Court File and Parties

COURT FILE NO.: CV-10-416611 DATE: 20160809 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Mason Homes Limited, Plaintiff/Responding Party AND: Lombard General Insurance Company of Canada, Defendant/Moving Party

BEFORE: Carole J. Brown, J.

COUNSEL: P. Gemmick, for the Plaintiff/Responding Party F. Viera, for the Defendant/Moving Party

HEARD: June 21, 2016

Endorsement

[1] The defendant, Lombard General Insurance Company of Canada (“Lombard") moves for summary judgment and dismissal of the claims of the plaintiff against it on the basis there is no genuine issue requiring a trial with respect to the claims.

[2] The insured, Mason Homes Limited ("Mason"), is a property developer, which was sued by the purchasers of a home developed by Mason ("the underlying action"). The plaintiff purchasers in the underlying action, David Pilote and Charlene Summerfield, allege breach of contract between Pilote/Summerfield and Mason. The contract, entered into on September 23, 2006, was for the purchase of a new home developed by the plaintiff and built on a ravine lot, which the purchasers alleged had not been graded properly or at all, rendering the grading of the lot too steep. The purchasers allege that Mason breached the contract by failing to provide a graded slope of 4 to1 as set out in the original agreement of purchase and sale and the elevation drawings.

[3] Based on the allegations in the underlying action, on July 24, 2006, two months before the parties entered into the said Agreement of Purchase and Sale, Mason and the Town of Uxbridge entered into an additional Subdivision Agreement which acknowledged that the grades in the rear yard of the property exceeded the maximum standards set out by the Town of Uxbridge and required Mason to include a warning in the Agreement of Purchase and Sale. Mason failed to include said warning as regards the change in the slope of the lot in the Agreement of Purchase and Sale with Pilote/Summerfield. The purchasers' position in the underlying action was that the lot, which was intended to be used as a family residential property, was not safe and could not be used.

[4] As regards the underlying action, Mason brought this claim against Lombard for defence and indemnity pursuant to a Commercial General Liability (“CGL”) policy of insurance number CBC06256555. It also brought a second claim for the plaintiff's losses arising out of the claim made in the underlying action, which arose as a result of the plaintiff having settled the underlying action with the purchasers.

[5] Lombard denied coverage under the Policy and maintained that the claim in the underlying action does not fall within the coverage provided in the insurance and/or is excluded under the exclusions. They maintained that the loss was not caused by an "occurrence" or "accident" and therefore did not fall within the insuring agreement.

The Issues

[6] The issues for determination by this Court are as follows:

1. Whether, pursuant to rule 20 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, there is a genuine issue requiring a trial.
2. Whether Mason's claim for defence coverage regarding the underlying action falls within the CGL;
3. Whether the claim for coverage is excluded pursuant to the CGL

The Allegations in the Underlying Claim

[7] In the underlying action, the specific allegations as against Mason in the amended statement of claim, paragraph 23, included the following:

1. Mason deliberately concealed from Uxbridge and the Plaintiffs the grading issues relating to [the property] and the lack of any prior knowledge of these issues by the Plaintiffs;
2. Mason is grossly negligent for preparing and submitting to Uxbridge a grading plan which severely reduced the maximum 4 to 1 grading slope according to the Uxbridge design criteria to approximately 2 to 1 …;
3. Mason proceeded to construct the home… without advising the Plaintiffs in advance of the grading changes of this magnitude which it knew or ought to have known would render the property virtually usable…;
4. Mason proceeded to construct the home… which was in fundamental breach of the purchase agreement and the July 24, 2006 subdivision agreement and precluded the Plaintiffs from making an informed decision prior to closing;
5. Mason acted maliciously and vindictively by taking no steps to rectify the grading issues…
6. Mason has refused to consider or pursue any other possible solutions to complete the grading in an effort to adhere to the purchase agreement and the subdivision agreement;
7. Mason has forced the plaintiffs to proceed to litigation in order to obtain their remedies with full knowledge that they were in breach of July 24, 2006 subdivision agreement and purchase agreement.

The Plaintiff's Claim against Lombard

[8] As against Lombard, the plaintiff seeks a declaration that Lombard has a duty to defend Mason in the underlying action; a declaration that Mason is entitled to appoint its own counsel to defend the action; and indemnity for any expenses incurred in defending the underlying action.

The Commercial General Liability Policy

[9] The provisions of the Commercial General Liability policy ("CGL") relied upon by the defendant are as follows:

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". b. This insurance applies to "bodily injury" or "property damage" only if: (1) The "bodily injury" or "property damage" is caused by an "occurrence"…

2. Exclusions This insurance does not apply to: a. Expected or Intended Injury "Bodily injury" or "property damage" expected or intended from the standpoint of the insured… h. Damage to Property "Property damage" to: (5) that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the "property damage" arises out of those operations; or (6) that particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.… Paragraph (6) of this exclusion does not apply to "property damage" included in the "products-completed operations hazard". k. Damage to Impaired Property or Property Not Physically Injured "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",…"

3. The term "property damage" is defined in the Policy as: "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." The term "your work" is defined in the policy as: "Your work" a) 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. b) Includes: a. Warrantees or representations made at any time with respect to the fitness, quality, durability, performance or use of "your work", and b. The providing of or failure to provide warnings or instructions."

[10] Lombard maintains that the allegations as against Mason in the underlying action, for which the plaintiff seeks contribution and indemnity for the cost of defending the underlying action are not covered pursuant to the Commercial General Liability ("CGL") insurance policy, as the property damage in question is not caused by an "occurrence" or "accident". They further maintain that it is excluded as regards property damage expected or intended from the standpoint of the insurer or property damage to real property on which the insured or contractors or subcontractors working directly or indirectly on behalf of the insured are performing operations where the property damage arises out of those operations or that particular part of any property that must be restored, repaired or replaced because of the insured's work being incorrectly performed on it. They further maintain that it is excluded pursuant to the "Damage to Impaired Property or Property Not Physically Injured" exclusion, whereby property damage to impaired property or property that has not been physically injured arises out of a defect, a deficiency, inadequacy or dangerous condition in the insured's product or work "("your work").

[11] The term "property damage" is defined in the Policy to mean "physical injury to tangible property, including all resulting loss of use of that property or loss of use of tangible property that is not physically injured.”Your work" is defined in the policy to mean "work or operations performed by you or on your behalf; and materials, parts or equipment furnished in connection with such work or operations", and includes "warrantees or representations made at any time with respect to the fitness, quality, durability, performance or use of "your work" and "the providing of or failure to provide warnings or instructions".

[12] It is the position of the plaintiff, Mason, that the claim in the underlying action is not only a claim for breach of contract, but also a claim for damages arising from the tort of negligent misrepresentation, which it maintains is clearly covered by the Policy. The plaintiff maintains that the claim in the underlying action also includes a claim for fraudulent misrepresentation, which counsel for the plaintiff concedes would result in no coverage under the policy.

[13] Further, the plaintiff takes the position that it negligently failed to include the clause that ought to have been included as regards the slope, required by the Town of Uxbridge in the Subdivision Agreement of July 24, 2006. Thus, counsel for the plaintiff argues that its true exposure in the underlying action was under the tort of negligent misrepresentation, which is covered under the Policy.

[14] Plaintiff's counsel further maintains that the issue of the warning clause, while raised in the defendant's factum, was not set out in the notice of motion and that the defendant is not now permitted to raise that issue. As regards what the plaintiff views as a "new issue" raised only in the defendant's factum, I am of the view that the notice of motion was drafted in very general terms. It was in the factum that the specific facts were sent out, including the failure to include in the Agreement of Purchase and Sale the warning that was required pursuant to the Subdivision Agreement with the Town of Uxbridge dated July 24, 2006. The plaintiff fully responded to this allegation. Moreover, in the underlying action, the plaintiff pleads as against Mason that it failed to include in the Agreement of Purchase and Sale or an amendment thereto, the warning clause as required by the Town of Uxbridge. Given that the notice of motion was general and framed in breach of contract, while the factum specified that the plaintiff failed to give a warning in breach of its requirements pursuant to the Subdivision Agreement with the Town of Uxbridge, and given that the underlying action specifically pleaded the failure to give a warning as part of the breach of contract claim, I do not find there is any prejudice to the plaintiff as regards the defendant's inclusion of this argument. The plaintiff was not taken by surprise as regards this aspect of the claim and motion, and indeed, in its motion materials, responded to it.

The Law

Rule 20: Summary Judgment

[15] Rule 20 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 provides for summary judgment where there is no genuine issue requiring a trial with respect to a claim or defence.

[16] The Supreme Court of Canada, in Hyrniak v. Mauldin, 2014 SCC 7 and Bruno Appliances and Furniture Inc. v. Hyrniak, 2014 SCC 8, has recently reinterpreted rule 20, taking into account the recognized need for access to justice for the majority of Canadians. The Supreme Court held that summary judgment rules must be interpreted broadly, favouring proportionality and fair access to the affordable, timely and just adjudication of claims. It found that the Court of Appeal, in Combined Air Mechanical Services Inc. et al. v. Flesch et al., 2011 ONCA 764, placed too high a premium on the "full appreciation" of evidence that can be gained in a conventional trial, given that such a trial is not a realistic alternative for most litigants. It held that a trial is not required if a summary judgment motion can achieve a fair and just adjudication, if it provides a process that allows the judge to make the necessary findings of fact, apply the law to those facts and is a proportionate, more expeditious and less expensive means to achieve a just result than going to trial.

[17] On a motion for summary judgment, the judge must first determine if there is a genuine issue requiring trial based only on the evidence before the judge without using the judge's new fact-finding powers.

[18] There will be no genuine issue requiring a trial if the summary judgment process provides the motion judge with the evidence required to fairly and justly adjudicate the dispute on the merits within the meaning of rule 20.04(2)(a) and is a proportionate, more expeditious and less expensive means to achieve a just result. Where a summary judgment motion allows the judge to find the necessary facts and resolve the dispute, proceedings at trial would generally not be proportionate, timely or cost-effective. However, a process that does not give the judge confidence in conclusions to be drawn can never be the proportionate way to resolve the dispute.

[19] Pursuant to rule 20.04 (4), where the court is satisfied that the only genuine issue is a question of law, the court may determine the question and grant judgment accordingly.

The Duty to Defend

[20] The Canadian jurisprudence clearly sets forth the legal principles governing the insurer’s duty to defend. The pleadings govern the duty to defend, and not the insurer’s view of the validity or nature of the claim or the possible outcome of the litigation. If the pleadings allege facts which, if true, would require the insurer to indemnify the insured for the claim, then the insurer is obliged to provide a defence. Where there is doubt as to whether the pleadings bring the incident within coverage of the policy, such doubt must be resolved in favour of the insured.

[21] Where it is clear from the pleadings that a suit falls outside policy coverage by reason of an exclusion clause, the duty to defend does not arise. It is not necessary to prove that the obligation to indemnify will in fact arise in order to trigger the duty to defend. The mere possibility that a claim falling within the policy may succeed will suffice. In this sense, the insurer’s duty to defend is broader than the duty to indemnify: Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801.

[22] In Nichols, supra, McLachlin J. stated:

“I conclude that considerations related to insurance law and practice, as well as the authorities, overwhelmingly support the view that the duty to defend should, unless the contract of insurance indicates otherwise, be confined to the defence of claims which may be argued to fall under the policy. That said, the widest latitude should be given to the allegations in the pleadings in determining whether they raise a claim within the policy.

[23] Any doubt as to whether the pleadings bring the incident within coverage of the policy must be resolved in favour of the insured. As clearly stated by Iacobucci J.:

Where 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. This principle is congruent with the broader tenets underlying the construction of insurance contracts, namely, the contra proferentum rule, and the principle that coverage provisions should be construed broadly, while exclusion clauses should receive a narrow interpretation. In Opron Maritimes, supra, the New Brunswick Court of Appeal conveyed these principles by stating at para. 15 that, “[a]ny doubt as to whether the pleadings bring the incident within the coverage of the policy ought to be resolved in favour of the insured”.

Moneco Ltd. et al. v. Commonwealth Insurance Co., 2001 SCC 49

[24] The starting point to determine whether a duty to defend arises under the policy is to analyze the pleadings following the three-part test outlined by the Supreme Court of Canada in Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551 at p. 581; 2000 SCC 24 at paragraphs 50-52 [Scalera]:

Determining whether or not a given claim could trigger indemnity is a three-step process. First, a court should determine which of the plaintiff's legal allegations are properly pleaded. In doing so, courts are not bound by the legal labels chosen by the plaintiff. A plaintiff cannot change an intentional tort into a negligent one simply by choice of words, or vice versa. Therefore, when ascertaining the scope of the duty to defend, a court must look beyond the choice of labels, and examine the substance of the allegations contained in the pleadings. This does not involve deciding whether the claims have any merit; all a court must do is decide, based on the pleadings, the true nature of the claims.

At the second stage, having determined what claims are properly pleaded, the court should determine if any claims are entirely derivative in nature. The duty to defend will not be triggered simply because a claim can be cast in terms of both negligence and intentional tort. If the alleged negligence is based on the same harm as the intentional tort, it will not allow the insured to avoid the exclusion clause for intentionally caused injuries.

Finally, at the third stage, the court must decide whether any of the properly pleaded, non-derivative claims could potentially trigger the insurer's duty to defend.

[25] The principles of policy interpretation include the following. In determining whether the allegations in a claim trigger a defence obligation, it is presumed that the facts alleged in the pleadings are true: Progressive Homes Limited v Lombard General Insurance Co. of Canada, 2010 SCC 33. When the pleadings filed against the insured allege facts which, if true, would require the insurer to indemnify the insured, the insurer has a duty to defend. If there is any possibility that the claim falls within the liability coverage, the insurer must defend. The court must look beyond the labels used by the plaintiff to ascertain the "substance" and "true nature" of the claims. It must be determined whether the factual obligations, if true, could possibly support the plaintiff's legal claims. It must be determined if any claims pled are entirely "derivative" in nature, within the meaning of that term as set out in Scalera. A derivative claim will not trigger a duty to defend. Where the pleadings are not sufficiently precise to determine whether the claims would be covered by the 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. In determining whether the policy would cover the claim, the usual principles governing the construction of insurance contracts apply, as follows: the contra preferentum rule; the principle that coverage clauses should be construed broadly and exclusion clauses narrowly; the desirability where the policy is ambiguous, of giving effect to the reasonable expectations of the parties. Extrinsic evidence that has been explicitly referred to in the pleadings may be considered to determine the substance and true nature of the allegations: Tedford v TD Insurance Meloche Monnex, 2012 ONCA 429.

Analysis

Does Mason's Claim for Defence Coverage in the Underlying Action Fall within the CGL

[26] It is the position of the defendant, Lombard, that the statement of claim is framed in breach of contract and intentional conduct which are not covered by the policy. It refers particularly to the allegations of fundamental breach, the deliberate concealment of the grading issues, the failure to take steps to rectify the grading issues despite its knowledge thereof, the refusal to consider other solutions, and a failure to include the warning to the purchasers required by the Town of Uxbridge: Amended Statement of Claim, paragraph 23. It argues that insurance is presumed to cover only negligence, but not intentional injury or conduct or contractual liabilities absent a specific term in the Policy providing such coverage, which term does not exist here. It relies on Randhawa v. Da Rosa.

[27] While it is the position of the plaintiff that there are allegations of negligence and gross negligence in the statement of claim which result in its falling within the policy terms, such allegations must be carefully scrutinized. The one allegation of gross negligence is found at paragraph 23(b) of the amended statement of claim. It states that "Mason is grossly negligent for preparing and submitting to Uxbridge a grading plan which severely reduced the maximum 4 to1 grading slope according to the Uxbridge design criteria to approximately 2 to 1 which had horrendous results for the plaintiffs when there were other options available such as the installation of a grinder pump for sanitary sewage or retaining walls". The pleadings do not contain any particulars of said negligence.

[28] As indicated in Scalera, the court must analyze and scrutinize the allegations contained in the pleadings. If said allegations sound in intentional tort, the use of the term negligence or gross negligence will not be controlling. As stated by Iacobucci J, with respect to identifying derivative claims, "a claim for negligence will not be derivative if the underlying elements of the negligence and the intentional tort are sufficiently disparate to render the two claims unrelated. If both the negligence and intentional tort claims arise from the same actions and cause the same harm, the negligence claim is derivative, and it will be subsumed into the intentional tort for the purposes of the exclusion clause analysis. If on the other hand, neither claim is derivative, the claim of negligence will survive and the duty to defend will apply: Scalera, supra at paragraph 85."

[29] The insuring agreement covers amounts the insured becomes legally obligated to pay as damages because of bodily injury or property damage. In this case, there is no allegation of bodily injury. The issue is whether there is property damage which falls within coverage. Coverage is only afforded if the property damage is caused by an "occurrence". Property damage is defined in the policy to mean "physical injury to tangible property, including all resulting loss of use of that property or loss of use of tangible property that is not physically injured". Damages for costs of repair do not constitute "property damage" for purposes of the policy: Privest Properties Ltd. v. Foundation Co. of Canada. "Occurrence" is defined in the policy as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions".

[30] Are there pleadings which allege facts that, if true, would require the insurer to indemnify the insured for the claim. The underlying claim alleges, as against Mason, intentional acts done deliberately, knowingly, maliciously and in fundamental breach of the APS, as set forth at paragraph 7, above. These claims are not covered and do not trigger a duty to defend. The plaintiff urges that the allegation of gross negligence as against Mason, as set forth at paragraph 7(2) above, brings the claim within coverage, although he concedes that any allegations of fraudulent misrepresentation would not fall within coverage. However, I am of the view that the true nature of the claim is intentional conduct. I am further of the view that the allegation of gross negligence, which is not particularized and for which no requisite elements of the negligence are pled, is derivative. The alleged negligence is not particularized as are the claims for intentional tort. The underlying elements of the negligence and the intentional tort claims are not sufficiently disparate to render the two claims unrelated. Indeed, the alleged gross negligence and intentional tort claims arise from the same actions and cause the same harm. Thus, the negligence claim is derivative and subsumed in the intentional tort claims. It will therefore not trigger the insured's duty to defend.

[31] There are no pleadings of property damage, namely physical injury to tangible property or loss of use of the property which would bring the claims within coverage.

[32] I find that the underlying claim does not fall within the insuring agreement and, therefore, there is no coverage.

[33] If I am incorrect as regards the foregoing, I am satisfied that there are policy exclusions which apply in this case. The relevant exclusions are set forth at paragraph 9, above.

[34] The insurance policy does not apply to property damage intended from the standpoint of the insured. Therefore, if the insured intended the consequences of its actions, the intentional act exclusion would apply. In this case, based on the pleadings, the nature of the claim is such that the insured intended the result of the steeper slope, and for that reason entered into the additional Subdivision Agreement with the Town of Uxbridge.

[35] Further, the ensuring policy does not apply to property damage arising out of operations undertaken by the insured or any contractors or subcontractors working directly or indirectly on the insured's behalf. Thus the exclusion applies to exclude coverage for the insured's work. In this case, the insured was performing grading operations on the lot which resulted in the steeper grading, as created by the insured. There was no allegation of resultant damage caused by the grading. Further, there is no allegation that the steeper slope was caused by an "accident" or “occurrence". It was intentional, and led the insured to enter into an additional Subdivision Agreement with Uxbridge as regards the steeper slope.

[36] I do not find the plaintiff's submissions as regards application of Progressive Homes Ltd v Lombard General Insurance Co. of Canada, 2010 SCC 33 to be persuasive. I accept the defendant's submissions as regards its being distinguishable.

[37] Finally, the insurance policy does not cover damage to impaired property or property not physically injured arising out of a defect, deficiency, inadequacy or dangerous condition in the insured's work. Thus, the exclusion applies to property that has not been physically injured arising out of a deficiency or inadequacy in the insured's work, which is defined to mean work or operations performed by the insured or on the insured's behalf by contractors or subcontractors. While the exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to the product or work after it has been put to its intended use, this is not applicable in the circumstances of this case. I am satisfied that this exclusion is applicable in the circumstances of this case. It is of note that, in this case, the Town of Uxbridge also required the insured to include a warning clause in the APS, which the plaintiffs did not do.

[38] Based on all of the foregoing, I find that the underlying action does not fall within the coverage afforded by the CGL policy of insurance number CBC06256555, and that Lombard does not owe Mason a duty to defend it as regards the underlying claim.

The Summary Judgment Motion

[39] As regards the motion for summary judgment dismissing this action, I am satisfied that the only question involved is a question of law, namely whether the claim falls within the provisions for coverage pursuant to the insurance policy. I have found that the underlying claims do not fall within the insurance policy coverage and do not trigger the duty to defend. Accordingly, I find that there is no genuine issue requiring a trial and that, pursuant to rule 20.04 (4) this action should be dismissed as against Lombard.

Costs

[41] I would urge the parties to agree upon costs, failing which I would invite the parties to provide any costs submissions in writing, to be limited to three pages, including the costs outline. The submissions may be forwarded to my attention, through Judges’ Administration at 361 University Avenue, within thirty days of the release of this Endorsement.

Carole J. Brown, J. Date: August 9, 2016