The excerpted article was written By Laura Day, Kevin McGivney
In Sky Clean Energy Ltd. v. Economical Mutual Insurance Company, 2020 ONCA 558, the Ontario Court of Appeal (the Court) discussed the availability of insurance coverage to an additional insured. The appeal concerned the interpretation of a common insurance term that requires liability to “arise out of the operations” of a named insured. The Court considered the requisite connection between the contractor’s operations and the additional insured’s liability. The Court upheld the traditional limits to the term “arising out of the operations,” requiring more than a “but for” analysis in order to establish the connection between the liability of the additional insured and the operations of the named insured. In the context of this case, it was not enough that the contractor had installed the equipment at issue.
The project owner (the Owner) was a developer of solar energy projects and the contractor was an electrical contracting company. The Owner entered into contracts with the contractor to install a solar power system that the Owner designed, using equipment selected and sourced by the Owner. The Owner contracted with equipment suppliers to provide the main components of the system, including the inverter and transformer. It was the contractor’s responsibility to install the components.
Before beginning to install the first transformer, the contractor discovered that the transformer delivered by the Owner’s supplier did not conform to the Owner’s design specifications. Due to time restrictions, the Owner asked the contractor to help source new transformers. The contractor’s supplier located a transformer manufactured by a third party. It was the Owner’s decision to accept the third party transformer, and the contractor was not asked to provide an opinion on the suitability of the transformer. Upon completing the first project, representatives of both the Owner and contractor observed an anomaly in the power flow and recommended shutting down and investigating the system. The Owner’s representative decided to leave the system energized for “observation” and the Owner formally took control of the facility.
Three days later, the transformer overheated and caught fire.
After investigating the fire, the Owner determined that the third party transformer was suitable for the projects, as long as a technical adjustment was made to one of the connections. The Owner approved the change and authorized the contractor to proceed with the installation at the second site (and replace the transformer at the first site). Soon after, a fire broke out at the second project site and the transformer destroyed. As a result, both systems were shut down temporarily and replacement transformers installed. The Owner paid for the remediation and lost revenue of just under $600,000.
The Owner commenced various proceedings against the insurer (under which it was an additional insured), the contractor and the manufacturer of the transformer.
Under the contract between the Owner and the contractor, the contractor agreed to indemnify the Owner against the contractor’s failure to perform its contractual obligations and for its negligent acts. The contractor also agreed to name the Owner as an insured under its Commercial General Liability insurance policy with its insurer, but only with respect to liability arising out of its operations.
The interpretation of “arising out of”
In interpreting the policy language “arising out of,” the Court reiterated that courts consistently interpret language such as “arising out of” or “arising from” as requiring more than a “but for” connection between the liability of the additional insured and the operations of the named insured. There must be an “unbroken chain of causation” and a connection that is more than “merely incidental or fortuitous.”
The interpretation of “operations”
The Court also considered the meaning of “operations,” which was said to include “the creation of a situation, or circumstance, that is connected in some way to the alleged liability.” It does not necessarily imply an “active” role by the named insured in the creation of the liability.
Findings of the Court of Appeal
The Court agreed with the trial judge and found that the contractor’s connection with the failure of the transformer was “merely incidental.” The trial judge found that the failure of the transformer caused the fire. Though the fire would not have occurred “but for” the fact that the contractor ordered and installed the transformers in the course of its operations under the contracts, the contractor’s “operations” under the contract did not require it to select the transformers to be installed in the projects. That was up to the Owner.
Consideration as to the underlying obligations between the parties necessarily informed the Court’s decision in this case. While the Court rejected the argument that the language of the contract between the Owner and the contractor should affect the interpretation of policy of insurance (other than to explain the commercial context), central to the Court’s decision was that the contractor was not responsible to choose the transformer. The Court noted that the Additional Insured Endorsement provided insurance with respect to the liability arising out of the “operations” of the named insured. The contractual obligations, including the scope of work, therefore formed part of the inquiry.
The Court upheld the traditional limits to the term “arising out of the operations,” requiring more than a “but for” analysis in order to establish the connection between the liability of the additional insured and the operations of the named insured. Despite the finding that the failed transformer caused the fire, the transformer was chosen by the Owner and thus it was not enough that the contractor installed the equipment at issue.
The Ontario Court of Appeal’s decision in Van Huizen v. Trisura Guarantee Insurance Company, 2020 ONCA 222 underscores the distinction between an insurance policy and an insurance contract; particularly the importance this difference has in determining whether an insurer’s duty to defend is engaged for individuals participating in a group insurance program.
Trisura Guarantee Insurance Company (“Trisura”) issued a professional liability insurance policy (the “Master Policy”) to the Appraisal Institute of Canada (“AIC”). The Master Policy pertained to claims made against AIC members, their personal corporations, employers, and the AIC, for the negligent provision of professional appraisal services.
Coverage was extended to individual members of the AIC under the Master Policy by way of individual application. An individual certificate of insurance was issued to each member.
Mr. Van Huizen, a professional appraiser and member of the AIC, made a claim under the Master Policy and his individual certificate of insurance (the “Van Huizen Insurance Contract”) for coverage in respect of three proceedings (two actions and a third party claim), which were brought against Mr. Van Huizen and a business style, Hastings Appraisal Services (collectively referred to as “Van Huizen”).
These proceedings arose from an allegedly negligent property appraisal performed by another AIC member, Mr. Barkley. Mr. Barkley was also insured under the Master Policy and had his own individual certificate of insurance issued by Trisura (the “Barkley Insurance Contract”). Mr. Barkley passed away in October 2016.
Before Trisura could issue its coverage position in respect of the Van Huizen claim, Van Huizen commenced an action against Trisura seeking a declaration that Trisura had a duty to defend and indemnify them under the Van Huizen insurance contract for the three proceedings.
The Summary Judgment Motion
Trisura brought a summary judgment motion to dismiss the action on the basis that it owed no duty to defend. In particular, Trisura took the position that, among other things, no coverage was available under the Van Huizen Insurance Contract because it did not provide coverage for Mr. Barkley’s alleged professional negligence.
The motion judge dismissed Trisura’s motion and granted judgment in favour of Van Huizen. In reaching this conclusion, the motion judge adopted a broad interpretation of the Master Policy and concluded that “Mr. Van Huzien has coverage for a legal claim arising from his own actions and also when it flows from his legal status as an employer of the alleged wrongdoer [Mr. Barkley].” The motion judge also found that Trisura had a duty to defend Van Huizen on the basis that such an interpretation was necessary for the vicarious liability provision to have any practical effect.
Trisura appealed the motion judge’s decision.
The primary issue on appeal was whether the motion judge erred in finding that Trisura’s duty to defend Van Huizen was engaged under the Van Huizen Insurance Contract.
While the motion judge correctly identified the relevant interpretative principles in determining whether there was a duty to defend, the Court found the motion judge erred by treating the Master Policy as the entire insurance contract for all AIC members.
The Court’s decision turned on the differences that separate insurance policies from insurance contracts as recognized by the statutory definitions of “contract” and “policy” in the Insurance Act, RSO 1990, c. I.8.1 The Court noted insurance policies are instruments that do not create legal obligations simply through their existence. Without an added contractual relationship, a policy is merely a recitation of terms and conditions that does not attach to a particular person or item.
In contrast, an insurance contract creates contractual obligations between parties. Like any contract, there must be an offer, acceptance, and agreement on all material terms. Premiums, the nature and duration of risks, and the extent of liability, are all material terms in an insurance contract.
The motion judged interpreted the Master Policy as if it constituted a binding agreement between Trisura and all members who had been issued certificates. Since both Mr. Van Huizen and Mr. Barkley each held certificates under the Master Policy, the motion judge incorrectly concluded they were both “Insureds” and entitled to coverage.
The Court explained that the Master Policy did not constitute a binding agreement on its own and merely set out the terms of the professional liability insurance being offered to the AIC members. Each AIC member who desired coverage must apply and, provided the member and the insurer come to an agreement on the remaining essential terms (e.g. premium to be paid and the term of insurance), a certificate of insurance must be issued to the member to confirm the existence of the insurance contract. Thus, the certificates issued to Mr. Van Huizen and Mr. Barkley were evidence of separate insurance contracts.
In light of this, the individual certificate issued to Mr. Van Huizen should have been used to determine whether Trisura had a duty to defend. Since the motion judge erred by finding a duty to defend based solely on the Master Policy, the Court reconsidered the issue based on an interpretation of the true contractual relationship between the parties.
As Mr. Barkley’s certificate did not form part of the Van Huizen Insurance Contract, only Van Huizen would be captured under the definitions of “Member”, “Insured” and “Wrongful Act”. In other words, coverage was only available for claims against Van Huizen respecting Mr. Van Huizen‘s provision of professional services. Consequently, there was no coverage under the Van Huizen Insurance Contract for Mr. Barkley‘s alleged professional negligence.
Ultimately, the Court found Trisura’s duty to defend was not engaged and the motion judge’s order was set aside.
The appeal decision in Van Huizen v. Trisura serves as a useful reminder of the important distinction between an insurance contract and an insurance policy, particularly where coverage is offered under a group insurance program. It is the insurance contract, not the insurance policy, which must be considered when determining an insurer’s liability.
1 Section 1 of the Insurance Act defines “contract” to mean “a contract of insurance, and includes a policy, certificate, … evidencing the contract …” and “policy” to mean “the instrument evidencing a contract”.
Originally published by Clyde & Co, August 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Read more at Mondaq
The excerpted article was written by Thomas J. Timmins and Howard XIN Articling student
Start with the Clause
A force majeure clause is a common inclusion to contracts for protecting parties from impairment caused by extraordinary or extreme events. These extraordinary events are often referred to as “acts of God”. When a force majeure clause has been included in a contract and force majeure events actually do occur, the expectation is that the party or parties facing impairment as a result of the proscribed force majeure event–a hurricane, war, flooding, political unrest, epidemic, etc.–will be relieved of all or some portion of its delivery obligations under the relevant contract and from all or some portion of liability for damages arising from delay or default occurring in the performance of its contractual obligations.
In drafting these provisions, companies will often use language that defines what will or will not constitute a force majeure event, often by listing specific examples which qualify as such–hurricanes, war, volcanic eruptions, strikes, lockouts, etc. Occasionally, in the rush to get the deal done, not a great deal of thought is given to the breadth or inclusions expressed in the clause and a “boilerplate” is used.
If there is no force majeure clause, courts will still consider defences by the impaired party based on foreseeability of the impairing event. Whether there is a force majeure clause or not, the burden of proof rests on the party seeking to rely upon the force majeure provision. In any case, the key starting point is with the force majeure clause itself. What does it say? Do the events which one party alleges to have occurred actually qualify under the terms of the clause? If so, did those qualifying events actually lead to the delay or the breach in question?
Force Majeure Case Law in Canada
For the past half-century, the leading case on force majeure in Canada has been Atlantic Paper Stock Ltd. v St. Anne Nackawic Pulp & Paper Co. This was a 1975 Supreme Court decision concerning a minimum annual supply of paper pulp over a 10-year period, which allegedly became subject to extraordinary events including acts of God and substantial decline in the market for such paper pulp. In this decision, Justice Dickson established that, “An act of God clause or force majeure clause … generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill” (emphasis added). Since then, no Canadian Supreme Court cases have revisited the matter in depth. However, despite the lack of Supreme Court precedents, there have been various lower-court cases affirming Atlantic Paper and exploring the interpretation of force majeure clauses.
In World Land Ltd. v Daon Development Corp., the court accepted the use of basket clauses to define the scope of force majeure applicability. In this case, a land development company was accused of failing to commence construction on the land by a specific date. In the agreement, the force majeure clause included in its definition of force majeure events, the very broad and inclusive language, “…or any other causes…beyond the control of the vendors or the purchasers”. The company had relied on this language and announced that the development would be delayed on the grounds of not having received a development permit, which it claimed was beyond its control. The court accepted the applicability of the basket clause. However, to the detriment of the land development company, it chose to interpret the language plainly and held that it had been within the company’s control to obtain the permit on time. In other words, the party alleging that force majeure events occurred was not entitled to sit idle.
Subsequently, Atcor Ltd. v Continental Energy Marketing Ltd. seemed to have revised the criteria for what constitutes a force majeure event. In this decision, a gas supplier successfully relied on force majeure when it failed to deliver gas because of various technical pipeline issues suffered by a third party pipeline owner. Here, the Alberta Court of Appeal rejected the idea that a force majeure event had to make performance impossible. Instead, “a real and substantial problem” that makes contractual performance commercially unfeasible was held to be the standard—i.e. a significantly lower threshold than the impossibility of performance standard posited in Atlantic Paper, cited above. Despite the apparent departure in Atcor, the impossibility standard set in Atlantic Paper has continued to be followed in recent cases. Thus, from a practical viewpoint, unless you have expressly contracted otherwise, ‘impossibility of performance’ should be viewed as the basic standard when reviewing force majeure circumstances.
As if to emphasize this point, in the 2011 British Columbia Supreme Court decision Domtar Inc. v Univar Canada Ltd., there was a focus on language of the force majeure provision. The facts were that a supplier could not source and supply caustic soda on commercially acceptable terms and, therefore, alleged that an event of force majeure had occurred and that it should be exempted from its contractual supply obligations. The force majeure event, in this case, was not being able to purchase raw materials at a commercially acceptable price because of an unprecedented rise in price of caustic soda. The argument was ultimately unsuccessful. The B.C. court found that the force majeure clause in the relevant contract did not include or contemplate economic or market conditions, and agreed with earlier findings from the English courts that, “the fact that a contract has become expensive to perform, even dramatically more expensive, is not a ground to relieve a party on the grounds of force majeure.”
Domtar Inc. suggests that “economic” force majeure would be extremely difficult, if not impossible, to justify. It also emphases the point which we made above—start by reading the force majeure clause in your contract.
Considering the Novel Coronavirus
It is not uncommon for force majeure clauses to include specific references to terms such as “plague” or “epidemic” when describing force majeure events. In light of global health emergencies that have surfaced in the last few decades, we have found that these types of clauses have included increasingly specific event references such as “public health emergencies” and “communicable disease outbreaks”. However, whether these specific wording inclusions will be of use to the party alleging that a force majeure event which can be relied upon as relieving it from its contractual obligations has occurred remains uncertain.
The Canadian case law surrounding force majeure provisions based on global health concerns is limited. For example, most mentions of the 2003 SARS outbreak or the 2015 Ebola pandemic pertain to cases of domestic occupational health and safety and refugee protection. Reported cases that refer to these specific health crises as triggers of force majeure are few. There is one 2005 decision issued by the Canadian Radio-television and Telecommunications Commission (CRTC) concerning rate adjustment plans in the Telecom industry that linked SARS to a force majeure event. In the decision, Bell Canada, TELUS, and several other telecom companies submitted that the 2003 SARS outbreak in Toronto fell within the scope of the following force majeure clause:
“No penalty shall apply in a month where failure to meet the standard is caused, in that month, by fire, strikes, default or failure of other carrier, floods, epidemics, war, civil commotions, acts of God, acts of public authorities or other events beyond the reasonable control of the Company which cannot reasonably be foreseen or provided against.”
In this case, Canadian telecom carriers sought to rely upon the force majeure wording above, arguing that factual circumstances, including the necessity to quarantine of a number of Bell Canada employees, and the specific mention of “epidemics” in the force majeure clause, lessened their respective quality of service obligations. (In many force majeure clauses, epidemics are not specifically included in the clause and left to be read-in under the sweeping category “other events beyond the reasonable control of the Company”.) In the end, the CRTC held that the approach to be adopted in order to determine whether or not SARS-related events were sufficient to trigger force majeure clause protections was a case-by-case one.
READ FULL ARTICLE HERE AT GOWLING WLG
Article by Charles A. Foucreault
Despite the legalization of cannabis by the federal government on October 17, 2018, not all cannabis-related activities have become legal. In an insurance context, illegal acts can lead to the cancellation of a policy or to the forfeiture of the right to an insurance indemnity, as seen in the decision rendered by the Superior Court of Quebec on April 15, 2019, in Vo v. Compagnie d’assurances Desjardins (Desjardins, Groupe d’assurances générales).1
In this case, the Superior Court rejected the insured’s claim, who were seeking an indemnity under a home insurance policy following a fire in their building. The tribunal held that the insurer satisfied the burden of proving the general exclusion clause against illegal or criminal activities applied. Indeed, because of their possession of cannabis plants, an illegal activity, the plaintiffs could not benefit from the indemnity payable under the insurance policy
The plaintiffs were the owners of a quadruplex that was insured under a home insurance policy. In 2013, a high intensity discharge lamp used in the plaintiffs’ at-home cannabis operation started a fire in the building.
The insurer refused to cover the loss because the policy excluded any loss resulting from illegal or criminal activities, which included (and still includes) cultivating and manufacturing cannabis. The plaintiffs sued the insurer for the amount of the loss under the policy.
The Superior Court decision
The burden rested with the insurer to establish that the plaintiffs were engaging in illegal or criminal activities and, accordingly, the exclusion clause applied. However, the insurer did not need to prove in this case that illegal activities caused the damage because the plaintiffs admitted that their cannabis cultivation in apartment #4 caused the fire.3 The plaintiffs lived in apartment #3 of the building, whereas apartments #1, #2, and #4 were vacant, uninhabitable, and used exclusively for cultivating cannabis.
According to the plaintiffs, apartments #1, #2, and #4 were occupied by three different tenants. However, the evidence demonstrated that there were no personal belongings in those apartments and the apartments were uninhabitable.4 Additionally, the evidence showed that the existence of the alleged tenants was highly doubtful, since none of the tenants who had allegedly lived in the apartments could be traced.5 Moreover, the plaintiffs were paying the costly electricity bills of the three other apartments and at the very least, knew that there were cannabis plants in the building.
The court found that the insurer satisfied the burden of proving that the exclusion clause pertaining to illegal and criminal activities applied in this case.6 In addition to the evidence put forward by the insurer, the judge also considered the serious gaps in the plaintiffs’ evidence and their unconvincing testimonies.7 As a result, the plaintiffs’ claim was rejected by the court.
The legalization of cannabis has certainly had an impact on some exclusion clauses pertaining to illegal or criminal activities, particularly in matters of insurance of persons. Nevertheless, some cannabis-related activities remain illegal, such as the possession of cannabis plants in Quebec.8 Therefore, policyholders who engage in prohibited activities may forfeit their right to an insurance indemnity.
1. Vo v. Compagnie d’assurances Desjardins (Desjardins, Groupe d’assurances générales), 2019 QCCS 1382 [Vo v. Desjardins].
2. Ibid at para 24; 2803 CCQ; See also Levesque c. Compagnie d’Assurance Desjardins, 2013 QCCS 1552, at paras 59—60.
3. Vo v. Desjardins, supra note 1 at para 10.
4. Ibid at paras 23—24.
5. Ibid at para 41.
6. Ibid at para 62.
7. Ibid at paras 57 and 61.
8. An Act to constitute the Société québécoise du cannabis, to enact the Cannabis Regulation Act and to amend various highway safety related provisions, LQ 2018, c 19, adopted on June 12th, 2018, art. 5.
About Norton Rose Fulbright Canada LLP
Norton Rose Fulbright is a global law firm. We provide the world’s preeminent corporations and financial institutions with a full business law service. We have 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.
Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.
Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.
For more information about Norton Rose Fulbright, see nortonrosefulbright.com/legal-notices.
Law around the world
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Cox & Palmer is proud to share that Glen L.C. Noel, Q.C., has been appointed a Judge of the Supreme Court of Newfoundland and Labrador and a Judge ex officio of the Court of Appeal of Newfoundland and Labrador.
Since 1990, Glen has worked exclusively with Cox & Palmer (and its predecessor firms), building an extensive practice for almost 30 years in insurance law, commercial insurance litigation, and personal injury law. Consistently recognized as a leading practitioner, Glen’s dedication to the legal profession, commitment to his clients and professional integrity have been paramount to the success of Cox & Palmer.
Albeit managing a demanding practice, Glen has an innate ability to approach every situation with sound judgement and definitive resolve. Steadily encouraging fairness, inclusion and comradery, Glen’s positive influence inspires all those around him. A true leader, Glen always makes time for his colleagues and has been an exceptional mentor and friend to the entire team at Cox & Palmer.
We are honoured to have him serve the Province of Newfoundland and Labrador as Justice Noel, and we are tremendously proud to congratulate him on this well-deserved achievement.
Read the media release from the Government of Canada.