Recently, the Ontario Court of Appeal considered an insurer’s duty to defend in the context of a specific project wrap up liability policy. The decision did not include any ground-breaking principles, but it clarified a few points that may be critical to insurers and insureds alike.
The application stems from a dispute initiated by a contractor (Distillery SE Development Corp., Cityscape Development Corp., and Dream Asset Management Corp. – collectively referred to as the Distillery Parties) and a series of subcontractors (GFL, Ashland Construction, and Rite-Air Mechanical). The Distillery Parties undertook to build a residential tower in the Distillery District in Toronto called the Clear Spirit Condominium Project and hired the subcontractors to complete various portions of the work.
Prior to the commencement of constructions, the Distillery Parties obtained specific project wrap up liability insurance from Temple Insurance Company and Aviva Insurance Company of Canada, which included the subcontractors as named insureds. The wrap up policy included 24 months for completed operations hazard, which covered property damage resulting from an occurrence after the insured’s work was complete.
The construction was completed in 2013 and subsequently purchased by Toronto Standard Condominium Corporation 2299 (TSCC 2299). Upon purchase, TSCC 2299 hired engineers who conducted an inspection of the premises and identified deficiencies in the work product.
In 2017, TSCC 2299 sued the Distillery Parties for damages in the sum of just shy of $10 million, who in turn sued the subcontractors for contribution and indemnity. The Distillery Parties and subcontractors applied to their respective insurers for a defence to the main action and the action commenced by the Distillery Parties for contribution and indemnity. The insurers denied the claims leading the Defendants to bring two applications to the courts to declare that the Insurers had a duty to defend them in the main action. The first application was brought by the Distillery Parties and Rite-Air and the second application was brought by GFL and Ashland Constructions. The applications were heard together at first instance and on appeal.
The Decisions and Subsequent Appeal
The first argument raised by the insurers was that they did not have a duty to defend when the claim fell below the policy deductible. The applications judge found that a determination regarding a duty to defend did not stem from the amounts that were in dispute; rather, the duty to defend analysis requires an insurer/the court to consider the scope of coverage offered by the insuring contract and contrast it with the allegations contained in the pleadings. Insurers must determine whether the allegations, if true, would fall within the scope of coverage, and if it does, whether there is an exclusion that takes the particular fact-set out of coverage. At first instance, the court noted that there is no caselaw requiring that the amount of indemnity must fall beyond the deductible in the policy for the policy to trigger a duty to defend.
On appeal, the Ontario Court of Appeal noted that the claim for damages in the main action was for nearly $10 million with the deductible on the policy being $10,000.00. The court acknowledged the application judge’s reasoning and confirmed that the court was not required to undertake a forensic analysis of the damages and determine whether the claim would be beyond the $10,000.00 deductible or not. This assessment is best explored at trial. As far a duty to defend was concerned, it “is engaged by the mere possibility that there may be coverage for property damage”.
The second argument raised by the insurers was that a supplemental expert report, which was referenced in TSCC 2299’s pleadings, clearly suggested that the claim fell outside of the scope of coverage. The Court of Appeal noted that although parties can include specific expert reports in their pleadings, during a coverage analysis, the court must refrain from prematurely assessing the evidence and making factual findings. The court must consider whether the pleadings established “the mere possibility” that the claim falls within liability coverage. The mere possibility test should not be abandoned in the face of specific factual allegations contained in the pleadings.
The Court did not provide us with any ground-breaking principles regarding a duty to defend; however, it confirmed and clarified a couple principles that insurers must consider when assessing coverage. First, the amount of damages sought in the pleadings is not a relevant consideration during an assessment of a duty to defend. If the amount disputed is below the deductible, this should not have an impact on whether the insurer owes an insured a duty to defend the claim. Second, insurers and courts should not make any factual findings when considering evidence cited in the pleadings. Although it may be considered, the test for a duty to defend remains the same: is there a possibility, a mere possibility, that the facts contained in the pleadings, if accepted as true, trigger a duty to defend?
See GFL Infrastructure Group Inc. v. Temple Insurance Company, 2022 ONCA 390
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