, together with the ongoing deterioration of the product, acted on by outside forces over time, the timing of the damage to property, as defined, may not be clear, or even determinable with precision.

[40] In my view, the question to be answered in the present case is whether the pleadings in the underlying actions against Versa allege ongoing deterioration of the allegedly defective valves from the time they were installed until they failed? None of the pleadings expressly say this. Versa and Krause nevertheless argue that the inference to be drawn from what is pleaded is that the claims’ true substance is that the valves deteriorated progressively over time.

[41] The underlying pleadings allege, inter alia, that:

a. the valves contained a manufacturing defect that led to premature failure of the valves through stress corrosion cracking

b. the valves could crack at any time

c. the valve failures occurred as a result of material and manufacturing defects, specifically that the valves were forged from a high-zinc brass alloy susceptible to dezincification and stress-corrosion cracking

[42] Not all of the six underlying actions contain allegations in these terms.

[43] Although, as already noted, the parties to an insurance contract are not necessarily bound by a plaintiff’s choice of labels, this principle applies as much to what is not said as it does to what is pleaded. In all cases the court needs to look beyond the labels and assess what is really being alleged. This will often require the application of common sense to an evaluation of what has been pleaded. In that regard:

The widest latitude is to be given to the allegations in the pleadings in determining whether they raise a claim within the policy and any doubt as to whether the claim falls within the policy is to be resolved in favor [sic] of the insured.

Dyne Holdings Ltd. v. Royal Insurance Co. of Canada (1996), 1996 3672 (PE SCAD), 138 Nfld. & P.E.I.R. 318, 135 D.L.R. (4th) 142 (P.E.I.C.A.) at para 19.

[44] The cause of the failures and the process that led to such failures will doubtless be the subject of extensive evidence at trial and will no doubt have a bearing on the eventual obligation (if any) of the insurers to indemnify Versa.

[45] For the purposes of assessing the duty to defend, however, the essence of the allegations made is that the ball valves were defective and they eventually cracked. The inference that this could be the result of a gradual deterioration, culminating in a catastrophic failure accords both with what has been implicitly pleaded in a number of the underlying actions and with common sense.

[46] Continental contrasts the property damage which is being claimed in the underlying actions with that in Bertrand v. Alie. In the present case, the plaintiffs are not claiming for the cost of harm to the plumbing system (except for the replacement of the remaining ball valves) but, rather, for the leakage, all of which took place after Continental was no longer on risk. In Alie, in which the underlying actions were heard concurrently with the coverage litigation, the claim was for the cost of replacing and repairing the entire defective foundations which the trial judge had found as a fact had deteriorated continuously since the date they were poured until the date the damage was discovered.

[47] The factual distinctions between Alie and the present case notwithstanding, since the Supreme Court of Canada’s decision in Progressive Homes Ltd. v Lombard General Insurance Co., 2010 SCC 33, it is well established that “property damage” includes damage to any tangible property including (subject to any applicable exclusions in the policy) an insured’s own work. An allegation to the effect that the valves manufactured by Versa were deteriorating from the time they were installed in the HVAC units until the valves failed would be sufficient to amount to “property damage”.

[48] I conclude that there is a possibility that the allegations against Versa could result in a finding that “property damage” occurred from the time that the valves were installed in the HVAC units in the subject buildings until the failure of those valves (or points in between). Such property damage would, subject to policy exclusions and the other coverage defences pleaded, engage a duty to defend on the part of the insurers on risk between those dates.

Does Continental Have a Duty to Defend?

[49] In the Glen Erin and Telegram Mews actions, the plaintiffs claim the cost of replacing ball valves which, it is alleged, may fail in the future. Continental argues that since no property damage has actually occurred in respect of these valves, there can be no coverage.

[50] This argument assumes that the valves are not already deteriorating. Having determined that the effect of the allegations made against Versa is that there is a possibility of it being found that Versa’s valves were deteriorating from the time they were installed in the HVAC units until they failed, it cannot be said at this juncture that there can have been no property damage and, hence, no duty to defend the claims for replacing the ball valves. The trial judge may, of course, decide that there is no merit to the allegations, in which case there would presumably be no duty to indemnify Versa for the claims relating to the cost of replacing the ball valves. But that is extraneous to the present motion.

[51] Alternatively, Continental argues that the claims for the cost of replacing ball valves is excluded by the policy’s “your product” exclusion which would apply even if there were allegations of physical damage to, or loss of use of ball valves that have yet to fail.

[52] Assuming that the exclusion is otherwise applicable, it would only have the effect of excluding the claims for the cost of replacing the ball valves if it is determined that the defect in Versa’s valves amounts to “property damage”. However, the pleadings also allege, inter alia, improper installation of the valves. Were that found to be the cause of the water leak, the exclusion would not be effective. Accordingly, there is at least a “mere possibility” that the exclusion will not apply and, hence, the exclusion does not operate to eradicate the duty to defend.

[53] A similar analysis and outcome applies to the Product Recall exclusion.

[54] Continental also relies on the “impaired property” exclusion to its policy. Inserting the allegations pleaded against Versa into the wording of the definition of “impaired property” would result in the following:

Impaired Property: air conditioning units that cannot be used or are less useful because they incorporate Versa’s ball valves which are known or thought to be defective, deficient, or inadequate, if the air conditioning units can be restored to use by the repair, replacement, adjustment or removal of the ball valves.

[55] The effect of this argument is that the HVAC units containing the compromised ball valves would be “impaired property”. Inserting the allegations into the exclusion itself would result in the following:

This insurance does not apply to:

Any loss of use of air conditioning units arising out of a defect, deficiency, inadequacy or dangerous condition in Versa’s ball valves.

[56] If a similar approach is taken what Continental describes as the second branch of the impaired property exclusion, it would read:

This insurance does not apply to loss of use of air conditioning units that have not been physically injured, arising out of a defect, deficiency, inadequacy or dangerous condition in Versa’s ball valves.

[57] The “impaired property” exclusion is, however, subject to an exception:

This exclusion does not apply to the loss of use of other property arising out of sudden accidental physical injury to your product or your work after it has been put to its intended use.

[58] The underlying claims include allegations that the valves or the HVAC systems were damaged at the time of installation. If that is so, there is a possibility the exclusion would not apply. Similarly, a sudden and accidental failure after the ball valves were put into use might engage the exception to the exclusion.

[59] Nor is it clear on the pleadings in the underlying action whether, and if so, to what extent, the HVAC systems were damaged (although particulars of loss pleaded include the costs of draining and inspecting the HVAC systems).

[60] At this juncture the possibility of there being a finding at trial that Versa could be liable for damage, including loss of use, caused to the valves and the HVAC systems cannot be ruled out. As Low J observed in Romlight v AXA Insurance (Canada) (2004), 2004 19929 (ON SC), 70 O.R. (3d) 751 (S.C.J.) at para 16:

Coverage is made out if the causal connection is made. Consequential loss (subject to the limits of foreseeability and remoteness) may potentially be the subject of an award of compensatory damages because of property damage.

[61] Provided that the language of the pleadings (including any inferences reasonably drawn from a reading of the pleadings) brings the claim within the possibility of coverage, the duty to defend will be engaged. The exclusions raised by Continental may well have application in the final coverage analysis. However only if, on a reading of the pleadings, coverage is necessarily excluded, should the application of policy exclusions, such as those raised by Continental, be determined at this stage.

[62] It cannot be said with a high degree of confidence that the allegations made against the insured will be excluded from coverage. In other words, there is at least a mere possibility that the allegations would give rise to covered claims. Accordingly, Continental does have a duty to provide Versa with a defence to the six actions that are the subject of its motion.

Disposition

[63] For the foregoing reasons:

a. Continental’s motion for a declaration that it has no duty to defend Versa in Court File Nos. CV-13-473484, CV-13-479630, CV-13-487262 00A1, CV-13-500901, SC-14-7511-00, CV-14-509383 is dismissed;

b. Versa’s motion for a determination that there is a mere possibility that the claims made against in Court File Nos. CV-13-473484, CV-13-479630, CV-13-487262 00A1, CV-13-500901, SC-14-7511-00, CV-14-509383 fall within the insuring agreement of the Berkley policy in that they allege “property damage” which occurred during the policy period of 28 May 2010 to 28 May 2013 is answered in the affirmative, without prejudice to the defences of waiver, estoppel, misrepresentation, or policy exclusions that have been raised by Berkley;

c. Versa’s motion for a determination that there is a mere possibility that the claims made against in Court File Nos. CV-13-473484, CV-13-479630, CV-13-487262 00A1, CV-13-500901, SC-14-7511-00, CV-14-509383 fall within the insuring agreement of the Continental policy in that they allege “property damage” which occurred during the policy period of 28 May 2008 until 28 May 2010 is answered in the affirmative and, accordingly that it is declared that Continental is bound by the terms of its policy to defend Versa in such proceedings.

[64] These orders are made without prejudice to the eventual determination of Berkley’s duty to defend Versa (if any) or to Continental seeking equitable contribution towards the cost of defending Versa.

[65] In the event that the parties are not able to agree on the disposition of costs of these motions, any party seeking costs should provide the court (via my judicial assistant) with a costs summary and written submissions of not more than three pages in length within three weeks of the release of these reasons. Any party wishing to respond should then deliver a written submission, again not exceeding three pages, within two weeks thereafter.

Graeme Mew J.

Released: 19 March 2015

CITATION: Versa Fittings v. Berkley Insurance Co., 2015 ONSC 1756

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Versa Fittings & Manufacturing Inc.

Plaintiff

– and –

Berkley Insurance Company and Continental Insurance Company and Krause Edwards Insurance Brokers Limited

Defendants

REASONS FOR JUDGMENT

Mew J.

Released: 19 March 2015