Daverne v. John Switzer Fuels et al. v. Aon Reed et al., 2015 ONSC 1803

CITATION: Daverne v. John Switzer Fuels et al. v. Aon Reed et al. 2015 ONSC 1803

COURT FILE NO.: CV-09-394427-00A1

DATE: 20150331

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

GERALD DAVERNE and JUTTA DAVERNE Plaintiffs

– and –

JOHN SWITZER FUELS LTD., BRIAN LASHER, GLENN LASHER HOME COMFORT SERVICE, McKEOWN & WOOD LIMITED and PARRSBORO METAL FABRICATORS LTD. Defendants

• and -

AON REED STENHOUSE INC., FEDERATED INSURANCE COMPANY OF CANADA, GCAN INSURANCE COMPANY, AVIVA INSURANCE COMPANY OF CANADA and CHARTIS INSURANCE COMPANY OF CANADA (formerly AMERICAN HOME ASSURANCE COMPANY) Third Parties

COUNSEL: Avi Cole for the Third Party, Federated Insurance Company of Canada John A. Ryder-Burbidge for the Defendant McKeown and Wood Limited Natalie M. Leon for the Third Parties, GCAN Insurance Company and Aviva Insurance Company of Canada Deepshikha Dutt for the Third Party, AON Reed Stenhouse Inc. Anthony Cole for the Third Party, Chartis Insurance Company of Canada (formerly American Home Assurance COMPANY)

HEARD: 12 & 13 January 2015 at Toronto

BEFORE: mew j.

Reasons for Judgment

[1] McKeown & Wood Fuels Limited (“M&W”) is a fuel oil distributor and a heating, refrigeration and air-conditioning contractor based in Napanee. It business includes the sale of fuel oil tanks.

[2] Sometime in or prior to 2000, M&W sold a fuel oil tank to Gerald and Jutta Daverne. The Davernes installed the fuel oil tank at their residence in Bath. M&W was not involved in the transportation of the tank to the Davernes’ residence or with the installation of the tank in the basement of the residence.

[3] In late January 2008 the Davernes returned home from a vacation to discover that fuel oil had leaked from the tank. The last delivery of fuel oil prior to that had been on 9 January 2008 and the Davernes allege that the leakage of fuel oil started sometime after that delivery.

[4] On 31 December 2009 the Davernes commenced an action, claiming damages of $400,000, against John Switzer Fuels Ltd. (the company that delivered the fuel oil that leaked), Brian Lasher and Glenn Lasher Home Comfort Service (Mr. Lasher is an oil burner technician who allegedly performed a comprehensive inspection of the subject tank on 13 November 2006), Parrsboro Metal Fabricators Ltd. (the manufacturer of the tank) and M&W.

[5] The notice of action and statement of claim in the main action were served on M&W on or a few days before 11 February 2010. According to James Wood, the president of M&W, this was M&W’s first notice of the action or knowledge of the alleged tank failure.

[6] M&W has brought a third party action against four of its insurers, Federated Insurance Company of Canada, AIG Insurance Company of Canada (previously known as American Home Assurance Company and Chartis Insurance Company of Canada), GCAN Insurance Company and Aviva Insurance Company of Canada, and against its insurance broker, Aon Reed Stenhouse Inc.

[7] The third party action was commenced on 11 March 2012.

[8] In the third party action M&W seeks a declaration that one or more of the third parties is required to provide a defence to M&W in the main action and to indemnify M&W in respect of any award of damages made against M&W. To date none of the insurers have accepted coverage. M&W has borne its own legal costs defending the main action.

[9] These reasons address four summary judgment motions, which were heard concurrently, in relation to the third party action.

[10] M&W brings a motion for partial summary judgment on the issue of whether one or more of its insurers are required to provide a defence to M&W in respect of main action.

[11] Federated brings a motion for summary judgment dismissing the third party action on the basis that it was commenced after a contractual limitation period contained in its policy had expired.

[12] Federated’s third party defence does not, as it presently stands, plead a limitation defence. However, Federated filed a supplementary motion record seeking leave to amend its third party defence to plead such a defence.

[13] American Home, GCAN and Aviva seek by way of cross-motion, orders dismissing the third party claims against them on the basis that their policies do not cover the Daverne claim.

[14] Federated requests that, in the event its summary judgment motion on the limitation issue is unsuccessful, M&W’s summary judgment motion seeking a declaration that Federation is required to defend M&W should be dismissed.

The Third Parties

[15] The following is a brief overview of the subject insurance policies and M&W’s dealings with the third parties.

The Federated Policy

[16] Federated Insurance Company of Canada insured M&W under a comprehensive general liability insurance policy from at least as early as 1999 until October 2007. Typically the Federated policies were for one year terms which were renewed annually. The policy is an “occurrence” based policy which provides liability coverage for bodily injury or property damages which occurs during the policy period.

[17] M&W forwarded the statement of claim in the main action to Federated on 11 February 2010. By a letter dated 9 April 2010, Federated denied coverage, stating:

As the occurrences occurred in January 2008, Federated Insurance will not be able to assist you with this claim. We did not insure McKeown and Wood Limited on the date of loss.

[18] On 17 March 2014, Federated’s solicitors wrote to M&W’s solicitors that Federated intended to raise a limitation defence based on a policy condition requiring every proceeding against Federated for the recovery of any claim under or by virtue of the policy to be commenced “within one year next after the loss or damage occurs” and to seek summary judgment based on that defence.

The AIG Policy

[19] AIG insured M&W pursuant to a commercial general liability insurance policy from 25 October 2007 until 25 October 2008. It would appear from the policy declaration pages that the policy was written under a programme available to members of the Canadian Oil Heat Association.

[20] AIG’s denial of coverage is based on a pollution exclusion contained in its policy.

The ENCON Policy

[21] The policy subscribed to by GCAN and Aviva was issued through a managing general agent, ENCON Group. The policy is described as a “Contractors’ Pollution Liability Insurance Policy”. It incepted on 25 October 2007 for a one year term and was renewed in 2008 and 2009. AIG was the underwriter of the 2007 and 2008 ENCON policies. GCAN and Aviva came on risk in 2009 for the policy period 25 October 2009 to 25 October 2010, with a retroactive date of 25 October 25 2007.

[22] The ENCON policy is a “claims made and reported” policy. It is also offered to members of the Canadian Oil Heat Association and is described as “limited as other insurers were to cover COHA members’ liability related to the larger component of their operations being fuel delivery including loading and unloading”.

AON

[23] AON acted as M&W’s insurance broker and, as such, denies any obligation to indemnify M&W with respect to any claims arising out of the sale of the allegedly defective fuel oil tank to the Davernes. AON takes the position that some or all of its co-defendants’ insurance policies cover the claim made against M&W in the main action.

Federated’s Limitation Defence

[24] The Federated policy is described as a “Basic Policy”. The policy documentation includes a “Property and Liability Policy Summary” which makes reference to the coverages provided and the forms which contain the wordings pertaining to such coverages. The Summary itself does not make reference to form BP–2.1, but the declarations page of the Basic Policy states that “This declaration must be attached to policy form BP–2.1”. Form BP–2.1 is entitled “Basic Policy Statutory Conditions”, clause 14 of which provides:

14. Action: Every action or proceeding against the insurer for the recovery of any claim under or by virtue of this contract is absolutely barred unless commenced within one year next after the loss or damage occurs.

[25] Under the heading “Additional Conditions” on the form BP–2.1, clause 8 provides:

8. Applicability of Statutory Conditions and Additional Conditions: The Statutory Conditions and Additional conditions apply with respect to all the perils insured by this policy and to the liability coverage, where provided, except where these conditions may be modified or supplemented by riders or endorsements attached.

[26] According to Federated, the effect of these two provisions is to bar any action for coverage commenced more than one year after “a demand the coverage is made of the insurer and the insurer has denied the claim”. As Federated denied coverage on 9 April 2010, it argues that any action against it more than a year after that date is barred.

[27] In International Movie Conversions Ltd. v. ITT Hartford Canada (2002), 57 O.R. (3d) 652, the court recognised that it was not uncommon for insurers to incorporate the statutory conditions into policies of insurance to attract their application to one or multiple coverages. In doing so, the court noted that section 148 of the Insurance Act, R.S.O. 1990 c.I.8, makes the statutory conditions part of every fire insurance contract in Ontario, but does not stipulate that the statutory conditions cannot also apply to other perils at the election of the insurer. The Court of Appeal rejected arguments that the use of the heading “Statutory Conditions” in the policy was misleading.

[28] On 1 January 2004, after International Movie Conversions was decided, the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B came into force. One of the main reforms introduced by the new Act was a general limitation period of two years, subject to the discoverability principle, for all claims other than those listed in Schedule A to the Act. Section 148 of the Insurance Act, statutory condition 14, was one of the limitation periods listed in Schedule A, and, hence, remained in effect. However, Section 22(1) of the new Act statutorily precluded any contracting out of a limitation period provided for by the Act. As statutory condition 14 is only applicable to fire insurance, its application to other coverages contained in an insurance policy would conflict with the “no contracting out” rule in section 22(1). Contracts entered into before 1 January 2004 were grandfathered. By amendments which came into force on 19 October 2006, an exception to the “no contracting out” rule was permitted in the case of “business agreements” entered into on or after that date: Legislation Act, 2006 S.O. 2006, c. 21, Sched. D, s. 2.

[29] The motion record includes a copy of a Federated policy in force from 25 October 2006 until 25 October 2007. That policy would therefore appear to be an agreement entered into on or after 19 October 2006. In Boyce v Co-Operators General Insurance Co, 2013 ONCA 298, it was held that insurance covering various risks related to the operation of an insured’s business fell within the definition of “business agreement” in s. 22(6) of the Limitations Act, 2002 (as amended).

[30] The Federated policies which were entered into or renewed prior to 1 January 2004 would be grandfathered.

[31] However, assuming that the Federated policy renewed annually on 25 October in each of 2004 and 2005, it is arguable that it was not open to the parties to contract out of the general two year limitation period contained in s. 4 of the Limitations Act, 2002 in respect of those two policy years. Neither M&W nor Federated addressed this possibility in argument. I therefore raise it without making a determination because, as will be seen, the issue is, ultimately, an academic one in light of my conclusion that the contractual limitation provision is unenforceable.

[32] M&W argues that the Federated policy really consists of two policies, a “Basic Policy”, to which, by extension, statutory condition 14 would apply, and a “Comprehensive General Liability Policy”, which provides stand-alone liability coverage, separate and distinct from the property coverages contained in the Basic Policy and, as such, not bound by statutory condition 14.

[33] An initial problem with this argument is that the “Property and Liability Policy Summary” attached to the declarations pages describes the type of policy as “Basic Policy” and then goes on to list under the headings “Blanket Property Coverages”, “Blanket Liability Coverages” (which includes comprehensive general liability) and “Personal Shield” the various coverages which are included along with the corresponding policy form numbers.

[34] M&W also argues that an important distinction between the circumstances addressed in International Movie Conversions and Boyce, is that the claims and policies involved were for first party coverages. Reference is made to Walker v. Sovereign General Insurance Company, 2011 ONCA 597.

[35] In Walker, two individuals who had obtained damages resulting from a slip and fall accident in a parking lot were unable to recover from the bankrupt judgment debtor. They therefore brought an action under s. 132 of the Insurance Act, seeking recovery of their judgment against the judgment debtor’s insurer. The policy in question contained two sets of conditions; a set of statutory conditions and a set of policy conditions. The statutory conditions began with the following statement: “The Statutory Conditions apply to the peril of fire and as modified or supplemented by riders or endorsements attached apply as Policy Conditions to all other perils insured by this policy”. As in the present case, the claim was made against the commercial general liability coverage provided by the policy.

[36] For reasons that were possibly as strategic as they were substantive, the insurer in Walker submitted that the statutory conditions applied to property losses such as fire and theft, but not to liability or losses to third parties. Laskin J.A. agreed with that submission. Continuing, he concluded that the policy had to be read as a whole, and that when it was, it could be seen to contain two separate sets of conditions, each of which had to be given scope and meaning. On his reading of the policy under consideration it was apparent to Laskin J.A. that the statutory conditions applied only to the property coverages in the policy, for example fire and theft, and any other property-related perils that were added by rider or endorsement. He found support for that view from the fact that a number of the other statutory conditions, for example “Property of Others”, “Appraisal”, “When Loss Payable” and “Replacement” have no relevance to third-party liability claims but, rather, address coverage for direct loss to an insured’s property, not coverage for loss or liability to a third party.

[37] The policy under consideration in Walker does not appear to have contained a comparable provision to clause 8 of the “Additional Conditions” in the Federated policy, which expressly purports to extend the application of the statutory conditions and additional conditions to the liability coverage.

[38] In KP Pacific Holdings Ltd. v. Gore Mutual Insurance Co., 2003 SCC 25, the Supreme Court of Canada considered the effect of section 119 of the Insurance Act, R.S.B.C. 1996, c. 226, which provided that Part 5 of that Act, including statutory conditions essentially identical to those contained in the Federated policy, applied “to insurers carrying on the business of fire insurance and to contracts of fire insurance, whether or not a contract includes insurance against other risks as well as the risks included in the expression “fire insurance”..”

[39] The Supreme Court concluded (at para. 6) that:

The comprehensive policy at issue on this appeal cannot be shoehorned into the Part 5 fire insurance section without contrived reconstruction and anomalous consequences. It simply does not fit. Consequently, it cannot be said that the Legislature intended the Fire Insurance provisions to govern.

[40] McLachlin C.J.C. went on to explain (at para. 18):

Section 119 is being asked to apply to an animal it was never designed to tame — the modern multi-peril policy. Section 119 is built on the premise of discrete policies for discrete subject matters, with limited overlap. It deals with overlap and intersection by enumerated exclusions, and by the logic of what is primary and what is incidental. It may still make good sense for certain multiple subject-matter policies, where these are fairly limited in scope, and where the subject matters can be readily identified and ranked. But when applied to broader multi-risk policies, it fails.

[41] M&W argues that the principle enunciated in KP Pacific Holdings that fire statutory conditions cannot be “shoehorned” into a multi-peril policy without anomalous consequences should apply equally to cases where the extension of such conditions is contractual, rather than statutory.

[42] I observe that at first instance in Boyce v. Co-operators General Insurance, 2012 ONSC 6381, the court relied on KP Pacific Holdings in concluding that a multi-peril policy cannot be considered fire insurance. The court went on to conclude that the term in the policy lacked the specific language necessary to override the two year statutory limitation period provided by s. 4 of the Limitations Act, 2002 and that in any event, the contract of insurance was not a “business agreement” as required under s. 22(5) of the Limitations Act, 2002. The Court of Appeal, as noted above, held otherwise on the “business agreement” issue. It does not appear, however, that the effect of KP Pacific Holdings on the enforceability of a contractual provision, designed for policies of fire insurance, to all risks policies was raised in the Court of Appeal.

[43] The facts of this case bring the anomalous effects of applying a provision designed for fire insurance claims to a multi-peril policy into focus in a way that those in International Movie Conversions and Boyce did not. The claim made by M&W relates to a third party coverage, in contrast to the first party claims in International Movie Conversions (loss of business income arising from the theft of insured audio-visual equipment) and Boyce (damage to inventory caused by a foul odour alleged to have resulted from the vandalisation of the insured’s premises).

[44] The limitation in statutory condition 14 is “within one year next after the loss or damage occurs”. M&W argues that the application of statutory condition 14 to many liability claims would result in no coverage because the “loss or damage” giving rise to the claim will often have occurred more than a year before the insured even knows about it. Federated’s response to this argument is that, for the purposes of M&W’s claim for defence and indemnity, the “loss or damage” refers not to the loss or damage said to have resulted from M&Ws breach of a duty which it is alleged to have owed to the Davernes, but, rather, to when M&W made its demand to Federated for coverage or to when Federated denied the claim.

[45] The phrase “loss or damage”, as used in statutory condition 14, appears in a number of other places in the statutory conditions. As noted by Laskin J.A. in Walker, the contexts in which it is used are in not readily adaptable to liability insurance coverage where the loss or damage which is the subject of a claim has been suffered by a third party who then seeks compensation from the insured. For example, statutory condition 6 (Requirements After Loss) refers to “the occurrence of any loss of or damage to the insured property”. It requires the delivery of a proof of loss, the contents of which are specified in the subparagraphs of the statutory condition, verified by a statutory declaration.

[46] Federated, however, argues:

McKeown's claim against Federated is a claim under a contract (i.e. a contract of insurance). Pursuant to the case law, the "loss" for the purpose of triggering a limitation period is the breach of contract. According to recent case law, including a decision from the Ontario Court of Appeal, the "loss" occurs when a demand for coverage is made of the insurer and the insurer has denied the claim.

[47] The case law Federated refers to includes Schmitz v. Lombard General Insurance Co., 2014 ONCA 88, an automobile insurance case, in which the insurer had conceded that a 12 month limitation period contained in an OPCF 44R (underinsured motorist coverage) endorsement was displaced by s. 4 of the Limitation Act, 2002. The insurer nevertheless argued that the discoverability provisions of the contractual limitation provision should apply rather than those set out in s. 5 of the Limitation Act. The Court of Appeal rejected that argument, holding that section 5 applied. In that regard, the court held that the “injury, loss or damage” that triggered the running of time under the discoverability provisions in s. 5 of the Limitations Act, 2002 would be when the insurer failed to satisfy its legal obligation under the OPCF 44R. Accordingly (Schmitz at para 20):

… the claimant suffers a loss “caused by” the underinsured coverage insurer’s omission in failing to satisfy the claim for indemnity the day after the demand for indemnification is made.

[48] Federated argues, in effect, that because in Schmitz the Court of Appeal held that the “injury, loss or damage” occurred when the insurer failed to satisfy the claim for indemnity, a similar approach should be taken, to a determination of when “the loss or damage” (for the purposes of statutory condition 14) occurred, in the context of an action against it for the recovery of any claim under or by virtue of its policy with M&W.

[49] I disagree. The OPCF 44R endorsement is a first party coverage which requires a party’s insurer to indemnify it for any shortfall between what the insured is legally entitled to recover from an inadequately insured motorist as compensatory damages in respect of bodily injury to or death of an insured person arising directly or indirectly from the use or operation of an automobile and what is actually recovered from the inadequately insured motorist (subject to the limits of coverage provided by the OPCF 44R insurer).

[50] In the Federated commercial general liability policy the insuring agreement is to:

… pay those sums that the insured becomes legally obligated to pay as compensatory damages because of “bodily injury” and “property damage” to which this insurance applies.

[51] In addition to the indemnity provided by the general insuring agreement, Federated provides coverage for defence and other supplementary payments:

We have the right and duty to defend any “action” seeking compensatory coverages [sic] …

[52] Federated’s duty to indemnify only arises when liability has been imposed upon, or assumed by, its insured (for example as a result of a settlement). Until then there is no “loss or damage” arising from Federated’s declinature of coverage. Its duty to defend while separate from, is nevertheless informed by its duty (if any) to indemnify.

[53] The finding that the denial of a claim amounts to “injury, loss or damage” in a first party policy does not accord with the way that liability policies work. To paraphrase McLachlin C.J.C. in KP Pacific Holdings, the statutory conditions, and in particular a limitation provision designed for first party claims, cannot be shoehorned into a policy’s commercial liability insurance coverage without contrived reconstruction and anomalous consequences.

[54] In Sever v. Economical Mutual Insurance Co. (1989), 66 O.R. (2) 799 (C.A.), it was held that an insurer could not rely upon a limitation defence because the language used to incorporate the statutory conditions into the contract was ambiguous. Logically a similar approach should be taken where the result of incorporating statutory conditions designed for first party insurance into conditions covering third party risks is to produce similar “anomalous consequences” to those described in KP Pacific Holdings. Such an approach is also consistent with the principle that where there is doubt or ambiguity about the meaning or applicability of a limitation period, such ambiguity should be resolved in favour of the person whose right is being truncated: Berardinelli v. Ontario Housing Corp., [1979] 1 S.C.R. 275

[55] I am accordingly of the view that statutory condition 14 does not apply to claims made under the commercial liability coverage provided by the policy and, hence, that the applicable limitation period is that provided for in s. 4 of the Limitations Act, 2002. Whether that limitation runs from the date of declinature of coverage or later, the third party claim was commenced less than two years after Federated first declined to defend or indemnify M&W and, hence, the third party action against Federated is not statute barred.

[56] I would add that there was evidence that when M&W asked Federation for a copy of the policy, it was sent the Commercial General Liability wording but not the statutory conditions. However there was also uncontradicted evidence that complete policy wordings had been delivered to M&W at the time of annual policy renewals. Accordingly, nothing, in my view, turns on Federated’s apparent failure to provide to M&W a copy of the limitation provision it now relies on when asked for a copy of the relevant policy wording.

[57] Because of my conclusion that the contractual limitation period does not apply, the proposed amendment to the statement of claim is redundant. Had I concluded otherwise, I would have allowed the amendment. Rule 26.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (as amended) provides that the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment. In Simpson v. Vanderheiden (1985), 49 O.R. (2d) 347 (H.C.J.) an insurer was permitted to amend its defence in a no-fault benefit action to plead a limitation defence on the eve of trial. The court found that the proposed amendment did not require any additional evidence to be adduced and merely drew the court’s attention to a part of the statute law. Furthermore, there was no suggestion in the pleadings that the insurer had intended to waive its limitation defence. In the present case, Federated gave notice of its intention to rely on a limitation defence in March 2014, at which point, the parties had exchanged pleadings, but the third party action had not otherwise progressed. There is no evidence of any prejudice that would have resulted from the proposed amendment.

The Insurers’ Duty to Defend

[58] 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), 72 O.R. (3d) 522 at paras 32, 35-37.

[59] 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.

[60] The parties to an insurance contract are not necessarily bound by a plaintiff’s choice of labels. When determining the scope of the duty to defend the court must look beyond the labels chosen by the pleader and examine the substance of the allegations against the insured. Allegations that are entirely derivative of uncovered allegations will not trigger a duty to defend: Lloyd’s Underwriters v. Scalera, 2000 SCC 24 at paras 50-52.

[61] However, where 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.

Allegations Made Against M&W

[62] The statement of claim in the main action makes the following allegations against M&W:

The plaintiffs … [p]urchased an oil fuel tank manufactured by the Defendant, Parrsboro Metal Fabricators Ltd. in 1998, from the Defendant, McKeown and Wood Limited in 2000, at which time it was installed for the purposes of supplying a space heater acting as a supplementary heater in the Plaintiff’s basement.

[F]uel oil leaked from the tank in question following the January 9, 2008 delivery by John Switzer Fuels Ltd. and the leak was discovered in late January, 2008 when the Plaintiffs returned from vacation.

The Plaintiffs … incurred significant costs to remediate their property as a result of the oil spill and … also incurred additional living expenses.

[T]he cause of the oil spill was an internal corrosion problem, which occurred within approximately12 inches to 18 inches from the outlet and of the subject tank, directly along the bottom of the tank. … [T]his type of failure was consistent with microbial influenced corrosion (MIC failure) where corrosion causes pitting of the tank, and the corrosion process occurs until the pitting proceeds through the shell of the tank. A hole eventually results along the bottom of the tank at the pit site and the fuel escapes therefrom. … [I]n order for microbial influenced corrosion to occur, water and sludge must exist along the bottom of the tank. This sludge is an emulsified electrolytic solution, which allows microbial influenced corrosion attack to occur.

[M&W] is liable to [the plaintiffs] in tort and in contract, and is strictly liable … under the Sale of Goods Act, R.S.O.1990, Chap. S.1, as amended, for reasons including the following:

(a) It sold to the Plaintiffs a fuel oil tank which was not fit for its intended purpose. In explanation, microbial influenced corrosion failures in oil tanks is well-known and tank manufacturers and dealers are aware of such design problems with tanks that are subject to such failures and have on this basis changed the design of their tanks to bottom outlet tanks or tanks with double wall construction, many with a protective coating along the interior of the tanks to protect against microbial influenced corrosion failures; and

(b) It failed to warn the Plaintiffs of the design problem with the tank which it sold to the Plaintiffs and to advise as to the possibility of a microbial influenced corrosion failure.

The Federated Policy

[63] The relevant provisions under the Federated policy granting coverage are as follows:

1. Insuring Agreement -

We will pay those sums that the insured becomes legally obligated to pay as compensatory damages because of ... "property damage" to which this insurance applies. This insurance applies only to ... "property damage" which occurs during the policy period. The ... "property damage" must be caused by an "occurrence"....

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

"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.

[64] Federated denies coverage in the defence on the grounds that its "occurrence based" policy requires that the date of the loss occur during the policy period and there is nothing in the statement of claim to suggest that there was any property damage suffered by the Davernes prior to 25 October 2007, when the Federated coverage was terminated.

[65] M&W asserts that although the statement of claim does not specify when the alleged corrosion of the tank, leading to its ultimate failure, occurred, it would be open to the court to find that the corrosion started sometime during the term of Federated’s coverage. Furthermore, a breach of M&W’s alleged duty to warn may well have occurred while Federated was on risk.

[66] A defect in workmanship could be an accident or “occurrence” within the meaning of the Federated policy. Furthermore, an accident need not be a sudden event. An accident or occurrence can result from continuous or repeated exposure to conditions: Progressive Homes Ltd. v. Lombard General Insurance Co., 2010 SCC 33 at paras 42-49.

[67] In Alie v. Bertrand & Frere Construction Co. (2002), 62 O.R. (3d) 345 (C.A.), one of the issues was the determination of which liability insurance policies were required to respond to claims 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 were situated. 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.

[68] In the present case the allegations in the statement of claim are broad and evidence has yet to be adduced as to the mechanism of the deterioration of the fuel tank. Unless coverage is otherwise excluded, the mere possibility that the fuel tank deteriorated over a period of time that may have included Federated’s time on risk is sufficient to trigger Federated’s duty to defend M&W.

[69] In argument Federation referred to an exclusion, which it has not expressly pleaded, but which, it argues, would eliminate any coverage that might otherwise exist. Exclusion 2(i) provides that “[t]his insurance does not apply to … “Property damage” to “your product” arising out of it or any part of it”. The policy defines “your product” as:

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

(1) You….

"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) … above.

[70] Federated cites the explanation of the “your product” exclusion given by Gordon Hilliker, Liability Insurance Law in Canada, 3^rd ed. (Toronto: Butterworths, 2001) at 184:

The purpose of this provision is to exclude from coverage the risk that the insured will be required to replace or repair its products as the result of some defect in the product itself.

[71] The statement of claim in the main action refers to the cause of the failure of the tank as “an internal corrosion problem” which “was consistent with microbial influenced corrosion … where corrosion causes pitting of the tank, and the corrosion process occurs until the pitting proceeds through the shell of the tank”. According to the statement of claim, “in order for microbial influenced corrosion to occur, water and sludge must exist along the bottom of the tank. This sludge is an emulsified electrolytic solution, which allows microbial influenced corrosion attack to occur”. M&W’s alleged breach of duty includes not only the implied warranties of merchantability and fitness for purpose prescribed by the Sale of Goods Act, but a failure to warn the plaintiffs of what the plaintiffs allege were a known “design problem with the tank” and “to advise as to the possibility of a microbial influenced corrosion failure”.

[72] Two points emerge. First, as Hilliker explains, the ‘your product” exclusion exists to eliminate coverage for the replacement or repair of the insured’s products. The damage claimed is that which resulted from the deterioration of the fuel tank, not the damage to the tank itself. Second, it is alleged that it was a combination of the design and the presence of water and sludge which enabled microbial influenced corrosion attack to occur and that M&W had a duty to warn the Davernes of this known risk. Whether or not that is a valid statement of M&W’s responsibilities will be a matter for the trial judge to decide, but, in my view, such allegations against M&W go beyond the application of the “your product” exclusion.

[73] Accordingly, the duty to defend under Federated’s policy is engaged by the allegations made against M&W.

The AIG Policy

[74] The AIG policy, like its Federated counterpart, is an occurrence-based policy. It generally covers “those sums that the insured becomes legally obligated to pay as ‘compensatory damages’ because of … ‘property damage’ to which this insurance applies”.

[75] However, the AIG policy also includes a “Pollution Exclusion”, pursuant to which the “insurance does not apply to” the following:

i) With respect to “petroleum operations”:

a. … “property damage”… arising out of the actual, alleged, potential or threatened spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of “pollutants” however caused and whenever happening;

b. any loss, cost or expense arising out of any:

1. request, demand, order or statutory or regulatory requirement that any Insured or others test for, monitor, clean up, remove, contain, treat, detoxify, decontaminate, stabilize, remediate or neutralize, or in any way respond to, or asses the effects of, “pollutants”; or,

2. claim or “action” by or on behalf of a governmental authority for “compensatory damages” because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, decontaminating, stabilizing, remediation or neutralizing, or in any way responding to, or assessing the effects of, “pollutants”.

Sub-paragraphs a. and b. of paragraph i) do not apply to… “property damage”… arising out of the “loading or unloading” of a tanker truck or tanker trailer.

This exclusion applies whether or not such injury or damage may be included within the “products-completed operations hazard”.

“Pollutants” means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, odour, vapour, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes material to be recycled, reconditioned or reclaimed.

“Petroleum operations” means tank farms, petroleum bulk stations or terminals, storage or any “storage tank system”, distribution, sale or delivery of petroleum, or installation, servicing, sale, rental or lease of petroleum tanks or any “storage tank system” or skid tanks. Petroleum includes petroleum products, fuel, oil and liquefied petroleum gas.

“Storage tank system” means a stationary tank or tanks owned or operated by the Insured and includes any on site integral piping or dispensing equipment, ancillary equipment and containment system associated with the tanks.

[76] AIG’s duty to defend can only arise if the allegations in the main action, if proven to be true, would trigger AIG’s duty to indemnify. If the duty to indemnify does not exist due to an exclusion, AIG has no duty to defend the underlying action: Progressive Homes, at para. 19.

[77] The AIG policy’s Pollution Exclusion contains two components:

a. It is triggered “with respect to ‘petroleum operations’”, which are defined to include the “sale, rental or lease of petroleum tanks”.

b. Once triggered, it applies to property damage “arising out of” the release of pollutants like oil “however caused and whenever happening”.

[78] To the extent that M&W’s liability to the Davernes is alleged to arise from its sale of the subject fuel tank, the exclusion clearly applies.

[79] M&W argues, however, that the allegations that it failed to warn of known “design problem with the tank” and “to advise as to the possibility of a microbial influenced corrosion failure” are free-standing and not derivative of the duties it had at the time its sale of the fuel tank to the Davernes and, hence, that the exclusion does not apply to those allegations.

[80] I disagree. Once the exclusion has been triggered by the fact that the fuel tank was sold, even if it could be argued that the failure to warn is not a derivative claim, the second component of the exclusion operates to exclude property damage arising out of the release of pollutants like oil “however caused and whenever happening”.

[81] In Ontario v. Kansa, [1994] I.L.R. 1-3031, 111 D.L.R. (4th) 757 (Ont. C.A.). the court said (at para. 21):

Damages resulting from a failure to regulate or a failure to warn of the release of pollutants constitute damages arising from the discharge of pollutants. The [insured]’s alleged negligence was merely incidental to the primary event of pollution and constituted a continuing cause rather than a new and independent cause giving rise to the loss.

[82] In my view the application of the pollution exclusion in the AIG policy forecloses even the merest possibility of a duty to indemnify and, hence, there can be no duty on the part of AIG to defend its insured in the main action.

The ENCON Policy

[83] M&W’s claim was also reported to ENCON.

[84] The ENCON policy for the policy period 25 October 2009 to 25 October 2010 provided coverage as follows:

PART II - COVERAGE AGREEMENTS

1. Coverage A - Third Party Liability

The INSURER will pay on behalf of the INSURED, LOSS that the INSURED becomes legally obligated to pay as a result of a CLAIM resulting from POLLUTION CONDITIONS caused by COVERED OPERATIONS that commence on or after the Retroactive Date indicated in Item 8 of the Declarations, provided such CLAIM is first made against the INSURED and reported to ENCON in writing during the POLICY PERIOD or during the EXTENDED REPORTING PERIOD.

[85] The retroactive date number 8 of the declaration page was 25 October 2007.

[86] The definition of “covered operations” in the ENCON policy provides:

COVERED OPERATIONS means work performed by or on behalf of the NAMED INSURED at a job site for a third party....

[87] Relevant exclusions include the following:

This insurance does not apply to CLAIMS, LOSS or Supplementary Payments:

3. Arising from the sale, distribution, design or manufacture of a product unless installed in conjunction with COVERED OPERATIONS.

4. Arising out of or attributable to warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of YOUR PRODUCT, and the failure to provide sufficient or any warnings or instructions in relation to YOUR PRODUCT.

[88] “Your product” is defined by the ENCON policy as "any goods or products manufactured, sold, handled or distributed or disposed of by the INSURED ... "

[89] For a claim to fall within the grant of coverage provided by the ENCON policy, there must be work performed by or on behalf of the insured at a job site.

[90] M&W argues that because the phrase “job site” is not defined in the policy, it would be open to the court to decide that the term includes the place where the sale of the fuel tank was effected. It also argues that “work performed” could refer to the physical sale and hand-over of the tank to the Davernes.

[91] Giving words and phrases their plain and ordinary meaning I do not accept those arguments.

[92] ENCON submits that as there are no allegations in the statement of claim of any work being performed at the plaintiffs' property by M&W, the claim simply does not fall within the initial grant of coverage under the ENCON policy.

[93] Even if M&W can somehow bring itself within the grant of coverage, the language of exclusions 3 and 13 is clear and unambiguous.

[94] Furthermore, both the covered operations and the pollution conditions caused by the covered operations must have occurred after the retroactive date: Northmore Fuels v. GCAN Insurance Co, 2013 ONSC 7346, paras 10-19.

[95] For the foregoing reasons I conclude that there is no coverage under the ENCON policy.

Disposition

[96] Federated’s motion for summary judgment dismissing the third party action against it based on its contractual limitation defence is dismissed.

[97] M&W’s motion for partial summary judgment against Federated for a declaration that Federated has a duty to defend and is required to defend M&W in respect of the claims advanced against M&W in the main action is granted. I may be spoken to if the parties are unable to resolve any issue in respect of the effect of this declaration on the reimbursement of defence costs already incurred by M&W on its own behalf.

[98] M&W’s motion for partial summary judgment against AIG, GCAN and Aviva is dismissed. In view of my findings in regard to the AIG and ENCON policies, the cross-motions for summary judgment dismissing the third party action against AIG, GCAN and Aviva is granted.

Costs

[99] The parties provided costs summaries following the hearing of these motions which address the quantum of costs each party would claim if awarded costs.

[100] M&W has succeeded against Federated on both Federated’s motion and M&W’s own motion. AIG, GCAN and Aviva have succeeded on M&W’s motion and each has secured a dismissal of the third party claim in its entirety.

[101] The principles articulated by the Court of Appeal in Boucher v. Public Accountants Council of Ontario, (2004) 71 O.R. (3d) 291 require a judge in fixing costs to consider the factors set out in rule 57.01(1) and set an amount that is fair and reasonable to the unsuccessful party in the particular proceeding. This task can more readily be applied when, as in the present case, each party has provided a costs summary on a “win or lose” basis.

[102] M&W is entitled to its costs of Federated’s motion and to partial costs incurred by it on its duty to defend motion, payable by Federated. I fix the costs payable by Federated to M&W on the Federated motion on a partial indemnity scale at $10,000, inclusive of disbursements and HST. On M&W’s motion, Federated shall pay a portion of the partial indemnity costs of that motion claimed by M&W, which share I fix at $10,000, inclusive of disbursements and HST.

[103] GCAN and Aviva are entitled to their partial indemnity costs of the motion for summary judgment and of the third party action, payable by M&W, which I fix at $10,000, inclusive of disbursements and HST.

[104] AIG is also entitled to its partial indemnity costs of the motion for summary judgment and of the third party action, payable by M&W. Although AIG’s costs summary was limited to the costs of the summary judgment motion, having regard to the principles in Boucher and the costs awarded to GCAN/Aviva, I fix AIGs costs of the motion and of the dismissed third party action at $10,000, inclusive of disbursements and HST.

[105] Although AON’s position was to support its client (M&W), it took no active part in the argument of the motions and did not deliver a factum or other material. Accordingly no order for costs is made in favour of or against AON at this time. This order is without prejudice to any claim M&W may advance at a later date against AON for the recovery of costs it has incurred as a result of litigating against its insurers.

Mew J.

Released: 31 March 2015