Nichols v American Home Assurance Co [1990] SCC

Non-Marine Underwriters, Lloyd’s London v Scalera [1999] SCC

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  The IBC standard form defines “bodily injury”: “bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time”
  
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    Sickness includes psychological harm, emotional trauma, nervous shock, depression, insomnia and mental stress, it is submitted: see Wellington Guarantee v Evangelical Lutheran Church in Canada (1996), 35 C.C.L.I. (2d) 164 (B.C.C.A.)
    

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  Damages “because of bodily injury, etc.” are generally considered to include related income loss, loss of earning capacity, cost of care, “in trust” claims (son takes care of mom, son sues in trust for mom), tax gross up compensation and management fees.
  
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    But they would not include unrelated consequential economic loss such as loss of use of property due to an existing medical condition.
    

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  The IBC standard form defines “property damage”: “a. physical injury to tangible property, including all resulting loss of use of that property; or b. loss of use of tangible property that is not physically injured.”
  

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  The cost of repairing or replacing the insured’s defective work and products has been held not to be “property damage”: see, e.g. Privest Properties v Foundation Co. of Canada Ltd. (1991), 6 C.C.L.I. (2d) 23 (B.C.S.C.)
  
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    The rationale for this is that the cost of repair/replacement is “pure economic loss” and not “physical injury” to property. Therefore, insofar as a third party’s action made claims for the cost of repair of the insured’s defective work and products, it was not possible to attract indemnity under the insured’s liability policy and as a result there would be no duty to defend
    

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  For some time, courts have tried to explain that mere faulty workmanship will not attract coverage unless there was damage to other property
  
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    A number of legal analysts have criticized this as having no basis in the language found in most CGL policies (including the IBC standard form) and in 2010, the Supreme Court of Canada endorsed this criticism in Progressive Homes Ltd. v Lombard Insurance Co.
    
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  Loss of use of property is deemed to be property damage
  
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    Examples where coverage has been held to apply include: a neighbour’s property fenced off because of the collapse of the insured’s retaining wall; loss of use of plastic bags rendered unfit by the supply of defective materials; loss of rental income and business losses from the inability to use damaged property
    

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  In the IBC standard form, for example, the bodily injury or property damage must occur during the policy period. What does this mean?
  
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  Courts have struggled to find a suitable answer by resorting to a “trigger” theory. This has resulted in a wide array of conflicting decisions and four different theories:
  

(2) exposure theory (when exposure to harm occurred before injury manifested)

(3) injury-in-fact theory (when the injury or damage actually took place) and

(4) the continuous trigger theory (covering the initial exposure, continued exposure and time of manifestation of injury)

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  Currently, Canadian courts appear not to favour theories (1) and (2) but do prefer theory (3) (injury-in-fact) and where it is impossible to determine when “in fact” the injury or damage occurred to apply theory (4) (continuous trigger)
  
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    See Alie v Bertrand & Frere Construction Co. (2003), 222 D.L.R. (4^th) 687 (Ont. C.A.)
    
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  In some cases the industry has responded with a practical convention of applying coverage to the policies which were on risk from the time of the initial exposure to harm through to the end of the continuous exposure to it
  
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    They accomplish this by attributing pro rata to each policy in place during the continuum of the whole time period a share according to the policy’s “time on risk”. This is called the “time on risk” formula and has been widely used in settling the so-called leaky condo claims in the lower BC mainland, where claims sometimes involve periods of continuous exposure to harm over many years.
    

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  Recall that the introductory words of the Insuring Agreement are key
  
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    They are the first place, after the Declarations page, to which we look to determine whether there is coverage for an insured’s liability
    

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  The introductory words, again, say: “[w]e will pay those sums that the insured becomes legally obligated to pay as compensatory damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.”
  
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    We have already examined the meaning of ‘bodily injury’ and ‘property damage’ (and those terms are defined in the Definitions section of the IBC standard form we are examining).
    
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  The IBC standard form in our case, does not define “compensatory damages”.
  
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    We use a common law (or case law) definition, which holds that “the almost universal definition…is a recompense for a wrong done”: see Chamberlain v North American Accident Insurance Co. (1916), 28 D.L.R. 298 (Alta. C.A.), adopted in Privest (B.C.S.C. 1991). This definition extends to money payable under any form of liability which may be imposed by law provided the damages are compensatory.
    
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      Thus, an insured’s involvement in a coroner’s inquest will not be covered as there is no possibility of the insured’s becoming liable to pay ‘compensatory damages’ as a result.
      
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      Nor are moneys payable as a form of penal sanction, such as fines by regulatory bodies, covered because they are not considered ‘compensatory’.
      
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      The same result applies to punitive damages; but does the same result pertain to aggravated damages? Why or why not?
      
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    An order for specific performance is not covered because it is not considered ‘compensatory’.
    
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  Question: absent an exclusion in the policy (we will examine exclusions later) is there coverage for an amount payable by the insured to the government for clean-up of oil spills under environmental legislation?
  
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    Statute says, when you create an oil spill, you must clean it up, is there coverage in this scenario?
    

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  We have already seen that coverage will apply to tort liability imposed against the insured (the most common example is negligence). But what about contractual liability? There are two opposing schools of thought on how this should be answered.
  

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  The older approach holds that contractual liability is considered ‘voluntary’ in the sense that the insured consented to such liability by entering the contract, and as such his/her liability is not ‘fortuitous’
  
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    See, e.g., Foundation of Canada Engineering Corp. v Canadian Indemnity Corp. (1977), 74 D.L.R. (3d) 266 at 271 (S.C.C.).
    

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  The contrary approach, advanced by several leading legal analysts (e.g. Sanderson; Brown), is that the words “legally obligated to pay” must be given their ordinary meaning, which must encompass liability arising by contract just as well as by tort
  
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    This approach is sound, it is respectfully submitted, and lends importance to the exclusion for contractual liability, usually found elsewhere in the CGL policy wordings and which would otherwise seem redundant or meaningless. It has some support in the case law: see, e.g., Moffat Tank Co. v Canadian Indemnity Co. (1973), [1974] W.W.R. 688 (Alta. C.A.)
    
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    If the policy wording is as found in the IBC standard form, then there will be an exclusion for liability assumed in contract and this should settle the debate.
    
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    Question: but what if the CGL wordings you are examining does not contain such an exclusion?
    

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  Assuming an exclusion does exist for contractual liability (as in the IBC standard model CGL), what is the coverage for claims pleaded against an insured for both tort and contractual liability?
  
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    The answer is that there will normally be coverage; the basis for this is found in the exception normally found to the exclusion itself (as will be discussed later)
    
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  “Legally obligated to pay” has been held to apply to the costs of execution on a judgment; a voluntary settlement of a claim for a defective product; equitable relief for unjust enrichment; and liability arising from new home warranty legislation.
  

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  Once you have determined that the Insuring Agreement grants coverage for the insured’s liability, the next step is to consider whether exclusions exist in the wording of the CGL to take the insured’s liability out of coverage
  
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  This is typical of the way CGL policies work:
  
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    First you find whether coverage is initially granted; then you look for an exclusion that might take it out of coverage (and lastly you look for an exception to the exclusion, which might bring it back into coverage)
    

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  Brown and Donnelly (Insurance Law in Canada, loose leaf ed.) comment that exclusions fall into 5 categories:
  
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    Restating general insurance principles (e.g. fortuity)
    
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    Claims which should have coverage outside the CGL (e.g. worker’s compensation legislation)
    
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    “First party” losses (i.e. direct losses of the insured), which typically should be the subject of property insurance
    
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    Liability for defective work or products
    
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    Special risks such as war, nuclear and pollution liability.
    
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  The full list of Exclusions in most CGL policies (including the IBC standard model we are using) immediately follow the Insuring Agreement (in practice these sections of the policy are often numbered 2 and 1 respectively). As time will not permit us to examine all of the exclusions here, we will select only a few which are representative of each of the 5 categories noted by Brown and Donnelly, above.
  

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  Because the Insuring Agreement limits coverage to liability for injury or damage caused by an “occurrence”, which is defined as an accident, it may seem unnecessary to include an exclusion for intentional injury and damage
  
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  Exclusion a. bars coverage for injury/damage “expected or intended from the standpoint of the insured”
  
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    Recall that case law has defined “accident” as an unlooked-for mishap or event which is not expected or intended from the standpoint of the insured: see, e.g., Progressive Homes (S.C.C.) at para. 49
    
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  An employer’s vicarious liability for the intentional act of an employee will not be excluded by a. unless the employer “expected or intended” the injury or damage. Note how this result could have a very significant impact on a sexual assault victim’s ability to recover his/her damages in a claim against a teacher and school.
  
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  Note that exclusion a. creates an exception for bodily injury resulting from the use of reasonable force to protect persons or property
  
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    Question: does the wording found in the IBC standard form restrict this protection to the insured’s own person or property? This is an excellent example of the importance of the policy’s particular language.
    

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  Exclusion b. excludes coverage for contractual liability. This is a restatement of the older school of thought which states that contractual liability cannot be covered in the first place
  
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    By incorporating exclusion b. for contractual liability it is submitted that the draftsperson has intended to compensate for the possibility that the older approach may not hold, especially given the wording of the Insuring Agreement in the IBC form;
    
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    In the event that the Insuring Agreement would grant coverage for contractual liability, then exclusion b. is here to take it out of coverage
    
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    This is another example of how a CGL policy can operate first to grant, then later to remove, coverage.
    

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  Note that exclusion b. contains an exception for contractual liability derived from an “insured contract”. “Insured contract” is typically defined in the CGL to mean certain specific types of contract; for example, the definition includes a “lease of premises”.
  
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    Thus an insured who is a party to a lease may be held to have coverage after all, for a breach of the lease agreement. In this example, the CGL first grants coverage
    
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    (Insuring Agreement—according to one approach), then takes it out of coverage (exclusion b.), and finally replaces coverage (exception to exclusion b.).
    

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  By “elsewhere” we mean ‘outside the CGL policy’.
  
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  An example is exclusion e. which bars coverage for liability for injury or damage arising out of the “ownership, use or operation by or on behalf of an insured of… any automobile”. The intention here is to prevent double coverage for liability risks which should be covered under other insurance (i.e. automobile).
  
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    Note, however, that the CGL wording does not require the other coverage actually to exist in order for exclusion e. to operate.
    
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    Note how the wording of exclusion e. accomplishes this result, even if insurance has not been obtained for the automobile.
    
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  CGL policies and automobile policies are intended to be complimentary. The coverage of the CGL policy is presumed to start where the automobile insurance ends. Can you describe circumstances where both policies could cover simultaneously?
  
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    See, e.g. Derksen v 539938 Ontario Ltd. (2001), 205 D.L.R. (4^th) 1 (S.C.C.)
    

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  It should be remembered that as a general rule of insurance law, coverage grants (Insuring Agreement) will be broadly interpreted in favour of the insured while coverage exclusions will be narrowly interpreted against the insurer.
  
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  In Amos v ICBC (1995), 31 C.C.L.I. (2d) 1 (S.C.C.), the court held for coverage in favour of an insured when he was sued by a person who was shot while entering the insured’s van, on the basis that injury arose “out of the ownership, use or operation” of the insured’s van.
  
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    Can you account for the seemingly inconsistent result in Derksen where the CGL excluded coverage for injury “arising out of the ownership, use or operation” (i.e., the same language as in Amos) of the insured’s vehicle?
    

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  Also known as liability for damage to property in which the insured had or has an interest amounting to an insurable interest
  
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  Exclusion h. 1), for example, bars coverage for property damage to property owned, rented or occupied by the insured
  
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    The rationale is that property insurance (i.e., first party insurance) covers the insured for pecuniary loss from property damage regardless of fault on the part of the insured; whereas liability insurance indemnifies the insured for the consequences of his/her acts or omissions and it is reasoned that the insured might be invited to profit (the so-called moral hazard) from his/her own wrongdoing if damage to the insured’s property were not excluded
    
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  The term “occupied” raises the question of fact whether the insured had/has sufficient control of the property to prevent strangers from interfering with it: see International Pipeline Co. v Seller’s Oil Field Services Ltd., [1976] I.L.R. 1-729 (Man. Q.B.), affirmed (1976), 66 D.L.R. (3d) 360 (Man. C.A.)
  
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    E.g. water well driller is client, hired to drill well on a ranch, driller doesn’t determine if there is water pipe in ground, goes ahead with drilling and strikes pipeline causing millions in pollution damage in air. Is the drilling company occupy that chunk of dirt? Did insurer have sufficient control of property to prevent...?
    

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  Several exclusions pertain to the general prohibition against coverage for fixing the insured’s defective work or product. This topic is too broad for our purposes, except to give a summary overview
  
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    It is fertile ground for jurisprudence (e.g., Progressive Homes) as we have seen and makes for an area for a more in depth review on another occasion. For our purposes the following brief comments will suffice.
    

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  The exclusions relating to the insured’s work/product are found in exclusions h.5), h.6), i., j., k. and l. Students should read these to gain a summary familiarity.
  
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    Note that the terms in “ “ are defined in the Definitions section, usually located near the end of the policy wordings.
    
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  Students should be familiar with the definitions for “property damage”, “your work”, “your product”, and “products-completed operations hazard”
  

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  In respect of exclusion i. “property damage” to “your product” arising out of it or any part of it, it is submitted that if any part of the insured’s product is defective and damages other parts of the insured’s product, coverage for the insured’s liability will be excluded for damage to all parts of the insured’s product.
  
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  While property damage to the insured’s product is excluded, the exclusion does not apply to resulting damage (sometimes referred to as ‘resultant’ damage) to other property.
  

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  Exclusion j. bars coverage for property damage to the insured’s “work” arising out of it or any part of it and included in the “products-completed operations hazard”. This exclusion commences at the completion or abandonment of the insured’s operations.
  
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    An exception is granted if the defective work was performed for the insured by a subcontractor. Again, note that this exclusion pertains to damage to the insured’s work; it does not bar coverage for the insured’s liability for resulting bodily injury or resulting damage to other property.
    
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  Example for discussion: assume the insured completes the construction of a house but the wiring is defective, causing a fire which destroys the house. Is the house the insured’s “work”? Is it away from the insured’s premise? Is the work complete? Does it satisfy the definition of “products-completed operations hazard”? Does the exclusion bar coverage for the insured’s liability for destroying the house he/she just finished building? Would the answer be different if the wiring had been installed by a subcontractor? Would the insured have been covered if the fire damaged the neighbour’s home next door?
  

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  These exclusions are found in the section of most CGL policies called the “common exclusion”, meaning that these exclusions pertain to 3 of the Coverages (A, C and D) and not just A.
  
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  For our purposes, students should be aware that there are exclusions for bodily injury, property damage and “clean up costs” relating to pollutants.
  
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    Students should be generally familiar with the wording of the Pollution Liability exclusion found in the Common Exclusions of the uploaded version of the IBC standard form CGL policy.
    
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  Similarly, the insured’s liability arising from “any nuclear liability act” or law, and for injury or damage due to war, invasion, hostilities, … or insurrection are excluded from coverage.
  
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  Note that these “common” exclusions do not relate to Coverage B (personal injury). Wrongful entry into premises may qualify as “personal injury” as a violation of a person’s “right of privacy”.
  
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    Would the insured’s release of pollutants onto its neighbour’s property therefore constitute “personal injury” as opposed to property damage? Does this mean the pollution exclusion does not prevent the insured from having liability coverage (because the exclusion does not apply to personal injury)?
    

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  Facts: insured operated self-service gas bar, gas leaked from underground storage tank on insured’s property and contaminated adjacent land. Adjacent property owner brought action against insured seeking damages for loss of property value, cost of conducting environmental assessment and cost of cleanup. Claim advanced in nuisance, negligence and strict liability. CGL carrier brought an application seeking a declaration it had no duty to defend or indemnify insured on the basis of the pollution exclusion in the policy
  
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  Held: Insurer had no duty to defend or indemnify. Ordinary meaning of exclusion was accepted and the exclusion applied
  

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  “Personal injury” is defined in the CGL as injury, other than bodily injury, arising out of one or more of the following offences: false arrest, malicious prosecution, wrongful entry, slander, libel and publication amounting to violation of privacy.
  

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  Coverage B deals with personal injury liability and contains its own Insuring Agreement and exclusions.
  
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  Coverage C grants coverage for medical payments for persons bodily injured on or about the insured’s premises, subject to certain specific conditions and limitations. It is intended to be a form of “no fault” coverage for medical expenses.
  
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    Coverage C also contains its own Insuring Agreement and exclusions.
    
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  Coverage D provides limited coverage for liability the insured incurs for property damage caused by fire, explosion, smoke or leakage from fire protective equipment to premises rented to or occupied by the insured. (insuring agreement might not cover contract breach, tenant under tenant agreement has no coverage under this school of thought, then look at exclusion clause that excludes coverage for contract, but exception to exclusion only to leases, so coverage may still apply)
  
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    Coverage D contains its own Insuring Agreement and exclusions.
    

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  Students should be generally familiar with the CGL wordings relating to Coverages B, C and D, but will not be examined on them other than in respect of the points noted above, in this slide.
  

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  These pertain to Coverages A, B and D only.
  
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  Found typically at the end of Section I of the CGL (in the IBC standard form they are the last paragraphs before Section II “Who is an Insured?”), this section of the policy is the insurer’s undertaking to pay “in respect to any claim or ‘action’ it defends:
  
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    “all expenses” it incurs (i.e., investigation, adjusting, legal and other costs)
    
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    “all costs taxed against the insured” in the ‘action’
    
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    Post judgment interest.
    

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  Note 1: these payments are considered excess to the policy monetary limits of insurance.
  
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  Note 2: pre-judgment interest is not mentioned in this list. CGL insurers in practice typically include pre-judgment interest within the policy monetary limits (see later, regarding ‘limits of insurance’) and do not consider it as a supplementary payment.
  
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    (This is an example of what we discussed in the first lecture as a principle of insurance ‘law’ derived from ‘convention’ or practice.)
    

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  This section of most CGL policies typically expands the ambit of who qualifies for coverage under the policy as an ‘insured’.
  
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    Note: the Declarations page identifies who is the ‘named insured’ which, as explained by the policy’s preamble, is referred to throughout the policy as “you” or “your”
    
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  Section II then expands the meaning of an insured to include:
  
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    A spouse of the named insured if the latter is an individual who is a sole owner of the business
    
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    Partners, if the named insured is a partnership or joint venture
    
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    If so named in the Declarations, organizations such as corporations, including their officers, directors, employees and shareholders
    
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    Other entities, not to be covered in this course. In practice, lawyers should be familiar with all of these additional entities before rendering advice on insurance coverage.
    

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  Note: the named insured’s employees are deemed to be included as ‘insureds’ under the policy, but subject to certain conditions which will not be covered in this course, but with which lawyers should be familiar before rendering advice on insurance coverage.
  

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  This section of the CGL typically defines the monetary limits of insurance afforded by the policy. It does this by reference to the Declarations, where the actual amounts specific to the insured are expressed. In practice, these are called the ‘policy limits’.
  
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    Note the reference to “aggregate limit” and “each occurrence limit”.
    
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  As an example: if the Declarations state $1 million as the aggregate and each occurrence limit, this means:
  
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    If more than one claim is paid on behalf of the insured during the policy period, then the ‘aggregate’ total of all claims must not exceed $1 million, and
    
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    No one claim paid can exceed $1 million.
    
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  Note: according to the Supplementary Payments provisions (above) certain other expenses may be paid in addition to the policy limits.
  

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  CGL policies typically place certain general conditions at the end of the policy. These conditions relate to the general contractual rights and obligations of the parties. In the IBC standard form we are examining in this course, they are found in “Section IV”.
  

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  Only condition 5 is considered to be a condition precedent to payment of a claim. It sets out the duties of the insured in the event of a claim:
  
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    To “promptly” notify the insurer
    
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    To cooperate with and assist the insurer in investigating, defending and settling the claim
    
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    Not to settle the claim without the insurer’s consent (unless at the insured’s own cost).
    
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  Note: condition 5 in effect turns over control and decision-making to the insurer for the investigation, defence and settlement of a claim.
  

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  In certain cases the court may grant an insured relief from forfeiture for failure to comply with condition 5
  
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    The grounds for relief are outside the purview of this course
    
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  Note: the limitation period of one year in condition 8 of older IBC forms must be considered as amended to two years by operation of the current Insurance Act in B.C.
  

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  Condition 9 deals with the interaction of other insurance and the insurance provided under this CGL
  
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    The expressions “primary” and “excess” are used and explained here. These provisions are outside the purview of this course
    
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  Condition 13 deals with the so-called “cross liability” among all insureds covered by the policy
  
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    In effect, it treats each insured as separately covered by the policy without expanding the policy monetary limits
    
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  Condition 14 codifies the insurer’s common law right of subrogation. Subrogation will be the subject of a separate lecture in this course
  

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  This section of the policy gives the definitions for the words bracketed by quotation marks in the policy.
  
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  Examples of these include “action”, “automobile”, “bodily injury”, “insured contract”, “occurrence”, “personal injury”, “products-completed operations hazard”, “property damage”, “your product” and “your work”.
  

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  This lecture has used the IBC standard form CGL policy as an example for illustrating some of the main principles governing liability insurance coverage.
  
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  While a CGL is used in the commercial or business context, learning its operation will give students a basic understanding of liability policies of most types including those found in personal and homeowners’ policies (e.g., see the example homeowner’s policy uploaded to TWEN).
  

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  In summary, like most liability policies, the CGL we have examined contains the following main components:
  
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    Declarations page(s), containing the information specific to the insured
    
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    Preamble
    
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    Insuring agreement (i.e., the grant of coverage)
    
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    Exclusions and exceptions to exclusions
    
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    Various categories of coverage (e.g., liability for property damage and bodily injury, personal injury, medical payments and tenants’ legal liability)
    
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    Common exclusions (e.g., nuclear, pollution and war)
    
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    Supplementary payments (i.e., in addition to the policy’s monetary limits)
    
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    Who is an insured
    
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    Policy (monetary) limits
    
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    General conditions
    
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    Definitions
    
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  Not all liability policies will follow this format. They are not required to. But most will do so. As has been mentioned, each policy’s language must be examined in every particular case in practice in order for the insurance practitioner to gain an understanding of the coverage it affords.