SUPERIOR COURT OF JUSTICE – ONTARIO
RE: City of Oshawa v MEARIE
BETWEEN:
The Corporation of the City of Oshawa
Applicant
AND:
Municipal Electric Association Reciprocal Insurance Exchange
Respondent
BEFORE: Justice S. E. Lavine
COUNSEL: Shaneka Shaw Taylor, for the Applicant
Bradley Halfin, for the Respondent
HEARD: February 4, 2021 by videoconference
REASONS FOR DECISION
1The Applicant, The Corporation of the City of Oshawa (“City”), seeks: (i) a declaration that the Respondent, Municipal Electric Association Reciprocal Insurance Exchange (“MEARIE”), is obligated to defend the City in respect of all claims against the City in the action brought by Harjit Randhawa (“the main action”); (ii) an order requiring the Respondent to reimburse the City in respect of all legal costs incurred to date defending the action; and, (iii) an order entitling the City to appoint and instruct counsel of its choice, at the expense of the Respondent, to defend the City in the main action.
2Harjit Randhawa, the plaintiff in the main action, alleges that, on September 14, 2016, she tripped and fell due to an uneven sidewalk in front of 245 King Street West in Oshawa, causing her injury. She claims damages for the alleged negligence of the City and the Oshawa PUC Networks Inc., a subsidiary of Oshawa Power and Utilities Corporation (“Oshawa PUC”).
3Prior to the incident, the City issued a Road Occupancy Permit to Oshawa PUC for repairs to an underground cable fault in the area in front of 245 King Street West on December 31, 2015. The completion of the repair required removal of the interlocking stone and asphalt adjacent to the sidewalk.
4The Road Occupancy Permit required that Oshawa PUC have in place commercial general liability insurance written on an occurrence basis with a liability limit of not less than $5,000,000 per accident or occurrence, with the City named as an additional insured. Oshawa PUC obtained the required insurance policy through the Respondent, MEARIE.
5The City states that, as claims in the main action arise from the operations of Oshawa PUC, it is entitled to a defence from MEARIE in the main action. The City seeks reimbursement of its already paid costs for defending the action.
6The City asserts that there is a conflict of interest, or reasonable apprehension of conflict of interest, between the City and MEARIE, in its defence of Oshawa PUC, such that the City should be entitled to appoint and instruct counsel of its choice without any reporting obligations to MEARIE.
7Accordingly, the issues to be determined on this application are:
(1) Does MEARIE have a duty to defend the City in the main action and fully pay the ongoing costs of the City’s defence?
(2) If so, is the City entitled to reimbursement of past costs of defending the main action?
(3) Is the City entitled to appoint and instruct counsel of its choice to defend the main action at MEARIE’s expense?
Analysis
Does MEARIE have a duty to defend the City in the main action and fully pay the ongoing costs of the City’s defence?
8The general governing principles to be applied in determining whether a duty to defend exists in a particular case are well established.
9If the pleadings allege facts which, if true, require the insurer to indemnify the insured for the claim, the insurer is obliged to defend the claim, even though the actual facts may differ from the allegations pleaded: Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49 at para. 28.
10It is not necessary to prove that the obligation to indemnify will, in fact, arise in order to trigger the duty to defend. The duty arises where there is a “mere possibility” that the true nature of the pleaded claim, if proven at trial, falls within coverage and would trigger the insurer’s duty to indemnify: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33 at para. 19; Monenco, at para. 29.
11Where it is clear from the pleadings that the claim falls outside of the coverage of the policy by reason of an exclusion clause, the duty to defend does not arise: Progressive at para. 19; Monenco, at para. 29.
12Where pleadings are not framed with sufficient precision to determine whether claims are covered by a 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. Genuine ambiguity or doubt as to whether the pleadings bring the incident within the coverage of the policy ought to be resolved in favour of the insured: Progressive at para. 14; Menenco, at paras. 31 and 32.
13The determination whether a duty to defend exists requires an assessment of the pleadings to ascertain the substance and true nature of the claims.
14In the statement of claim the plaintiff alleges that she fell in front of 245 King Street on September 14, 2017, because the sidewalk was uneven.
15The other factual allegations are contained in the particulars of the allegations of negligence, set out in paragraphs 6 and 7 of the statement of claim, as follows:
- The damages and injuries as are hereinafter set out were caused by the negligence or breach of duty of the Defendant, the Corporation of the City of Oshawa, in that it:
(a) failed to take proper measures to ensure that the sidewalk was level and in a good and safe state of repair for pedestrians;
(b) failed to properly inspect the sidewalk;
(c) failed to warn pedestrians of the dangerous condition of the sidewalk
- The damages and injuries are as hereinafter set out were caused or contributed to by the negligence or breach of duty by the Defendant, Oshawa PUC Networks Inc., a subsidiary of Oshawa Power & Utilities Corporation, in that it:
(a) performed groundwork in the area in question, causing the sidewalk to settle unevenly;
(b) failed to ensure that the sidewalk and surrounding area was level after performing its work;
(c) failed to warn pedestrians of the dangerous condition of the sidewalk.
16The City and Oshawa PUC cross-claimed against each other.
17There are also further facts which are undisputed.
18It is undisputed that the City owns, maintains and exercises control over, and is responsible for the sidewalk in front of 245 King Street. The City, as a municipal corporation under the provisions of the Municipal Act, 2001 S.O. 2001 c. 25, is responsible for the maintenance and repair of the sidewalk.
19Although not referred to in the pleadings, it is not disputed that the City issued a Road Occupancy Permit to Oshawa PUC to occupy 245 King Street on December 31, 2015. The Road Occupancy Permit indicates that the boulevard and asphalt adjacent to the sidewalk would be cut and would have to be restored.
20The terms and conditions of the Road Occupancy Permit included a term that if “to carry out the works it is necessary to alter, break or disturb an existing pavement, curb and gutter or sidewalk, the applicant shall undertake a permanent repair immediately upon completion to the satisfaction of the City unless alternative arrangements are made with the City. Temporary repairs are permitted after December 15th but must be reinstated to a permanent repair no later than April 30th”. A further term required that “all sidewalk, curb and gutter, boulevard and asphalt repairs shall meet City Standards and OPSS specifications”.
21As stated earlier, other terms and conditions of the Road Occupancy Permit required the applicant, Oshawa PUC, to fully indemnify the City against all claims brought against the City, “arising out of the issuance of this Permit or in any way related to the work performed by the Applicant”, and to provide an Insurance Certificate, naming the City on the policy as an additional insured.
22The Certificate of Insurance held by the City refers to policy L20160SHA1 issued to Oshawa PUC Networks Inc. and Oshawa PUC Energy Services Inc., effective January 1, 2016. The Certificate provides a limit for general liability coverage in the amount of $5,000,000.
23The Certificate states that the City is added as an additional insured “but only with respect to Additional Insured’s vicarious liability arising out of the operations covered of Oshawa PUC Networks Inc. solely as it relates to the project, event or contract listed below, but excluding any negligent acts committed by such Additional Insured.”
24The second page of the Certificate is the Certificate of Insurance certifying that policy number L2016OSHA1, Oshawa PUC’s Comprehensive Liability Insurance Policy, was issued on January 1, 2016. The Certificate lists the City of Oshawa as an additional named insured, “but only with respect to liability arising out of the Operations Covered of the Named Insured”.
25The respondent, MEARIE, contends that the policy contains a clear and unambiguous exclusionary clause that limits the City’s coverage to vicarious liability for Oshawa PUC’s operations and expressly carves out negligent acts of the City from coverage.
26The Respondent further contends that, even if negligent acts of the City are not excluded from coverage, the true nature of the entire claim against the City does not arise from the operation of Oshawa PUC as the claim alleges liability for the City’s own negligence and breach of duty under the Municipal Act, regardless of any alleged negligent work performed by Oshawa PUC.
27The Respondent submits that, unlike many cases relied on by the City, here, the plaintiff has not pleaded all allegations against both defendants jointly and in identical language. The form of the pleading, however, is not determinative. The pleadings must be assessed to determine the substance and the true nature of the claim.
28The statement of claim in broadly worded. There are two paths to liability. One possible path to liability would contemplate liability based on the negligent conduct of Oshawa PUC in the performance of its work on the City’s property creating the uneven sidewalk that caused the plaintiff’s injuries. In this path of liability, the alleged negligence or breach of duty by the City is connected to the operation of Oshawa PUC.
29I am not satisfied, as the Respondent contends, that the existence of the City’s independent obligations under the Municipal Act severs this connection, or that the passage of time, in the circumstances, renders the connection too remote. In this path of liability, the connection between the liability of the City and the operations of Oshawa PUC is unbroken and more than incidental or fortuitous, such that the City’s liability arises out of the operations of Oshawa PUC in the work under the Permit: Sky Solar (Canada) Ltd. v. Economical Mutual Insurance Co., 2020 ONCA 558 at paras. 100-101.
30The Respondent, as stated above, urges that there is a clear and unambiguous exclusion clause which expressly limits the City’s coverage to vicarious liability arising out of the operations of Oshawa PUC and expressly excludes any negligent act committed by the City.
31The onus of establishing the applicability of coverage, an exclusion, or exception to an exclusion rests of the party seeking to rely on that policy provision: Non-Marine Underwriters, Lloyd’s London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551 (S.C.C.) at para. 49.
32The provisions of a policy are to be interpreted in accordance with the general principles of interpretation of insurance policies, including the contra proferentum rule; the principle that coverage provisions should be construed broadly and exclusion clauses narrowly; and the desirability, at least where the policy is ambiguous, of giving effect to the reasonable expectations of the parties: Zurich Insurance Co. v 686234 Ontario Ltd., 2002 CanLII 33365 at para. 23; Monenco at para. 31.
33The Certificate of Insurance is evidence of the policy, but it is not the contract itself. The two Certificates of Insurance confirm slightly different coverages. The policy itself is not before me.
34The City is entitled to rely on the certificate that is most favourable to it, which states that the City is an additional insured for claims “arising out of the operations covered of Oshawa PUC”, without further qualification. Accordingly, MEARIE has an obligation to defend the City on all claims that arise out of the operations of Oshawa PUC.
35Allegations in the statements of claim are to be accorded the widest latitude in determining whether they raise a claim within the policy. An insurer has a duty to defend where there is a “mere possibility” that the true nature of a pleaded claim, if proven at trial, falls within coverage. One of the two theories of liability is that the dangerous situation was created by the Oshawa PUC’s negligent performance of its work. As stated above, this theory of liability is one in which the City’s liability arises from the operations of the Oshawa PUC.
36I conclude, therefore, that MEARIE has a duty to defend.
Is MEARIE required to fully pay the costs of defending the main action?
37The City urges that, as there is no practical means of readily distinguishing the costs of the defence between the covered and non-covered claims, MEARIE should provide the City with independent counsel, at MEARIE’s expense, to defend the action in its entirety.
38I will first address the issue of defence costs. MEARIE has a duty to defend at least some of claims in the action. The duty to indemnify does not arise in this application.
39The Court of Appeal in Markham (City) v. AIG Insurance Co. of Canada, 2020 ONCA 239, leave to appeal dismissed [2020] S.C.C.A No. 170, most recently considered the circumstances where an insurer’s duty to defend is engaged by some, but not necessarily all, of the claims against the insured.
40The court confirmed earlier decisions holding that the insurer is obligated to pay the reasonable costs of the insured’s defence of covered claims, even if that defence furthers the defence of uncovered claims. This, however, does not mean that an insurer who owes a duty to defend on one aspect of a claim covered by the policy must bear all costs of the defence. The insurer is not obligated to pay costs related solely to the defence of uncovered claims: Markham, at para. 69 and footnote 1.
41In Markham, the City was insured by Lloyd’s Underwriter’s under a commercial general liability policy. The City was also named as an additional insured to Hockey Canada’s insurance policy with AIG Insurance Company of Canada, but only in respect of liability arising out of Hockey Canada and Waxer’s operations. The court held that, as both insurers had a duty to defend at least some of the claims in the action, both were responsible to contribute to the defence costs of the City.
42Recognizing that the respective risk could not be determined at the early stage of the proceedings and that the claim did not allow for a precise allocation of defence costs, the court held that, in the circumstances, the fairest and most equitable allocation of defence costs was that each insurer pay an equal share of the defence costs pending final disposition of the action and the final determination of the allocation of costs: Markham, at para. 87.
43I recognize that, practically, there may be difficulties in readily distinguishing the costs of the defence at this stage between those aspects of the claims that are covered and those aspects of the claim which fall outside coverage.
44As the City does not have coverage for all of the claims in the action, this is a situation quite similar to that in Markham. I can see no basis to depart from that approach in this case. MEARIE has no obligation to bear all costs of the defence. The City must bear its share of the defence costs to the extent that costs are related solely to the uncovered claims, or exceed the reasonable costs associated with the defence of the covered claims.
45With respect to past costs incurred by the City, I am not persuaded that it is now necessary to address those costs. They shall be addressed at the end of the action together with the final allocation of defence costs.
Is the City entitled to appoint and instruct counsel of its choice, at MEARIE’S expense, to defend the main action?
46In Markham, the Court of Appeal confirmed that an insurer who has a duty to defend an action also has a prima facie right to control the conduct of that defence. The test for when the insured may appoint and direct its own counsel at the insured’s expense is when a reasonable apprehension of conflict arises for the insurer’s counsel.
47In Markham, the Court of Appeal held that the “mere fact that an insurer has reserved its rights on coverage does not cause the insurer to lose its right to control the defence and appoint counsel”: Markham, at para. 92. I am not satisfied that denying coverage, as opposed to reserving coverage, is sufficient, in and of itself, to cause the insurer to lose its right to control the defence. It is a factor to be considered, but it is not determinative.
48As stated by Thorburn J. in Markham, “the question is whether the circumstances of the case create a reasonable apprehension of conflict of interest if that counsel were to act for both the insurer and the insured in defending the action”: Markham, at para. 92.
49The onus is on the insured to establish a reasonable apprehension of conflict of interest on the part of the insurer: Markham, at para. 93, citing Brockton at para. 43.
50The City contends that it is reasonable to assume that counsel taking instructions from MEARIE will “soft-pedal” the City’s defence or steer the conduct of the case to an outcome that shifts liability outside the scope of coverage, that is, that the plaintiff’s injuries were caused solely by the City’s negligence, rather than the work performed by the Oshawa PUC. The City argues that MEARIE has no incentive to defend claims for which it owes no duty to indemnify, and may have an incentive to settle the claim against the City as quickly as possible.
51While these apparent conflicts of interest must be minimized, I am not persuaded that these assumptions and apparently conflicting interests, rise to the level to require that the insurer lose its right to control the defence and appoint counsel, in its entirety. I am satisfied that there are mechanisms available that sufficiently minimize any conflict of interest and provide meaningful protection to the City.
52MEARIE has proposed that the concern over potential conflict may be addressed by MEARIE in at least three ways: (i) appointing different counsel to defend the City while MEARIE continues to retain control over the conduct of the defence; (ii) that the separate counsel appointed to defend the City will be required to report to a separate adjuster than the adjuster instructing counsel for Oshawa PUC, and, (iii) that neither adjuster have access to each other’s file. MEARIE stated that it was also prepared to adopt a protocol with terms akin to that adopted in Markham.
53I am satisfied that these proposed safeguards adequately alleviate any perceived conflict or compromise of the City’s defence to the main action, and meets the concerns expressed by both sides.
54Counsel are encouraged, and it is hoped can agree on the protocol to be adhered to.
Summary
55For all of the above reasons:
a) MEARIE has a duty to defend the City in the main action;
b) The City must defend those aspects of the defence related solely to the non covered claims itself, and to the extent that MEARIE incurs costs defending uncovered claims, the City must bear its share of the defence costs.
c) The City is not entitled to an order to appoint and instruct counsel of its choice to defend all claims made against the City in the main action;
d) If the City and MEARIE cannot agree upon the terms and protocol for MEARIE’s conduct of the defence, the parties may seek further direction from the court;
e) Any past legal costs of the City shall be addressed at the end of the action together with the final allocation of defence costs; and
f) If the parties cannot agree on costs for this motion, they may contact the trial coordinator to schedule an appearance before me to address the issue of costs.
Order to go accordingly.
The Honourable Madam Justice S. Lavine
Date of Release: June 7, 2021