First Condo Group Ltd. v. Lloyd's Underwriters

Ontario Reports Ontario Superior Court of Justice Perell J. January 8, 2020 149 O.R. (3d) 487 | 2020 ONSC 146

Case Summary

Insurance — Exclusion clauses — Interpretation — Insured sued for negligent preparation of condominium reserve fund study after worker injured on condominium property — Insurer denying coverage because "incident" of negligent preparation occurred before date designated in exclusion clause — Insured claiming that "incident" of worker's injury occurred after designated date — Contextual reading of policy unambiguously supported insurer's interpretation.

Insurance — Interpretation and construction — Exclusion clauses — "Incident" — Insured sued for negligent preparation of condominium reserve fund study after worker injured on condominium property — Insurer denying coverage because "incident" of negligent preparation occurred before date designated in exclusion clause — Insured claiming that "incident" of worker's injury occurred after designated date — Contextual reading of policy unambiguously supported insurer's interpretation.

Insurance — Liability insurance — Coverage — Exclusions — Insured sued for negligent preparation of condominium reserve fund study after worker injured on condominium property — Insurer denying coverage because "incident" of negligent preparation occurred before date designated in exclusion clause — Insured claiming that "incident" of worker's injury occurred after designated date — Contextual reading of policy unambiguously supported insurer's interpretation.

The applicant was an engineering firm that prepared reserve fund studies for condominium corporations. One such study was completed in November 2013 and it addressed the safety and remaining life span of lampposts on a condominium corporation's property. In October 2015, a worker was injured on the property while working on an electrical pole. The worker and the condominium corporation commenced proceedings alleging that the applicant was negligent in preparing the reserve fund study and ought to have known that the lamp pole was prone to corrosion and liable to collapse. The respondent had issued a professional insurance policy to the applicant for the periods between March 2010 and March 2014, and between September 2015 and September 2019. The second policy had a clause excluding coverage for professional liability for any incident occurring on or before the "retroactive date" of September 11, 2015. The respondent took the "incident" to be the preparation of the reserve fund study which occurred before the retroactive date such that the exclusion applied. The applicant took the "incident" to be the worker's injury, which occurred after the retroactive date such that the exclusion did not apply. The applicant sought an order that the respondent provide coverage.

Held, the application should be dismissed.

The word "incident" unambiguously referred to the applicant's alleged misconduct in 2013 and not to the consequences of that misconduct in 2015. Devoid of context the word could have been properly applied to either situation, so it had to be placed in the context of the policy to ascertain the parties' intentions. By reading the policy as a whole and giving the words used in the policy their ordinary and literal meaning -- unless it would be destructive of the commercial objective of the policy -- and having in mind the surrounding circumstances, the insurer intended that some claims-based incidents would be excluded from the policy and that the insured agreed to such exclusions notwithstanding that the claims were made during the policy period. Such an interpretation did not change a claims-made policy into an occurrence policy and did not lead to an absurd conclusion.

Cases Referred To

Statutes Referred To

Condominium Act, 1998, S.O. 1998, c. 19

APPLICATION by an insured for an order for insurance coverage.

John De Vellis, for applicant. Gerry Gill and Lauren Furukawa, for respondent.

PERELL J. : —

A. Introduction

[1] The applicant, First Condo Group Ltd., is the insured under an insurance policy with the respondent, Lloyd's Underwriters. Relying on an exemption clause in the Policy, Lloyd's has denied coverage with respect to a professional negligence claim brought against First Condo.

[2] The parties agree that the Policy covers the negligence, but they disagree about the interpretation and application of the exemption clause in the Policy. First Condo brings this application for an order that Lloyd's provide coverage. For the reasons that follow, First Condo's application is dismissed.

B. Facts

[3] First Condo is a reserve fund planner. It is an engineering firm that prepares reserve fund studies, insurance appraisals and performance audits for condominium corporations, which under the Condominium Act, 1998 are required to prepare reserve funds studies.

[4] Lloyd's insured First Condo for four years between March 25, 2010 and March 25, 2014 under "claims-made" insurance policies, i.e., under policies that respond to claims for coverage made during the policy period.

[5] In November 2013, during the term of the insurance policies, First Condo prepared a Reserve Fund Study for Durham Condominium Corporation No. 62 ("DCC 62"). Among other things, the Reserve Fund Study addressed the safety and remaining life span of lampposts on the condominium corporation's property. The study was completed on November 11, 2013. After the completion of the study, First Condo had no further contact with and provided no other services to DCC 62 until well after October 30, 2015.

[6] The Reserve Fund Study was completed on November 11, 2013. As will become clearer below, it shall be important to note that five years later, it is alleged that the study was negligently prepared in 2013. To avoid any confusion, it is important to note that although the negligence was alleged to have occurred during a period in which Lloyd's was providing errors and omissions insurance, no claim was made during the policy period to trigger insurance coverage.

[7] Between March 25, 2014 and September 10, 2015, First Condo was insured by an insurer other than Lloyd's and no claim was made about the Reserve Fund Study during this period.

[8] On September 11, 2015, Lloyd's issued a new insurance policy to First Condo for the period between September 11, 2015 and September 11, 2016. This Policy was renewed annually up to and including a Policy issued for the period September 11, 2018 to September 11, 2019, which is the Policy that is pertinent to the immediate case.

[9] Thus, First Condo is the insured under a Professional Insurance Policy with Lloyd's bearing Policy number PSH037555236. The following facts should be noted about the Policy:

(a) The Policy runs from September 11, 2018 to September 11, 2019.

(b) The Policy has ten insurance clauses, namely:

(i) Insuring Clause 1: Professional Liability (ii) Insuring Clause 2: Cyber Event Costs (iii) Insuring Clause 3: Commercial General Liability (iv) Insuring Clause 4: Commercial Property (v) Insuring Clause 5: Business Interruption (vi) Insuring Clause 6: Legal Expenses (vii) Insuring Clause 7: Directors and Officers Liability (viii) Insuring Clause 8: Loss Mitigation (ix) Insuring Clause 9: Court Attendance Costs (x) Insuring Clause 10: Reputation and Brand Protection

(c) The dispute in the immediate case concerns a part of Insuring Clause 1, which provides professional errors and omissions insurance and which has nine sections (A to I) and an exemption clause that applies to Insuring Clause 1A.

(d) The relevant part of Insuring Clause 1, Section A states:

INSURING CLAUSE 1: PROFESSIONAL LIABILITY

SECTION A: ERRORS AND OMISSIONS

We agree to pay on your behalf all sums which you become legally obligated to pay [. . .] as a result of any claim first made against you during the period of the policy arising out of your business activities for any:

(a) negligent act, error, omission, misstatement, or misrepresentation;

(e) Insuring Clause 1, Section A is, in essence, a "claims-made" insurance policy. As noted above, under a "claims-made" policy, the insurer is liable to indemnify the insured for claims made during the currency of the policy, regardless of when the negligence giving rise to those claims may have occurred, i.e., liability for negligent acts before the policy period is covered if a claim arising from those acts is made during the policy period. 2

(f) A claims-made policy is different from an "occurrence policy", where coverage is available for an insured's negligent acts during the policy period. Occurrence policies (or "claims-based" policies) provide insurance cover for liability triggering events irrespective of when an actual claim is made. 3 Occurrence policies focus on events during the policy period. Occurrence policies present a problem for insurers and insureds in circumstances when the consequences of an insured's negligence may not be discovered until years after the occurrence. The problem is that the insurance may be prohibitively expensive given the difficulty of assessing the contingency risk of future claims. Occurrence policies work reasonably well in covering insureds where the nature of the negligent act and the resultant damages are known upon the happening of the negligent act. 4

(g) The Policy has a "Retroactive Date" from September 11, 2015.

(h) September 11, 2015 is the date on which Lloyd's came back on risk following the 18-month period in which it did not insure First Condo.

(i) The Policy contains an exclusion clause that applies to Insuring Clause 1, which states:

We will not make any payment under this Policy:

EXCLUSIONS RELATING TO ALL INSURING CLAUSES

65. Retroactive Date

in respect of INSURING CLAUSES 1, 3 (Section G only), 6 and 7 arising out of any actual or alleged incident occurring, in whole or in part, on or before the retroactive date.

[10] On October 30, 2015, Jason Cash was injured while working on an electrical pole on DCC 62's property. He suffered a severe traumatic brain injury.

[11] In 2016, Mr. Cash and his family began the first of several proceedings against DCC 62 and others.

[12] In August 2018, DCC 62 and Mr. Cash and his family issued claims that brought First Condo into the proceedings as a party defendant. In particular, on August 14, 2018, DCC 62 sued First Condo for contribution and indemnity and on September 21, 2018, Mr. Cash issued a claim against First Condo for negligence. On October 10, 2018, the Cash family issued a claim against First Condo for negligence.

[13] In these proceedings, it is alleged that First Condo was negligent in preparing the Reserve Fund Study and ought to have known that the lamp pole on the condominium's property was prone to corrosion and liable to collapse causing injury. It is alleged that First Condo's Reserve Fund Study misrepresented the state of the lamp posts.

[14] On September 12, 2018, First Condo was served with DCC 62' statement of claim seeking contribution and indemnity with respect to Mr. Cash's claim against DCC 62.

[15] On September 14, 2018, First Condo reported DCC 62's claim to Lloyd's. First Condo reported the other claims as it became aware of them.

[16] Lloyd's acknowledges that in the absence of any exclusion clause, the claims being made against First Condo are within the coverage provided by Insuring Clause 1A. However, on October 9, 2018, Lloyd's advised First Condo that it was denying coverage. The letter denying coverage stated:

The alleged negligence by First Condo is alleged to have taken place on the drafting of the [Reserve Fund] Study, which is dated November 11, 2013. This date falls "on or before" the Retroactive Date of September 11, 2015, pursuant to the wording of Exclusion 65.

The [Claims] do not allege any "actual or alleged incident" to have occurred after [the Retroactive Date] September 11, 2015 but before the date of the Injury, less than one month later. There was no contract between the Insured and DCC 62 from November 11, 2013 through to the Retroactive Date.

[17] First Condo disputed Lloyd's' interpretation of the exclusion clause of the Policy and when Lloyd's persisted in denying coverage, First Condo brought the application now before the court.

C. Principles of Contract Interpretation for Insurance Policies

[18] Contractual interpretation is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix. 5 The goal of contractual interpretation is to determine the intent of the parties and the scope of their understanding giving the words used by the parties their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. 6 The rules of contract interpretation direct a court to search for an interpretation from the whole of the contract that advances the intent of the parties at the time they signed the contract. 7

[19] In searching for the intent of the parties at the time when they negotiated their contract, the court should give particular consideration to the terms used by the parties, the context in which they are used and the purpose sought by the parties in using those terms. 8 Provisions should not be read in isolation but in harmony with the contract as a whole. 9

[20] In interpreting insurance contracts, the language of a contract is the first and most important matter to be examined in interpreting its terms, labels such as "claims-made policy" or "occurrence policy" do not dictate a certain legal result once a policy is characterized as one or the other; the issue is always what the particular policy dictates, regardless of what it is called. 10 In Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co. 11 at paras. 13-14, Justice McLachlin, as she then was, stated for the Supreme Court of Canada:

At the same time, it is important to note that "claims-made" and "occurrence" are not legal labels which dictate a certain legal result once a policy is characterized as one or the other. The issue is always what the particular policy dictates, regardless of what it is called. This is particularly so due to there being disagreement between academics as to just what are "pure" "claims-made" policies, and "pure" "occurrence" policies. For instance, there is disagreement as to whether "claims-made" means claims made against the insured by third parties, or claims made by the insured against the insurer for coverage under the insurer's policy. Regarding the characterization of "pure" "occurrence" policies, one point of disagreement is whether the "occurrence" consists of a negligent act, or the resultant damage, or both.

These disagreements can perhaps be resolved by recognizing that there may be different types of "claims-made" and "occurrence" policies, as well as hybrid policies that have some features of "claims-made" policies and some features of "occurrence" policies. The essential is not the label one places on the policy, but what the policy says. The courts must in each case look to the particular wording of the particular policy, rather than simply attempt to pigeonhole the policy at issue into one category or the other. Construction of policies at issue in these kinds of cases depends much more on the specific wording of the policy at issue than on a general categorizing of the policy.

[21] Generally, words should be given their ordinary and literal meaning. However, if there are alternatives, the court should reject an interpretation or a literal meaning that would make the provision or the contract ineffective, superfluous, absurd, unjust, commercially unreasonable, or destructive of the commercial objective of the contract. 12

[22] Since insurance contracts are essentially adhesionary, the standard principle is to construe ambiguities against the insurer with the corollary principle that coverage provisions should be construed broadly and exclusion clauses construed narrowly. 13

[23] Where an insurance policy is ambiguous, a court should consider the reasonable expectations of the parties, so long as such an interpretation can be supported by the text of the policy. 14

[24] When there is an ambiguity or contradiction in a contract that cannot be resolved by the other rules of construction, then resort may be made to the contra proferentem rule, which posits that the language of the contract will be construed against the party that inserted the provision to the other with no opportunity to modify its meaning. 15

[25] The rules of construction are applied to resolve ambiguity; they do not operate to create ambiguity where there is none in the first place. 16 Ambiguity does not exist whenever a policy contains wording that could be open to two or more reasonable interpretations and an effort should be made to interpret the policy in a commercially reasonable fashion and in a way that gives effect to the reasonable expectations of the parties. 17

D. The Arguments of the Parties

1. Lloyd's' argument

[26] Lloyd's submits that Exclusion Clause 65 applies to exclude coverage in the immediate case.

[27] Lloyd's submits that the word "incident" in the Exclusion Clause 65 is not an ambiguous term and refers to the date of First Condo's alleged negligence, which was its preparation of the Reserve Fund Study in November 2013, which was before the Retroactive Date of September 11, 2015, and therefore the exception clause applies to exclude coverage under the Policy, notwithstanding that a claim was made within the Policy period.

[28] Lloyd's submits that by reading the Policy as a whole, an "incident" refers to First Condo's conduct and not the claims arising from that conduct. It submits that the Policy is a claims-made insurance contract with a retroactive date exception. It submits that when a claims-made policy provides a retroactive date, the date of the alleged misconduct is relevant to the scope of coverage for claims made during the policy period and that a retroactive date will eliminate coverage for claims produced by the insured's conduct that took place before the retroactive date. Lloyd's submits that this exclusion of coverage occurred in the immediate case and that Exclusion Clause 65 operates to remove from coverage those claims that arise from First Condo's conduct undertaken before the Retroactive Date, regardless of when the resulting injury occurred.

2. First Condo's argument

[29] First Condo submits that Exclusion Clause 65 does not apply in the circumstances of the immediate case.

[30] It submits that the word "incident" in Exclusion Clause 65 refers to the date when Mr. Cash was injured working on the electrical pole, i.e., on October 30, 2015, which is a date after the Retroactive Date and, therefore, the incident was not excluded from coverage under Exclusion Clause 65.

[31] First Condo submits that Lloyd's' interpretation of "incident" is contrary to the ordinary usage of the word, which means "a discrete event or occurrence", which in the immediate case is referable to the injury to Mr. Cash, which occurred on October 30, 2015, which thus is an incident after the retroactive date.

[32] First Condo submits that Lloyd's' interpretation mistakenly equates "incident" with "negligent act, error or omission" in the insuring clause of the Policy, which cannot be correct because the Policy uses different language in the exclusion clause and, therefore, the parties intended that "incident" mean something different than First Condo's negligence.

[33] First Condo submits that contrary to the intention of the parties, Lloyd's' interpretation would effectively transform the Policy from a claims-made policy to an occurrence policy. First Condo argues that had Exclusion Clause 65 been intended to refer to the date of the alleged negligence that led to the claims for insurance coverage, then the Policy would have -- or should have -- explicitly been worded that way.

[34] Further, First Condo submits that if there is any ambiguity in the meaning of the word "incident" then in accordance with the principles of interpretation that govern insurance contracts including the contra proferentem principle, the ambiguity must be resolved in favour of First Condo.

E. Discussion and Analysis

[35] The short answer to the interpretation question presented by this application is that I agree with Lloyd's' argument and disagree with First Condo's counterargument and, therefore, First Condo's application should be dismissed.

[36] My own line of reasoning and somewhat longer answer is as follows.

[37] In and of itself, and devoid of context, the word "incident" is not ambiguous, and the word denotes a discrete event or occurrence.

[38] It would be a proper use of the word "incident" to say that First Condo's preparation of the Reserve Fund Study in 2011 was the "incident" that gave rise to the claim that was made by Mr. Cash against First Condo on September 12, 2018 and reported to Lloyd's two days later.

[39] If there had been no exclusion clause in the Policy, that is what the parties might have interpreted the contract to say if they had been asked what was the incident, i.e., the event or occurrence that gave rise to the claim covered by the policy.

[40] If there had been no Exclusion Clause 65 in the Policy, the Policy would have been a straight-forward claims-made policy; there would have been coverage for Mr. Cash's claim, notwithstanding that the material facts giving rise to his claim occurred before he actually brought the court actions that would be reported to trigger insurance coverage.

[41] However, the Policy did have an exclusion clause, and in this circumstance (which is the source of the dispute between the parties), it would also be a correct usage of the word "incident" to say that Mr. Cash's accident was the incident, i.e., the discrete event or occurrence, that prompted him to make a claim against First Condo, which, in turn, prompted First Condo to make a claim under the Policy.

[42] While using the word incident to refer to Mr. Cash's accident would be a correct use of the word "incident"; however, this usage begs the question of how the word "incident" was intended to be used by the parties in the context of a claims-made policy with an exclusion clause.

[43] Asking this question does not make the use of the word "incident" ambiguous, but it raises the question of how the word incident should be interpreted under the Policy in these circumstances where the word incident can properly be used to refer to First Condo' alleged misconduct and also to the consequences of that alleged misconduct. What did the parties intend the word "incident" to refer to in these circumstances? The word "incident" has to be placed in the context of the Policy and the contractual nexus.

[44] In my opinion, by (a) reading the Policy as a whole; (b) giving the words used in the Policy their ordinary and literally meaning, unless it would be destructive of the commercial objective of the Policy; and (c) having in mind the surrounding circumstances, the answer is that Lloyd's, the insurer, intended that some claims-based incidents would be excluded from the Policy and that First Condo, the insured, agreed that there would be some claims-based incidents that would be excluded notwithstanding that the claims were made during the Policy period.

[45] In other words, the answer is that in the context of this insurance Policy "incident" refers to the events of 2013, when First Condo's alleged negligence occurred and not the events of 2015 when Mr. Cash allegedly suffered the consequences of First Condo's negligence. The outcome is that there is no coverage for the claim associated with Mr. Cash's accident because of Exclusion Clause 65.

[46] I agree with Lloyd's argument that the word "incident" unambiguously refers to First Condo's conduct in 2013 or alleged misconduct and not to the consequences of that misconduct in 2015, which consequence includes the incident that a lamppost fell on the unfortunate Mr. Cash.

[47] Contrary to First Condo's submission, this interpretation is not objectionable or to be rejected because it changes a claims-made policy into an occurrence policy. The policy remains a claims-made policy subject to some exclusions based on a retroactive date, and that is what the parties bargained for. 18 Contrary to First Condo's submission, the Policy does not require different language to achieve the outcome that Lloyd's submits was the intent of the parties.

[48] It is not necessary to apply the contra proferentem or the other principles of interpretation associated with resolving ambiguities because there is no ambiguity when the normal principles of contract interpretation are applied. In my opinion, the meaning of "incident", as Lloyd's and as I have interpreted it, is not ambiguous and this interpretation does not lead to an absurd construction.

F. Conclusion

[49] For the above reasons, First Condo's application is dismissed.

[50] If the parties cannot agree about the matter of costs, they may make submissions in writing beginning with Lloyd's submissions within 20 days of the release of these reasons for decision followed by First Condo's submissions within a further 20 days.

Application dismissed.

First Condo Group Ltd. v. Lloyd’s Underwriters, 2020 ONSC 146

Case Summary

First Condo Group Ltd. v. Lloyd's Underwriters

Case Summary

Cases Referred To

Statutes Referred To

A. Introduction

B. Facts

C. Principles of Contract Interpretation for Insurance Policies

D. The Arguments of the Parties

1. Lloyd's' argument

2. First Condo's argument

E. Discussion and Analysis

F. Conclusion

Notes

Cited By (3 cases)

Symmban Stroud Inc. v 20636999 Ontario Inc. O/A Dollar Bits and Discounts, 2023 ONSC 6123

KB Group Inc v. Dr. Saroya et al., 2020 ONSC 3132

First Condo Group Ltd. v. Lloyd’s Underwriters, 2020 ONSC 1309

Judge

Counsel

Parties

Areas of Law