Introduction

[1] The Applicant Liberty Mutual Insurance Company (“Liberty”) brings this application for a declaration that coverage is excluded for any loss resulting from the claims against its insured, Cronnox Inc. (“Cronnox”), in certain underlying litigation because of the application of what Liberty describes as a “prior notice” exclusion provision in the Liberty insurance policy. Liberty also applies for a declaration that it has no duty under the Liberty policy to defend or indemnify Cronnox with respect to the underlying litigation.

[2] For the following reasons, I conclude that coverage for any loss resulting from claims against Cronnox in the underlying litigation is excluded by the “prior notice” exclusion in the Liberty Policy, and that Liberty has no duty to defend or to indemnify Cronnox with respect to the underlying litigation.

Background Facts

[3] Cronnox is an engineering company that provides mechanical and electrical engineering and design services. Mark Peric is the owner of Cronnox, its President and a director. Mr. Peric is a professional engineer.

[4] The professional liability insurer of Cronnox from November 11, 2012 to November 11, 2103 was Lloyd’s Underwriters (“Lloyd’s”) under a policy issued by Lloyd’s (the “Lloyd’s Policy”).

[5] The Lloyd’s Policy was replaced by a professional liability policy issued by Liberty effective November 11, 2013 to November 11, 2014 bearing policy number PLTOAAWXCZ001 (the “Liberty Policy”). The Liberty Policy provides coverage for claims made and reported to Liberty during the policy period or within 60 days after the expiration or termination of the policy period, subject to the terms and conditions of the Liberty Policy.

[6] Cronnox was engaged in 1998 by the developers of the Holiday Inn in Oakville to provide engineering services during the construction of the hotel.

[7] On May 13, 2012, an electrical explosion occurred at the Holiday Inn in Oakville.

[8] In September 2013, Cronnox received correspondence from two separate law firms concerning the explosion. This correspondence was received during the Lloyd’s Policy period.

[9] The following is a summary of the relevant correspondence:

a. Cozen O’Connor (“Cozen”), the lawyers for the property insurer of the hotel, sent a letter dated September 3, 2013 to Cronnox and advised that their investigation indicated that the damage was due to an electrical explosion and that the explosion appeared to have been caused by damage to the insulation of a conductor cable during its installation by Cronnox. Cronnox was invited to contact its liability insurer and to participate in the process of further examining the cause of the loss, and to notify Cozen if Cronnox wished to participate in the testing.

b. Mr. Peric responded to the letter on September 4 and advised that Cronnox did not install any electrical items on the project, and he suggested that the actual installation contractor be contacted.

c. Cozen replied by email on the same day and advised that it would still be prudent for Cronnox to participate in the testing and to provide notice to its liability insurer. Cozen advised that even if Cronnox did not perform the actual installation work, it was possible that it may have liability for the acts/omissions of electrical contractors involved in the project.

d. Mr. Peric responded on September 9 and advised that contacting Cronnox’s liability insurers would be superfluous because Cronnox was not the installing contractor. Mr. Peric advised that Cronnox did not perform any installation work on the project. Mr. Peric advised that Cronnox is in the design field and as such is typically employed by the architect on a project. Mr. Peric advised that in this case, Cronnox’s scope of work would have been to provide design drawings for permit purposes for authorities having jurisdiction to approve or decline. Mr. Peric advised that the Cozen letter was clear that the damage was caused by a material fault and not a design fault.

e. Cozen replied and attached mechanical/electrical drawings that listed Cronnox as the Mechanical Electrical Consultants for the project. Cozen advised that Cronnox, as a consultant, may still have liability for the work performed by the responsible mechanical/electrical contractors in respect of any supervisory, inspection, certification or approval role in which Cronnox may have been involved, and that Cronnox may have acquired a common law duty of care to future occupiers of the building. Cozen confirmed that the email was notice of a potential future claim against Cronnox, and again encouraged Cronnox to put its liability insurer on notice. Cronnox was again invited to participate in future testing, and Mr. Peric was asked to advise by September 20 if he was interested in participating in the testing.

f. Mr. Peric responded on September 9 and asked to be informed when and where the testing would be held so that Cronnox could send a representative. Cozen responded that they would keep Mr. Peric apprised of any other participants who wished to participate, and advise as soon as tentative dates were scheduled.

g. Koskie Minskie LLP (“Koskie”), the lawyers for the construction manager for the project, wrote to Cronnox on September 25, 2013 and enclosed a copy of a letter that Cozen had sent to their client that was similar to the letter that Cozen had sent to Cronnox. Koskie noted in its letter that Cozen was inviting parties to be involved with the testing of the conductor cable in question as they tried to determine the cause of the explosion. Koskie also wrote:

Our clients advise that your companies were directly involved with the work relating to the design, installation and/or inspection of the conductor cable and we therefore provide you with the enclosed correspondence so you can notify your insurers and/or counsel accordingly.

h. Mr. Peric’s evidence is that he informed the person who wrote the Koskie letter that he was aware of the letter from Cozen, and that Cronnox was waiting to hear from Cozen concerning the date for testing. Mr. Peric wrote a note on the Koskie letter that reads “Responded that we are aware of this and waiting for test date”.

i. Mr. Peric’s evidence is that he did not hear further from Cozen or Koskie about testing.

[10] Cronnox did not provide written notice to Lloyds during the Lloyd’s Policy period that it had received this correspondence from Cozen and from Koskie.[^1]

[11] On February 3, 2014, Cronnox was served with a Statement of Claim (in court file no. CV-13-488834) by the hotel’s owner, Innvest Master Properties GP X Ltd. (“Innvest”). The Statement of Claim had been issued on September 16, 2013. Innvest issued a second Statement of Claim (court file no. CV-14-503208) against Cronnox and others on April 30, 2014. The claim in the second Statement of Claim is identical to the claim in the first Statement of Claim, except that the second Statement of Claim replaced a “John Doe” defendant with the name of the actual defendant. The second Statement of Claim was later amended to replace the defendant Vrancor Development Corporation with 1271519 Ontario Limited. The two actions by Innvest are described as the “underlying litigation”.

[12] Cronnox reported the claim to Liberty on February 4, 2014.

[13] Liberty denied coverage by letter dated February 14, 2014 under an exclusion in section 4.3 of the Liberty Policy on the basis that Cronnox knew about the potential claim before the inception of the Liberty Policy.

[14] Section 4.3 of the Liberty Policy reads, in the material parts:

This Policy does not apply to and Liberty shall not be liable for Loss resulting from any Claim made against an Insured:

4.3 based upon, arising from or in any way related to any Wrongful Act... which, prior to the inception date of this Policy ... any of the Named Insured’s directors, officers, principals, partners or insurance managers knew or could have reasonably expected that such Wrongful Act ... might give rise to a Claim;

[15] Under section 22 of the Liberty Policy:

22.2 “Claim” means a demand for money or services, naming an Insured and alleging a Wrongful Act...

22.19 “Wrongful Act” means any actual or alleged act, error or omission... in the performance of Professional Services by an Insured

22.18 “Professional Services” means those services that an Insured performs for others in their practice as an ... engineer...

[16] Lloyd’s and ClaimsPro LP (as a third-party claims administrators for Lloyd’s) are named as respondents to this application. Lloyd’s has also denied coverage under the Lloyd’s Policy, for different reasons. Lloyd’s denial of coverage is being litigated in separate proceedings. The parties have agreed that this application concerning the Liberty Policy should proceed prior to the hearing of the litigation involving the Lloyd’s Policy. Lloyd’s does not take a position on the merits of Liberty’s application.

Analysis

[17] Cronnox submits that coverage for the underlying litigation falls within the insuring agreement in section 1 of the Liberty Policy, and that section 4.3 of the Liberty Policy does not exclude coverage. Liberty acknowledges that the claim against Cronnox in the underlying litigation falls within the insuring agreement of the Liberty Policy for the purposes of the duty to defend, and that there are no issues regarding compliance with policy conditions. Liberty submits that coverage for liability in the underlying action is excluded by section 4.3 of the Liberty Policy.

[18] I find that the claim by Innvest against Cronnox in the underlying litigation is covered under section 1 of the Liberty Policy, subject to determination of whether coverage is excluded by section 4.3 of the Liberty Policy.

[19] The sole question on this application is whether a declaration should be granted that section 4.3 of the Liberty Policy excludes coverage for the claims against Cronnox in the underlying litigation and, accordingly, that Liberty has no duty under the Liberty Policy to defend or indemnify Cronnox with respect to the underlying litigation.

[20] In order to answer this question, I must first address Cronnox’s submission that I should decline to decide this application on the record before me.

[21] If I decide that I should not decline to decide the application, I must decide whether section 4.3 of the Liberty Policy applies to exclude coverage under the Liberty Policy for claims against Cronnox in the underlying litigation. The onus is on Liberty to show that section 4.3 clearly and unambiguously excludes coverage for claims made in the underlying litigation: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245 at paras. 51, 54.

Should I decline to decide this application on the evidentiary record that is before me?

[22] Cronnox submits that I should not decide Liberty’s application on the evidentiary record that is before me for three reasons:

a. First, Cronnox submits that there are material facts in dispute on this application that also relate to the underlying action, and that Liberty is improperly asking me to decide factual questions on contested evidence. Cronnox submits that I should not proceed under Rule 14.05(3) of the Rules of Civil Procedure to make factual determinations and draw inferences from an incomplete record of disputed facts.

b. Second, Cronnox submits that this application is in substance one to decide whether Liberty has a duty to defend Cronnox under the Liberty Policy, and that this determination must be made prospectively by reference to the allegations made in the claim. Cronnox submits that Liberty should not be permitted through this application to justify its denial of the duty to defend by retrospectively drawing inferences from selected pieces of evidence which have not been the subject of judicial determinations in the underlying action. Cronnox submits that the approach taken by Liberty is one that causes the duty to defend application to become a “trial within a trial”, and that the jurisprudence establishes that such an approach is improper and impermissible. Cronnox cites, among other authorities, Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, at para. 637, in support of this submission.

c. Third, Cronnox submits that Liberty, by bringing this application long after the underlying action was commenced to seek an order relieving it of the duty to defend based upon selected facts and conflicting inferences to be drawn from such facts, is violating its duty of good faith owed to its insured and has placed itself in position where its interest conflicts with its duty of good faith. Cronnox relies upon Halifax Insurance Co. of Canada v. Innopex, 2004 CanLII 33464 (ON CA), at paras. 37-39 and 55, in support of this submission.

[23] Liberty relies upon (i) the pleadings in the underlying litigation as evidence that there was a “Claim” (as defined in the Liberty Policy) made against Cronnox, and (ii) the correspondence to Cronnox from Cozen and from Koskie as evidence that there was a “Claim” based upon, arising from or related to a “Wrongful Act” which, prior to the inception date of the Liberty Policy, Mr. Peric knew or could have reasonably expected might give rise to a “Claim”.

[24] Liberty submits that a determination that there was a “Wrongful Act” within the meaning of this term in the Liberty Policy requires only evidence of an alleged act, error or omission in the performance of services that Cronnox performs for others in its practice as an engineer. Liberty submits that Mr. Peric has acknowledged in his affidavit that Cronnox is a design engineer, and that Cronnox was hired to provide design services for the bidding process for construction of the hotel. It submits that the written correspondence from Cozen and Koskie is evidence of an alleged act, error or omission in the performance of design services that Cronnox performs for others as an engineer.

[25] Liberty submits that whether Mr. Peric could have reasonably expected that such alleged act, error or omission might give rise to a “Claim” must be determined according to an objective standard, and does not require any factual findings in relation to what Mr. Peric subjectively expected. Liberty submits that the evidence of the correspondence from Cozen and Koskie to Cronnox is all that is needed for me to decide whether Mr. Peric could reasonably have expected that acts, errors or omissions alleged by Cozen and by Koskie might give rise to a “Claim”.

[26] Liberty submits that there are no contested facts, and that it is entitled to seek declaratory relief in relation to the exclusion in section 4.3 of the Liberty Policy without waiting for the trial in the underlying action.

[27] Cronnox relies upon the evidence of Mr. Peric in relation to the scope of Cronnox’s engineering design services for the hotel project, as distinguished from those of the electrical contractor and of Oakville Hydro, the regulatory authority in Ontario, Ontario Hydro, and the Electrical Safety Authority division of Ontario Hydro. Cronnox submits that Mr. Peric’s evidence is that his professional services had nothing to do with the installation, testing, inspection, or approval of the cable, and that I should not make any findings on this issue.

[28] In my view, given the evidence of facts upon which Liberty relies on this application, there are no facts in dispute on this application that would require a trial for a fair and just adjudication of the question of whether Liberty has met its burden of showing that the exclusion in section 4.3 of the Liberty Policy clearly and unambiguously applies.

[29] With respect to Cronnox’s second submission, Liberty does not disagree that the determination of whether an insurer has a duty to defend is to be made from the pleadings. Liberty submits, however, that its application is not brought to decide whether, on the pleadings, there is a duty to defend. Liberty acknowledges that Innvest’s claim falls within the insuring agreement of the Liberty Policy for the purposes of the duty to defend, and that there are no issues regarding compliance with the conditions of the Liberty Policy. Liberty submits that its application is for a judicial determination of whether coverage for the Innvest claim is excluded pursuant to section 4.3 of the Liberty Policy. Liberty submits that none of the cases cited by Cronnox was concerned with a “prior knowledge exclusion”, such as the exclusion in section 4.3 of the Liberty Policy, and that it is entitled to bring this application for a judicial determination of whether the exclusion in section 4.3 of the Liberty Policy applies.

[30] In support of this submission, Liberty relies on the decision of the Court of Appeal in Broadhurst & Ball v. American Home Assurance Co., 1990 CarswellOnt 638. In Broadhurst & Ball, an action was brought against a firm of lawyers and a partner in the firm alleging conspiracy, breach of fiduciary duty and negligence. The firm and partner were insured under two professional liability insurance contracts, one providing primary and the other providing excess coverage. On a motion by the insureds, a trial was directed to determine whether the excess insurer was obliged to defend the law firm in the underlying action. The excess policy was a “claims made” policy. The trial judge declared that the claims against the insureds were covered by the excess policy and that the excess insurer had a duty to defend. On appeal, the excess insurer submitted that the trial judge had erred in deciding the coverage issue rather than leaving the issue to be decided after the trial of the underlying action.

[31] One of the grounds upon which the excess insurer in Broadhurst & Ball relied at trial to deny coverage was based on its allegation that the insureds were aware or should have been aware of the potential claims in the underlying action when they applied for coverage and, in failing to disclose the claims, were excluded from indemnity by an exclusion provision in the policy. In his reasons, Robins J.A., at para. 12, acknowledged that it is well established that an insurer’s obligation to defend is wider than, and independent of, its obligation to indemnify. Robins J.A. accepted that if the proceedings brought by a third party against an insured allege a cause of action that appears to be covered by the policy, the insurer is bound to defend even if it should turn out that the insurer is not liable to indemnify the insured under the policy.

[32] Robins J.A., at para. 15, then addressed whether the trial judge had erred in deciding that the policy exclusion based upon prior knowledge of a potential claim:

I agree that, as a general proposition, a declaration of coverage ought not to be granted in advance of the trial of the third party action against the insured, and certainly not where that action may provide the answer to the problem of whether the insured is covered under the terms of the policy. That, however, is not this case. Unlike questions relating to the propriety of the respondents’ conduct in the Lumsden Building transactions, the question of the date upon which they became aware of the claims is not at issue in the action. The applicability of Exclusion 1 of the Guardian policy, unlike Exclusion 3, is in no way dependent on any findings of liability that may be made against the insured. In the circumstances, the resolution of the particular question of fact raised by this coverage issue, in my opinion, was not premature and was properly decided in advance of the adjudication of the Lumsden Building action.

This ground of appeal was rejected.

[33] A similar application was decided in Brelih v. St. Paul Cos., [2006] O.J. No. 1369. In Brelih, the insureds applied for determination of whether either of the respondent insurers was required to defend the insureds in an underlying action brought against them. Before the action, the insureds had received email communications from the lawyer for the claimants (who were the plaintiffs in the underlying action that was commenced later) indicating that they were considering commencing an action in relation to a real estate transaction. The insureds believed that the claimants were simply attempting to avoid payment of a portion of the commissions, and they did not report the matter to their insurer at the time. Coverage under a policy issued by a new insurer commenced and, after being served with the statement of claim, the insureds reported the claim to the new insurer. The new insurer denied coverage on the basis that all of the events giving rise to the claim occurred before the inception of the insurer’s policy and that the insureds were aware of the potential claim before the commencement of the new insurer’s policy. The first insurer also denied coverage, on the basis that the claim was reported outside of the policy period. Both of the policies were “claims made” policies.

[34] In Brelih, Lax J. rejected the insureds’ submission that they did not reasonably foresee at the inception date of the new policy that the email correspondence they had received from the claimant’s lawyer would result in a claim against them. Lax J. reviewed the email correspondence between the claimants’ lawyer and the insureds in order to decide whether, on an objective test, the insureds did not reasonably foresee that a claim would be made. Lax J. concluded that, based upon the email correspondence, the insureds could have reasonably foreseen before the effective date of the new policy that a claim would result from an act, error or omission prior to the commencement of coverage under the new policy. Lax J., at para. 19, held that there was no coverage under the second insurer’s policy.

[35] In my view, Liberty’s application for declaratory relief seeks a judicial determination that is similar to the judicial determinations that were made in Broadhurst & Ball and in Brelih even though, in these cases, the proceedings were commenced by the insureds. In neither of these cases did the court hold that a decision in relation to the question of whether the particular exclusion applied would be premature because it would be made before the trial of the underlying action against the insureds. Whether or not coverage for any liability that Cronnox may have to Innvest in the underlying action is excluded under section 4.3 of the Liberty Policy does not depend on any findings to be made in the underlying action.

[36] I conclude that this application is not premature even though it seeks a declaration, before the trial of the underlying action, that there is no coverage under the Liberty Policy.

[37] With respect to its third submission, Cronnox relies upon the implied obligation in every insurance contract that the insurer will deal with claims from its insured in good faith: 702535 Ontario Inc. v. Non-Marine Underwriters Members of Lloyd’s London, 2000 CanLII 5684 (ON CA) at paras. 27-29. In 702535 Ontario Inc., the Court of Appeal, at para. 29, addressed the duty of good faith of an insurer when an insured makes a claim for coverage:

The duty of good faith also requires an insurer to deal with its insured’s claim fairly. The duty to act fairly applies both to the manner in which the insurer investigates and assesses the claim and to the decision whether or not to pay the claim. In making a decision whether to refuse payment of a claim from its insured, an insurer must assess the merits of the claim in a balanced and reasonable manner. It must not deny coverage or delay payment in order to take advantage of the insured’s economic vulnerability or to gain bargaining leverage in negotiating a settlement. A decision by an insurer to refuse payment should be based on a reasonable interpretation of its obligations under the policy.

[38] Cronnox submits that through this application, Liberty seeks a judicial determination, years after the commencement of the Innvest action, to relieve it of the duty to defend based upon evidence of facts in the underlying action. Cronnox submits that, in addition to violating the principle that the duty to defend must be determined prospectively and not retrospectively in the middle of the underlying action, Liberty is also violating its duty of good faith.

[39] Liberty denies that by bringing this application it is violating its duty of good faith to its insured, or that it is in a conflict of interest. Liberty denies that it brings this application to relieve it of its duty to defend, based upon evidence of contested facts that will be determined in the underlying action. Liberty relies on the fact that its application for declaratory relief that the exclusion in section 4.3 of the Liberty Policy applies to exclude coverage is based upon allegations made by others and the legal consequences that follow from the fact of such allegations.

[40] In this regard, Liberty relies upon a decision of the Supreme Court of Canada in Nichols v. American Home Assurance Co., [1990] I S.C.R. 801. In Nichols, an action alleging fraud against a lawyer was brought but subsequently discontinued. The lawyer applied for a declaration that his liability insurer should have defended the action brought against him, and he sought an order that the insurer pay the unrecovered portion of the lawyer’s defence costs. The policy excluded coverage for claims in relation to dishonest or fraudulent conduct. McLachlin J. (as she then was) allowed the appeal and dismissed the lawyer’s application on the ground that the duty to defend should be confined to the defence of claims which may be argued to fall within the coverage provided by the policy, and that the claim as pleaded against the lawyer was excluded from coverage under the policy.

[41] Liberty submits that, like the insurer in Nichols, it relies in this application only on evidence of allegations by others against its insured, and that it is not violating its duty of good faith by taking the position that coverage is excluded because of the legal consequences that follow from the fact that such allegations were made, in the same way that the insurer in Nichols took the position, based upon pleaded allegations of fraud against its insured by the plaintiff in the underlying action, that coverage was excluded.

[42] I disagree with Cronnox that Liberty is seeking a court declaration to relieve it of the duty to defend based upon evidence of underlying facts that go to the truth of the allegations pleaded by Innvest against Cronnox in the underlying action. I disagree that, by bringing this application, Liberty is asking me to conduct a “trial within a trial”. In my view, Liberty is entitled to seek a judicial determination that coverage for any liability that Cronnox may have to Innvest is excluded by the application of section 4.3 of the Liberty Policy.

[43] I conclude that by commencing this application, Liberty is not violating its duty of good faith to its insured.

Does section 4.3 of the Liberty Policy apply to exclude coverage for any liability that Cronnox may have to Innvest in the underlying action?

[44] Both the Liberty Policy and the Lloyd’s Policy are known as “claims made and reported” policies. These policies only cover claims that are first made and reported during the policy period.

[45] The approach under a claims made policy for determining whether a claim is, from a temporal perspective, covered differs from the approach under an occurrence based policy. Under an occurrence based policy, if the negligent act giving rise to the damages occurred during the policy period, the insurer is required to indemnify the insured for any damages arising from it regardless of when the actual claim is made. Under a claims made policy, if a claim is made by a third party during the policy period, the insurer is required to indemnify the insured regardless of when the negligent act giving rise to the claim occurred. Claims made policies might exclude from coverage any negligence of which the insured is aware prior to the coverage period, even if no claims have been made. Section 4.3 of the Liberty Policy is an example of this type of exclusion. See Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, [2006] I S.C.R. 744 at paras. 23-26.

[46] In order to determine whether Liberty has met its burden of showing that coverage is excluded by section 4.3 of the Liberty Policy, I must answer the following questions:

a. Has Liberty shown that Innvest’s claim as pleaded in the underlying litigation is a “Claim made against an Insured”?

b. Has Liberty shown that the “Claim” is “based upon, arising from or in any way related to any Wrongful Act”?

c. Has Liberty shown that the “Wrongful Act” is one “which, prior to the inception date of this Policy, any of [Cronnox’s] directors, officers, principals ... knew or could have reasonably expected ... might give rise to a Claim”?

Has Liberty shown that Innvest’s claim as pleaded in the underlying litigation is a “Claim made against an Insured”?

[47] The Liberty Policy defines a “Claim” as “a demand for money or services, naming an Insured and alleging a Wrongful Act”. Innvest’s amended statement of claim against Cronnox seeks $2 million in damages and, therefore, is a “demand for money” against the Insured, within the meaning of section 4.3 of the Liberty Policy.

[48] The definition of “Claim” also requires that the demand for money must be one alleging a “Wrongful Act”. This involves consideration of the definitions of the terms “Wrongful Act” and “Professional Services” in the Liberty Policy. There must be “an actual or alleged act, error or omission” in the performance of “those services that [Cronnox] performs for others” in its “practice as an engineer”.

[49] Innvest makes such allegations in its Amended Statement of Claim.[^2]

[50] I conclude that Liberty has shown that the Innvest claim as pleaded in the underlying litigation is a “Claim made against an Insured”.

[51] If the Innvest claim as pleaded is a “Claim”, in order for the exclusion in section 4.3 to apply, the Claim must be “based upon, arising from or in any way related to any Wrongful Act which, prior to the inception date of this Policy, [Mr. Peric] knew or could have reasonably expected ... might give rise to a Claim”.

[52] Cozen’s September 9, 2013 email alleged that Cronnox was the “Mechanical Electrical Consultants for the project” and that, as a consultant involved in the project’s mechanical/electrical work, Cronnox “may have liability for the work performed by the responsible mechanical/electrical contractors in respect of any supervision, inspection, certification or approval role in which Cronnox may have been involved”. Cozen’s email advised of a potential future claim against Cronnox. Koskie’s letter to Cronnox dated September 25, 2013 alleged that Cronnox was “directly involved with the work relating to the design, installation and/or inspection of the conductor cables”. Both Cozen and Koskie invited Cronnox to notify its liability insurer.

[53] In paragraphs 8 and 9 of his affidavit, Mr. Peric explained the scope of Cronnox’s design services for the project. Mr. Peric confirmed that Cronnox was the design engineer, and it was not the electrical contractor for the project. Mr. Peric confirmed that Cronnox was hired by the developers of the hotel to provide design services for the bidding process for construction of the hotel, and that Cronnox’s engagement required that it provide a set of drawings to the owner for mechanical and electrical designs. Mr. Peric also confirmed that Cronnox was not engaged as a building consultant, project manager, surveyor, or contractor on the site.

[54] As noted, the term “Wrongful Act” is defined in the Liberty Policy to mean “any actual or alleged act, error or omission ... in the performance of Professional Services by an Insured ...”. The term “Professional Services” means “those services that an Insured performs for others in their practice as an ... engineer”.

[55] The communications by Cozen and by Koskie allege acts by Cronnox (in relation to its engagement as a consultant on the hotel project) in the performance of services, including design services as alleged by Koskie, for others in its practice as an engineer. The acts alleged by Cozen and Koskie fall within the meaning of the term “Wrongful Act” in the Liberty Policy. Innvest’s claim against Cronnox in the underlying litigation relates to the acts allegedly performed by Cronnox in respect of its engagement as an engineering consultant on the hotel project.

[56] I conclude that Liberty has met its burden of showing that Innvest’s claim against Cronnox (which is a “Claim” under the Liberty Policy) is based upon, arises from or is related to a “Wrongful Act”, as that term is defined in the Liberty Policy.

Has Liberty shown that the “Wrongful Act” is one “which, prior to the inception date of this Policy, any of [Cronnox’s] directors, officers, principals ... knew or could have reasonably expected ... might give rise to a Claim”?

[57] Mr. Peric was a director, officer and principal of Cronnox at all material times. In September 2013, prior to the inception date of the Liberty Policy, Mr. Peric received the correspondence from Cozen and from Koskie.

[58] Cronnox submits that Mr. Peric did not expect that a claim would be pursued because he was never called back to participate in testing and he believed that Innvest was pursuing the contractor. Cronnox submits that Mr. Peric’s expectation was reasonable. Cronnox submits that Liberty did not consider the proposed testing or the fact that Cronnox as the design engineer did not perform “professional services” relating to the cable installation when it denied coverage.

[59] Cronnox submits that a judicial determination in relation to the question of whether section 4.3 of the Liberty Policy applies to exclude coverage necessitates an inquiry into the underlying facts in order to determine the “wrongful act” asserted against Cronnox, the nature and scope of the “professional services” performed by Cronnox in respect of the hotel project, and whether those alleged services fall within the definition of “Professional Services” in the Liberty Policy. Cronnox submits that Liberty is imposing a reasonableness standard from its own perspective as insurer, nearly four years after denying coverage, by way of a “trial within a trial” which, Cronnox submits, is improper and impermissible.

[60] Cronnox also submits that the evidentiary record before me does not eliminate the possibility that the trial judge in the underlying litigation will accept Cronnox’s evidence concerning the nature and scope of its “professional services”, and Mr. Peric’s reasonable belief that the alleged supervision and inspection of the cable installation in the September 2013 correspondence were not related to any “professional service” performed by Cronnox as engineer.

[61] In Fellowes McNeil v. Kansa General International Insurance Co., 2000 CarswellOnt 3093 (Ont. C.A.) the Court of Appeal, in connection with a case involving an application for professional liability insurance, quoted at para. 46 the following passage from the decision of McLachlin J. (as she then was) in Sayle v. Jevco, 1984 CanLII 346 (BC SC), 9 C.C.L.I. 54 (S.C.C.):

Resolution of that issue depends on whether there were circumstances of which the petitioners knew or ought to have known which might give rise to a claim. Again, the test is objective. It is not enough that the persons responsible for completion of the application acted honestly in the belief that there were no circumstances which were likely to give rise to a claim. The question is what a reasonable person in the applicant’s position would have concluded. As stated in Wright v. Engineers Ltd. v. U.S. Fire Ins. Co. (1983), 1983 CanLII 590 (BC SC), 48 B.C.L.R. 37 at 48, 2 C.C.L.T. 32 (S.C.), “the responsible officers or executives of the corporation cannot, through wilful blindness or stupidity, ignore the evidence of a claim or potential claim.” (Italics in original)

[62] In Brelih, at para. 19, Lax J. considered whether it was reasonably foreseeable that email correspondence from the claimants’ lawyer would result in a claim against the insured and she concluded that “[w]here an insured receives communications from a solicitor alleging acts that caused the damages and the prospect of a lawsuit, it is reasonably foreseeable that this will result in a claim”.

[63] Whether Mr. Peric subjectively knew that the alleged acts performed by Cronnox as an engineer in relation to the hotel project might give rise to a “Claim” against Cronnox is not determinative. Section 4.3 also applies if Liberty satisfies its burden of showing that Mr. Peric could have reasonably expected that such alleged acts might give rise to a “Claim”. This involves an inquiry into whether a reasonable person in Mr. Peric’s circumstances could have reasonably expected that such alleged acts might give rise to a “Claim”. There is no need for me to conduct a “trial within a trial” in order to undertake this inquiry and make a determination in this respect.

[64] In this case, Cozen wrote to Cronnox on four occasions. In the first three communications, Cozen invited Cronnox to contact its liability insurer. Cozen noted in its September 9, 2013 email that failure to provide notice to Cronnox’s insurer could prejudice its entitlement to liability coverage. The Koskie letter also invited Cronnox to notify its insurers and/or counsel.

[65] In its September 9, 2013 email, Cozen expressly advised Mr. Peric that the email was “confirmation of a potential future claim against your company”. This advice of a potential future claim against Cronnox was given after Mr. Peric had confirmed in two separate emails that Cronnox “did not install any electrical items”, that it was not the mechanical/electrical contractor, and that it did not carry out or sub-contract any installation work.

[66] The trial judge in the underlying litigation may accept Mr. Peric’s evidence concerning the nature and scope of the professional services performed by Cronnox. The trial judge may accept that Cronnox’s professional services were not related to supervision and inspection of the cable installation referenced in the September 2013 correspondence. Mr. Peric may have thought that a claim would not be pursued because he was not called back to participate in testing, and he may have believed that Innvest was pursuing the electrical contractor. It may be that a reasonable person in Mr. Peric’s circumstances could have expected that the acts alleged in the September 2013 correspondence might not give rise to a “Claim”. However, in order to meet its burden of showing that the exclusion applies, Liberty does not need to show that Cronnox was negligent, or that Mr. Peric could have reasonably expected that a “Claim” would certainly, or even probably, follow from the acts alleged in the September 2013 correspondence.

[67] In order for Liberty to meet its burden of showing that section 4.3 clearly and unambiguously excludes coverage, it must show that a reasonable person in Mr. Peric’s circumstances could have reasonably expected that the acts alleged in the September 2013 correspondence “might give rise to a Claim”. Cozen specifically informed Mr. Peric of a potential future claim in its September 9, 2013 email. I cannot reach any other conclusion than that a reasonable person in Mr. Peric’s circumstances, having been so informed, could have reasonably expected that the acts alleged in the September 2013 correspondence “might give rise to a Claim”. Liberty has met its burden in this respect.

[68] I conclude that Liberty has met its burden of showing that section 4.3 of the Liberty Policy applies to exclude coverage for any loss resulting from claims against Cronnox in the underlying litigation.

Disposition

[69] For these reasons:

a. I declare that the exclusion in section 4.3 of the Liberty Policy excludes coverage for the claims against Cronnox in the underlying litigation.

b. I declare that Liberty has no duty under the Liberty Policy to defend or indemnify Cronnox with respect to the underlying litigation.

[70] Lloyd’s has requested that I remain seized of the remaining litigation involving coverage issues between Cronnox and Lloyd’s in relation to the Lloyd’s Policy. There is no reason why I cannot hear this litigation if I am available, but I do not find it necessary to be seized of the litigation involving Lloyds and Cronnox.

[71] If the parties are unable to agree as to costs, Liberty and, if so advised, Lloyd’s, may make written submissions within 20 days. Cronnox, may make responding submissions within 15 days thereafter.

Cavanagh J.

Released: March 7, 2018

[^1]: The Lloyd’s Policy includes a provision that requires the Assured to give written notice of any specific negligent act, error or omission which may reasonably be expected to give rise to a Claim, and provides that if the Assured complies with the written notice requirements, any Claim subsequently made against the Assured arising out of such act, error or omission shall be treated as a Claim first made on the date on which such written notice was received by Underwriters. The Liberty Policy has a similar provision.

[^2]: See Amended Statement of Claim, para. 4: “at all material times” Cronnox carried on business “as a provider of mechanical and electrical engineering consultancy services”; see Amended SOC, para. 9: Cronnox was “the responsible/lead electrical engineer and engineering consultant” on the Holiday Inn project, and it was responsible for the quality of electrical work done by its employees and by electrical contractors. Innvest also makes allegations against all of the Defendants, including Cronnox: see Amended SOC para. 21(a): [Cronnox] owed a duty to subsequent occupiers of a building “to use reasonable and safe standards of construction and engineering”; see Amended SOC para. 22: [Cronnox] owed a duty to “take all prudent, reasonable and necessary care” to ensure that the hotel “did not contain electrical construction defects” that posed danger to health and safety; and see Amended SOC paras. 23(a) and (d): [Cronnox] was responsible for “directing and supervising the electrical and contracting work” and ensuring that the work complied with applicable laws, regulations and codes.

Liberty Mutual Insurance Company v. Cronnox Inc., 2018 ONSC 1578

Case Summary

Introduction

Background Facts

Analysis

Should I decline to decide this application on the evidentiary record that is before me?

Does section 4.3 of the Liberty Policy apply to exclude coverage for any liability that Cronnox may have to Innvest in the underlying action?

Has Liberty shown that Innvest’s claim as pleaded in the underlying litigation is a “Claim made against an Insured”?

Has Liberty shown that the “Wrongful Act” is one “which, prior to the inception date of this Policy, any of [Cronnox’s] directors, officers, principals ... knew or could have reasonably expected ... might give rise to a Claim”?

Disposition

Judge

Counsel

Parties

Areas of Law

Fact Patterns

Issues

Legal Tests 1