COURT FILE NO.: CV-19-00626839 COURT FILE NO.: CV-20-00644177 DATE: 20210323
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
Distillery S.E. Development Corp., Cityscape Development Corporation and Dream Asset Management Corporation Applicants
- and - Temple Insurance Company and Aviva Insurance Company of Canada Respondents
Jeffrey A. Brown and Dylan Cox for the Applicants Jamie Spotswood and Max Ebrahim for the Respondents
AND BETWEEN:
Rite-Air Mechanical Co. Ltd. Applicant
- and - Temple Insurance Company and Aviva Insurance Company of Canada Respondents
Josiah T. MacQuarrie for the Applicant Jamie Spotswood and Max Ebrahim for the Respondents
HEARD : February 18-19, 2021
PERELL, J.
REASONS FOR DECISION
A. Introduction
[1] Justice Myers ordered that four Applications be heard together. These are my Reasons for Decision in the first two applications. My Reasons for Decision in the other two Applications are being released simultaneously. [1]
[2] The Respondents in all four Applications are Temple Insurance Company and Aviva Insurance Company of Canada, whom I shall refer to as the “Insurer.”
[3] In the first Application, the Applicants are Distillery S.E. Development Corp., Cityscape Development Corporation, and Dream Asset Management Corporation, whom I shall refer to as the “Distillery Parties.” In the first Application, the Distillery Parties sue the Insurer for a declaration that the Insurer has a duty to defend the Distillery Parties under a Specific Project Wrap-Up Liability Insurance Policy.
[4] In the second Application, the Applicant is Rite-Air Mechanical Co. Ltd. In the second Application, Rite-Air sues the Insurer for a declaration that the Insurer has a duty to defend Rite-Air under the same Specific Project Wrap-Up Liability Insurance Policy.
[5] In both Applications, the Insurer admits that there was an “occurrence” that would engage a duty to defend for Property Damage coverage under the insurance policy but, nevertheless, the Insurer has denied a duty to defend because the Property Damage for which there is coverage is less than the $10,000 deductible.
[6] The Insurer, therefore, asks that the Distillery Parties’ Application be dismissed. Alternatively, if there is a duty to defend, the Insurer asks that there be an order that it be obliged to contribute only up to a maximum of 1% of the Distillery Parties’ reasonable defence costs. In other words, the Insurer asks for an ex ante (“before the event”) allocation order for the reasonable defence costs.
[7] Similarly, the Insurer asks that Rite-Air’s Application be dismissed. Alternatively, if there is a duty to defend, the Insurer asks that there be an order that it be obliged to contribute only up to a maximum of 1.5% of Rite-Air’s reasonable defence costs. In other words, the Insurer asks for an ex ante (“before the event”) allocation order for the reasonable defence costs.
[8] In bringing the Applications, the Distillery Parties and Rite-Air respectively seek an order that the Insurer perform its duty to defend. The Distillery Parties and Rite-Air respectively submit that there is a duty to defend even if the Property Damage is below the deductible and, in any event, they say that the Property Damage is above the deductible. Further, they submit that it is premature to make any type of allocation order.
[9] For the reasons that follow, the Distillery Parties’ Application for a declaration that there is a duty to defend in the immediate case is granted without prejudice to an ex post facto allocation order once it can be determined how to allocate the defence costs based on a trial determination as to what legal expenses were exclusively or solely for uncovered claims.
[10] For the reasons that follow, Rite-Air’s Application for a declaration that there is a duty to defend in the immediate case is granted without prejudice to an ex post facto allocation order once it can be determined how to allocate the defence costs based on a trial determination as to what legal expenses were exclusively or solely for uncovered claims.
B. Overview and Methodology
[11] In the early 2010s, the Distillery Parties built a residential condominium tower that came to be owned by Toronto Standard Condominium Corporation No. 2299 (“TSCC 2299”).
[12] The Distillery Parties hired Rite-Air to perform the HVAC work for the construction of the condominium.
[13] The Distillery Parties are named insureds and Rite-Air is an insured under a Specific Project Wrap-Up Liability Insurance Policy issued by the Insurer.
[14] In 2015, TSCC 2299 sued the Distillery Parties for Property Damage for negligence and defects in the construction of the building.
[15] There were five iterations of the Statement of Claim, and TSCC 2299 eventually particularized a claim for damages of $9,913,169.25.
[16] Based on the Statement of Claim in TSCC 2299’s Action, it is arguable that a large portion of TSCC 2299’s claim against the Distillery Parties is outside the insurance coverage.
[17] The Insurer says that based on the pleading against the Distillery Parties only $8,507.66 is covered Property Damage, and since the deductible under the policy is $10,000, the Insurer argues that it is are not responsible to pay the $8,507.66 and more to the point, it submits that where the Property Damage is less than the deductible it has no duty to defend.
[18] The Distillery Parties dispute the Insurer’s denial of the duty to defend. In essence, the Distillery Parties submit that as a matter of interpretation of the insurance policy, the deductible is irrelevant to the duty to defend. They say that the duty to defend has been triggered by the Insurer’s concession that there are some covered Property Damages.
[19] As an alternative argument, the Distillery Parties analyze TSCC 2299’s pleading and several expert reports incorporated by reference and identify seven additional claims with an aggregate value of $94,741.03 (parking garage drainage, balcony waterproofing, elevator, interior hallways, emergency repairs, security costs, and water leakage) of Property Damage that more than bridge the remaining $1,492.35 in the deductible and trigger the duty to defend. The Distillery Parties, therefore, submit that even with a $10,000 deductible, the duty to defend has been triggered.
[20] In 2017, the Distillery Parties commenced an action seeking contribution and indemnity from 38 contractors, including Rite-Air with respect to any liability the Distillery Parties may have to TSCC 2299 in respect of the allegations made in the TSCC 2299 Action. The TSCC 2299 pleadings were incorporated by reference in the Distillery Parties’ Statement of Claim.
[21] Based on the Statement of Claim in TSCC 2299’s action, it is arguable that a large part of TSCC 2299’s claim for which the Distillery Parties seek contribution and indemnity is outside the insurance coverage.
[22] In so far as Rite-Air is concerned, the Insurer says that based on the pleading only $2,034 is covered Property Damage, and since the deductible under the policy is $10,000, the Insurer argues that it is are not responsible to pay the $2,034 and more to the point, it submits that where the Property Damage is less than the deductible it has no duty to defend.
[23] Rite-Air disputes the Insurer’s denial of the duty of defend. In essence, Rite-Air submits that as a matter of interpretation of the insurance policy, the deductible is irrelevant to the duty to defend. It says that the duty to defend has been triggered by the Insurer’s concession that there are some covered Property Damages.
[24] As an alternative argument, Rite-Air analyzes TSCC 2299’s pleading and several reports incorporated by reference and argues that the Property Damages claim actually exceeds the deductible. Rite-Air, therefore, submits that the duty to defend has been triggered.
[25] As foreshadowed in the introduction, I grant the Distillery Parties’ and Rite-Air’s Applications. To explain my decision, by way of methodology, after the Introduction and this Overview, my judgment shall have six parts:
a. First, I shall set out the relevant terms of the insurance policy. b. Second, I shall describe the procedural background and the evidentiary record for this Application. c. Third, I shall set out the facts necessary to address the interpretative issue about the role of the deductible and about the matter of an allocation order. I shall be very brief in discussing the facts that: (a) are associated with the seven claims that are advanced to show that based on TSCC 2299’s pleadings, the Property Damages actually exceeds the deductible; and (b) are associated with the claims against Rite-Air, which are advanced to show that based on TSCC’s pleadings, the Property Damage claim actually exceeds the deductible. d. Fourth, I shall set out the principles of interpretation for insurance contracts and for the duty to defend. e. Fifth, I shall explain why in the immediate case, the deductible is not relevant to the interpretative issues associated with the Insurer’s duty to defend. f. Sixth, I shall explain why it is premature to make an allocation order.
[26] In this judgment, I shall only in passing address the Insurer’s substantive arguments that the claims for Property Damage are not covered claims because the policy does not cover the losses or because of policy exclusions. In the immediate case, the extent to which, for example, the insured’s own work exclusion, applies in the circumstances of the immediate case remains to be determined at the appropriate time.
C. Specific Project Wrap-Up Liability Insurance Policy No. WUT364202
[27] This Application involves the interpretation and application of Specific Project Wrap-Up Liability Insurance Policy No. WUT364202 issued by Temple Insurance and Aviva Insurance. The policy period was extended by an endorsement to February 28, 2014 and was further extended to April 28, 2014.
[28] For present purposes, the following provisions of the policy are relevant:
DECLARATIONS
Named Insured: DISTILLERY S.E. DEVELOPMENT CORP.
Additional Insured: All contractors, subcontractors, engineering and architectural consultants.
Insured Project: CONSTRUCTION OF THE CLEAR SPIRIT CONDOMINIUM IN TORONTO, ON.
Policy Period: 21 October 2009 to 29 October 2012 […] Completed Operations: As respects the Completed Operations Hazard, the policy shall nevertheless continue to apply for a period of 12 months following such date of termination.
Limit of Liability: $20,000,000 (as per Limit of Liability, page 1, Section III).
Property Damage Deductible: $10,000 (subject to definition contained herein).
Estimated Project Cost: $70,000,000
Deposit Premium: $98,000
Insurers: Subscribing Insurer(s) Percentage First $5,000,000 Temple Insurance Company 100% Excess of $5,000,000 Temple Insurance Company 80.00% Aviva Insurance Company of Canada 20.00% It is agreed that the above INSURERS are binding themselves, severally and not jointly, up to the extent of their above proportion only.
PART I – INSURING AGREEMENTS
To pay on behalf of the Insured all sums which the Insured shall become legally obliged to pay, or for any liability assumed by the Insured under Contract (as defined herein), for damages arising out of the Insured’s Work in connection with the Insured Project, because of:
- Coverage B – Property Damage (as defined herein).
PART II – ADDITIONAL INSURING AGREEMENTS
Under coverages, A, B, C, E, and F of Part I, the Insurer further agrees to:
(a) defend in the name and on behalf of the Insured and at the costs of the Insurer, any civil action brought against the Insured on account of such Bodily Injury, Property Damages or Personal Injury, but the Insurer shall have the right to make such investigation, negotiation and settlement of any claim as may be deemed expedient by the Insurer;
(c) pay all costs taxed against the Insured in any civil action defended by the Insurer and any interest accruing after entry of judgment.
PART III – LIMIT OF LIABILITY
The Limit of Liability in the Declarations forming part of this policy applicable to each accident or Occurrence is the total limit of the Insurer’s liability for coverages A – Bodily Injury, B- Property Damage … from one Occurrence, accident or series of accidents arising from one event when such Occurrence, accident or series of accidents occur during the policy period.
PART IV – DEDUCTIBLE
The sum shown in Item 7 of the Declarations shall be deducted from each Property Damage claim or series of Property Damage claims arising from an accident or Occurrence. Such amount to be paid by the Insured. The Deductible referred to herein will not reduce the limit of the Insurer’s liability.
The terms of this policy apply irrespective of the application of the deductible amount.
The Insurer may pay part of the deductible amount to effect settlement of any claim or suit, and upon notification of the action taken, the Named Insured will promptly reimburse the Insurer for the amount of the deductible so paid.
PART V – POLICY PERIOD
This insurance applies during the policy period indicated in Item 5 of the Declarations of this policy. As respects the Products Hazard and Completed Operations Hazard, this policy shall continue to apply for the period so indicated, subject to the definition of Products Hazard and Completed Operations Hazard contained herein.
PART VII – EXCLUSIONS
This policy does not apply to any liability:
- Under Coverage B for: Injury to, or destruction of, or loss of use of:
(b) except with respect to liability under sidetrack agreement that is covered by this policy, or the use of elevators or escalators at premises owned, rented or controlled by or on behalf of the Insured:
(iv) that particular part of any property, not on premises owned by or rented to the Insured:
(a) performed at the time of the injury thereto or destruction thereof, arising out of the Insured’s Work; or
(b) out of which any injury or destruction arises; or
(c) the restoration, repair or replacement of which has been made or is necessary by reason of faulty workmanship thereon by or on behalf of the Insured;
(c) […]
(ii) the Insured’s Work out of which such injury, destruction or loss of use arises, but this exclusion will only apply to that particular portion of such product or work out of which such injury, destruction or loss of use arises;
(e) the Insured’s Work, or any property of which the Insured’s Work forms a part, if such work is deemed unsafe, inadequate, fault or unsatisfactory because of any known or suspected defect or deficiency therein. Any expense incurred by the Insured for the inspection, withdrawal, repair or replacement of such work, or loss of use of such work or of any property of which such work forms a part is not reimbursable by this policy and is not a subject of cover hereunder.
(f) any property [sic] resulting from:
(i) a delay in, or lack of performance by or on behalf of the Insured with respect to any Contract or agreement or
(ii) the failure of the Insured’s Products or the Insured’s Work to meet the level of performance, quality, fitness or durability warranted or represented by the Insured, but this exclusion does not apply to loss of use of tangible property resulting from sudden and accidental physical injury to or destruction of, the Insured’s Products or the Insured’s Work performed after such products or work have been used in the manner for which it was intended by any person(s) or organization(s).
PART VIII - DEFINITIONS
- Completed Operations Hazard As used in this policy means liability arising out of the Insured’s Work in connection with the Insured Project because of Bodily Injury or Property Damage, but only if such Bodily Injury or Property Damage results from an Occurrence after the Insured’s Work has been completed or abandoned.
The Insured’s Work shall be deemed completed at the earliest of the following times:
(a) when all of the Insured’s Work to be performed under the Insured’s Contract is completed;
(b) when all of the Insured’s Work to be performed for the Insured’s Work to be performed for the Insured Project is completed;
(c) when that portion of the Insured’s Work out of which the Bodily Injury or Property Damage arises has been put to its intended use by other than another Contractor or Subcontractor engaged in performing operations for the Named Insured as part of the same Inured Project;
(d) when the Insured’s Work has been accepted by or on behalf of the owner.
- Contract Contract means any contract in writing entered into by the Insured relating to the Insured Project and which is:
(a) in writing; or
(b) has been formalized in writing prior to the Bodily Injury, Property Damage or Personal Injury.
- Insured’s Work:
(a) Means:
(i) work or operations performed by the Insured or on the Insured’s behalf;
(ii) materials, parts or equipment furnished in connection with such work or operations.
Occurrence The word Occurrence means an accident, including continuous or repeated exposure to conditions, which result in Bodily Injury or Property Damage neither expected nor intended from the standpoint of the Insured and includes:
Property Damage Means
(a) Physical injury to or destruction of tangible property caused by an Occurrence (as defined herein) during the policy period, including the loss of use thereof resulting therefrom; or
(b) Loss of use of tangible property which has not been physically injured or destroyed providing such loss of use is caused by an Occurrence during the policy period.
D. Procedural Background and Evidentiary Record
[29] For reasons that will become apparent later in these Reasons for Decision, it shall be important to note that the evidentiary record for the Distillery Parties’ and Rite-Air’s Applications was extensive. It was made larger still by the circumstance, as noted above, that four Applications were argued together. The combined evidentiary record was thousands of pages. The argument of the Applications extended over two days.
[30] The evidentiary record became enormous because although TSCC 2299’s Statement of Claim was a 34-page, 63-paragraph pleading, with its incorporations by reference it became a pleading of hundreds of pages including dense and intricate expert reports.
1. Distillery Parties Application
[31] On September 5, 2019, the Distillery Parties issued their Application.
[32] The Application was supported by the affidavit of Jamie Goad dated September 17, 2020. Mr. Goad is co-owner of Cityscape Holdings Inc., which owns 50% of the common shares of Distillery S.E. Development Corp.
[33] Mr. Goad’s affidavit had 41 exhibits and the Application Record had 1,123 pages.
[34] The Insurer delivered a Responding Application Record of 31 pages with an affidavit dated October 30, 2020 from Mark Mandelker. Mr. Mandelker is an associate lawyer with Clyde & Co. Canada LLP, lawyers for the Insurer.
2. Rite-Air Application
[35] On July 17, 2020, Rite-Air commenced its Application.
[36] The 242-page Application Record was supported by an affidavit dated July 27, 2020 from Mike DiMauro. Mr. DiMauro is the Office Manager of Rite-Air Mechanical Co. Ltd.
[37] The Insurer delivered a Responding Application Record of 976 pages with an affidavit dated October 30, 2020 from Mr. Mandelker.
E. Facts
[38] The Distillery Parties developed a 43-story high-rise tower containing 350 condominium units and four levels of underground parking known as the Clear Spirit Condominium project at 70 Distillery Lane in Toronto.
[39] Rite-Air is a full-service HVAC/R contractor with its head office in Concord, Ontario. Rite-Air was retained to perform HVAC work for the construction of the condominium building pursuant to a contract between Rite-Air and the Distillery Parties, dated August 19, 2010. Rite-Air installed the HVAC system of the condominium building. Rite-Air’s scope of work included the following:
Supply and install all insulation to equipment and other work by this Trade contractor as required for acoustic and thermal purposes. Where required provide for jacketing of such insulation for acoustic, thermal, moisture for exterior exposure purposes. […]
Supply and install complete split system or packaged units in elevator machine room. Supply all duct sleeves off the retail units and associate ductwork from the fan coils. Fresh air duct work from exterior through ERVs included. ERV units to be supplied and installed as well.
[40] The Distillery Parties were named insureds in a Specific Project Wrap-Up Liability Insurance Policy bearing policy number WUT364202 issued by the Insurer. As a sub-contractor, Rite-Air was an insured under the policy.
[41] The condominium was constructed, and TSCC 2299 became the owner of the condominium.
[42] The construction was completed in November 2013. The Completed Operations extension of the insurance policy ended in November 2015.
[43] In accordance with s. 44 of the Condominium Act, 1998, [2] TSCC 2299 retained Belanger Engineering, to determine whether the common elements of the condominium building suffered from any deficiencies which could give rise to a guarantee claim under s. 14 of the Ontario New Home Warranties Plan Act. [3]
[44] Belanger Engineering conducted a performance audit and supported by several expert reports, the audit revealed alleged deficiencies in the construction of the condominium building.
[45] TSCC 2299 retained additional experts and a second performance audit was conducted and more deficiencies were identified.
[46] TSCC 2299 brought the deficiencies to the attention of the Distillery Parties. TSCC 2299 alleges that the Distillery Parties did nothing to fix the problems.
[47] On March 13, 2015, TSCC 2299 sued the Distillery Parties for Property Damage arising from alleged design and defects in the construction of the high-rise building. (File No. CV-15-523947 - the “TSCC 2299 Action”). TSCC 2299 alleges that the condominium building was constructed negligently.
[48] TSCC 2299 alleges that the Distillery Parties were liable for breaches of contract, including implied warranties and representations, negligence, breaches of fiduciary duty, and breaches of statutory warranties and representations. TSCC 2299 claims damages of $9,913,169.25.
[49] TSCC 2299 alleges that: (a) there was deficient workmanship and material; (b) there were deviations from plans and specifications, building requirements and industry standards; and (c) there were design and construction deficiencies in the common elements, condominium units, shared facilities, and assets of the condominium corporation.
[50] TSCC 2299 alleges that the negligence of the Distillery Parties caused damage to numerous elements of the Condominium, including the underground parking garage, balconies, and elevators, as well as interior damage to walls and ceilings in units and common areas.
[51] In its action, TSCC 2299 pleads that the Distillery Parties are vendors and pursuant to s.31.1 of the Ontario New Home Warranties Plan Act, vendors of new homes guarantee that the home is constructed in a workmanlike manner, free from defects in materials, in accordance with the Ontario Building Code [4] regulations [5] and fit for habitation. In its Statement of Claim, TSCC 2299 refers to the first and second performance audits that identified the defects in the building.
[52] On September 8, 2017, the Distillery Parties notified the Insurer of TSCC 2299’s Claim. At that time, the TSCC 2299 Action only included a claim with respect to the condominium’s window glass. The pleading underwent four subsequent amendments.
[53] On September 17, 2017, the Distillery Parties commenced an action (Court File No. CV-17-582357 - the “Distillery Action”) seeking contribution and indemnity from 38 contractors, trades, suppliers, consultants, and professionals, with respect to any liability the Distillery Parties may have to TSCC 2299 in respect of the allegations made in the TSCC 2299 Action. The TSCC 2299 pleadings were incorporated by reference in the Distillery Parties’ Statement of Claim.
[54] Rite-Air was a defendant in the Distillery Parties’ Action with respect to any liability the Distillery Parties may have to TSCC 2299 in respect of the allegations made in the TSCC 2299 Action. In particular, TSCC 2299 alleged that work performed by Rite-Air was deficient and that it caused damage to the building. The alleged deficiencies were as follows.
a. It is alleged that the installation of the HVAC System was deficient. TSCC’s expert estimated that it would cost $150,0000 for “repair/remedial and increased maintenance" costs for the HVAC equipment; b. It is alleged that various units including Suite 3904 had defective ERV intake grills; and c. It is alleged that improper insulation on the air-conditioning units caused damage to a ceiling at a cost of $2,034.00 plus investigation costs of $167.24.
[55] The Court has ordered that the TSCC 2299 Action and the Distillery Action be tried together one right after the other, with joint production and discoveries.
[56] By letter dated October 3, 2018 from Robert Emblem of Clyde & Co LLP, coverage counsel, the Insurer denied that it had a duty to defend the Distillery Parties. The Insurer relied on exclusions 2(b)(iv)(c), (c)(ii), (e), and (f) of the insurance policy. It was the Insurer’s position that:
a. the claims made by TSCC 2299 are not claims on account of Property Damage as that term is defined in the Policy; b. if the claims were on account of Property Damage, they were excluded from coverage; c. although some claims by TSCC 2299 might be covered as Property Damage not excluded under the Policy, the total Property Damages sought for such claims was $8,507.66, which was less than the Policy’s $10,000 deductible. The Insurer submitted that this means that there is no possibility that these damages would be covered, and thus no duty to defend was triggered.
[57] The Distillery Parties retained Stevenson Whelton LLP to defend the TSCC 2299 Action. To September 17, 2020, the Distillery Parties have incurred defence costs of $316,841.93.
[58] On July 4, 2019, Rite-Air notified the Insurer about the TSCC 2299 action and the Distillery Parties action.
[59] On September 24, 2019, the Insurer denied cover to Rite-Air on the basis that: (a) the bulk of the claim against Rite-Air is for non-covered defective workmanship; (b) one of the alleged claims does not constitute Property Damage; and (c) the third claim, which might allege Property Damage, falls within the Policy deductible and therefore does not attract a duty to defend.
F. Principles of Interpretation for Insurance Contracts and for the Duty to Defend
[60] The legal principles that govern a contract interpretation dispute about whether an insurer has a duty to defend and about the interpretation of insurance contracts are as follows.
a. 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. [6] b. The goal of contractual interpretation is to determine the intent of the parties and the scope of their understanding giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. [7] c. The factual nexus is objective evidence of the background facts at the time of the execution of the contract; i.e., knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting including anything that would have affected the way in which the language of the document would have been understood by a reasonable person. [8] d. The parol evidence rule precludes admission of evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing, but in interpreting a commercial contract, the court may have regard to the surrounding circumstances; that is, the factual background and the commercial purpose of the contract. e. While a proper understanding of the factual matrix is crucial to the interpretation of many contracts, it is less relevant to standard form contracts where there is no meaningful factual matrix specific to the parties to assist the interpretation process and where the standard form is essentially a take-it-or-leave-it proposition for one of the contracting parties. [9] f. Provisions should not be read in isolation but in harmony with the agreement as a whole. [10] g. 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 agreement ineffective, superfluous, absurd, unjust, commercially unreasonable, or destructive of the commercial objective of the agreement. [11] h. Since insurance contracts are essentially a contract of adhesion, 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. [12] i. 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. [13] j. The rules of construction are applied to resolve ambiguity; they do not operate to create ambiguity where there is none in the first place. [14] 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. [15] k. When there is an ambiguity or contradiction in an agreement that cannot be resolved by the other rules of construction. resort then may be had to the contra proferentem rule, 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. [16] l. The insurer has a duty to defend if the pleadings filed against the insured allege facts which, if true, would require the insurer to indemnify the insured. [17] m. The court must determine whether the factual allegations in the pleading, if true, could possibly support the plaintiff’s legal claims. [18] n. The pleadings govern the duty to defend, not the insurer's view of the validity or nature of the claim nor by the possible outcome of the litigation. [19] o. In a duty to defend application, the court must determine the substance and true nature of the claims based on the allegations in the pleadings taking the entire pleading into account and without engaging in a fanciful reading of the statement of claim for the purpose of requiring the insurer to defend. [20] p. The court must look beyond the labels used by the plaintiff to ascertain the substance and true nature of the claims. [21] q. If there is any possibility that the claim falls within the liability coverage, the insurer must defend. [22] r. If the pleadings are not sufficiently precise to determine whether the claims would be covered by the policy, the insurer's obligation to defend will be triggered where, on a reasonable reading of the pleadings, a claim within coverage can be inferred. [23] s. If it is clear from the pleadings that suit falls outside the coverage of the policy by reason of an exclusion clause, the duty to defend is not triggered. [24] t. If there is a claim that is outside or excluded from insurance coverage and a claim within insurance coverage, but the covered claim is entirely derivative of the uncovered claim, which is to say that the claims arise from the same actions and cause the same harm, then the derivative claim will not trigger a duty to defend. [25] u. In determining whether the policy would cover the claim, the usual principles governing the construction of insurance contracts apply, namely: (a) the contra proferentem rule; (b) the principle that coverage clauses should be construed broadly and exclusion clauses narrowly; and (c) where the policy is ambiguous, effect should be given to the reasonable expectations of the parties. [26] v. Extrinsic evidence that has been explicitly referred to in the pleadings may be considered to determine the substance and true nature of the allegations. [27]
[61] In Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [28] the Supreme Court of Canada summarized the law about when the duty to defend is triggered as follows:
- An insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim. It is irrelevant whether the allegations in the pleadings can be proven in evidence. That is to say, the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify. What is required is the mere possibility that a claim falls within the insurance policy. Where it is clear that the claim falls outside the policy, either because it does not come within the initial grant of coverage or is excluded by an exclusion clause, there will be no duty to defend.
G. Has the Duty to Defend Been Triggered?
[62] The issue of the role of the deductible in determining whether the duty to defend has been triggered is a matter of contract interpretation. Generally speaking, each contract must be interpreted in its own factual nexus, and thus, in theory, each contract is unique. Thus, court decisions about other insurance contracts with different language and different circumstances are not binding and may not be particularly useful.
[63] However, where standard form contracts or standard terms found in many contracts are in issue, court decisions will be binding because there is no meaningful factual matrix that is specific to the particular parties to assist the interpretation process, and the interpretation is better characterized as a question of law which must meet the legal standard of correctness. [29]
[64] In the immediate case, the parties agreed that there are no Canadian cases that are directly on point. In the immediate case, both parties were unable to find any cases that interpreted language similar to the language of the Specific Project Wrap-Up Liability Insurance Policy. The closest case is Swan Wooster Engineering Co v. Continental Casualty Co., [1971] 1 W.W.R. 541 (B.C.S.C.), [30] discussed below; however, that case has different contract language and was a professional negligence policy, and thus, the case at bar about the interconnection between the deductible and the duty to defend is, in essence, a case of first instance.
[65] Both parties referred to American authorities, but the language of the policies and the factual nexus in those cases were different and the cases were distinguishable from the immediate case. [31] The American cases were not helpful, and, therefore, the immediate case must be decided using first principles.
[66] Applying those first principles, I conclude that based on the plain language and plain meaning of the words used in the insurance policy, the Insurer agrees to defend any civil action brought against the Distillery Parties on account of Property Damage regardless of whether the Property Damage may be below the deductible.
[67] The Insurer argues that the proper interpretation of the insurance policy is that the duty to defend is only triggered once the policy is actually engaged and this means that there is no duty to defend for claims that fall within the deductible. The Insurer submits that to interpret otherwise is to convert an indemnity insurance policy into a litigation insurance policy.
[68] I disagree with the Insurer’s interpretation, which would have the insurance policy mean that the Insurer agrees to defend any civil action brought against the Distillery Parties on account of Property Damages only if the Property Damage exceeds $10,000.
[69] Reading words of limitation into the insurance contract offends the principles that coverage provisions should be construed broadly and exclusion clauses should be construed narrowly and adds an exclusionary or limitation to the contract that the parties did not bargain for.
[70] Reading words of limitation about the deductible into the insurance contract offends the principle that the court should reject an interpretation that would make the agreement absurd, unjust, commercially unreasonable or destructive of the commercial objective of the agreement.
[71] The absurdity, commercial unreasonableness, inefficiencies, and unfairness of the Insurer’s interpretation is actually demonstrated by the circumstances of the immediate case.
[72] In the immediate case, it is a fluke of five iterations of an overly particularized and detailed pleading by TSCC 2299 that the argument could even be made that the Property Damage did not exceed the $10,000 deductible.
[73] Had TSCC 2299 simply pleaded that there was Property Damage without monetary quantification or had TSCC 2299 pleaded that the Property Damage to the building was $10,001, everyone would have been spared this duty to defend application and the interminable arguments that there was: HVAC Property Damage; parking garage drainage Property Damage; balcony waterproofing Property Damage; elevator Property Damage; interior hallways Property Damage; emergency repairs damage; security costs Property Damage; and water leakage Property Damage, that separately or in the aggregate exceeded the deductible.
[74] Through a fluke of pleading, the court has been asked to undertake a forensic analysis that went far beyond the interpretation of the terms of the insurance policy measured against the Statement of Claim and would have taken the court into territory better and best explored at the trial. It is to be remembered that the duty to defend is engaged by the mere possibility that there may be coverage for Property Damage.
[75] When TSCC 2299’s action is tried it may turn out that: (a) it suffered no damage; (b) the damage it suffered was not within insurance coverage; or (c) the damage it suffered was within insurance coverage but excluded by a policy exclusion to coverage. All of these instances, where there would be no insurance coverage, would not change the Insurer’s obligation to defend because at the outset there was the mere possibility that there may be coverage for Property Damage. It is commercially unreasonable to interpret the policy so that before there is a trial, there is no duty to defend because the Property Damages pled in the Statement of Claim arguably did not exceed $10,000.
[76] Reading these words of limitation into the insurance contract offends the interpretative principle that contract provisions should not be read in isolation but in harmony with the agreement as a whole. The Insurer’s interpretation is discordant and not in harmony with the agreement as a whole. For example, there is no deductible applied to the duty to defend any civil action against Distillery Parties on account of bodily injury or personal injury, including de minimus claims with values below $10,000, and there is no explanation why the deductible would be relevant to the duty to defend some covered claims and not other covered claims.
[77] I disagree with the Insurer’s argument that the words of limitation referable to the deductible are necessary because unless the policy was interpreted in this way an indemnity insurance policy would be converted into a litigation insurance policy.
[78] In the immediate case there is no conversion. There is express language in the insurance contract providing a duty to defend that is independent of but related to the Insurer’s duty to indemnify and there is no express language limiting the duty to defend to indemnifications exceeding the deductible.
[79] Swan Wooster Engineering Co v. Continental Casualty Co., which as mentioned above concerned a professional negligence policy, is supportive of the arguments of the Distillery Parties and Rite-Air in the immediate case. In that case, the insured was sued for professional negligence. The claim was for approximately $90,000 and the insurer refused to defend the insured because the policy had a $100,000 deductible. Justice Macfarlane of the British Columbia Supreme Court ordered the insurer to defend the claim because the policy had an express term that the deductible amount did not apply to and include the costs defence. There is no similar express term in the immediate case, but based on the above analysis of the Specific Project Wrap-Up Liability Insurance Policy, I am satisfied that the Insurer is obliged to defend claims both below and also above the deductible.
[80] In the immediate case, TSCC 2299’s action has triggered a duty to defend, which is an independent obligation of the Insurer.
[81] Regardless of the amount of the deductible, if TSCC 2299’s action did not raise the possibility of a Property Damage claim, then there would be no duty to defend. The policy is not a litigation insurance policy; it is a policy in which the Insurer has a duty to defend regardless of the deductible if a Property Damages claim is advanced against the insured.
[82] In contrast to the Insurer’s interpretation of the insurance policy, the Distillery Parties’ interpretation is consistent with a reading of the whole contract and with the principles for the interpretation of insurance contracts.
[83] In particular, the Distillery Parties rely on the provision in the contract that states: “The terms of this policy apply irrespective of the application of the deductible amount.” I agree that this provision supports the Distillery Parties’ interpretation. However, I add that the Distillery Parties’ interpretation would be sound, even if, as the Insurer would have it, these words are referable only to the insured’s obligations and not its entitlements under the insurance policy.
[84] I agree with the Distillery Parties’ interpretation of this particular provision, but the point is that ultimately the Distillery Parties’ argument does not depend upon this particular provision of the contract. With or without this provision, the Distillery Parties’ argument is sound that a duty to defend has been triggered in the immediate case.
[85] I, therefore, conclude that the duty to defend has been triggered in the immediate cases for both the Distillery Parties and Rite-Air.
H. Should There be an Allocation Order?
[86] As noted in the introduction, the Insurer seeks ex ante allocation orders. It seeks this order because it is apparent from TSCC 2299’s Statement of Claim that some of TSCC 2299’s claims against the Distillery Parties are covered claims and some of its claims are uncovered claims.
[87] The Insurer submits that it is entitled to an allocation order because while it may have a duty to defend covered claims it does not have a duty to defend uncovered claims. The insurer submits that in the immediate case, it is apparent from TSCC 2299’s Statement of Claim that 99% of the claims against the Distillery Parties are uncovered claims and 98.5% of the claims against Rite-Air are uncovered claims. Thus, the Insurer submits that there should be allocation orders making it responsible for 1.0% of the Distillery Parties’ defence costs and 1.5% of Rite-Air’s defence costs.
[88] The Ontario Court of Appeal addressed the matter of allocation orders in Hanis v. University of Western Ontario, 2008 ONCA 678, [32] where the court addressed the question of how the expense of defending a lawsuit should be apportioned between the insurer and the insured when some but not all of the claims are covered by the insurance policy.
[89] In Hanis v. University of Western Ontario, the Court of Appeal established the following principles:
a. Where some but not all the claims against an insured are covered by the insurance policy, whether there is an apportionment of the costs of defending a lawsuit is a matter of interpreting the insurance contract. Apportionment is a matter of contract interpretation not a matter of fairness or equity. b. It is a matter of contract interpretation whether the parties have bargained for an insurance policy in which the insurer has an obligation to pay all or some of the legal expenses for both covered and uncovered claims. c. It is matter of contract interpretation whether the parties have bargained for an insurance contract in which the legal expenses of defending the lawsuit is apportioned between covered claims, uncovered claims, or mixed claims. d. Where the obligation to defend claims covered by the policy is unqualified by contract language, the insurer is required to pay all reasonable legal expenses associated with the defence of the covered claims even if those expenses are also associated with the defence of the uncovered claims. In other words, if the same legal expense is incurred for both a covered and an uncovered claim, the insurer is responsible for the legal expense. e. Where the obligation to defend claims covered by the policy is unqualified by contract language, the insurer is not required to pay the legal expenses associated with exclusively defending the uncovered claims. In other words, the insurer is not obliged to pay and there may be an allocation to the insured for legal expenses that can be identified as relating exclusively to uncovered claims. f. Unless the insurance contract expressly provides for the payment of the legal expenses for uncovered claims, the insurer is not liable to pay the legal expenses associated exclusively or solely with uncovered claims. g. The determination of what part of the legal expense relate to a covered claim, an uncovered claim, or a mixed claim, is a factual matter to be determined by the judge charged with resolving the issue of allocating the legal expenses associated with covered and uncovered claims.
[90] Hanis v. University of Western Ontario, was applied by the Court of Appeal in Tedford v. T.D. Insurance Meloche Monnex, 2012 ONCA 429, [33] where the Court concluded that an apportionment of the costs of the defence between uncovered or uncovered claims was appropriate.
[91] In Tedford, the Court of Appeal made a direction about how defence counsel should apportion the legal expenses and provided that the Insurer was entitled to apply to the court after the defence of the covered and uncovered claims was concluded Justice Hoy, as she then was, stated at paragraphs 24 and 25:
I would direct, unless the parties otherwise agree, that the appellant's counsel be instructed to defend both the covered and the uncovered claims, in a manner commensurate with the aggregate amount claimed, and that the respondent bear the costs of the defence, to the extent they exceed the reasonable costs associated with the defence of the covered claims. In determining the reasonable costs associated with the defence of the covered claims, it is appropriate to consider the quantum of the covered claims. It would be unfair to the insurer to fix it with defence costs that are disproportionate to the extent of its potential liability for the covered claim.
If the parties are unable to agree on an allocation of the costs, the appellant insurer shall be entitled to apply to the Superior Court of Justice for a determination of the allocation, in accordance with Hanis, after the matter is concluded or at such other time as the parties agree.
[92] Applying these principles in the immediate case, I interpret the Insurer’s obligation under the Specific Project Wrap-Up Liability Insurance Policy to pay all the legal expenses except for legal expenses that can be identified as having been incurred exclusively or solely for uncovered claims.
[93] It is, however, premature to make any allocation. Any allocation of the legal expenses between uncovered or covered claims is a fact-specific determination that cannot be made based just on the pleadings. The allocation of the legal expenses between uncovered or covered claims cannot be made ex ante (before the event). The pleadings are not the appropriate metric for allocation, and it is too early in the proceeding to make any allocation. Allocation must be determined ex post facto; i.e., allocation is determined after the court assesses what is the value of the uncovered or covered claims respectively and after the court assesses what legal resources were expended for covered, uncovered, or mixed claims.
I. Conclusion
[94] For the above reasons, the Distillery Parties’ Application and Rite-Air’s Application for a declaration that there is a duty to defend in the immediate case are granted without prejudice to an ex post facto allocation order once it can be determined how to allocate the defence costs based on a trial determination as to what legal expenses were exclusively or solely for uncovered claims.
[95] If the parties cannot agree about the matter of costs, they may make submissions in writing beginning with the Distillery Parties’ and Rite-Air’s submissions within twenty days of the release of these Reasons for Decision followed by the Insurer’s submissions within a further twenty days.
Perell, J.