The Corporation of the Town of Huntsville v. Lloyd's Underwriters et al.
[Indexed as: Huntsville (Town) v. Lloyd's Underwriters]
Ontario Reports Ontario Superior Court of Justice, Wood J. February 22, 2017 137 O.R. (3d) 129 | 2017 ONSC 1208
Case Summary
Insurance — Insurer's duty to defend — Homeowners suing town after discovering that basement flooding resulted from non-compliance with Building Code and that building inspection department had [page130] approved deficient plans — Parties executing minutes of settlement after homeowners accepted opinion of defendant's expert that problem could be remedied without having to lift house off foundation — Homeowners accepting $200,000 from town's insurer — Releases held in escrow — Minutes of settlement effectively requiring town to enter into contract with homeowners for repair of basement — Homeowners bringing second action against town after discovering that remedial plan had not worked — Town's insurer having duty to defend second action.
In 2008, homeowners discovered that the basement of a house which they had purchased in 2007 was flooding because the basement walls and floor had not been constructed in accordance with the Building Code, O. Reg. 332/12. The town's building inspection department had approved deficient plans and on inspection had failed to identify deficiencies in the construction of the basement. The owners sued the town and W, the person they had hired to perform a pre-purchase home inspection. An engineer retained by W believed that the basement could be repaired and brought up to code without having to raise the house off its foundations. The owners accepted the engineer's proposal, and they executed minutes of settlement. The town's insurer paid the owners $200,000, but releases were held in escrow. The minutes of settlement effectively required the town to enter into a contract with the owners for the repair of the basement. After discovering that the remedial plan had not worked, the owners brought a second action against the town. The applicant applied for a declaration that the town's insurer was obliged to defend the second action.
Held, the application should be allowed.
The first action was not settled and remained an open file. The second action had the same parties and arose out of the same circumstances -- the continuation of water infiltration into the basement. It was in reality a continuation of the first action on the additional ground of breach of contract. Although the policy did not oblige the insurer to defend an action for breach of contract, the first action, a pure negligence case, remained unfinished business and should continue to be defended. The town was exposed to the contractual claims solely because it relied on the advice of counsel retained by and answerable to the insurer when the minutes of settlement were negotiated. Having placed the town in this predicament, the insurer could not now rely on the terms of its own policy to claim that it had no responsibility because the claim was framed primarily in contract. In any event, the second action alleged negligence as well as breach of contract, albeit unconvincingly. That factor alone entitled the town to coverage.
Cases referred to Alie v. Bertrand & Frère Construction Co. (2002), 62 O.R. (3d) 345, [2002] O.J. No. 4697, 222 D.L.R. (4th) 687, 167 O.A.C. 20, 26 C.L.R. (3d) 5, 119 A.C.W.S. (3d) 129; Home Insurance v. Landmark, 293 Cal. Rptr. 277 (Cal. App. 4 Dist., 1988)
Rules and regulations referred to Building Code, O. Reg. 332/12 [as am.]
APPLICATION for a declaration that the insurer had an obligation to defend an action.
R.J. Kennaley, for applicant. [page131] N.R. Downer, for respondent Lloyd's Underwriters. I.A. Mair and B.M. Martin, for respondent AIG Insurance Company of Canada.
[1] Wood J. : — This was an application by the Corporation of the Town of Huntsville (the "town") seeking a declaration that the respondent insurers, Lloyd's Underwriters ("Lloyd's") and AIG Insurance Company of Canada ("AIG"), have an obligation to defend action #CV-15-177 Bracebridge (the "second action"), commenced against the town by James MacKendrick and Leaynne Connolly (the "owners"). The application also seeks derivative relief including orders for indemnification for sums already spent defending the action and dividing the respondents' responsibility to defend.
[2] There has been no trial in this matter. When a request for coverage is made at this stage, the court must accept the facts as alleged in the plaintiff's claim as being capable of proof, unless the policy in question expressly indicates that this is not to occur (Alie v. Bertrand & Frère Construction Co. (2002), 62 O.R. (3d) 345, [2002] O.J. No. 4697, paras. 182-84). Neither policy contains such language. Therefore, the findings of fact with respect to the events giving rise to the owners' claim in the second action, and the damages arising therefrom, are assumed to be as alleged in the second action's statement of claim.
Findings of Fact
[3] Lloyd's provided third party liability coverage to the town from May 1, 2008 to May 1, 2009 under policy #PK0800116. AIG provided third party liability coverage to the town from May 1, 2015 to May 1, 2016 under policy #3630360.
[4] On October 30, 2017, the owners made an offer to purchase 101 Gryffin Lodge Rd. in the municipality of Huntsville. On November 8, 2007, they retained Christopher Wilson ("Wilson") to perform a home inspection on the house, and on the strength of his report closed the transaction.
[5] On June 29, 2008, the basement of the house flooded. Although the immediate cause of the flood was back up through a floor drain, removal of the interior wall siding revealed that water was infiltrating into the basement through the pressure treated wood walls. The owners retained an engineer. His report confirmed that that this was so. He also found
(1) That the basement walls had not been constructed in accordance with the standards of the Ontario Building Code. Or CAN/CSA-S406 (Construction of Preserved Wood Foundations) [page132] (3) That the floor of the basement had been constructed approximately 12 inches below the water table in the area. And not in accordance with the Ontario Building Code.
He recommended that the house be lifted off the foundation and that the entire basement be reconstructed so that the floor was 12 inches higher.
[6] The town's file on the property revealed that the building inspection department had approved deficient plans and, on inspection, had failed to identify several deficiencies in the construction of the basement. As a result, the owners sued the town and Wilson in Parry Sound action CV-09-098 (the first action). Lloyd's defended the action on behalf of the town. Wilson also defended the action.
[7] As part of his preparation for a trial, Wilson retained his own engineer, Edward Poon of Rochon Engineering. Poon believed that the basement of the house could be repaired and brought into compliance with the applicable codes without the necessity of raising the house. He submitted a proposal for doing so. This proposal was accepted by all the parties and incorporated into minutes of settlement for the first action. The terms of those minutes were as follows.
(1) The defendants Wilson and Huntsville shall pay to the plaintiffs the sum of $200,000.00 in full satisfaction of damages and pre-judgment interest. (2) The defendant Wilson, shall retain Rochon Engineering to provide stamped drawings acceptable to, and to conduct any inspections required by the Town of Huntsville, with respect to the following aspects of repair at the plaintiffs' home (a) Lateral Support required during the repair (b) A site drainage plan (3) Rochon shall provide the Town of Huntsville with a permit application and the stamped drawings referred to a paragraph 2 above by May 31, 2013 (4) The defendant Town of Huntsville will issue a permit to complete the repair on the basis of the stamped drawings produced by Rochon engineering by June 30, 2013 and in any event within 10 days of the receipt of an acceptable permit application completed either by Rochon Engineering or Burke Restorations at the choice of the defendant Wilson. (5) The Plaintiffs shall retain Burke Restoration to complete the repair proposed by Rochon Engineering for the fixed costs set out in the Evaluate estimates dated May 4, 2012 and the Burke Restoration estimate for site drainage dated May 1, 2013, attached hereto as schedules A and B. In the event that Rochon Engineering alters its current repair design with respect to the foundation or site drainage resulting in additional cost the defendants shall be responsible for this additional cost. [page133] (6) Burke Restorations shall use best efforts to complete all repairs at the plaintiffs' home by October 31, 2013 and in accordance with the scope of repair specified by Rochon Engineering and at the direction of the Town of Huntsville (7) The defendants Wilson and Huntsville shall pay a contribution to the plaintiffs' costs on a partial indemnity basis in the amount of $25,000.00 (8) Upon settlement the parties through their solicitors, shall execute releases acceptable to counsel and incorporating these minutes of settlement and a consent to the dismissal of the claim on a without costs basis. The releases to be held in escrow pending the completion of the repairs to the plaintiffs' home. The plaintiffs shall take out the dismissal order.
[8] The parties executed the releases called for in the minutes. Lloyd's paid the owners $200,000. The owners retained Burke restorations and that company carried out the work called for by Rochon Engineering between July and December 2013. The owners paid for the work.
[9] During the course of the restoration, both Edward Poon and the town carried out regular inspections. The town required the installation of a second sump pump not called for by Rochon. Mr. Poon amended the scope of the repairs to include additional bracing. This extra work was paid for by the defendants as called for in the minutes.
[10] Upon completion, the owners sought confirmation from Mr. Poon that the work had been completed in accordance with the Rochon Engineering plan. They also sought a final inspection report from the town. Mr. Poon provided a letter confirming that the work on the house had been completed in accordance with the Rochon plan and that it complied with the Ontario Building Code, O. Reg. 332/12. He did not, however, sign off on the exterior grading portion of the Rochon plan as by the date of his inspection, the ground was snow covered. The town has not issued a final report.
[11] The pleadings are silent as to whether the releases remain in escrow. However, the action has not been dismissed as it is still listed as active on the court's database.
[12] Over the winter of 2014, the owners refinished the interior of the basement. However, when spring arrived the sump pump in the north-east corner of the basement began to run constantly and its discharge flooded the property's driveway. The pump failed on May 15, 2015, and six inches of water accumulated in the basement.
[13] Mr. Poon attended on May 30 and opined that
(a) The ponding in the driveway was as a result of the position of the sump pump outlet and therefore a pre-existing condition and not part of the work designed by Rochon; [page134] (b) The flood was due entirely to the failure of the pump and not infiltration; (c) The evidence of water seepage was as a result of water entrapment between the floor and sub floor not infiltration through the walls; and (d) A second sump pump should be installed in the central sump pump pit installed at the suggestion of the town during the restoration work.
[14] When the interior walls were removed in July 2015, it was found that water was indeed still infiltrating through the walls. The second sump pump in the central pit continues to run constantly. The town has not yet closed its building file or issued a final report. And Rochon engineering has refused to re-attend at the property.
[15] The statement of claim in the second action alleges:
(a) That the settlement agreement in the first action released the plaintiffs' claims only to the date of settlement. (b) That the settlement was predicated on the defendant's representations that their expert's scope of repair was appropriate to remedy ongoing water infiltration through the foundation and to bring that foundation into compliance with the Ontario Building Code and CAN/CSA-S406. (c) That it was an implied term of the Minutes of Settlement that the repair proposed by the defendants would eliminate water infiltration through the foundation. And bring the foundation into compliance with the Ontario Building Code and CAN/CSA-S406. (d) That their continuing loss arises as a result of the defendant's negligent misrepresentation, and contractual breach of the settlement agreement the particulars of which are as follows: (i) They failed to retain a competent engineer to prepare an appropriate scope of repair when they knew that the plaintiff would rely on that engineer's expertise to repair their home. (ii) They represented that their engineer's proposed scheme of repair was an appropriate remedy to repair the plaintiffs' home when it was not, and they knew that the plaintiffs would rely on such representation. (iii) The defendants or their agent have failed to design and complete the repair of the property in a good and workmanlike manner, and (iv) The defendants have breached the minutes of settlement by failing to seek an altered repair scope to remedy the ongoing water infiltration and to pay those additional costs of repair.
The Law
[16] Counsel are agreed on the approach to be taken by the court in analyzing cases such as this. Where damage is alleged to have occurred throughout more than one coverage period, the 2002 decision of the Ontario Court of Appeal in [page135] Alie v. Bertrand & Frère Construction Co., supra, provides a comprehensive roadmap. That decision exhaustively reviewed both the Canadian and American jurisprudence and provided a useful analysis of the approach to be taken. As it applies to these facts, it can be summarised as follows:
(a) Since insurance coverage is a contractual arrangement any analysis must begin with the wording of the contracts: Alie, para. 22. (b) Both policies in this case are standard CGL policies. As such, each require a "triggering event", which results in an occurrence causing property damage. This occurrence must be during the policy period, whether or not there is an originating precipitating event outside the policy period: Alie, para. 91. (c) Where damage is ongoing throughout multiple policy periods but its extent and nature remain unquantified, there may be more than one triggering event and as a result more than one policy found to apply: Alie, para. 151. (d) If however the full extent of the damage has become a certainty at a point in time before it is discovered, then the injury has occurred by that point in time. The discovery will trigger the policy in place on the date of discovery and further deterioration will not trigger subsequent policies because the damage is already complete. "The point when the full extent of the damages becomes known is the manifestation date": Alie, paras. 135, 136, 142.
Should Lloyd's Provide Coverage?
[17] In my view, Lloyd's should provide coverage. The events that have occurred in this matter must be viewed as a continuum. Lloyd's defence of the town in the first action was an admission that the discovery of water infiltration through the foundation walls in July 2008 was a triggering event for the Lloyd's policy in force at the time.
[18] I find as a fact that the owners' engineering report discussed at para. 5 above, revealed the full extent of the damage to the owners' property. It correctly identified the source of the problem as water infiltration through the walls. It also identified the location of the floor below the water table as a defect requiring correction. Subsequent events have shown this report to have been correct.
[19] I further find as a fact that the water infiltration through the basement walls discovered in July 2015 was a continuation [page136] of the same damage that had been identified and quantified in 2008. The Rochon repairs failed to cure a pre-existing condition.
[20] At first blush, this would appear to be the very situation discussed in Alie beginning at para. 135. In adopting with approval the reasoning of the California Court of Appeal in Home Insurance v. Landmark, 293 Cal. Rptr. 277 (Cal. App. 4 Dist., 1988), the Ontario Court of Appeal explained the rational for holding the insurer on risk at the time of the manifestation liable for continuing damage, as follows.
. . . where there is ongoing damage after the first manifestation, the policy in place at the date of manifestation of the loss is responsible for the entire loss and any subsequent policy is not triggered. This is necessary because once the need for replacement is known, the full loss has been crystallized at that time and any further deterioration is caused by delay in proceeding with the necessary replacement.
[21] However, in this case there is the complication of the first and second actions and the purported settlement of the first. The effect of the two lawsuits and the parties' actions in response to the first, must therefore be considered with respect to Lloyd's continuing responsibility to provide coverage.
[22] As set out at para. 7 above, the parties entered into minutes of settlement of the first action. One component of that settlement was a payment of $200,000 by Lloyd's on the town's behalf for damages suffered by the owners. Arguably, this should have been the end of the matter for the town. The sum (which amounted to 85 per cent of the price the owners had paid for the house less than six months before discovering the problem) represented the agreed quantification of damages for the town's negligence. In the normal course, a release would have been obtained on payment and the town and Lloyd's would have been free of responsibility for any subsequent events.
[23] However, that is not how the settlement was structured. The releases, although signed, were held in escrow. The town was required to enter into a three-way contractual relationship with its co-defendant Wilson and the owners for the repair of the basement. Upon reviewing the minutes and the statement of claim in the second action, I find that despite the latter's being couched in both the language of negligence and contract the basis of the action is overwhelmingly the latter (see clause (d) of the portion of the statement of claim reproduced at para. 15 above). It is this contractual relationship, and not any further negligence on the part of the town or its agents, that forms the basis of the second action.
[24] It may turn out that the town was not well served by the counsel hired by Lloyd's to represent it when the minutes of [page137] settlement were negotiated. For in executing them, the town took on obligations that it would not otherwise have had and potentially exposed itself to a finding against it in the second action. However, for the purpose of this analysis, the question is what effect if any, do those minutes and the events subsequent to their signing, have upon Lloyd's continuing duty to provide coverage.
[25] In my view at this stage, they have none. The first action is not settled and remains an open file. The second action has the same parties as the first and arises out of the same circumstances -- the continuation of water infiltration into the basement. As such it is in reality a continuation of the first action on the additional ground of breach of contract. The two actions should be consolidated.
[26] Although the Lloyd's policy does not oblige the insurer to defend an action for breach of contract, the first action, a pure negligence case, remains unfinished business and must continue to be defended. The town is exposed to the contractual claims solely because it relied on the advice of counsel hired by and answerable to Lloyd's when the minutes of settlement were negotiated. Lloyd's exercised control over the settlement through its choice and control of the town's representation. This representation has resulted in the town's exposure to contractual claims which would not have arisen but for the settlement. Having placed the town in this predicament Lloyd's cannot now rely on the terms of its policy to claim that it has no responsibility because the claim against the town is framed primarily in contract rather than tort. In any event, the second action alleges negligence as well as breach of contract, albeit unconvincingly. This factor alone entitles the town to coverage.
[27] At this stage, a final quantification of the damages to be paid for the town's negligence remains an open question. A trial judge may well find that the monetary settlement already paid on behalf of the town, was determinative and that the matter is therefore res judicata. But before that determination can be made, the town must defend the action and Lloyd's remains responsible to do so on its behalf. Ancillary to this duty Lloyd's must also reimburse the town for all expenses incurred to date in defending the second action.
Should AIG Provide Coverage?
[28] AIG has no duty to defend the second action for two reasons. First, as discussed at para. 23 above, I find that the second action is framed in contract not tort despite its language. The [page138] AIG policy, like the Lloyd's policy, insured the town for tortious acts not breach of contract.
[29] Second, I have found that the damage was manifest in July 2008. As discussed above. This triggered the Lloyd's policy and prevented any subsequent policy from being triggered.
Disposition
[30] There will be a declaration that Lloyd's has an obligation to provide a defence to the town in the second action and further that Lloyd's has an obligation to reimburse the town for all expenses it has incurred to defend the second action to date.
[31] If the parties are unable to settle costs, they may file written submissions within 30 days of the date of release of these reasons.
Application allowed.
End of Document