COURT OF APPEAL FOR ONTARIO
CITATION: AIG Insurance Company of Canada v. Lloyd’s Underwriters, 2022 ONCA 699
DATE: 20221014
DOCKET: C69819
Gillese, Huscroft and Sossin JJ.A.
BETWEEN
AIG Insurance Company of Canada
Applicant (Respondent)
and
Lloyd’s Underwriters
Respondent (Appellant)
Heather Gray and Julia Vizzaccaro, for the appellant
Sébastien A. Kamayah, for the respondent
Heard: September 13, 2022
On appeal from the judgment of Justice William Black of the Superior Court of Justice, dated August 4, 2021, with reasons reported at 2021 ONSC 5372.
Gillese J.A.:
I. INTRODUCTION
[1] The key question to be decided on this appeal is whether two insurers have a duty to defend a mutual policyholder in a progressive property damage claim. In answering that question, this court must consider the role of “premature” evidence in a duty to defend analysis, interpret an “Expected or Intended Injury” exclusion clause in a standard form insurance policy, and determine whether a crystalizing event had triggered the operation of that exclusion clause.
II. BACKGROUND
A. The Underlying Action
[2] In 2012, Karine Forget-Briand and Marcel Forget (the “Forgets”) purchased vacant land at 220 Wallingford Road in Timmins, Ontario (the “Property”). The Property is located at the outside of a broad meander of the Mattagami River that flows through the City of Timmins (the “City”).
[3] The City is responsible for issuing building permits for the construction of homes within City limits. The Mattagami Region Conservation Authority (the “MRCA”) regulates, manages, and protects land and water, including the Mattagami River watershed. The MRCA is responsible for issuing permits for development (including the construction of a home) within the Upper Mattagami River Watershed.
[4] In 2013, the Forgets obtained a building permit from the City to construct a new residence on the Property. The Forgets’ application to the City attached a site plan and an MRCA permit. The MRCA permit referred to an engineering report which the MRCA required the Forgets to obtain before construction (the “Engineering Report”).
[5] The Forgets built a home on the Property and moved into it in December 2013.
[6] 230 Wallingford Road adjoins the Property (the “Adjoining Property”). Starting in 2016, the slope on the Adjoining Property began to fail.
[7] Since September 2016, ongoing erosion has impacted the stability of the Property. Ultimately, in December 2019, the City issued an order requiring the Forgets to remove, relocate, or demolish their home.
[8] The Forgets brought a claim against the City for property damage occurring between April 2016 and December 2019 (the “Underlying Action”). They named, as co-defendants, the owners of the Adjoining Property, the MRCA, and the author of the Engineering Report.
[9] In the Underlying Action, the Forgets claim against the City for negligence, nuisance, and trespass to land. The focus is on the City’s alleged negligence said to have caused, or contributed to, the damage to the Property because of ongoing drainage issues, slope instability, and erosion.
[10] In its defence to the Underlying Action, the City denies it is liable in negligence, nuisance, or trespass, and addresses the specific actions and conduct attributed to it.
B. The City’s Insurers
[11] The appellant, Lloyd’s Underwriters (“Lloyd’s”), and the respondent, AIG Insurance Company of Canada (“AIG”), provided general liability insurance to the City during successive policy years in the period covered by the Underlying Action. AIG provided the City with coverage for 2016 and 2017. Lloyd’s provided the City with coverage for 2018 and 2019 under the Public Entity Casualty Insurance Package Policies, policy no. PSCP0014 (the “Lloyd’s Policy”).
[12] The City sought coverage for the Underlying Action from Lloyd’s and AIG, under their respective policies.
[13] AIG agreed to defend the City, under reservation of rights for indemnity because its policy with the City did not respond to any “occurrence” giving rise to “property damage” taking place after AIG’s time on risk.
[14] Lloyd’s denied coverage for the Underlying Action.
[15] Counsel for both Lloyd’s and AIG agree that the operative provisions of their respective insuring agreements are “functionally identical”. The agreements provide coverage for property damage caused by an “occurrence” if it occurs during the policy period. The relevant part of Section 1 – Coverage, paras. 1(a) and (b) of the Lloyd’s Policy reads as follows:
a. We will pay those sums that the “Insured” becomes legally obligated to pay as “damages” because of … “property damage” to which this insurance applies. We will have the right and duty to defend the “Insured” against any “action” seeking those “damages”. …
b. This insurance applies to … “property damage” only if:
(1) The … “property damage” is caused by an “occurrence” … and;
(2) … occurs during the policy period.
[16] The agreements exclude coverage for “Expected or Intended Injury” (the “Exclusion Clause”). The relevant part of the Exclusion Clause in the Lloyd’s Policy reads as follows:
2. Exclusions:
This insurance does not apply to:
a. Expected or Intended Injury
… “property damage” expected or intended from the standpoint of the “Insured”.
C. The Application
[17] AIG brought an application to determine whether Lloyd’s had a duty to defend in connection with the Underlying Action (the “Application”). In the Application, AIG also sought equitable contribution from Lloyd’s for the costs of defending the City in the Underlying Action. At the time of the Application, AIG had incurred approximately $60,000 in such costs.
[18] On the Application, Lloyd’s conceded that the Underlying Action alleges that City negligence led to “property damage” occurring during Lloyd’s time on risk. However, Lloyd’s took the position that damage to the Property was not caused by an “occurrence”, as required to engage coverage under the Lloyd’s Policy. If there was an occurrence, Lloyd’s maintained that the Exclusion Clause ousted its duty to defend.
[19] Lloyd’s denial that there was an occurrence was based on allegations in the statement of claim in the Underlying Action relating to a report, prepared at the City’s request in May 2017, by the geotechnical firm Amec Foster Wheeler Environment & Infrastructure (“AFW”) (the “AMEC Report”). The City hired AFW “to complete a preliminary assessment of the condition of the slope” of the Adjoining Property.
[20] The AMEC Report offered “potential remedial actions and recommendations” to mitigate further damage to the Adjoining Property. These “preliminary” actions and “possible remedial options” focused on drainage and upgrading of the slope stability. Although they focus on the Adjoining Property, reference is also made to the Property.
[21] Lloyd’s maintained that any property damage caused by the drainage and erosion problems had been manifested by May 2017 when the AMEC Report was delivered to the City. Thus, it argued, even though there was ongoing deterioration of the Property after the AMEC Report was delivered, because the report gave the City knowledge of how to remedy the cause of the damage, its failure to proceed with the recommended remediation meant that any ongoing damage to the Property was no longer “accidental”. In short, Lloyd’s maintained that the “occurrence” alleged in the Underlying Action was effectively terminated once the AMEC Report was issued, a point in time before the Lloyd’s Policy was on risk.
[22] In contending that the Exclusion Clause applied, Lloyd’s made similar arguments based on the AMEC Report. It argued that, after receipt of the AMEC Report, from the “standpoint of the insured” (i.e. the City), further property damage was expected. Therefore, Lloyd’s contended, even if there was an occurrence that engaged the Lloyd’s Policy, the Exclusion Clause ousted its duty to defend.
III. The Decision Below
[23] The application judge recounted the salient facts and the parties’ positions. He said he had “reservations about placing the AMEC Report into the fray in the way that Lloyd’s urges.” He explained that while the AMEC Report and some of its substantive content are referred to in certain paragraphs in the Forgets’ amended statement of claim, in those same paragraphs the Forgets “felt and expressed at the time of its issue that the AMEC Report contained factual inaccuracies and was missing information.”
[24] The application judge also referred to the caselaw that limits importing evidence to that which is “non-controversial” so as to avoid a “trial within a trial”. He said that the “AMEC Report may cross that line.”
[25] The application judge concluded that, in any event, the AMEC Report was “not sufficiently robust in its analysis and conclusions to bear the weight and force Lloyd’s purports to accord it.” He described the AMEC Report as “preliminary”, noting that it was entitled “Preliminary Drainage and Slope Condition Assessment, Wallingford Road, Timmins, Ontario” and pointing to various sections in the report that reiterate the preliminary nature of its investigation and assumptions. He also described the AMEC Report as “somewhat equivocal”.
[26] Due to its preliminary nature and qualifying language, the application judge found the AMEC Report could not fairly be construed as a “crystallizing event” after which ongoing damage to the Property could no longer be seen as accidental and had to be seen as “expected or intended”. To the contrary, he found that the evidence confirmed there were ongoing investigations and discussions of potential remediation and that the pending trial would determine what steps were the right ones, who had responsibility for them, and whether the investigation and remediation in which the City was involved met the required standard.
[27] The application judge concluded that damage to the Property continued and progressed during the currency of the Lloyd’s Policy and that the evidence “more than [met]” the “mere possibility” test, thereby triggering Lloyd’s duty to defend.
[28] Counsel for the parties had agreed that if the application judge found Lloyd’s had a duty to defend, costs were to be shared on a 50/50 basis. Based on that agreement, having found that Lloyd’s had a duty to defend the Underlying Action, the application judge ordered Lloyd’s to reimburse AIG for 50% of the costs AIG had already incurred in defending the City and to contribute equally to ongoing costs.
IV. THE ISSUE
[29] A single issue must be decided on this appeal: did the application judge err in concluding that Lloyd’s has a duty to defend the Underlying Action?
V. The Parties’ Positions
[30] Lloyd’s makes two overarching submissions in contending that the application judge erred in so concluding.
[31] First, Lloyd’s submits that the application judge erred in his treatment of the AMEC Report by:
i. failing to apply the traditional “pleadings rule” in the duty to defend analysis, which requires that allegations in the statement of claim be accepted as true; and
ii. misapplying the law on the admissibility of extrinsic evidence referred to in the statement of claim by importing an additional requirement that such evidence must not be “controversial” in order to be considered as part of the duty to defend analysis.
[32] Second, Lloyd’s submits that the application judge erred in finding that the Exclusion Clause did not apply. Its arguments in support of this submission can be summarized as follows. Based on the allegations in the amended statement of claim and the extrinsic evidence to which it refers (i.e. the AMEC Report), the City was alerted to the problem, its causes, and the likelihood of recurrence before the Lloyd’s Policy was on risk. Therefore, based on the plain meaning of “expected”, from the City’s standpoint, any “property damage” that occurred after the Lloyd’s Policy was operative was “expected”. Accordingly, the Exclusion Clause applied and ousted its duty to defend.
[33] AIG says the application judge made no error in concluding that the Exclusion Clause was inapplicable to the pleaded facts and, thus, the appeal must be dismissed.
VI. THE STANDARD OF REVIEW
[34] Lloyd’s submits that the applicable standard of review is correctness because this court is reviewing the application judge’s interpretation of a clause in a standard form insurance policy. In making this submission, Lloyd’s relies on Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, at paras. 4, 46.
[35] AIG agrees that the correctness standard of review applies to the interpretation of the Exclusion Clause but submits that “in the absence of overriding or palpable error, the [application judge’s] interpretation of the pleaded facts is entitled to deference”.
[36] I accept that this court is to apply a correctness standard when reviewing the interpretation of a clause in a standard form contract and that the Exclusion Clause is part of a standard form insurance policy. However, I do not accept that correctness is the appropriate standard of review of the decision below because, unlike Ledcor, where the sole issue was the interpretation of an exclusion clause, the issue in this appeal is whether the application judge erred in concluding that Lloyd’s has a duty to defend the Underlying Action.
[37] Whether Lloyd’s owes a duty to defend cannot be conflated with – or simply labelled as – the application judge’s interpretation of the Exclusion Clause, thereby rendering his decision subject to review on a correctness standard. While the application judge had to interpret and apply the terms of the Lloyd’s Policy in assessing whether the Underlying Action triggered Lloyd’s duty to defend, Lloyd’s does not quarrel with that assessment. Its complaints revolve around the application judge’s treatment of the AMEC Report.
[38] In Ledcor, the Supreme Court recognized an exception to the Sattva standard of review of contractual interpretation. At para. 46, it explained that where the interpretation of a standard form contract is of precedential value and “there is no meaningful factual matrix specific to the particular parties to assist the interpretation process, this interpretation is better characterized as a question of law subject to the correctness standard”. That rationale for the correctness standard of review does not apply in this case because the alleged errors relate to the application judge’s treatment of the AMEC Report and the AMEC Report is part of the factual matrix specific to the parties in this proceeding. Therefore, in my view, the deferential standard of review called for by Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 50-54, applies.
VII. ANALYSIS
[39] Before turning to the issues Lloyd’s raises on this appeal, I will summarize my view of the decision below.
[40] A liability insurer’s duty to defend arises when an insured shows a “mere possibility” that the true nature or substance of a pleaded claim, if proven at trial, falls within coverage and would trigger the insurer’s duty to indemnify: Progressive Homes Ltd. v. Lombard Insurance Company of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at paras. 19-20.
[41] The application judge accepted, as true, the factual allegations in the amended statement of claim that City negligence led to damage to the Property occurring during Lloyd’s time on risk. He did not treat the contents of the AMEC Report as true. Nor did he accept the AMEC Report as evidence showing that the City expected or intended the damage to the Property that occurred while Lloyd’s was on risk. Accordingly, the application judge concluded that the Exclusion Clause did not apply to oust Lloyd’s duty to defend.
[42] Having found that the claim “more than [met]” the mere possibility that it falls within the Lloyd’s Policy, the application judge concluded that the Underlying Action triggered Lloyd’s duty to defend.
[43] Far from being an error, in my view, the application judge’s determination was inescapable.
A. No error in the application judge’s treatment of the AMEC Report
The Governing Legal Principles
[44] In Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, the Supreme Court sets out the legal principles for assessing whether an insurer’s duty to defend has been triggered. The starting premise rests on the traditional “pleadings rule” (para. 28). If the pleadings filed against the insured allege facts which, if true, would require the insurer to indemnify the insured for the claim, then the insurer is obliged to provide a defence (para. 28).
[45] Determining whether a duty to defend exists in any given situation requires an assessment of the pleadings to ascertain their substance and true nature (para. 35). The court may go beyond the pleadings and consider “extrinsic evidence that has been explicitly referred to within the pleadings … to determine the substance and true nature of the allegations, and thus, to appreciate the nature and scope of an insurer’s duty to defend” (para. 36). However, this approach cannot cause the duty to defend application to become “a trial within a trial”. The court considering the application may not look to “premature” evidence, which the Supreme Court defines as “evidence which, if considered, would require findings to be made before trial that would affect the underlying litigation” (para. 37).
[46] As this court stated in Reeb v. The Guarantee Company of North America, 2019 ONCA 862, 97 C.C.L.I. (5th) 175, at para. 6, excluding premature evidence from the application judge’s duty to defend analysis avoids turning the hearing into a “trial within a trial” on contested facts or issues best reserved to the trial judge.
[47] As I explain below, the differences between, and permissible uses of, extrinsic evidence and premature evidence, as those terms are defined in Monenco, are critical in the resolution of this appeal.
Analysis
[48] Contrary to Lloyd’s submission, the application judge did apply the traditional pleadings rule in his duty to defend analysis.
[49] The application judge determined that the true nature and substance of the Forgets’ pleaded claim against the City was negligence. As required by the pleadings rule, his determination was based on the assumption that the factual allegations in the amended statement of claim are true. His reasons can be read as identifying that in the Underlying Action, the Forgets assert facts against the City which, if true, would require Lloyd’s to indemnify it for damages due to property damage caused by an occurrence during the period in which Lloyd’s provided coverage.
[50] I do not understand Lloyd’s to quarrel with the foregoing. Its quarrel is with the application judge’s treatment of the AMEC Report. It submits that, because the AMEC Report is referred to in the amended statement of claim, the traditional pleadings rule required the application judge to accept as true its contents and that he erred in failing to do so.
[51] I do not accept this submission. While the AMEC Report is referred to in the pleadings, that does not make it part of the pleadings. On a plain reading of Monenco, the AMEC Report is extrinsic evidence.
[52] Monenco defines extrinsic evidence as including “evidence explicitly referred to in the pleadings” (at para. 36). The AMEC Report is precisely that – extrinsic evidence explicitly referred to in the amended statement of claim. As extrinsic evidence, the application judge was entitled to consider the AMEC Report for the purpose of determining the substance and true nature of the allegations (at para. 36). However, because the AMEC Report was not part of the pleadings, it was not subject to the traditional pleadings rule. On a fair reading of the application judge’s reasons, his consideration of the AMEC Report comported with the permissible use of extrinsic evidence according to Monenco – it assisted in his determination of the substance and true nature of the pleadings when assessing whether Lloyd’s has a duty to defend.
[53] The application judge gave a number of reasons for not treating the AMEC Report as Lloyd’s had urged. I acknowledge that he did not use the Monenco language or lens of “premature” evidence. However, he was alive to its dictates and cited to it at para. 22 of his reasons. There, the application judge explains there is a prohibition against reliance on contested evidence since to import it “would risk the application judge having to conduct a ‘trial within a trial’ and lead to premature findings on such contested facts best left to the judge hearing the underlying trial.” In the result, the application judge did not accept that the AMEC Report was evidence of a crystallizing event such that the Exclusion Clause applied.
[54] At para. 37 of Monenco, the Supreme Court says that the court considering a duty to defend application “may not look to ‘premature’ evidence” (emphasis added). It defines “premature” evidence as evidence that would require findings to be made before trial that would affect the underlying litigation. The AMEC Report was precisely that type of “premature” evidence. Thus, rather than misapplying the law on the admissibility of extrinsic evidence, as Lloyd’s contends, the application judge’s treatment of the AMEC Report comports with the Monenco dictates.
[55] It is true that the application judge referred to the AMEC Report as “controversial” but he was not importing an additional requirement for its consideration. To the contrary, the application judge was simply acknowledging that the AMEC Report could not be used in the way that Lloyd’s urged because it would require findings to be made before trial that would affect the underlying litigation.
B. No error in the application judge’s conclusion that the Exclusion Clause did not apply
[56] Lloyd’s contends that the allegations in the amended statement of claim together with the extrinsic evidence in the form of the AMEC Report alerted the City to the problem that led to damage to the Property, its cause, and the likelihood of recurrence. It says that because the City received the AMEC Report before the Lloyd’s Policy was on risk, any “property damage” that occurred thereafter was “expected” from the City’s standpoint and, accordingly, the Exclusion Clause applied to oust Lloyd’s duty to defend.
[57] Neither the amended statement of claim nor the AMEC Report assists Lloyd’s in its contention that the Exclusion Clause applies and ousts its duty to defend.
[58] The amended statement of claim does not allege intentional conduct on the part of the City that would suggest the property damage was expected or intended during the time that Lloyd’s was on risk. As the application judge found, the true nature and substance of the Forgets’ pleaded claim against the City was negligence. Absent reference to a policyholder’s intentional conduct causing expected or intended property damage, negligence allegations suggest the damage was fortuitous and an accident: Progressive Homes, at para. 50.
[59] And, as I explain above, the fact that the pleadings refer to the AMEC Report does not make the report part of the pleadings for the purpose of the pleadings rule. The AMEC Report is “premature” evidence – that is, evidence which, if considered, would require findings to be made before trial that would affect the underlying litigation (Monenco, at para. 37). As such, the application judge did not err in concluding that the City’s receipt of the AMEC Report was not the “crystallizing event” Lloyd’s claimed it was. Nor did he err in not considering the AMEC Report when determining whether the Exclusion Clause applied.
[60] As Lloyd’s could not show that the Exclusion Clause applied, the application judge made no error in ruling that Lloyd’s has a duty to defend.
VIII. Disposition
[61] For these reasons, I would dismiss the appeal with costs to AIG fixed at the agreed-on amount of $10,000, all-inclusive.
[62] AIG asks that, if the court dismisses the appeal, it ratify the order below requiring the parties to share equally the costs of defending the City in the Underlying Action. For the sake of clarity, I would simply note that the effect of dismissing the appeal is to leave the order below undisturbed, including that provision.
Released: October 14, 2022 “E.E.G.”
“E.E. Gillese J.A.”
“I agree. Grant Huscroft J.A.”
“I agree. Sossin J.A.”