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Insurance - Duty to Defend (5). Thunder Bay (City) v. Great American Insurance Company
In Thunder Bay (City) v. Great American Insurance Company (Ont CA, 2024) the Ontario Court of Appeal considered an insurance 'duty to defend' issue:[4] The application judge gave detailed reasons for her conclusion that the appellant had a duty to defend. In particular, the application judge found that at least one part of the lead exclusion was ambiguous and that there was at least “a mere possibility” that the exclusion did not apply to the claims. The application judge relied on the decision in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, where Rothstein J. said, at para. 51:Having found that the claims in the pleadings fall within the initial grant of coverage, the onus now shifts to Lombard to show that coverage is precluded by an exclusion clause. Because the threshold for the duty to defend is only the possibility of coverage, Lombard must show that an exclusion clearly and unambiguously excludes coverage (Nichols, at p. 808). . Kerk-Courtney v. Security National Insurance Company (TD General Insurance Company)
In Kerk-Courtney v. Security National Insurance Company (TD General Insurance Company) (Ont CA, 2024) the Ontario Court of Appeal dismissed an appeal by defendant vendors who sought a 'duty to defend' declaration against their insurer:[14] The application judge dismissed the application. He applied the three-step test from Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, at para. 52, for determining whether a claim triggers an insurer’s duty to defend, and the principles governing an insurer’s duty to defend as set out by this court in Tedford v. TD Insurance Meloche Monnex, 2012 ONCA 429, 112 O.R. (3d) 144.
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[27] Determining whether an insurer has a duty to defend involves interpreting the insurance policy, as the court must consider if the pleadings in the underlying action allege facts that, if true, would be covered by the policy: Tedford, at para. 14.
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(1) The application judge correctly instructed himself on the legal test to determine an insurer’s duty to defend
[29] The application judge correctly instructed himself on the analytic framework in Scalera to determine if the respondent owed a duty to defend to the appellants. In Scalera, at paras. 50-52, Iacobucci J. provided a three-step process to be used when determining whether a given claim could trigger an insurer’s duty to defend:First, a court should determine which of the plaintiff’s legal allegations are properly pleaded. In doing so, courts are not bound by the legal labels chosen by the plaintiff. A plaintiff cannot change an intentional tort into a negligent one simply by choice of words, or vice versa. Therefore, when ascertaining the scope of the duty to defend, a court must look beyond the choice of labels, and examine the substance of the allegations contained in the pleadings. This does not involve deciding whether the claims have any merit; all a court must do is decide, based on the pleadings, the true nature of the claims.
At the second stage, having determined what claims are properly pleaded, the court should determine if any claims are entirely derivative in nature. The duty to defend will not be triggered simply because a claim can be cast in terms of both negligence and intentional tort. If the alleged negligence is based on the same harm as the intentional tort, it will not allow the insured to avoid the exclusion clause for intentionally caused injuries.
Finally, at the third stage, the court must decide whether any of the properly pleaded, non-derivative claims could potentially trigger the insurer’s duty to defend ... . [30] The application judge also relied on the following principles flowing from this framework, as set out by this court in Tedford, at para. 14:1. 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.
2. If there is any possibility that the claim falls within the liability coverage, the insurer must defend.
3. The court must look beyond the labels used by the plaintiff to ascertain the “substance” and “true nature” of the claims. It must determine whether the factual allegations, if true, could possibly support the plaintiff’s legal claims.
4. The court should determine if any claims plead are entirely “derivative” in nature…. A derivative claim will not trigger a duty to defend.
5. 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”.
6. In determining whether the policy would cover the claim, the usual principles governing the construction of insurance contracts apply, namely: the contra proferentem rule and the principle that coverage clauses should be construed broadly and exclusion clauses narrowly…. As well, the desirability, where the policy is ambiguous, of giving effect to the reasonable expectations of the parties.
7. Extrinsic evidence that has been explicitly referred to in the pleadings may be considered to determine the substance and true nature of the allegations. [Citations omitted.] [31] This analytic framework is well settled and not disputed. ....
[39] Relying on Monenco Limited v. Commonwealth Insurance Company, 2001 SCC 49, [2001] 2 S.C.R. 699, at para. 32, the application judge instructed himself that the "the widest latitude should be given to allegations in the pleadings in determining whether they raise a claim within the policy". His conclusion that the claim was not unambiguously excluded from constituting “property damage” within the meaning of the Policy flowed from a reasonable and generous reading of the Purchaser’s pleadings, and in my view, does not reveal any error. . Live Nation Ontario Concerts GP, Inc. v. Aviva Insurance Company of Canada [equitable contribution]
In Live Nation Ontario Concerts GP, Inc. v. Aviva Insurance Company of Canada (Ont CA, 2024) the Ontario Court of Appeal considered an appeal on the 'duty to defend' issue of 'equitable contribution', where 'mixed claims' (ones both policy-covered and uncovered) are present.
Here the court considers 'equitable contribution', which cannot be advanced against insureds but only co-insurers:[22] The application judge declined to order the removal of the respondents’ current counsel. He stated that it might be appropriate to implement “some or all of the elements of the ‘split file protocol’” from this court’s decision in Markham (City) v. AIG Insurance Company of Canada, 2020 ONCA 239, 445 D.L.R. (4th) 405, at paras. 105-106, leave to appeal refused, [2020] S.C.C.A. No. 170.
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[48] Markham dealt with the duty to defend overlapping and mixed claims that were covered under separate policies with two different insurers, both of whom were parties to the proceedings. As here, some of the pleaded claims overlapped under both policies, but other pleaded claims were covered under one but not both policies. The court applied the doctrine of equitable contribution as between the insurers and found that both insurers had to contribute but that, as the level of risk of each of the insurers for the respective pleaded claims could not be ascertained at the early stage of the proceedings and the claims did not allow for a precise allocation of defence costs, the fairest allocation at that point would be an equal sharing of the defence costs: at paras. 85, 87.
[49] In the absence of Starr as a party to these proceedings, Markham has no application to the present case. I disagree with the appellants that Markham permits Aviva to claim equitable contribution from the respondents as if they were insurers.
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[50] Equitable contribution can only be sought from a concurrent insurer, not from the insured. The doctrine of equitable contribution flows from the fundamental principle of indemnity. Where a policy holder holds more than one insurance policy that may respond to claims in an action, the policy holder may not recover from the concurrent insurers more than the amount of the full loss. However, “the insured ... is entitled to select the policy under which to claim indemnity, subject to any conditions to the contrary”: Family Insurance Corp. v. Lombard Canada Ltd., 2002 SCC 48, [2002] 2 SCR 695, at para. 14. The selected insurer is entitled to claim contribution from all other insurers who have a concurrent duty to defend the insured on the same or other of the pleaded claims: Family Insurance, at para. 14; Markham, at para. 79. Assuming, without deciding, that Starr is a concurrent insurer in this case,[2] the appellants could have and still may be able to seek equitable contribution from Starr. . Live Nation Ontario Concerts GP, Inc. v. Aviva Insurance Company of Canada [duty to defend - equitable contribution]
In Live Nation Ontario Concerts GP, Inc. v. Aviva Insurance Company of Canada (Ont CA, 2024) the Ontario Court of Appeal considered an appeal on the 'duty to defend' where 'mixed claims' (ones both policy-covered and uncovered) are present:[4] I agree that the application judge erred in his characterization of the true nature of the pleaded claims as only involving overlapping claims on which the appellants were the primary insurer. The claims are better described as mixed claims because some of the pleaded claims were not covered under the appellants’ policy.
[5] The application judge’s mischaracterization of the pleadings affects his determination of what claims are covered and uncovered under the Aviva policy. The appellants should not be required to defend claims and to fund costs that are solely attributable to the defence of claims clearly not covered under the Aviva policy. If a finding is made that certain costs were paid by Aviva but incurred solely in defence of claims not covered by the Aviva policy, those costs may be reallocated, and the respondents may be required to repay those costs to Aviva.
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[21] However, the application judge concluded that it was nevertheless “most appropriate” to require the appellants to pay 100% of past and future defence costs because Ms. Nimmo’s claim was “based on the allegation that she was struck by [NorthWest] personnel who were removing an unruly patron”. Referencing this court’s decision in Hanis v. Teevan, 2008 ONCA 678, 92 O.R. (3d) 594, at paras. 32-33, leave to appeal refused, [2008] S.C.C.A. No. 504, the application judge made his order that the appellants must pay the respondents’ defence costs subject to the appellants’ right to apply to reapportion those costs at the end of a trial or settlement to “ensure that the [appellants’] policy is not responsible for costs that are attributable solely to issues that do not relate to [NorthWest’s] conduct.”
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(a) General principles
[25] An insurer’s obligations are found in the applicable policy. Courts should give effect to clear and unambiguous language in an insurance policy, having regard to the contract as a whole: Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, at para. 71. An insurer has a duty to defend 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, [2010] 2 SCR 245, at para. 19. Assessing the true nature of a particular claim is not an exercise to be undertaken in the abstract; rather, it should be approached with a view to the specific limitations imposed by the policy at issue: Papapetrou v. 1054422 Ontario Ltd., 2012 ONCA 506, 111 O.R. (3d) 532 at para. 47.
[26] The insurer has the duty to conduct the defence of such claims. However, absent express language to the contrary, the duty to defend extends only to claims that could potentially trigger indemnity under the policy. An insurer’s obligation to defend is limited to defending claims that, if proven true, would fall within coverage under the policy: Scalera, at paras. 49, 74-76. Requiring an insurer to defend claims which cannot fall within the policy puts that insurer in the conflicted position of having to defend claims which in its interest should succeed: Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801, at p. 812.
[27] In Scalera, at paras. 50-52, the Supreme Court set out the following three-step process for determining whether a given claim could trigger indemnity and a duty to defend (“the three-step Scalera process”):First, a court should determine which of the plaintiff’s legal allegations are properly pleaded. In doing so, courts are not bound by the legal labels chosen by the plaintiff. A plaintiff cannot change an intentional tort into a negligent one simply by choice of words, or vice versa. Therefore, when ascertaining the scope of the duty to defend, a court must look beyond the choice of labels, and examine the substance of the allegations contained in the pleadings. This does not involve deciding whether the claims have any merit; all a court must do is decide, based on the pleadings, the true nature of the claims.
At the second stage, having determined what claims are properly pleaded, the court should determine if any claims are entirely derivative in nature. The duty to defend will not be triggered simply because a claim can be cast in terms of both negligence and intentional tort. If the alleged negligence is based on the same harm as the intentional tort, it will not allow the insured to avoid the exclusion clause for intentionally caused injuries.
Finally, at the third stage the court must decide whether any of the properly pleaded, non-derivative claims could potentially trigger the insurer’s duty to defend. [Emphasis added.] ....
(ii) Application of the Hanis analytical framework
[35] The application judge made no error in turning to Hanis in his analysis. The analytical framework in Hanis applies here because this case as framed involves the question of covered and uncovered claims under one policy of insurance, the Aviva policy.
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[39] Hanis involved an insured’s claim against only one insurance policy in the context of covered and uncovered claims. The insured defendant sought a declaration at the end of the trial that the insurer was required to provide a defence to an action for damages for wrongful dismissal and malicious prosecution, among other claims. The insurance policy in issue covered the claim for malicious prosecution but not the claim for wrongful dismissal. This court affirmed that the insurer’s duties to defend and to pay defence costs associated with the claim for malicious prosecution was triggered. In determining the extent of the insurer’s duties, the court distinguished between claims clearly covered and clearly uncovered under a policy of insurance and acknowledged that the imposition of a duty to pay defence costs solely related to uncovered claims would be unjustified. In this context, the court considered the issue of an insurer’s obligation where defence costs would assist the defence of both covered and uncovered claims. The court concluded that the insurer was required to pay the entirety of defence costs associated with the covered claim for malicious prosecution, even if those defence costs also assisted the defence of the uncovered claim for wrongful dismissal, subject to reallocation for costs solely relating to the uncovered claim. The basis for the court’s conclusion was that the factual narrative underpinning both claims was the same and it was not possible to separate them. The trial judge’s determination that the insurer was 95% liable for the defence costs was upheld on appeal.
[40] The principled distinction drawn in Hanis[1] between claims that are clearly covered and not clearly covered under a policy of insurance was applied in Atlific Hotels and Resorts Ltd. v. Aviva Insurance Co. of Canada (2009), 2009 CanLII 24634 (ON SC), 97 O.R. (3d) 233 (SC). Atlific involved an insurer’s duty to defend claims in an action arising out of a slip and fall on ice at a resort hotel. The court in Atlific determined that the true essence of the action was not captured by any one particular claim or category of claims and that while the snow and ice claims appeared at first glance to be predominant, the claims alleging negligence in the hotel operations and management were “formidable” and could “stand on their own”. As a result, the insurer was obliged to provide the applicant with a defence to only the snow and ice removal claims that fell within coverage of its policy and the hotel owners/operators were required to provide their own defence to the other two categories of claims. . Davies v. AIG Insurance Company of Canada
In Davies v. AIG Insurance Company of Canada (Ont CA, 2024) the Ontario Court of Appeal allowed an appeal on D&O (directors and officers) insurance, here where the issue was the 'duty to defend' in the face of material application misrepresentations, both objective and subjective:The Misrepresentation was Material
[33] The applications judge’s materiality determination was fatally flawed because he failed to consider the Misrepresentation when making that determination. Instead, he focused on the Email and Ms. McQueen’s response to it. Because the applications judge’s approach to materiality reflects legal error, this court must determine whether the Misrepresentation was material.
[34] In my view, there can be no doubt that the Misrepresentation was material.
[35] The legal framework surrounding materiality was well summarized in the following statements drawn from Sagl v. Chubb Insurance Company of Canada, 2009 ONCA 388, 209 O.A.C. 234, at paras. 51-52:1. the parties to the contract of insurance are held to a standard of utmost good faith;
2. this duty places a heavy burden on applicants for insurance coverage to provide full disclosure to the insurance company of all information relevant to the nature and extent of the risk the insurer is being asked to assume;
3. a fact is material if it would influence a prudent insurer in deciding whether to issue the policy or in determining the amount of the premium;
4. there is also a subjective element to be considered when determining whether a misrepresentation or non-disclosure is material;
5. the duty to disclose all material facts applies even in the absence of questions from the insurer, although the absence of questions may be evidence that the insurer does not consider a fact to be material; and
6. the consequence of non-disclosure or misrepresentation of a material fact by the insured is that the insurer is entitled to void the insurance contract ab initio. [36] The applications judge’s reasons can be understood as finding that the objective component of the materiality test was met. He referred to the expert evidence that “determining the source and amount of financing is the cornerstone underwriting issue for a privately owned real estate development company” and concluded that “the subject of the real estate development financing is material to the decision to extend coverage”.
[37] It may be that the applications judge was considering the subjective component when he said Ms. McQueen needed to do something more than she had after receiving the Email. However, because the applications judge failed to set out the legal test for materiality, the basis on which he was assessing her response to the Email is unclear.
[38] In any event, the applications judge had to determine the entirety of AIG’s subjective response, not simply its response to the Email. On that matter, Ms. McQueen’s evidence was clear and unchallenged: (1) she needed information on the amount and sources of funding because the Davies Companies had not provided that information and that information was necessary to ensure there was sufficient funding for the Davies Companies to complete their development projects; (2) without that information, she was not able to provide quotes for the Policies; and (3) she would not have placed the risk as she did had she known the true state of financing for the Davies Companies. The 2015 process leading up to the issuance of the Policies supports her testimony. Before responding to the coverage request and quoting the risk, Ms. McQueen specifically sought the financing information, a context that confirms the materiality of the requested information to AIG.
[39] The Davies Companies failed to disclose to AIG, at any point in the process culminating in the issuance of the Policies, that they were financed by way of syndicated mortgages. There is no question that was a material Misrepresentation, viewed both objectively and subjectively.
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