St. Paul Fire and Marine Insurance Company v. Lockerbie & Hole Eastern Inc. et al.

[Indexed as: St. Paul Fire and Marine Insurance Co. v. Lockerbie & Hole Eastern Inc.]

Ontario Reports

Ontario Superior Court of Justice

Sossin J.

November 14, 2019

148 O.R. (3d) 682 | 2019 ONSC 6489

Case Summary

Insurance — Exclusion clauses — Construction company being sued for damages resulting from alleged improper installation of heating and cooling system at university campus — Company having commercial general liability policies with four different insurers over the course of construction — One insurer relying on faulty workmanship and loss of use exclusions to deny duty to defend — Allegations in statement of claim regarding consequential damage and loss of use sufficient to give rise to possibility of coverage and therefore duty to defend.

Insurance — Insurer's duty to defend — Costs of defence — Allocation — Construction company being sued for damages resulting from alleged improper installation of heating and cooling system at university campus — Company having commercial general liability policies with four different insurers over the course of construction — One insurer relying on faulty workmanship and loss of use exclusions to deny duty to defend — Allegations in statement of claim regarding consequential damage and loss of use sufficient to give rise to possibility of coverage and therefore duty to defend — Time on risk approach more appropriate than dividing responsibility for costs equally.

Insurance — Liability insurance — Duty to defend — Construction company being sued for damages resulting from alleged improper installation of heating and cooling system at university campus — Company having commercial general liability policies with four different insurers over the course of construction — One insurer relying on faulty workmanship and loss of use exclusions to deny duty to defend — Allegations in statement of claim regarding consequential damage and loss of use sufficient to give rise to possibility of coverage and therefore duty to defend.

A construction company was sued over its installation of a steam heating and cooling pipe system at a university campus. The university alleged that construction defects in the mechanical system led to various failures requiring repairs and remediation after construction, culminating in a leak in the cooling system and resulting in disruption to campus operations. Over the course of the construction project the company was insured by four different insurers: St. Paul, AIG, Northbridge and Zurich. St. Paul was the first to acknowledge a duty to defend, followed by Zurich and Northbridge. AIG relied on two exclusion clauses to deny a duty to defend. A faulty workmanship exclusion barred recovery for the restoration, repair or replacement of property made necessary by faulty workmanship thereon by or on behalf of the insured. A loss of use exclusion barred coverage for loss of use of tangible property not physically injured or destroyed resulting from delay, lack of performance or failure to meet certain standards. The dispute over the duty to defend also raised a question of allocation of defence costs, with Zurich arguing that it should be entitled to apply its full self-insured retention ("SIR") to require [page682] the construction company to pay the first $50,000 of defence costs. St. Paul applied for a declaration that all four insurers had a duty to defend, and for a declaration that the costs of defending the action be allocated among the insurers in proportion to their time on risk.

Held, the application should be allowed.

The faulty workmanship exclusion did not preclude AIG's duty to defend. The exclusion referred to "that particular part of any property" whose restoration, repair or replacement was made necessary by faulty workmanship. That wording was sufficiently ambiguous so as to create at least the possibility of coverage in some of the consequential damage alleged in the statement of claim, including increased utility costs from degradation of insulation and ineffective drainage from improperly positioned weeping tiles. There was also sufficient ambiguity in relation to the effect on campus operations to give rise to the possibility of coverage, and therefore the duty to defend.

Likewise, the loss of use exclusion did not preclude AIG's duty to defend. AIG characterized the allegations of negligence as really more akin to an action for breach of warranty in the contract, but the claim was not limited to such alleged breaches. Given that exclusions were to be interpreted narrowly and coverage broadly, the broad allegations of "loss of use" of the campus raised at least the possibility of coverage not subject to the loss of use exclusion.

The time on risk approach to allocation of costs was more appropriate than making each insurer responsible for 25 per cent of the costs. It was a question of fairness within the court's equitable jurisdiction. With the damage occurring continuously throughout the various policy periods, all policies in effect over that time were called upon to respond to the loss. There was no guesswork with respect to the start and end point of the damage period nor uncertainty as to the period of each insurer's coverage, so the time on risk approach was appropriate at first instance. Evidence at trial or findings on interlocutory motions might clarify the actual damage occurring at actual time periods, thereby possibly meriting a recalculation of defence costs.

It was not appropriate to address the SIR issue. St. Paul's application to share the defence costs was a claim in equity, not contract, so the SIR provision and the contractual rights or burdens to which it might give rise did not constitute a basis on which to alter the allocation of defence costs.

Goodyear Canada Inc. v. American International Companies (2013), 115 O.R. (3d) 728, 2013 ONCA 395; Hay Bay Genetics Inc. v. MacGregor Concrete Products (Beachburg) Ltd., 2003 90091 (ON SC), [2003] O.J. No. 2049, 6 C.C.L.I. (4th) 218, 29 C.L.R. (3d) 60 (S.C.J.); Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, [2010] S.C.J. No. 33 (S.C.C.), folld

General Electric Canada Co. v. Aviva Canada, Inc., [2011] O.J. No. 2198, 2010 ONSC 6806, 10 C.C.L.I. (5th) 16, 216 A.C.W.S. (3d) 1000, distd

Other cases referred to

Alie v. Bertrand & Frere Construction Co. (2002), 2002 31835 (ON CA), 62 O.R. (3d) 345, [2002] O.J. No. 4697 (C.A.); Bridgewood Building Corp. v. Lombard General Insurance Co. of Canada (2006), 2006 10205 (ON CA), 79 O.R. (3d) 494, [2006] O.J. No. 1288 (C.A.); Broadhurst & Ball v. American Home Assurance Co. (1990), 1990 6981 (ON CA), 1 O.R. (3d) 225, [1990] O.J. No. 2317 (C.A.); Foundation Co. of Canada Ltd. v. Canadian Indemnity Co. and Simcoe & Erie General Insurance Co., 1979 2695 (NS SC), [1979] N.S.J. No. 601, 33 N.S.R. (2d) 317, 57 A.P.R. 317; General Electric Canada Co. v. Aviva Canada, Inc., [2011] O.J. No. 2198, 2010 ONSC 6806, 10 C.C.L.I. (5th) 16, 216 A.C.W.S. (3d) 1000; Jesuit Fathers of Upper Canada v. Guardian Insurance [page683] Co. of Canada, [2006] 1 S.C.R. 744, [2006] S.C.J. No. 21, 2006 SCC 21 (S.C.C.); Marigold Holdings Ltd. v. Norem Construction Ltd., 1988 3490 (AB KB), [1988] A.J. No. 612, [1988] 5 W.W.R. 710, 60 Alta. L.R. (2d) 289, 89 A.R. 81, 31 C.L.R. 51, 11 A.C.W.S. (3d) 120; Monenco Ltd. v. Commonwealth Insurance Co., [2001] 2 S.C.R. 699, [2001] S.C.J. No. 50, 2001 SCC 49 (S.C.C.); Nichols v. American Home Assurance Co., 1990 144 (SCC), [1990] 1 S.C.R. 801, [1990] S.C.J. No. 33 (S.C.C.); Non-Marine Underwriters, Lloyd's of London v. Scalera, [2000] 1 S.C.R. 551, [2000] S.C.J. No. 26, 2000 SCC 24 (S.C.C.); Privest Properties Ltd. v. Foundation Co. of Canada Ltd., 1991 2346 (BC SC), [1991] B.C.J. No. 2213, 57 B.C.L.R. (2d) 88, 6 C.C.L.I. (2d) 23, [1991] I.L.R. 1349, [1991] ILR para 1-2737 at 1349; Rivtow Marine Ltd. v. Washington Iron Works, 1973 6 (SCC), [1974] S.C.R. 1189 (S.C.C.); Royal & Sun Alliance Insurance Co. of Canada v. Fiberglas Canada Inc., 1999 36853 (ON CJ), [1999] O.J. No. 1275, 99 O.T.C. 196, 12 C.C.L.I. (3d) 282, [1999] I.L.R. I-3698, 87 A.C.W.S. (3d) 553

Authorities referred to

Morgan, D. Carol, "Time on Risk," in Mark Lichty and Marcus Snowden, Annotated Commercial General Liability Policy (Toronto: Thomson Reuters, 2017)

Wielinski, Patrick, Insurance for Defective Construction, 3rd ed. (Dallas: Inter-national Risk Management Institute, Inc., 2012)

APPLICATION for a declaration of duty to defend and to allocate defence costs on a time on risk basis.

Thomas Donnelly and Joyce Tam, for applicant St. Paul Fire & Marine Insurance Company.

Ramon Andal and Sean Petrou, for respondent AIG Insurance Company of Canada.

Jennifer Kent and Nikki Dehnashi, for respondent Northbridge General Insurance Corporation.

Avi Sharabi, for respondent Zurich Insurance Company Ltd.

Jeffrey Brown, for respondent Lockerbie & Hole Eastern Inc.

SOSSIN J.: —

Overview

[1] This application raises the issue of when an insurer has a duty to defend a claim, and how defence costs should be allocated where sequential insurers of a defendant have a duty to defend a single claim.

[2] The applicant, St. Paul Fire & Marine Insurance Company ("St. Paul"), brings this application for a declaration that the respondent insurance companies, AIG Insurance Company of Canada ("AIG"), Northbridge General Insurance Company ("Northbridge"), and Zurich Insurance Company Ltd. ("Zurich") have a duty to defend Lockerbie & Hole Eastern Inc. ("Lockerbie") in the suit brought by York University ("York") against Lockerbie (the "York action").

[3] St. Paul further seeks a declaration that the costs of defending the York action will be allocated among the insurance companies [page684] involved in proportion to their time on risk, including reimbursement for the past defence costs paid by St. Paul to this point in time.

[4] Lockerbie is a construction company, whose predecessor, Adam Clark, was contracted by York to build a steam heating and cooling pipe system (the "mechanical system"), in 2002.

[5] The scope of this project is a subject of importance in this application, and it is described in York's amended claim in the following terms (at para. 5):

The Project

5. In early 2002, York began its plans for Phase II of its Superbuild Project, a significant infrastructure improvement project, on its campus in North York, Ontario (the "Project"). The Project involved the establishment of underground trenches and the construction and installation of a new steam heating and cooling pipe system housed in those trenches (the "mechanical system"). The trenches are buried, and the Owner has no access for inspection, repair or maintenance once the system is commissioned. The mechanical system is connected by a series of underground valve chambers on campus, including valve chambers 36, 37, 38, 39 and 40. Proper design, construction and support of the pipes were critical for the safety, stability and long-term functionality of the mechanical system, to which a 50-80 year life span can reasonably be attributed. Reliability was a paramount concern, particularly since failure of the steam heating system during the winter heating season can have a disproportionate impact on York's operations and the functional integrity of several buildings, and failure of the cooling system during the summer cooling season can seriously inhibit York's operations.

(Emphasis indicates amended portions of the amended claim in original)

[6] York alleges that construction defects in the mechanical system led to various failures requiring repairs and remediation after construction (including specific failures in July 2003, February 2005 and April 2011, and culminating in a leak in the cooling system in December, 2013).

[7] Investigations of the 2013 cooling pipe failure revealed additional problems with the cooling system, including allegations by York of improper installation of weeping tiles, inadequate waterproofing and the improper use of calcium silicate as pipe insulation, among other concerns.

[8] On March 20, 2013, York commenced its action against Lockerbie and an engineering company, H.H. Angus and Associated Limited (CV-13-476653). York amended its claim on November 30, 2015, adding further allegations of damage discovered in December 2013, with damages overall of $8.5 million (the "amended claim").

[9] Each of the insurance companies in this application, St. Paul, AIG, Northbridge and Zurich insured Lockerbie at various points between 2003, when the construction project was completed, and 2016, when York's amended claim was finalized. [page685]

[10] While all the insurance policies provided similar coverage to Lockerbie (or its predecessor Adam Clark, or parent company, Aecon Construction Group Inc.), and while the claim alleged damage covering the policy periods of all the insurance companies, only St. Paul initially acknowledged its duty to defend, and to this point has covered all expenses relating Lockerbie's defence of the York action, a sum which now exceeds $144,000.

[11] Northbridge initially denied coverage but acknowledged its duty to defend on October 9, 2018. Northbridge supports St. Paul's application to declare that AIG also has a duty to defend Lockerbie in the York action. Northbridge opposes St. Paul's application with respect to the proposed time on risk calculation for the allocation of defence costs, and argues instead that the equal allocation of defence costs is appropriate in this case.

[12] Zurich initially denied coverage but acknowledged its duty to defend on September 13, 2018. Zurich supports St. Paul's app-lication to declare that AIG also has a duty to defend Lockerbie in the York action. Zurich also supports St. Paul's time on risk approach to the allocation of defence costs.

[13] Zurich additionally argues that it should be entitled to apply its full self-insured retention ("SIR") under its policy with Lockerbie to its portion of defence costs, which would require Lockerbie to pay $50,000 towards Zurich's obligation to defend it in the York action, before any obligations of Zurich to defend the claim would be triggered.

[14] AIG continues to deny coverage and any duty to defend.

[15] Lockerbie takes no position on the issues relating to the duty to defend or allocation of defence costs, but opposes the position taken by Zurich that it would be required to pay the SIR of $50,000 before Zurich would be required to contribute to the defence costs.

Preliminary Issues

[16] A preliminary issue arose with respect to whether I should consider an excerpt from Patrick Wielinski's 2012 chapter entitled, "Incorrect Work Exclusion" in his text, Insurance for Defective Construction, 3rd ed. (Dallas: International Risk Management Institute, Inc., 2012) ("Incorrect Work Exclusion"), submitted by St. Paul as a late addition to its book of authorities, and opposed by AIG.

[17] AIG requested an adjournment if this source was accepted as an authority for purposes of the application.

[18] I denied the requested adjournment, and instead indicated I would accept supplementary submissions on this source and its appropriateness as an authority for this application. [page686]

[19] The Wielinski excerpt discusses the rationale for broad form property damage coverage and U.S. case law exploring its scope and common exclusions. This work was cited by the Supreme Court in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, [2010] S.C.J. No. 33 ("Progressive Homes") (at para. 63).

[20] Given its relevance to the exact exclusion language at issue in this application, and its acceptance in analogous Canadian case law, St. Paul argues it is appropriate to rely on this source her as well.

[21] AIG opposes reliance on the Wielinski excerpt as there is sufficient Canadian jurisprudence analyzing the type of policy and exclusion at issue in this application. The U.S. case law which informs Wielinski's analysis either may be distinguished from this application, or stand for propositions which differ from St. Paul's position.

[22] Having reviewed the supplementary submissions on this point, I find it appropriate to accept the Wielinski's excerpt as part of the authorities which may be referred to by the parties, but I also acknowledge AIG's position on the importance of a close analysis of the U.S. case law cited by Wielinski prior to any reliance on his conclusions.

[23] To conclude this preliminary issue, I do not see a basis to exclude this source from the authorities on this application, nor do I view this source as conclusive or determinative of any of the issues raised on this application.

Analysis

[24] In light of the issues raised by this application, I must consider the following questions:

(1) Does AIG have a duty to defend Lockerbie in the York action?

(2) How should the defence costs of Lockerbie be allocated between the insurers?

(3) Does the self-insured retention alter Zurich's portion of defence costs?

[25] I will consider each question in turn.

(1) Does AIG Have a duty to defend Lockerbie in the York action?

[26] The test for the duty to defend on insurers requires a close reading both of the terms of the applicable insurance policy and the allegations in the claim from which the duty to defend may arise. [page687]

[27] In considering the duty to defend, the court will assume all facts pleaded in the action are true. The question, then, is whether those proven facts include allegations of damage covered under the policy. The duty to defend will arise if there is a mere possibility that those proven facts might engage coverage under the policy: see Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, [2006] 1 S.C.R. 744, [2006] S.C.J. No. 21, 2006 SCC 21, at para. 54; citing Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801, [1990] S.C.J. No. 33, 1990 144 (S.C.C.), at pp. 810-11 S.C.R.

[28] Any doubt as to whether the pleaded facts give rise to coverage, and therefore the duty to defend, is to be resolved in favour of the insured: Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, [2001] S.C.J. No. 50, at para. 31.

[29] AIG's policy, as with the others at issue on this application, included a duty to defend the insured in any civil action on account of "property damage".

[30] AIG does not deny there was "property damage" alleged in the York action during the time the policy was in effect, but takes the position that the damage alleged falls within the exclusions under the policy.

[31] Specifically, AIG raises two exclusions in its policy which, in its submissions, applies to as to exclude coverage in the York action: the faulty workmanship exclusion and the loss of use exclusion. Each of these exclusions are considered below.

Does the faulty workmanship exclusion apply?

[32] AIG relies on the exclusion at "J(2)(d)(ii)" of the policy (the "faulty workmanship exclusion"), which it submits excludes the allegations in the York action from giving rise to coverage under the policy, and therefore a duty to defend. The faulty workmanship exclusion bars recovery for the following type of property damage:

(J) "property damage" including loss of use

(2) except with respect to liability under a written sidetrack agreement or arising out of the use of "elevators", to

(d) that particular part of any property

(ii) the restoration, repair or replacement of which has been made necessary by reason of faulty workmanship thereon by or on behalf of the insured[.] [page688]

[33] According to St. Paul, whose policy has an exclusion with similar language, the faulty workmanship exclusion does not extend to all of the allegations in York's amended claim. St. Paul raises two grounds in support of this argument.

[34] First, St. Paul argues that the reference to "that particular part of any property" in the faulty workmanship exclusion refers to the site of the damage, but does not extend to other property damage in related areas.

[35] St. Paul focuses on the allegations in York's amended claim relating to the faulty installation of weeping tile and waterproofing (at paras. 24-26). According to St. Paul, while the faulty workmanship exclusion would apply to the damage to the weeping tile itself, or to the vault which filled with water due to the inadequate waterproofing, it does not extend to resultant damage to pipes and other structures.

[36] St. Paul relies on the Supreme Court's decision in Progressive Homes, at paras. 62-63, where the court concluded that the term "that particular part of your work" was language that narrowed the scope of the exclusion at issue in that case. The court stated, "This means that coverage for repairing defective components would be excluded, while coverage for resulting damage would not."

[37] In Progressive Homes, the court concluded that a trial was necessary to determine which "particular parts" of the work were defective, and because coverage could not be ruled out based on the pleadings, the insurer had a duty to defend the litigation in that case (at para. 65).

[38] The exclusion at issue in Progressive Homes differs from the faulty workmanship exclusion here but I accept that the court's analysis in that case may assist in interpreting the phrase "that particular part of any property" from the faulty workmanship exclusion at issue in this case.

[39] In Bridgewood Building Corp. v. Lombard General Insurance Co. of Canada (2006), 79 O.R. (3d) 494, [2006] O.J. No. 1288, 2006 10205 (C.A.), the Ontario Court of Appeal traced the development of the faculty workmanship exclusion and emphasized that the introduction of the current language was intended to narrow the exclusion and broaden coverage of subcontractor's work (at paras. 14-15).

[40] As indicated above, I have accepted Wielinski's chapter entitled "Incorrect Work Exclusion" as an addition to St. Paul's book of authorities. Wielinski describes the effect of the faculty workmanship exclusion with the following scenario (at p. 255):

Assume, for example, a contractor is constructing a home. He first erects the walls and completes the roof and then begins finishing out the interior. However, the roofing work was poorly performed and leaks during a rainstorm, [page689] damaging parquet floors that were partially completed. The damage to the floors being installed would be covered, but replacement of the poorly constructed roof would be excluded.

[41] Following this approach, St. Paul argues that the faulty workmanship exclusion does not address the consequential damage caused by the failure of the mechanical system, as alleged in the York action. In particular, St. Paul argues that paras. 24-26 of York's amended claim allege such consequential damage. Those paragraphs allege:

24. As York investigated the cooling system, it became aware of other problems.

25. The water absorption degraded the insulation and reduced its function in insulating the pipes. As a consequence, over the life of the cooling system York sustained water, chemical and electricity consumption and overall utility operating costs that were significantly higher than they ought to have been with appropriate insulation.

26. York discovered that weeping tiles in several locations were positioned improperly and even wrapped in plastic such that they were either discontinuous or elevated above the trench floor and did not provide effective drainage. This may have facilitated the introduction of moisture into the areas with the calcium silicate insulation.

(Emphasis indicates amended portions of the amended claim in original)

[42] AIG argues that the faulty workmanship exclusion covers all of the allegations in York's amended claim, which all stem from alleged faulty construction and repair of the mechanical system. In AIG's submission, the point of departure for an analysis of an insurer's duty under a commercial general liability ("CGL") policy is that they do not insure against the cost of repairing the defective work of the insured.

[43] As the court held in Privest Properties Ltd. v. Foundation Co. of Canada, 1991 2346 (BC SC), [1991] B.C.J. No. 2213, [1991] 6 C.C.L.I. 23 (S.C.), at para. 272, "where a contractor has effective control over all project work and materials, building damage caused by the faulty workmanship or use of defective materials constitutes a con-tractual business risk to be borne by the general contractor and not by the CGL insurer".

[44] In light of this principle, AIG takes issue with this narrow interpretation of "that particular part of any property". AIG submits that all of the property damage alleged in York's amended claim is contained within the mechanical system.

[45] AIG further submits that particular paragraphs in the amended claim cannot be viewed in isolation but that rather the "true nature of the claims" should be considered in their entirety. AIG describes the amended claim in the York action in the following terms (at para. 38 of AIG's factum): [page690]

It is clear from the pleadings all of the property damage which required repairs or replacement occurred entirely within the mechanical pipe system constructed by or on behalf of Adam Clark. There was no allegation of resultant physical damage to any other part of the York campus. Only disruptions of York's campus operations. It is also clear from the pleadings the mechanical pipe system had to be repaired because of the alleged faulty workmanship thereon by or on behalf of Adam Clark and its failure to comply with the Specifications in the Contract.

(Emphasis in original)

[46] AIG reviewed the bid process and resulting contract between Lockerbie's predecessor company, Adam Clark, and York in detail so as to emphasize that the entire heating and cooling pipe system was within the scope of the project. These documents are also referred to specifically in York's amended claim (at paras. 5-9).

[47] I accept that there are competing interpretations of the language in the faulty workmanship exclusion and specifically how far it extends with respect to the consequential damage arising from faulty workmanship alleged in York's amended claim.

[48] While I have little doubt that the faulty workmanship exclusion applies to damage alleged in York's amended claim, I am left with doubt that the exclusion extends to the entirety of the damage alleged in York's amended claim.

[49] Based in particular on the Supreme Court's analysis in Progressive Homes, I find sufficient ambiguity as to the scope of "that particular part of the property" in this exclusion so as to create at least the possibility of coverage in some of the consequential damage alleged in York's amended claim. This consequential damage includes the damage alleged in paras. 24-26 of York's amended claim.

[50] St. Paul's second argument for why the faulty workmanship exclusion does not preclude coverage in the York action relates to the allegation in para. 43 of York's amended claim seeking damage for any "loss of use" of the entire campus as a result of damage from the mechanical system. St. Paul argues that this allegation extends beyond the scope of damage to "that particular part of any property".

[51] York's allegation with respect to potential disruptions to the campus is both broad and general. Paragraph 43 of York's amended claim alleges:

Depending on the outcome of the discoveries of additional forensic inspections and investigations and the scope of the necessary repair, York may have to suffer significant disruptions to its campus infrastructure and academic operations. For certainty, York is seeking damages in relation to all such costs of disruption.

[52] AIG emphasizes that the faulty workmanship exclusion itself excludes property damage due to faulty workmanship "including loss of use of that particular part of any property". [page691] In AIG's submission, this removes coverage with respect to the physical damage to the mechanical system and the loss of use of the mechanical system. In other words, the disruptions to York's operations make up the "loss of use of the mechanical pipe system" (at para. 47 of AIG's factum).

[53] York's allegations, however, extend beyond the loss of use of the mechanical pipe system to the failure of the entire heating and cooling system on campus, and the resulting disruption to campus operations to which this would give rise.

[54] In this context, I find sufficient ambiguity as to the scope of the faulty workmanship exclusion in relation to the "loss of use" allegations in York's amended claim relating to campus operations to give rise to the possibility of coverage, and therefore, to the duty to defend on the part of AIG.

[55] Therefore, I am not satisfied that the faulty workmanship exclusion precludes AIG's coverage in the York action.

[56] For this reason, it is necessary to turn to AIG's argument that any aspects of the York action not excluded by the faulty workmanship exclusion are excluded by the loss of use exclusion.

Does the loss of use exclusion apply?

[57] AIG also relies on exclusion "M" in its policy (the "loss of use exclusion"), which excludes coverage for

loss of use of tangible property which has not been physically injured or destroyed resulting from,

(3) a delay in or lack of performance by or on behalf of any insured of any contract or agreement, or

(4) the failure of any Insured's products or work performed by or on behalf of any Insured to meet the level of performance, quality, fitness or durability warranted or represented by any insured;

But this exclusion does not apply to loss of use of other tangible property resulting from the sudden and accidental physical injury to or destruction of the Insured's products or work performed by or on behalf of the Insured after such products or work have been put to use by any person or organization other than the Insured.

[58] Generally, AIG's position is that the loss of use exclusion addresses whatever aspects of the York amended claim are not already excluded by the faulty workmanship exclusion, including any loss of use on the York campus that did not arise from property that was physically injured or destroyed.

[59] Specifically, AIG argues that this exclusion applies to the allegations in the York action involving the loss of use of the campus. AIG once again relies on the "true nature of the claim", which it submits is breach of the construction contract. [page692] AIG submits that there is no claim in the York action that is independent of the alleged breach of contract.

[60] For example, AIG refers to para. 38 of York's amended claim, which alleges that "Adam Clark owed York a duty of care to construct and install a satisfactory mechanical system for York in accordance with specifications for the Project, which duty was breached."

[61] AIG characterizes the allegations of negligence as really more akin to an action for breach of warranty in the contract, relying on Marigold Holdings Ltd. v. Norem Construction Ltd., 1988 3490 (AB KB), [1988] A.J. No. 612, [1988] 5 W.W.R. 710 (Q.B.), at para. 223; and Rivtow Marine Ltd. v. Washington Iron Works, 1973 6 (SCC), [1974] S.C.R. 1189, [1973] S.C.J. No. 126, at para. 36.

[62] As the Supreme Court observed in Non-Marine Underwriters, Lloyd's of London v. Scalera, [2000] 1 S.C.R. 551, [2000] S.C.J. No. 26, 2000 SCC 24, at para. 130, allegations of negligence which are derived from intentional torts cannot escape the reach of an exclusion clause to an insurance policy which provides that intentional torts will not give rise to coverage.

[63] If all of York's claims similarly may be seen as subsumed in breach of contract, AIG argues that its exclusion precludes coverage for the alleged damage flowing from this breach.

[64] St. Paul argues that the first clause of this exclusion does not apply to York's amended claim, because York does not allege "delay" or "lack of performance", but rather poor performance.

[65] St. Paul further argues that the second clause of this exclusion does not apply because York does not allege breach of warranty or representation. Further, at para. 38 of the amended claim, York includes the alternative allegation of negligence which is a distinct allegation of damage.

[66] While York's amended claim includes breach of contract, I am not satisfied that the claim is limited to such alleged breaches, even if broadly construed.

[67] Given that exclusions are to be interpreted narrowly and coverage broadly as a principle in the interpretation of the policy, I find that the broad allegations of "loss of use" of the campus in York's amended claim raise at the least the possibility of coverage that is not subject to the loss of use exclusion.

[68] Therefore, for the reasons set out above, and because the faulty workmanship exclusion and loss of use exclusion do not separately or cumulatively exclude all possible coverage of the damage alleged in the York action against Lockerbie, I find AIG has a duty to defend Lockerbie in the York action.

[69] I reiterate that this finding is limited to the possibility of coverage under AIG's policy, which triggers its duty to [page693] defend. The interpretation of the exclusion clauses at issue in this application may need to be addressed more fully at trial on the basis of the evidence presented.

(2) How should the defence costs of Lockerbie be allocated between the insurers?

[70] In light of the finding above in relation to AIG, there are now four insurers who have a duty to defend Lockerbie in the York action: St. Paul, Northbridge, Zurich and AIG.

[71] Northbridge insured Lockerbie for the period March 1, 2003 to March 1, 2009.

[72] St. Paul insured Lockerbie for the period April 1, 2009 to January 31, 2010.

[73] AIG insured Lockerbie for the period January 31, 2010 to July 1, 2014.

[74] Zurich insured Lockerbie for the period July 1, 2014 to July 1, 2016.

[75] St. Paul, supported by Zurich, seeks an allocation on a "time on risk" approach. Under this scheme, as St. Paul insured Lockerbie for a ten-month period of the 159 months at issue, it would be responsible for approximately seven per cent of the defence costs. Northbridge, by contrast, seeks an allocation of costs on an equal basis, so that each of the four insurers would be responsible for 25 per cent of the costs. There is no insurer for whom this question is neutral. Northbridge will be better off with an equal division of defence costs, just as St. Paul and Zurich will be better off with a time-on-risk approach.

[76] AIG has taken no position on the issue of allocative approach, as it opposed St. Paul's application on the basis it had no duty to defend Lockerbie in the York action.

[77] The allocation of defence costs among insurers is a question of fairness within the court's equitable jurisdiction: Alie v. Bertrand & Frere Construction Co. (2002), 2002 31835 (ON CA), 62 O.R. (3d) 345, [2002] O.J. No. 4697 (C.A.) ("Alie"), at paras. 171 and 235-236.

[78] Allocation cases have considered various scenarios, such as where there is one primary insurer and one excess insurer who both have insured a party in a given year, or where there are insured and uninsured allegations within a similar claim. These scenarios may provide analogous principles for the scenario here of multiple sequential insurers, where it is not clear from the claim how much damage resulted from activities in any given policy period.

[79] In order to determine the appropriate approach to allocating defence costs, it is necessary to determine the "trigger" theory which fits the circumstances of this case. The Court of Appeal identified four potential trigger theories in Alie [at paras. 93-98]: [page694]

The four approaches have been developed in the U.S. and Canadian jurisprudence for determining the timing of property damage which is latent, or developing over time, and which does not become apparent immediately. The "Exposure Theory", the "Manifestation Theory", the "Injury in Fact Theory" and the "Continuous Trigger or Triple Trigger Theory" are often referred to as the "four trigger theories". The word "trigger" is not a term of art, nor is it used in the policy language. It is rather a term used in the jurisprudence to signify that the coverage afforded by a particular policy has been effectively called upon or activated and that the policy will respond to the loss.

Although the four formulations are referred to as "theories", we do not endorse that nomenclature as it may imply an arbitrary or conceptual basis rather than an evidentiary basis for triggering coverage under a policy. As will be evident, the trigger theories are, in effect, four ways of interpreting the often-complex evidence of how and when the damage occurred, then labelling the approach. Upon close analysis, each theory is effectively an application of the "injury in fact" theory where the court determines, on the evidence, at what point or continuum of points in the process, the property damage in fact occurred.

The first trigger theory is referred to as the Exposure Theory. On this theory, from the first exposure to the condition or conditions which ultimately cause the property damage, that damage is inevitable, a certainty. As a result, the property damage is considered to have occurred on that first exposure so that the deterioration following that exposure is merely the manifestation of the damage that has already occurred requiring repair or replacement. Consequently, only the insurance policy in effect at the date of the first exposure is triggered to respond to the loss.

The second is the Manifestation Theory. On this theory, damage only occurs when it becomes known (on one formulation, to the insured, and on another, to the third party whose property is affected). Therefore, coverage is triggered when the insured or third party first becomes or could have become aware of the damage. Again, the result is that only the insurance policy in effect on the date of manifestation of the damage is triggered to respond to the loss.

The third approach is referred to as the Injury in Fact Theory. A policy responds if in fact there was damage which actually occurred during the policy period, whether or not anyone was aware of it or could have been aware of it. Where property damage is ongoing or continuous, every policy in effect while the damage continues to occur is triggered to respond to the loss.

The fourth approach is the Continuous Trigger or Triple Trigger Theory. Under this theory, the property damage is effectively deemed to have occurred from the initial exposure to the time when the damage became manifest or ought to have become manifest to the plaintiffs, and if alerted, to the insured. In that case, all policies in effect over that period are called upon to respond to the loss.

[80] Northbridge submits that the continuous trigger theory is the most appropriate here, where the damage occurs continuously throughout the various policy periods (see General Electric Canada Co. v. Aviva Canada, Inc., [2011] O.J. No. 2198, 2010 ONSC 6806 (S.C.J.), at para. 69). I agree.

[81] St. Paul argues that the time on risk approach is the most consistent with the policy wording of the four insurers, which [page695] restrict coverage to property damage during the policy period, and also is the most consistent with the duty to defend jurisprudence in the context of continuous damage.

[82] In Hay Bay Genetics Inc. v. MacGregor Concrete Products (Beachburg) Ltd., 2003 90091 (ON SC), [2003] O.J. No. 2049, 6 C.C.L.I. (4th) 218, at paras. 41-47 (S.C.J.) ("Hay Bay"), Sheffield J. considered how to allocate defence costs for a suit alleging damage from a leak of pig manure over a number of years involving the continuous trigger theory. Citing Royal & SunAlliance Insurance Co. of Canada v. Fiberglas Canada Inc., 1999 36853 (ON CJ), [1999] O.J. No. 1275, 12 C.C.L.I. (3d) 282), at para. 34, appeal quashed on other grounds 2000 CarswellOnt 605 (C.A.), Sheffield J. held that, "I am awarding costs on the basis that the insurance companies, whose policies were in force at the time of the leakage/damage may have occurred, are responsible for indemnification during their precise and respective periods of policy coverage" (at para. 46).

[83] The time on risk approach appears to reflect the preferred approach in Canadian courts in cases with multiple insurers and continuous damage. According to D. Carol Morgan's article, "Time on Risk", in Mark Lichty and Marcus Snowden, Annotated Commercial General Liability Policy (Toronto: Thomson Reuters, 2017), at IF-64:

Where the issue has been the method of allocating loss among multiple successive insurers inter se (which is governed by equitable principles), Canadian courts have usually adopted the pro rata approach to allocation, which recognizes that the insurer should only be responsible for its own share of the damage. The judicially favoured method of allocation amongst such insurers under the pro rata approach has been some form of "time on risk" formula, although in at least one case, an "equal shares" formula was used.

[84] For its argument that an "equal shares" approach should be used in this case, Northbridge relies on the following passage from the Ontario Court of Appeal judgment in Foundation Co. of Canada Ltd. v. Canadian Indemnity Co., 1979 2695 (NS SC), [1979] N.S.J. No. 601, 98 D.L.R. (3d) 70 (T.D.), at para. 22, cited in Broadhurst & Ball v. American Home Assurance Co. (1990), 1990 6981 (ON CA), 1 O.R. (3d) 225, [1990] O.J. No. 2317 (C.A.):

A 50-50 allocation seems equitable under the circumstances. As a general rule, it appears reasonable that when two or more insurance companies are at risk on a claim, and the amount of that claim is unascertained at the time of commencement of the action, then the companies should be equally liable for the costs of defending the action. This approach, albeit arbitrary, avoids the possibility of becoming involved in complicated calculation based upon criteria which may change radically in each case.

[85] Northbridge also argues that General Electric Canada Co. v. Aviva Canada Inc., [2011] O.J. No. 2198, 2010 ONSC 6806 (S.C.J.), aff'd on other grounds, [2012] O.J. No. 3642, [page696] 2012 ONCA 525 ("General Electric") is on point. In General Electric, two insurers had potential liability for a pollutant found on property owned by General Electric. In addressing an equitable method by which to allocate defence costs, Penny J. held (at para. 66):

An equitable allocation of defence costs would be one that is proportionate to the risk that the underlying action will be resolved in a way that triggers each insurer's obligation to indemnify the insured. The apportionment should take into account the degree to which legal costs in defending the underlying claim inure to the benefit of the various insurers. Factors to be taken into account could, therefore, include both the likelihood that the obligation will be triggered and the quantum of the obligation if triggered.

[86] However, there is an important distinction between the facts alleged in the General Electric action and the facts alleged in the York action. Both the insurers in General Electric argued a time on risk method was appropriate, which would also have included a significant period of the time span of the potential damage in which neither insurer had a policy covering the property, and General Electric was self-insured. There was a high degree of uncertainty in General Electric as to the span of the potential damage under consideration. Penny J. found General Electric's exposure as a self-insurer ranged between 0 and 65 years. Penny J. distinguished these circumstances from Hay Bay, for example, where the period of time in which the damage occurred was clearly known to be four years.

[87] Penny J. stated that the time on risk approach would not be the most fair and equitable approach in General Electric because of the absence of any reliable information about how many years are involved, and the vast swings of quantum involved in a time on risk approach based on assumptions accepted about this time span. Penny J. referred to this guesswork as the "occurrence roulette wheel". As a result, Penny J. found the most fair and reasonable approach in General Electric was to divide the defence costs so that each of the two insurers and General Electric were responsible for a third of the costs.

[88] In this case, however, there is no guesswork with respect to the start and end point of the damage period or uncertainty as to the period of each insurer's coverage of Lockerbie. Thus, I find Hay Bay circumstances more analogous to the situation in this case than General Electric.

[89] With respect to the appropriate allocative principle in this case, I also am guided by the Court of Appeal's analysis in Goodyear Canada Inc. v. American International Companies (2013), 115 O.R. (3d) 728, 2013 ONCA 395 ("Goodyear"). Goodyear involved multiple insurers whose policies covered damage caused by asbestos exposure over a number of years. In Goodyear, [page697] Cronk J.A. explained the court's approach to the allocation of defence costs as follows [paras. 18-21]:

To avoid the unfairness inherent in the all-sums allocation method, courts in the United States and Canada have sometimes employed a "pro-rata approach" to the allocation of loss in continuous injury cases where multiple insurance policies are in play. The aim of the pro-rata allocation method is to ensure that the allocation of loss to a particular insurance policy is proportionate to the damages suffered during that policy's term.

For asbestos-related continuous injury claims, like the U.S. Claims, the pro-rata approach has been combined with what is known as the "continuous trigger theory". Under this theory, every insurance policy in effect from first asbestos exposure to discovery or manifestation of injury is deemed to be engaged. Once multiple policies have been triggered, the question then shifts to one of liability allocation.

In combination, the pro-rata allocation method and the continuous trigger theory contemplate that a loss spanning multiple policy years will be allocated to each of the policy periods under the triggered insurance policies. An individual insurer's liability is then determined by dividing the time that it was on risk, by the total length of time during which the loss is found to have occurred. . . .

In Canada, those courts that have considered the all-sums and pro-rata liability allocation approaches have tended to prefer to allocate the relevant losses over policy periods based on some type of pro-rata allocation method. See for example, Surrey (District) v. General Accident Assurance Co. of Canada (1996), 1996 2119 (BC CA), 19 B.C.L.R. (3d) 186 (C.A.); Alie v. Bertrand & Frère Construction Co. (2002), 2000 50976 (ON SC), 11 C.L.R. (3d) 19 (Ont. S.C.), aff'd (2002), 2002 31835 (ON CA), 62 O.R. (3d) 345 (C.A.).

[90] In light of this analysis, and relying on Hay Bay and Goodyear, I find the time on risk approach to be appropriate as an allocative approach for defence costs at first instance. Assuming the damage is continuous, this approach reflects a proportionate pro rata calculation of which insurer will be responsible for defence costs based on the months or years of covered damage under its policies.

[91] This approach, however, does not represent a final allocation of defence costs. Based on evidence in the trial, or findings on interlocutory motions, the actual damage occurring during actual time periods may clarify the proportion of damage for which each insurer actually was responsible. At that time, such findings may well merit a recalculation of defence costs.

(3) Does the self-insured retention alter Zurich's portion of defence costs?

[92] I turn now to the final issue raised on this application, which relates to the implications of the self-insured retention clause ("SIR") in the insurance policies covering a portion of the period of damage. [page698]

[93] Zurich has acknowledged its duty to defend the York action, but submits that the SIR provision in its policy means its duty to contribute to defence costs arises only after the first $50,000 of its obligations has been provided by Lockerbie.

[94] In Goodyear, Cronk J.A. confirmed that where a party is self-insured over a portion of a loss period, the self-insured policy will bear responsibility for that part of the total loss [at para. 20]:

In combination, the pro-rata allocation method and the continuous trigger theory contemplate that a loss spanning multiple policy years will be allocated to each of the policy periods under the triggered insurance policies. An individual insurer's liability is then determined by dividing the time that it was on risk, by the total length of time during which the loss is found to have occurred. Importantly, part of the loss is also allocated to periods when the insured was self-insured. Consequently, the self-insured bears responsibility for part of the total loss.

(Emphasis added)

[95] Lockerbie takes the position that the SIR applies, if at all, to the duty to indemnify after a full consideration of the facts at trial or after a resolution of the action. The duty to defend, by contrast, arises on the allegations in the claim, where there is the mere possibility of coverage under the policy, and the SIR has no application at this stage of the proceeding.

[96] Lockerbie further argues that St. Paul's application against the other insurers for contributions to the defence costs is a claim in equity, not contract, and therefore the SIR provision, and the contractual rights or burdens to which it gives rise, does not constitute a basis on which to alter the allocation of defence costs as between the various insurers.

[97] I share this view. I find that St. Paul's application is not the appropriate proceeding to address the possibility of a contractual dispute between Zurich and Lockerbie respecting the SIR. For purposes of this application, the only issues are whether Zurich has a duty to defend and what its allocation of defence costs should be.

[98] If Zurich seeks to invoke the SIR against Lockerbie, this may be the subject of a separate proceeding between those parties at some point in time.

Conclusion

[99] For the reasons above, St. Paul's application is granted, both with respect to the declaration that AIG has a duty to defend Lockerbie in the York action, and with respect to the time on risk calculation for allocating the defence costs across the four insurers who are subject to the duty to defend.

[100] I further find that Zurich's obligation under this allocation scheme of defence costs is not affected by the SIR in its policy [page699] covering Lockerbie, though this finding is without prejudice to this issue being the subject of separate, subsequent proceedings between Zurich and Lockerbie.

Costs

[101] St. Paul has been successful on its application for a declaration that AIG has a duty to defend Lockerbie in the York action and is entitled to costs from AIG. That said, AIG took no position with respect to the allocation of defence costs and should not be liable for costs for that portion of the application.

[102] Northbridge has been successful in its support of St. Paul's position that AIG owes a duty to defend but not in its position that the defence costs should be allocated equally among all insurers. These two issues occupied most of the hearing. In these circumstances of mixed results, I find no award of costs are appropriate for or against Northbridge.

[103] Zurich has been successful in support of St. Paul's position that AIG owes a duty to defend and in its support of St. Paul's argument that a time on risk approach is appropriate for the allocation of defence expenses. Zurich was not successful, however, in its argument that the SIR should apply so as to reduce its exposure to defence costs on this application, a position which occupied a significant portion of Zurich's submissions. In these circumstances of mixed results, I find no award of costs are appropriate for or against Zurich.

[104] Lockerbie was successful in opposing Zurich's position on the SIR but does not seek costs.

[105] For these reasons, I find St. Paul is entitled to costs in the amount of $15,000, all inclusive, payable by AIG within 30 days of this judgment.

[106] I wish to thank all counsel for their considered and helpful submissions on this application.

Application allowed.

End of Document