Source: http://mccagueborlack.com/emails/articles/mechanics-duty-defend.html
Timestamp: 2019-04-20 22:08:05+00:00

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An insurer's duty to indemnify its insured will only be triggered after the merits of the law suit have been determined by a court or after a settlement agreement has been reached.
The Supreme Court of Canada has dealt with the question of when the duty to defend will arise, in a series of decisions. In 1990, the Court ruled in Nichols v. American Home Assurance Co., that an insurer's duty to defend arises only if, assuming that the facts as alleged in the pleadings were proven true, an insurer would have an obligation to indemnify its insured.4 This decision cites a judgment from the British Columbia Superior Court that held, “the pleadings govern the duty to defend”.5 Nichols stands for the proposition that in order for the duty to defend to arise, it is not necessary to prove that the duty to indemnify will certainly arise. Rather the “mere possibility that a claim within the policy may succeed” is enough to trigger the duty to defend.6 This decision clarified one of the distinctions between the two duties, by stating that “in a sense…the duty to defend is broader than the duty to indemnify.” 7 Essentially then it can be said that an insurer cannot owe a duty to indemnify if they do not owe a duty to defend, but an insurer can owe a duty to defend but ultimately be found not to owe a duty to indemnify.
After a court has analyzed the pleadings and after it has made a determination as to what the true nature of the allegations being pled are, the next step that a court will take in order to assess the scope and nature of the duty to defend is to scrutinize the actual contract of insurance to explore whether the policy is triggered by the allegations or not. It is at this step of the process where the value of precise and unambiguous language in a CGL policy truly becomes apparent. The manner in which the CGL policy is drafted can have important implications in terms of whether an insurer will have to defend their insured or not.
In Ontario Society for the Prevention of Cruelty to Animals v. Sovereign General Insurance Co. the Ontario Court of Appeal dealt with an insurer's duty to defend under a CGL policy of insurance. In that case, three separate actions for malicious prosecution were brought against the Ontario Society for the Prevention of Cruelty to Animals (the “OSPCA”) who had charged three individuals with animal cruelty offences. After those charges were ultimately withdrawn, the three individuals launched a civil suit against the OSPCA. The OSPCA reported the claims to its insurer and requested that it provide a defence. The insurer refused to defend the actions as they relied on, among other things, an exclusion clause in the policy that stated no coverage would be granted when there are allegations of willfully violating a penal statute. The insurer's position was based on an allegation in the pleadings that the OSPCA violated an order of the Animal Care Review Board, which is an offence under the OSPCA Act. The insurer further argued that the OSPCA Act was a penal statue and therefore the exclusion clause is triggered.
At the court of first instance the insurer was ordered to defend the actions.21 The Court of Appeal upheld that decision and dismissed the insurer's appeal. The Court found that the interpretation of insurance contracts involves a unique blend of the general principles of interpretation applicable to all contracts and the unique principles applicable in the insurance setting.22 While courts have found that the “language of the policy” is the most important factor in determining whether coverage is granted or excluded, courts have found that where there is genuine ambiguity or doubt, the duty to defend ought to be resolved in favour of the insured.23 Similarly other insurance law principles should be considered, such as the principle that coverage provisions should be construed broadly and exclusion clauses should be construed narrowly.24 It was this last principle that the Court looked to in making a decision in this case.
The Court determined that, notwithstanding the prohibitions that the OSPCA Act creates, the object of the legislation taken as a whole is not to punish behaviour that is morally blameworthy, but rather to prevent cruelty to animals. The Court therefore found that the statute was not penal in nature but rather was remedial and therefore the exclusionary clause in the insurance policy was not triggered.25 One of the key lessons about careful policy drafting is the importance of considering the implications of the language being used in the policy, in light of who the insured is and what risks they may face in the course of carrying out their functions. If the OSPCA's insurer had drafted the policy in a broader manner, to include the willful violation of, for instance “any and all statutes”, the insurer, ceteris paribus would have been able to rely on the exclusionary clause and would have avoided the steep costs associated with assuming the OSPCA's defence.
Although courts have established that where there is genuine ambiguity or doubt, the duty to defend ought to be resolved in favor of the insured, the Ontario Court of Appeal has said that this principle of interpretation “has no application where the wording of the policy is plain on its face and capable of only one meaning. Trite though it may be, an insurer has the right to limit coverage in a policy issued by it and when it does so, the plain language of the limitation must be respected”.26 Insurers should ensure that exclusionary clauses are drafted clearly, unambiguously and as broadly as possible in order for a court to uphold the clause and decide the issue in the insurer's favour, as occurred in the case detailed below.
The policy at issue in this case, was crafted in such a way that in order to engage the insurer's duty to defend, it required the communication, during the policy period, by a third party, of an intention to hold the Jesuits responsible for damages.36 In this case, it was accepted by the parties, that if the claims were made within the temporal limits of the Policy, the duty to defend would have been engaged as the claims allege injuries that would fall within the policy.37 In fact the Court found one of the claims was made within the policy period and therefore did trigger the insurer's duty to defend.38 The rest of the claims however were found not to have been communicated during the policy period and, as a result, the insurer did not have a duty to defend the actions.39 The determination of whether a policy will be “claims-made” or “occurrence based” will depend on many factors. However, it clear that prior to drafting a particular CGL policy, an insurer should be fully cognizant of who the intended insured party is and what sort of potential claims they might face, before determining which type of policy should be drafted.
The Court first looked to the pleadings to assess what the nature of the allegations was. The claim had several allegations, including that the parents “failed to investigate”, “failed to take steps to remedy”, and “failed to take disciplinary action” with regards to their daughter. The court found that the language of the plaintiff's claim made it obvious that the claim was a negligence claim.42 The Court then compared the language in the claim to the language in exclusionary clause 7(b) cited above. MacPherson JA, writing for the unanimous court, stated, “I see no ambiguity in the wording of this clause. The first word of the clause is ‘failure' which…is also the centrepiece of the Amended Statement of Claim”.43 The court concluded that “exclusion clause 7(b) is clear on its face and it applies to the lawsuit”.44 The insurer therefore did not owe a duty to defend in this circumstance.
The Ontario Superior Court released a decision that shows the importance of clearly drafted exclusionary clauses and how the courts will dissect each word of the contract to determine whether the duty to defend is triggered or not. Borthwick v. Lombard Insurance was an application for a determination on whether a duty to defend was owed to an insured.45 Mr. Douglas and Mr. Borthwick went to Fox Hollow Farm to cut down trees. While doing so, one of the trees fell on Mr. Douglas, who became paraplegic. Mr. Douglas and his family sued the farm and Mr. Borthwick for damages. Two insurance policies were potentially in force in relation to Mr. Borthwick; a homeowner's policy issued by Northbridge and a business insurance policy issued by Economical.
The Northbridge policy included liability coverage and stipulated a promise to pay compensatory damages awarded against Mr. Borthwick if he unintentionally caused bodily injury to another. However, the policy excluded claims arising from any “full time, part-time or occasional pursuit undertaken for financial gain”.46 Northbridge submitted that the action involved claims for damages for bodily injury arising from an activity (tree cutting) that was undertaken with a view to making a profit. This, it argued, constituted a "business" within the meaning of the Northbridge policy and triggered the exclusion.47 Mr. Borthwick argued it was a one-time event which did not fit within the definition of business. Justice Grace found that the Northbridge policy was unique in comparison to policies analyzed in other cases, as it defined the term “business” in the clause to include the term “occasional pursuit”.48 The judge found that the pleadings indicate that Mr. Borthwick was harvesting trees with a view to making a profit.49 Even if this was only a ‘one-time' event, the exclusion clause was very clear that even an occasional pursuit would be excluded from coverage and therefore “effect should be given to unambiguous language appearing in the Northbridge policy”.50 Northbridge was therefore found not to owe a duty to defend the claim on behalf of its insured.
When a court is tasked to determine whether an insurer owes its insured a duty to defend them against a claim brought by a third party, the court will first look to the pleadings to assist them in making a determination of what the true nature of the allegations are. Once the nature of the claim being made against the insured has been identified, courts will then turn their attention to the insurance policy wording to assess whether the allegations against the insured are covered by the policy or not. Insurers should be very careful as to how they word the policies they underwrite since as demonstrated by the cases we have discussed, all it takes is the presence or omission of just one word from the policy, to result in the insurer having to incur the costs of defending the claim. Prior to drafting a policy or even determining what the nature of the policy will be (claims based or occurrence based), insurers should be cognizant of who the potential insured party is and what the anticipated risks are, that they are seeking to insure against. Exclusionary clauses should be drafted broadly, but at the same time insurers should be wary of making the clauses ambiguous, since ambiguity is resolved in favor of the insured. Although there is no way to predict precisely how a court will view each fact situation, hopefully some of the above considerations will be of assistance.
1 Barbara Billingsley, General Principles of Canadian Insurance Law, 1st ed, Student ed, Lexis Nexis, at 233.
4 Nichols v. American Home Assurance Co  1 SCR 801at para 16-17.
5 Ibid at 16 citing Bacon v. McBride (1984), 6 DLR (4th) 96.
8 Supra note 1 at 236.
9 Non-Marine Underwriters, Lloyd's of London v. Scalera  1 SCR 551.
17 Monenco Ltd. v. Commonwealth Insurance Co.  2 SCR 699 a par 34.
20 Virani v. Intact Insurance Co. 2015 ONCA 400 at para 6.
21 Ontario Society for the Prevention of Cruelty to Animals v. Sovereign General Insurance Co. 2014 ONSC 3345 at para 113.
22 Ontario Society for the Prevention of Cruelty to Animals v. Sovereign General Insurance Co. 2015 ONCA 702 at para 39.
24 Ibid citing Reid Crowther & Partners Ltd. v Simcoe & Erie General Insurance Co, 1993 1 SCR 252.
25 Supra note 21 at 78-86.
26 Kohanski v. St. Paul Guarantee Insurance Co  OJ No. 157 (ONCA) at para 41 citing Stuart v. Hutchins  OJ No. 3672 at paras 29-30.
33 Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada  1 SCR 744.
40 D.E v. Unifund Assurance Co. 2015 ONCA 423.
45Borthwick v. Lombard Insurance 2015 ONSC 4845.

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