At our weekly Friday meeting, Taya Rosenberg discussed the Ontario Court of Appeal’s decision in AIG Insurance Company of Canada v. Lloyd’s Underwriters, 2022 ONCA 699.
This case was on appeal from AIG Insurance Company of Canada v. Lloyd’s Underwriters, 2021 ONSC 5372. AIG brought an application seeking equitable contribution from Lloyd’s towards the cost of defending the City of Timmins in an action brought by two homeowners for damage caused to their property between April 2016 and December 2019.
In the underlying action, the homeowners sought damages for property damage arising from erosion of their land. The erosion had progressed over several years, and in 2019, the City issued Orders prohibiting occupancy of their home and requiring them to relocate or demolish it.
The homeowners sued the City in negligence, nuisance and trespass to land. The focus on the claim against the City was on the City’s alleged negligence, which is said to have resulting drainage issues, slope instability, and erosion.
The City had two insurers over the time period at issue. Lloyd’s and AIG had both issued Public Entity General Liability Insurance policies to the City in successive years, with AIG on risk for 2016 and 2017, and Lloyd’s on risk for 2018 and 2019. Counsel for both Lloyd’s and AIG agreed that the operative provisions of their respective insuring agreements are “functionally identical.”
The agreements provided coverage for property damage caused by an “occurrence” during the policy period. Additionally, both policies contained an “Expected or Intended Injury” exclusion which stated that they would not apply to property damage expected or intended from the standpoint of the insured.
When the City requested a defence to the underlying action pursuant to the policies, only AIG responded. Lloyd’s refused to defend, and maintained that the ongoing damage was not accidental after May 2017. Lloyd’s relied on the “Expected or Intended” exclusion to deny coverage.
As a result of this refusal to defend, AIG brought an application to determine whether Lloyd’s had a duty to defend in connection with the underlying action. During the application, it was agreed that pursuant to Progressive Homes Ltd. v. Lombard General Insurance Company of Canada, 2013 SCC 33, a duty to defend would exist if the insured was able to show a “mere possibility” that the true nature or substance of the claim, if proven, would trigger a duty to indemnify.
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.
Lloyd’s conceded that the Underlying Action alleged that City negligence led to “property damage” occurring during Lloyd’s time on risk. However, Lloyd’s position was that the 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 “Expected or Intended” exclusion ousted its duty to defend.
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 Amec Foster Wheeler Environment & Infrastructure (the “AMEC Report”). The City hired AMEC “to complete a preliminary assessment of the condition of the slope” of the Adjoining Property.
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 focused on the Adjoining Property, reference was also made to the Property in question.
Lloyd’s maintained that any property damage caused by the drainage and erosion problems had manifested or crystallized by May 2017 when the AMEC Report was delivered to the City. They argued that 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.”
Lloyd’s accordingly submitted 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. Lloyd’s also argued that, after receipt of the AMEC Report, from the “standpoint of the insured” (i.e. the City), further property damage was expected. Therefore, even if there was an occurrence that engaged the Lloyd’s Policy, the “Expected or Intended” exclusion eliminated the possibility of coverage, and therefore its duty to defend.
The Decision Below
The application judge found that the AMEC Report was preliminary in nature and could not be construed as a crystalizing event after which ongoing property damage would not be accidental, or had to be seen as “expected or intended.” 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.
The application judge also had reservations about placing so much weight on the AMEC Report, as urged by Lloyd’s, because the caselaw limits consideration of evidence on a “duty to defend” application to that which is “non-controversial,” so as to avoid a “trial within a trial.” The application judge felt that the “AMEC Report may cross that line.”
Regardless, in considering the AMEC Report, the Court observed that the report was clear in emphasising its preliminary nature, including being titled “Preliminary Drainage and Slope Condition Assessment,” and noted that the report’s authors made substantial efforts throughout to reinforce the preliminary nature of its content. As such the Court attributed little weight to the AMEC Report’s “conclusions.”
The key question on appeal was whether Lloyd’s had a duty to defend this progressive property damage claim. In answering that question, the Court of Appeal considered the role of “premature” evidence in a duty to defend analysis, interpreted an “Expected or Intended Injury” exclusion clause in a standard form insurance policy, and determined whether a crystalizing event had triggered the operation of that exclusion clause.
On this appeal, Lloyd’s argued that the application judge erred in his treatment of the AMEC Report by:
- 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
- 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.
Lloyd’s also submitted that the application judge erred in finding that the Exclusion Clause did not apply.
Treatment of the AMEC report
The Court of Appeal held that the application judge did not err in excluding the AMEC report, and agreed that it was premature evidence and, therefore, not permissible extrinsic evidence for consideration on a “duty to defend” application. The Court noted that the application judge’s treatment of the AMEC report correctly followed the Supreme Court’s decision in Monenco v. Commonwealth Insurance Co., 2001 SCC 49, which 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”. 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.
- Monenco provides that determining whether a duty to defend exists in any given situation requires an assessment of the pleadings to ascertain their substance and true nature.
- Monenco also states that 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”. However, this approach cannot cause the duty to defend application to become “a trial within a trial.” That is to say, the court may not look to “premature” evidence, that if considered, would require findings to be made before trial that would affect the underlying litigation.
The Court of Appeal found that, contrary to Lloyd’s submissions, the application judge did apply the traditional pleadings rule in his duty to defend analysis. Lloyd’s had argued that because the AMEC Report was referred to in the pleadings, the application judge was required to accept its contents as true for the purposes of the application.
The Court held that although the AMEC Report is referred to in the pleadings, that does not make it part of the pleadings that must be taken as true for the purposes of the application. Rather, the AMEC Report was clearly extrinsic evidence as defined by the Supreme Court in Monenco, being “evidence explicitly referred to in the pleadings.”
The Court of Appeal noted that on a duty to defend application, the court “may not look to ‘premature’ evidence,” or 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. Accordingly, the application judge’s treatment of the AMEC Report was appropriate.
The “Expected or Intended Injury” Exclusion
Lloyd’s argued that the allegations in the pleadings, combined with the AMEC Report, indicate that the City was aware of the problem giving rise to the plaintiffs’ alleged damages prior to Lloyd’s being on risk. Accordingly, any property damage that occurred thereafter would have been expected from the City’s point of view, and so the “Expected or Intended Injury” exclusion applied to eliminate any possibility of indemnity and therefore Lloyd’s duty to defend.
The Court of Appeal noted that the pleadings alleged negligent conduct on the part of the City, not intentional conduct. Allegations of negligence suggest that the damages was fortuitous and accidental, rather than expected or intentional.
Moreover, the Court held that the application judge’s refusal to consider the AMEC Report in determining whether the exclusion applied was appropriate, given that it was extrinsic and “premature” evidence.
As a result, the Court of Appeal upheld the lower court’s decision, and dismissed the appeal.