2017 ONSC 5718
COURT FILE NO.: CV-14-498788
DATE: 20171003
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Mori-Vines Inc. and Mori Essex Nurseries Inc.
Plaintiffs
– and –
Northbridge General Insurance Corporation
Defendant
Anne Juntunen, Rebecca Shoom for the plaintiffs.
William S. Chalmers, for the defendants
HEARD: August 16, 2017
Koehnen J.
[1] The plaintiffs claim that the defendants owe them a duty to defend a lawsuit in British Columbia. The plaintiffs also assert that they should have the right to appoint and instruct counsel even though the insurance policies at issue give the defendant insurers that right.
[2] For the reasons that follow, I find that the defendants do not owe the plaintiffs any duty to defend the claim British Columbia claim as it is currently pleaded. If I am wrong in this and the insurers do owe a duty to defend, I would impose terms, discussed later in these reasons to protect the plaintiffs against any potential conflict that may arise as a result of events to date.
I. Key Facts
[3] The plaintiff Mori-Vines Inc. (“Mori”) is a grower and wholesaler of grape vines based in Ontario’s Niagara wine region.
[4] The plaintiff Mori Essex Nurseries Inc. (“Essex”) is a corporation related to Mori that provides nursery services to grapevine wholesalers. In the spring of 2011, Essex retrieved approximately 47,000 vines from Mori and cared for them over the course of the summer. As part of this care, Essex sprayed the vines with a mixture of chemicals.
[5] In the fall of 2011, Essex uprooted the vines and returned them to Mori who placed them into cold storage for the winter. In the spring of 2012, Mori delivered the vines to Andrew Peller Ltd. (“Peller”) pursuant to contracts entered into earlier. Peller is a well-known wine producer who planted the vines in three of its vineyards in British Columbia.
[6] The vines were allegedly defective, as a result of which Peller commenced an action for damages against Mori in the Supreme Court of British Columbia.
[7] Mori issued a third party notice against Essex in Peller’s action.
[8] Both Mori and Essex had purchased “Business Choice” insurance from the defendant Lombard General Insurance Company of Canada (“Lombard”). The defendant Northbridge General Insurance Corporation (“Northbridge”) is the successor in interest to Lombard.
[9] Although Mori and Essex purchased separate insurance policies, their wording is essentially identical. Both policies included Commercial General Liability (“CGL”) coverage.
[10] Northbridge has denied a duty to defend Mori in the Peller claim and Essex in Mori’s third party notice. Northbridge bases its denial on three exclusions in its insurance policies: the “Your Product”, the care custody or control and the fungus exclusions.
[11] In this proceeding, Mori and Essex seek an order requiring Northbridge to defend Peller’s action against Mori and to defend Mori’s third party claim against Essex. Mori and Essex also seek an order entitling them to appoint and instruct counsel of their choice, at Northbridge’s expense, which counsel need not report to, or take instructions from, Northbridge.
II. Procedural Issues
[12] The issues come before me in the form of a Rule 21 motion for the determination, before trial, of a question of law. Neither party objects to the use of Rule 21. Rule 21 has been recognized as an appropriate mechanism to determine issues concerning the duty to defend: Versa Fittings & Manufacturing Inc. v. Berkeley Insurance Co., 2015 ONSC 1756 at para. 23.
[13] Mori and Essex have filed a solicitor’s affidavit for use on the motion. It attaches correspondence between their counsel and the insurer’s counsel. Northbridge objects to the affidavit. Mori says it was given no forewarning of the objection and that Northbridge has filed its own affidavit and responding record.
[14] I have decided to admit both the plaintiffs’ and the defendant’s affidavits, but solely to enter into the record the insurance policies and the pleadings which are attached as exhibits to those affidavits. I have ignored the balance of the affidavits.
[15] Neither counsel made material use of any of the other materials in the affidavits during oral argument, nor do I think it would be appropriate to do so on a Rule 21 motion.
[16] Under Rule 21.01 (2) no evidence is admissible on the motion, except with leave of a judge or on consent of the parties. Both parties chose to proceed under Rule 21 and the evidentiary limitations inherent in it.
[17] The additional materials involve correspondence between the plaintiffs and Northbridge that deals with the reasons for which Northbridge denied coverage and the possible causes of damage to the vines.
[18] Mori relies on the correspondence dealing with the reasons for which Northbridge has denied coverage to demonstrate that the insurer’s position on coverage evolved over time. Mori asks me to draw an adverse inference from that evolution. I do not believe that would be appropriate. Northbridge’s position changed during the course of its investigation. Some of the change in position arose as a result of language contained in Peller’s claim. Northbridge took one position before it received Peller’s Notice of Action and revised that position in response to specific allegations contained in the Notice of Action. I see nothing improper in that. An insurer should base its position on the circumstances before it. As those circumstances change, the insurer is entitled to, and in many cases, must, reassess its position.
[19] Mori has given me no authority to suggest that Northbridge’s conduct in the present circumstances is improper.
[20] At the end of the day, neither the allegedly evolving position of Northbridge nor the possible causes of damage to the vines are material to the determination I am required to make. My role on this motion is not to determine what caused damage to the vines or to determine whether Northbridge acted improperly. My role is to determine whether or not the allegations in Peller’s Notice of Action or Mori’s Third Party Notice give rise to a duty to defend.
III. Principles Surrounding the Duty to Defend
[21] The insuring agreement in the policies provides that Northbridge:
“will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies.”
[22] For purposes of this motion, Northbridge concedes that the damage at issue constitutes property damage but that it is relieved of any duty to defend because of the exclusions in the policy.
[23] The motion therefore turns on the interpretation and application of the exclusions and the duty to defend.
[24] The principles applicable to exclusions and the duty to defend are not disputed. They can be summarized as follows:
(a) The onus is on the insurer to establish that an exclusion applies: Poplawski v McGrimmon, 2010 ONSC 108 at para 23.
(b) A policy exclusion will only relieve an insurer of a duty to defend where coverage is necessarily and conclusively excluded: Versa Fittings at para. 61.
(c) An insurer has a duty to defend if there is a “mere possibility” that a claim falls within the coverage provided by the insurance policy: Nichols v American Homes, 1990 144 (SCC), [1990] 1 SCR 801 at 810.
(d) The duty to defend is broader than the duty to indemnify. Nichols at 810.
(e) Whether an insurer is bound to defend a particular claim will depend on an assessment of the allegations made in the pleadings filed against the insured. This remains so even though the actual facts may differ from the allegations pleaded: Monenco Ltd. v Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 SCR 699 at 713.
(f) The object of reading a pleading to determine whether it triggers coverage is to focus on the pith and substance of the pleading. “[T]he court needs to look beyond the labels and assess what is really being alleged. This will often require the application of common sense to an evaluation of what has been pleaded.” Versa Fittings & Manufacturing Inc. v. Berkeley Insurance Co., 2015 ONSC 1756 at paragraph 43.
IV. The Three Exclusions
A. The “Your Product” Exclusion
(1) Language of the Exclusion
[25] Northbridge relies on the “Your Product” exclusion principally to deny coverage to Mori rather than to Essex. The “Your Product” exclusion reads as follows:
“2. Exclusions
This insurance does not apply to: …
“ i. Damage to “Your Product”
“Property damage” to “Your Product” arising out of any part of it.” …
[26] “Your Product” is defined as:
“any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by” the insured.
[27] The words “arising out of any part of it” in the “Your Product” exclusion refer to damage to the product because of a defect in the product itself.
(2) Purpose and Policy Behind the Exclusion
[28] Before analyzing the exclusion in light of the Peller claim, it is useful to set out the general principles underlying it.
[29] The “Your Product” exclusion exists, at least in part, is to ensure that the insurer does not become the guarantor of the goods manufactured, sold, handled or distributed by an insured. In other words, the quality of the vines at issue is a risk for Mori to assume, not for the insurer to guarantee.
[30] As a general rule, CGL policies provide protection to the insured when its products or actions injure someone or cause damage to the property of others. To take a simple example, if an insured sells a machine to a customer and the machine explodes, thereby destroying the customer’s factory, the CGL policy might respond to indemnify the insured for his liability for the destruction of the factory, but would not indemnify the insured for the cost of replacing the machine it had sold to the customer.
[31] The principal was summarized in Alie v. Bertrand & Frère Construction Co., 2000 50976 (ON SC), [2000] O.J. No. 1360 (Ont. Sup. Ct.) at para. 297;
“It is a well-established principle of Canadian insurance law that comprehensive general liability policies are intended to protect the insured from liability for injury or damage to persons or property of others; they are not intended to pay for costs associated with replacing the insured's defective work and products, which are purely economic losses. In other words, CGL policies are not performance bonds. They will not pay the insured to remove and replace its own faulty work of deficient product. They are intended to indemnify the insured in a situation where the deficient product causes damages to a third party's property.” (Citations omitted)
[32] There are good policy reasons for restricting the application of CGL policies in this way. Having insurance cover the costs of the insured’s own product, effectively allows the insured to be paid twice: once by the insured’s customer and a second time by the insurer. It effectively rewards the insured for producing defective product by allowing the insured to make two sales instead of one. In addition, having the insurer act as a guarantor of the insured’s product relieves the insured of any incentive to perform its job properly or take measures to ensure that what it sells is of merchantable quality: Privest Properties Ltd. v. The Foundation Company of Canada Limited, 1991 2346 (BCSC) at page 79 – 80.
(3) Analysis
[33] I begin my analysis with the Peller claim, the critical paragraphs of which state:
“4. On or about September 15, 2011 Andrew Peller entered into a contract with Mori, pursuant to which Mori agreed to provide 43,205 grapevines of various varieties… (Paragraphs 5 and 6 of the claim contain similar allegations with respect to additional contracts between Mori and Peller).
It was an express, or alternatively, an implied term of the… [contracts] that the vines supplied by Mori would be fit for their intended purpose, of merchantable quality and would be free of all chemicals, funguses or diseases that could kill the vines or detrimentally impact their productivity.
At all material times, Mori owed a duty of care to Andrew Peller to ensure that the vines provided to Andrew Peller were fit for their intended purpose, of merchantable quality, and were free of all chemicals, funguses or diseases that could kill the vines or detrimentally impact their productivity.
On or about August 10, 2012 Mori advised Andrew Peller that the vines supplied pursuant to the Contracts were defective as a result of the use of certain chemicals during the growing process. Andrew Peller reviewed the progress of the vines, and found that approximately 40% of the vines it had purchased from Mori were dead.
As a result, Andrew Peller immediately purchased vines to replace the approximately 40% of the vines that were dead…
In or about January 2013, Andrew Peller learned that, contrary to what Mori had advised in August 2012, the vines it had purchased were infected with four separate funguses, which would kill the remaining 60% of the vines before they could reach productivity. As a result, Andrew Peller immediately purchased further vines to replace the remaining 60% of the vines that it had purchased from Mori…
As a result of Mori’s breach of contract and duty of care, Andrew Peller has suffered loss and damage, including, but not limited to, the replacement cost of the vines, and a loss of production from the Vineyards.”
[34] These paragraphs demonstrate that Peller’s fundamental complaint is that the vines that Mori sold to Peller were damaged. That complaint would put the vines squarely within the definition of “Your Product” which is defined as: “goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by” the insured.
[35] Mori raises several arguments to suggest that the Peller claim is not caught by the “Your Product” exclusion.
[36] First, Mori argues that the exclusion does not apply because Peller does not allege that the vines are the product of any particular person or entity. While that is correct in the sense that Peller does not state literally that the vines are the product of Mori, the paragraphs quoted above make it clear that Peller bought vines from Mori, the vines were defective and the vines had to be replaced. These allegations bring the claim squarely within the language of the “Your Product” exclusion.
[37] Second, Mori submits that the vines are real property which removes them from the definition of “Your Product”, because the definition specifically excludes real property.
[38] In support of its submission, Mori relies on Hoegy v General Accident Assurance Co. of Canada, 1977 CarswellOnt 776 (Co Ct) where the court decided that it could not determine whether a flax crop was real property or personal property and interpreted the ambiguity in favour of the insured. There is, however, no such ambiguity here. In Hoegy, the court dealt with conflicting case law about the real or personal nature of crops. Cases that characterize crops as real property generally involve situations where the crop is planted in the ground. That could not be the case here. Peller purchased vines from Mori in Ontario for delivery to British Columbia. What Peller purchased was a plant that was moved from Ontario to British Columbia. That is inherently movable, personal property; not real property.
[39] Third, Mori submits that Peller claims damages for harm to Peller’s property and not to the vines that Mori sold.
[40] To support this submission, Mori asserts that Peller seeks damages for soil remediation. There is, however, no claim for soil remediation articulated in Peller’s claim. If Peller did assert such a claim, I would agree that a claim for soil remediation would generally not fall within the “Your Product” exclusion.
[41] To further support its argument that Peller seeks damages for harm to its own property, Mori argues that Peller claims loss of use of its vineyards because Peller could not replace the vines for a full year. Although the loss of use claim is not expressly articulated in Peller’s claim, I am prepared to accept that there is such a claim for purposes of this motion. Even so, I do not agree that a loss of use claim by Peller would take the claim outside of the “Your Product” exclusion.
[42] Mori argued that loss of use could not fall within the “Your Product” exclusion because the loss of use refers to the absence of or shortage of grapes from the vineyards, which grapes are not Mori’s product.
[43] As this court noted in Versa Fittings & Manufacturing Inc. v. Berkeley Insurance Co. 2015 ONSC 1756 at para. 43:
“In all cases the court needs to look beyond the labels and assess what is really being alleged. This will often require the application of common sense to an evaluation of what has been pleaded.”
[44] The pith and substance of Peller’s claim is that the vines did not perform as promised. In this sense the vines are no different than the output from a machine that a customer might purchase from an insured. If the customer claimed that the machine did not produce as many widgets as the insured had promised, no one could argue that that claim fell within a CGL policy. To do so would turn a CGL policy into a performance bond or guarantee of the effectiveness of the insured’s product. As noted earlier this is not their purpose.
[45] The grapes are no different. Their absence or shortage does not arise from damage that a Mori product has caused to Peller property. It arises from a defect inherent in the Mori product. The vines were intended to produce grapes. They did not. They did not do so because they were defective.
[46] Mori’s argument might hold force if Peller’s claim alleged physical damage to the vineyard, such as soil contamination. There is, however, no such claim. The damage as pleaded is for the cost of replacing the vines and for loss of production from the vines that Mori sold to Peller.
[47] Where property damage is excluded under a CGL policy, the exclusion also excludes loss of use claims related to the property: March Elevator Co. v. Canadian General Insurance Co. 1995 CarswellOnt 1237(S.C.J.), at para. 30. In other words, if the “Your Product” exclusion excludes damage to the vines, it must also exclude damages for loss of use of the vines. If it were otherwise, the CGL policy would again be turned into a performance bond or product guarantee.
[48] None of Mori’s submissions has persuaded me that the Peller claim is anything but what it seems on its face: a claim against Mori for the delivery of defective products which is excluded by the “Your Product” exclusion.
B. The Care Custody or control Exclusion
[49] The second exclusion relevant to the motion is the care custody or control exclusion. It applies primarily to Essex because Mori delivered the vines to Essex for care and treatment.
[50] The care custody or control exclusion reads as follows:
"2. Exclusions
This insurance does not apply to: …
h. "Property damage" to:
(4) "Personal property in your care, custody or control;
(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. …”
[51] Although Peller makes no allegations against Essex, Mori has commenced a third party notice against Essex in the Peller action. In its third party notice, Mori claims that it delivered to Essex for treatment, the vines it sold to Peller. Essex treated the vines and returned them to Mori. Mori then states in paragraph 10 of its third party notice:
“Mori Vines denies that the vines it sold to Andrew Peller were in any way damaged or defective at the time of sale. However, if it is established that the vines were defective at the time of sale, then the defective condition of those plants was caused by Mori Essex’s negligent treatment of the vines.”
[52] In light the allegation that any defect “was caused by Mori Essex’s negligent treatment of the vines”, the care custody or control exclusion applies on the face of the third party notice and relieves Northbridge of any duty to defend Essex.
[53] Essex raises several arguments to avoid the care custody or control exclusion.
[54] First, Essex argues that the exclusion could only apply if the damage to the vines occurred when they were in its care custody or control. Essex points out that Peller does not allege when the damage occurred.
[55] This misses the point. Peller did not join Essex as a defendant; Mori did. As a result, the pleading relevant to the coverage analysis of Essex is Mori’s third party notice. It clearly alleges that any defect was caused by Essex’s negligent treatment of the vines. That treatment could only arise if the vines were under the care custody or control of Essex. In addition to paragraph 10 quoted above, Mori’s third party notice also alleges that “vines [ ] were being grown and cared for by Essex…” and that “Essex would fully care for the vines during the growing season…” Mori’s own allegation that the vines are under Essex’s care, triggers the exclusion against Essex.
[56] Second, Essex argues that we do not yet know when the damage arose and points to case law that sets out different theories about when damage occurs to trigger coverage under an insurance policy. Some cases follow the exposure theory which holds that damage occurs when the property is first exposed to a deleterious substance. The exposure theory would hold that damage to the vines occurred while they were in the care custody or control of Essex. Other cases follow the manifestation theory which holds that damage occurs when the damage manifests itself. This theory would presumably have the damage occur at some time after the vines came into Peller’s possession and therefore not while they were in the care custody or control of Essex. Other cases follow the injury in fact theory which holds that damage occurs when the injury actually occurs. Still others follow the triple trigger theory which holds that damage occurs when any of the facts for any of the three earlier theories arise. Given these ambiguities Essex argues that they should be resolved in favour of the insureds.
[57] For purposes of this motion, the issue of when the damage occurred should not be resolved by resorting to complex trigger theories from cases with very different factual contexts. The issue must be resolved in light of the pleadings in the Peller action.
[58] Mori’s third party notice against Essex states in paragraph 9 that “Peller alleges that the vines were damaged at the time they were purchased…” In other words, the vines were damaged by the time Peller took delivery. That pleading precludes any argument by Mori (at least as against Essex) that the damage arose after delivery to Peller. As already noted, Mori goes on to allege that any defect in the vines “was caused by Essex’s negligent treatment of the vines.” The pith and substance of Mori’s claim against Essex is that any damage to the vines was caused by Essex. That allegation triggers the care custody or control exclusion as against Essex.
[59] Third, Mori argues that the care custody or control exclusion applies only to personal property, whereas the vines were real property while they were in the possession of Essex because they were planted in the ground.
[60] On the motion before me Northbridge argued that, even if the vines are characterized as real property, the care custody or control exclusion continues to apply because sub-paragraph 2(h)(5) excludes from coverage:
“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”
[61] I agree that sub-paragraph 2(h) (5) applies and relieves Northbridge of any duty to defend even if the vines are deemed to be real estate.
[62] The reference to contractors and subcontractors in sub-paragraph 2(h) (5) renders it applicable to both Mori and Essex.
[63] Mori and Essex object to the use of sub-paragraph 2(h) (5) because it was raised for the first time in Northbridge’s factum. Until delivery of its factum, Northbridge had always taken the position that the vines constituted personal property under the concept of fructus industriales even if they were planted in the ground.
[64] Mori and Essex do not allege any particular prejudice to them arising from Northbridge’s late use of the argument, nor did they seek an adjournment to conduct further research to respond to the argument.
[65] I have also considered the issue of fructus industriales and conclude that the vines were in fact personal property when they were in the possession of Essex and are therefore covered by other portions of the care, custody or control exclusion.
[66] The starting point of the analysis is to recognize that any single plant can be either real property or personal property or both depending on the circumstances and the time at which the question is posed. Generally speaking, if a plant is rooted in the ground, it is more likely to be characterized as real property. Once the plant is removed from the ground, it is more likely to be characterized as personal property: Stewart v. TD General Insurance Co. [2014] O.J. No. 983 (Div. Ct.).
[67] The concept of fructus industriales recognizes that even plants that are planted in the ground can constitute personal property. Plants that are fructus industriales and therefore personal property are the fruits of labour or industry. They refer to crops that are produced through human activity such as sewing or cultivation and include things like wheat, corn or other vegetables or grains that are sewn and harvested each year: Cameron v. Gibson (1889) 17 O.R. 233 (Ch. Div.) at p. 238 [1889] O.J. No. 167 at para. 20; Stewart v. TD General Insurance Co. [2014] O.J. No. 983 (Div. Ct.), at fn. 1.
[68] This is contrasted with the concept of fructus naturales such as perennial bushes or trees. In the context of the pleadings of this case, I find the vines to be fructus industriales while they were in the possession of Essex and therefore constitute personal property.
[69] Mori’s third party notice against Essex states that: Mori delivered the vines to Essex, Mori contracted with Essex to care for the vines during the growing season, Essex returned the vines to Mori in a rooted stage, Mori stored the vines in cold storage for the winter and Mori shipped them to Peller in the spring of 2012.
[70] It is clear from Mori’s third party notice that Mori shipped the vines to Essex on a temporary basis. Even though Essex might have planted the vines in the ground, there was no transfer of title from Mori to Essex and it was never intended that the vines would remain with Essex for the long-term. It was a temporary delivery of personal property that was returned to Mori as personal property, stored by Mori as personal property and shipped to Peller as personal property.
C. The Fungus Exclusion
[71] The third exclusion on which Northbridge relies is the fungus exclusion. It reads as follows:
“COMMON EXCLUSION – COVERAGES A, B, C AND D
This insurance does not apply to: …
- Fungi or Spores
a. “Bodily injury”, “property damage” or “personal and advertising injury” or any other cost, loss or expense incurred by others, arising directly or indirectly from the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, presence of, spread of, reproduction, discharge or other growth of any “fungi” or “spores” however caused, including any costs or expenses incurred to prevent, respond to, test for, monitor, abate, mitigate, remove, cleanup, contain, remediate, treat, detoxify, neutralize, assess or otherwise deal with or dispose of “fungi” or “spores”;
b. Any supervision, instructions, recommendations, warnings, or advice given or which should have been given in connection with a. above; or
c. Any obligation to pay damages, share damages with or repay someone else who must pay damages because of such injury or damage referred to in a. or b. above.”
[72] The exclusion is broadly drafted. It applies to both Mori and Essex. It applies regardless of the time at which the fungus arose. The exclusion of “any other cost, loss or expense…” precludes coverage for any potential claims by Peller for loss of use or loss of yield.
[73] The Peller claim clearly alleges fungus as the cause of the damages. Paragraph seven of the Peller claim alleges that it was an express or implied term of the contract between Peller and Mori that the vines would be free from fungus. The claim goes on to allege:
“10. On or about August 10, 2012 Mori advised Andrew Peller that the vines supplied pursuant to the contracts were defective as a result of the use of certain chemicals during the growing process. Andrew Peller reviewed the progress of the vines and found that approximately 40% of the vines purchased from Mori were dead.
As a result, Andrew Peller immediately purchased vines to replace the approximately 40% of the vines that were dead from alternative suppliers due to concerns with the Mori-Vine quality. The replacement vines could not be planted until the 2013 growing season.
In or about January 2013, Andrew Peller learned that, contrary to what Mori had advised in August 2012, the vines it had purchased were infected with four separate funguses, which would kill the remaining 60% of the vines before they could reach productivity. As a result, Andrew Peller immediately purchased further vines to replace the remaining 60% of the vines that it had purchased from Mori. The replacement vines could not be planted until the 2014 growing season.
In breach of the terms of the Contracts and its duty of care owed to Andrew Peller, Mori failed to ensure the vines provided to Andrew Peller pursuant to the contracts were fit for their intended purpose, of merchantable quality and free from all chemicals, funguses and diseases that could kill of materially impact the productivity of the vines.”
[74] Mori and Essex raise two arguments to avoid the fungus exclusion. First they point out that there has been no determination that fungus caused the damage. Second they argue that Peller alleges that only 60% of the damage arose from fungus. Neither of these submissions assists them.
[75] I accept that there has been no determination that fungus caused the damage. As the Supreme Court of Canada noted in Monenco, it is the pleadings that determine coverage issues at this stage. It matters not that the facts found at trial may differ from those pleaded. Here pleadings clearly raise allegations of fungus which trigger the exclusion.
[76] Whether the pleading alleges that 60% or 100% of the damage was caused by fungus makes no difference to the end result on the motion. If we assume that Peller alleges that only 60% of the damage was caused by fungus, the remaining 40% of the vines would still be caught by the “Your Product” and the care custody or control exclusions, both of which apply to the entire claim.
[77] That said, I read Peller’s claim as quoted above to allege that fungus affected 100% of the vines it purchased from Mori. In paragraphs 10 and 11 of its claim, Peller alleges that Mori told Peller in August 2012 that the vines it had supplied were defective because of the use of certain chemicals. Peller found 40% of the vines to be dead which caused Peller to replace those 40%. In paragraph 12 Peller alleges that that, in January 2013 it learned that what Mori had advised in August 2012 was wrong and that Peller now learned that the vines were infected with fungus which would kill the balance of the vines. As a result, Peller replaced the remaining 60% of the vines. I read that paragraph as alleging that all of the damage to the vines arose because of fungus although that is not what Mori initially advised.
V. The Pleadings Rule
[78] As noted earlier, coverage is determined by the pleadings, even if the facts at trial are found to be different than the facts pleaded.
[79] Mori relies on two other cases to suggest that I am not strictly bound by the pleadings and that I should make inquiries beyond the pleadings to determine if coverage or a duty to defend are triggered. Mori suggests that making inquiries beyond the pleadings is one way in which the court can take into account the fact that no factual determinations have yet been made. In other words, it is a way of having the court retain some flexibility that the pleadings rule might preclude.
[80] The two cases are Aquatech Logistics et al. v. Lombard Insurance et al., 2015 ONSC 5858 and Aviva insurance Co. of Canada v. Intact Insurance Company, 2017 ONSC 509, 2017 ONSC509. I read both cases quite differently than the plaintiffs do. In both cases, the statement of claim triggered coverage under the policies. In both cases, the insurer argued that the facts as they come out at trial may trigger an exclusion, as a result of which the insurer should be relieved of a duty to defend. Both cases were resolved by the pleadings, not by speculating about what might happen at trial.
[81] Mori pointed me to paragraph 39 of Aquatech where Justice Dunphy posed a number of questions, the answers to which were not known when the motion was before him and which would form part of the factual inquiry at trial. Mori argues that there will be a similar factual inquiry in the Peller action, the answers to which may affect the duty to defend. In my view, Mori’s submission takes what Justice Dunphy did in paragraph 39 of Aquatech out of context.
[82] In Aquatech, an Aquatech employee delivered chlorine to a public pool which he poured into the wrong tank, thereby creating chlorine gas and causing damage. One of Aquatech’s insurers denied coverage because its policy contained an exclusion for claims arising from “the loading or unloading of a motor vehicle using equipment attached thereto…” The statement of claim in Aquatech made no reference to a motor vehicle. Pausing there, the language of the statement of claim simply did not give rise to the exclusion and triggered a duty to defend. Justice Dunphy found just that.
[83] Justice Dunphy went further, however, and accepted that the chlorine was likely delivered by a motor vehicle. That simple fact did not, however, trigger the exclusion. The exclusion was triggered only if the equipment used to unload the gas was attached to the motor vehicle. The statement of claim made no allegations in this regard either. In paragraph 39 of his reasons, Justice Dunphy explored a variety of scenarios in which the gas could have been unloaded using equipment that was not attached to the motor vehicle.
[84] In other words, Justice Dunphy was not speculating about what might be the result at trial as the plaintiffs ask me to do. Justice Dunphy had a statement of claim which triggered a duty to defend. He then made assumptions in favour of the insurer which the insurer had asked him to make and then explained in paragraph 39 why even those assumptions did not trigger the exclusions.
[85] Justice Dunphy did not reject or restrict the pleadings rule summarized in Monenco but applied that rule (see Aquatech, para 28 – 31).
[86] Aviva is to similar effect. The statement of claim underlying the dispute in Aviva alleged that pollution had migrated on to the plaintiff’s property from the insured’s property. The insurance policy excluded coverage for pollution unless its release was “sudden and accidental”. The insurer denied coverage. The insured sued for coverage. The court found in favour of the insured, holding that the statement of claim did not specify whether the migration of pollutants had occurred over a brief period of time and hence would be sudden, or whether the migration of pollutants extended over a period of time and hence would not be sudden. As a result, there was a “possibility” of coverage and the exclusion was not triggered. In addition, the court noted a division in the case law about the meaning of the “sudden and accidental” exclusion. Some cases have held that it referred to a temporal element; others have held that it related to an unexpected element. This also meant that there was a “possibility” that the claim could fall within coverage.
[87] In the present case, the statement of claim clearly triggers exclusions under the policy. Mori and Essex argue that the facts determined at trial might turn out to be different and might not have triggered the exclusions. While that may or may not be the case, it is irrelevant to the current analysis.
[88] The duty to defend must be based on the allegations contained in the statement of claim, not upon possible findings at trial. If it were otherwise, insurer and the insured would do battle in each case about whether facts might develop at trial that either trigger a duty to defend or trigger an exclusion. Imaginative counsel can develop arguments like that at the outset of almost any legal proceeding. If we let such arguments rule the day, it would be impossible to determine if there is a duty to defend until after the proceeding is over. The only way to resolve the debate in a practical way is to have the pleadings govern.
[89] Rather than having courts speculate about what might happen at trial, the better approach is to rely on the pleadings and, if the pleadings change or the facts at trial come out differently than set out in the pleadings, it might be appropriate to re-visit the issue.
VI. Are The Plaintiffs’ Entitled to Appoint Their Own Counsel?
[90] In the event I am wrong about the applicability of the exclusions and Northbridge’s duty to defend, I will address the plaintiffs’ request to appoint and instruct their own counsel at Northbridge’s expense.
[91] The starting point of the analysis on this issue is that the policies are duty to defend policies. In other words, they give Northbridge the right the right to appoint and instruct counsel for the insured. Duty to defend policies are to be contrasted with duty to indemnify policies. Duty to indemnify policies give the insured the right to select its own counsel, instruct counsel without involvement of the insurer and have the insurer indemnify the insured for legal expenses.
[92] The plaintiffs say the insurer has already decided that there is no duty to defend and no duty to indemnify. That creates the risk that the insurer could direct the defence to ensure that any finding of liability is one that falls outside the scope of the insurer’s duty to indemnify. Northbridge responds by submitting that this is a risk with any duty to defend policy. Duty to defend policies do not, however, relieve the insurer of its duties of good faith towards the insured nor do they relieve counsel of their professional obligations to the insured.
[93] In Brockton (Municipality) v. Frank Cowan Co., 2002 7392 (ON CA), [2002] O.J. No. 20 (C.A.), the Court of Appeal held that courts should resolve the issue by asking whether there was a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer. Put another way, can counsel’s mandate from the insurer reasonably be said to conflict with his mandate to defend the insured in the civil action: Brockton t para. 43.
[94] If an insurer issues a simple reservation of rights letter based on the monetary limits under the policy, that is unlikely to create a conflict because the reservation is not based on the insurer’s view about any conduct of the insured that would be at issue in the underlying litigation: Brockton at paragraph 39 – 40, 47.
[95] Where, however, the insurer has taken positions that create a conflict between the position of the insured and that of the insurer in the underlying litigation, a conflict may exist: Corporation of the City of Markham v. Intact Insurance Company, 2017 ONSC 3150 at para. 52-53.
[96] In PCL Constructors Canada Inc. v Lumbermens Mutual Casualty Co., 2009 CarswellOnt 3695, [2009] ILR I-4860 (Sup Ct) 2009 32915, the court held that it was appropriate to take steps to guard against conflict even where it found that no actual conflict existed.
[97] In the present case, there is more potential for conflict than in Brockton or in PCL but less than in Markham v. Intact.
[98] In the present case, the insurer and its counsel have taken firm positions and have devoted a fair degree of energy and analysis to their positions. It is difficult for anyone in those circumstances to reverse course and advance vigorously, a contrary position. If it were determined that Northbridge did have a duty to defend the Peller claim and the third party notice, Mori and Essex would, in my view, have a reasonable apprehension that personnel who have been involved to date on behalf of Northbridge would find it difficult to approach the matter with a completely open mind and that there would be a real risk that the insurer could steer the defence or witnesses towards a theory that characterized the conduct of the insureds as falling within an exclusion. This is in no way to impugn the character or good faith of the people involved. It simply reflects the human difficulty in advancing a position that is contrary to the position one has advanced before. While lawyers may be used to doing so. They usually do so on behalf of different clients and in the face of different facts.
[99] As in PCL, there are steps that can be taken to guard against those risks while at the same time maintaining the policy’s character as a duty to defend policy.
[100] As a result, if I am found wrong in my earlier conclusions and Northbridge does in fact have a duty to defend, I would order that the following steps be taken to protect the interests of Mori and Essex:
(a) Northbridge shall continue to have the right to appoint and instruct counsel to defend Mori and Essex.
(b) Defence counsel will be appointed who has not acted for Northbridge, Mori or Essex in the last five years.
(c) The adjuster with carriage of the defence should be different from the adjuster who had carriage of the coverage issue.
(d) The new defence counsel should not have any discussions with the coverage counsel, the coverage adjuster or other Northbridge personnel involved in the coverage issues to date.
(e) The internal insurance file should be purged of all documents dealing with coverage prior to being assigned to the new adjuster or new counsel with carriage of the defence.
(f) Claims staff within Northbridge that is assigned to the case should have had nothing to do with the claim up until this point and will have no communication with any person who has had dealings with the claim.
(g) New defence counsel shall report to Mori, Essex and Northbridge about all steps taken in defence of this matter so both insurer and insured are in a position to monitor the defence effectively and address any concerns that may arise. If Mori and Essex are represented by separate counsel they need only report to Northbridge and the litigation client they are defending (i.e. Mori or Essex but not both).
[101] These steps strike a balance between the rights of Northbridge under a duty to defend policy to assume carriage of the defence and the rights of Mori and Essex to have the defence conducted free of any potential conflict between themselves and Northbridge.
VII. Costs
[102] Northbridge is entitled to its costs on a partial indemnity scale which I fix at $7500 as Northbridge requested. This is slightly less than what the plaintiff’s proposed as an appropriate partial indemnity award for themselves should they have been successful.
Koehnen J.
Released: October 3, 2017
2017 ONSC 5718
COURT FILE NO.: CV-14-498788
DATE: 20171003
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Mori-Vines Inc. and Mori Essex Nurseries Inc.
Plaintiffs
– and –
Northbridge General Insurance Corporation
Defendant
REASONS FOR JUDGMENT
Koehnen J.
Released: October 3, 2017