A recent case out of Ontario’s Superior Court of Justice focuses on the obligation of an insurer under a labour and materials payment bond. What makes the case interesting is that on the face of it, the plaintiff sub contractor ended up in a better position as a result of all of the circumstances surrounding the underlying claim including multiple breaches by the GC. The insurer argued that this was a simple case of mitigation and that the plaintiff had mitigated its losses and was therefore not entitled to recovery under the bond. The court saw it differently.
In Lopes v. Guarantee Company of North America, the plaintiff was a sub-contractor who sued under a surety bond issued to the General Contractor, Gorf Manufacturing. Gorf failed to pay invoices to the plaintiff totaling approximately $250,000. Gorf subsequently abandoned the project entirely. The plaintiff sent Notice of Claim to the insurer for the unpaid invoices in accordance with the bond terms. Concurrently, the project owner sought from the insurer that arrangements be made for completion of the project pursuant to the Performance Bond that had been issued together with the labour and material bond. The insurer retained a new GC who accepted new bids to complete the work pursuant to a Completion Contract.
The plaintiff bid to complete its work with the new GC and was awarded the contract which paid it $550,000 more than what they would have been paid under the original contract prior to the default by Gorf. In other words the abandonment of the project by Gorf resulted in a significant windfall for Lopes. From a commercial perspective, the plaintiff had been put in a better position as a result of Gorf abandoning the project that it would otherwise have been.
The insurer argued the doctrine of mitigation, noting that by entering into the new contract at a premium, the plaintiff had mitigated its damages. The plaintiff took the position that the benefit gained under the successful bid for the Completion Contract was irrelevant to the unpaid invoices breach.
The court noted that the wronged party has a duty to mitigate damages that were ‘consequent to the breach’. In this case the plaintiff’s windfall was not consequent to the breach for which indemnity was sought under the labour and material bond; i.e. unpaid invoices. Rather the windfall was related to the original GC (Gorf) abandoning the project. Therefore, the benefit obtained by Lopes in successfully bidding for the Completion Contract could not be characterized as mitigation of their damages for the unpaid invoices which was the breach that gave rise to the bond claim. This case is unique as the defendant was arguing that the plaintiff was not entitled to damages because it had mitigated its damages. The court did not find that the plaintiff did not mitigate its damages. It simply found that the principle of mitigation did not apply.
This decision is an interesting read and a good refresher on the principles of mitigation. The decision can be found here.
What happens when two insurers cover the same risk and each declare themselves excess to other available insurance? Ontario’s Court of Appeal addressed that issue in the recent case of TD General Insurance v. Intact Insurance, which involved a claim for bodily injury advanced by a passenger in a boat driven by the insured.
The TD policy covered the specific boat involved in the accident and the driver was covered as he was operating the boat with the owner’s consent. The driver was also covered under his homeowner’s policy with Intact, which provided liability coverage for claims arising out of the insured’s use or operation of any type of watercraft. Each policy declared itself excess to other available insurance.
Because the TD policy specifically covered the boat in question, the application judge held that the TD policy provided primary insurance for the watercraft in question and dismissed TD’s application that the two policies share equally in the defence and indemnity of the driver. In doing so he relied on the ‘closeness to the risk approach’ in which courts consider:
- Which policy specifically described the accident causing instrumentality?
- Which premium reflect the greater contemplated exposure?
- Is coverage of the risk primary in one policy and incidental to the other?
Unfortunately the Supreme Court of Canada expressly rejected this approach to overlapping coverage in the Family Insurance Corp. v. Lombard Canada Ltd. Case. Instead, the Supreme Court preferred to focus on “whether the insurers intended to limit their obligation to contribute, by what method, and in what circumstances vis-à-vis the insured”. Because the contest, as here was between two insurers, the court held that there was no need to look to surrounding circumstance and instead relies strictly on the policy wording. If there are no limiting intentions or limiting intentions that cannot be reconciled, the burden is shared equally between the insurers. The Court of Appeal considered the identical ‘other insurance clauses’ to be limiting intentions. Because each policy was declared excess to the other, the court concluded that they were irreconcilable. As a result, the policies had to contribute equally. The reasons of the Court of Appeal in this case are nuanced and underscore the importance of a close reading of policy wording when faced with a circumstance of overlapping coverages.
The Court of Appeal has provided further guidance on the issue of prescriptive easements in the case of Hunsinger v. Carter. The case involved one party having uninterrupted use of a shared driveway over a 40 year period for commercial purposes, facing off against a neighbor who purchased the property last year and attempted to restrict his neighbours historic use of the property. The ‘new’ neighbor was operating a daycare and wanted to erect a fence in the middle of the shard driveway for reasons of safety.
On application, the court held that the ‘new’ neighbor could erect the fence, in part relying on the finding that the historic neigbour would be able to maneuver vehicles on their portion of the driveway and that the fence would not provide an absolute impediment to doing so. The application court judge found that the historic neighbor had established a prescriptive easement over the driveway as it was the dominant tenement for over 40 years before 2007 when both properties were registered in the Land Titles system. The appellant and his family had made use of the gravel driveway “openly, continuously, and without licence over this period. However, the application court judge found that the obstruction of the easement in erecting a fence was allowable because that portion of the driveway which was obstructed was not needed to be used by the historic neighbor.
The Court of Appeal disagreed, finding that building the fence would encroach on the easement. It is interesting to note that the Court did not disagree that the proposed fence did not prevent the historic neighbor from utilizing the driveway to access the back of his property. Rather it was clear that the court accepted the argument that the fence would substantially interfere with the neighbours use. Encroachment is only permissible where the encroachment does not substantially interfere with the easement and in this instance, the fence was thought to constitute a substantial interference.
Ontario’s Court of Appeal has again addressed issues relating to commercial tenancies and the impact of lease provisions which obligate one party or the other to obtain insurance for the benefit of another. In CLLC Inc. v. 20 Eglinton , the tenant was obligated to obtain insurance throughout the period of their possession of the premises, and for the entire term, with the landlord named as an insured. The tenant did not obtain the insurance as required. Water leaks in the premises resulted in loss and damage to the tenant who brought an action against the landlord. Summary judgment dismissing the action against the landlord was granted and the tenant appealed. The Court of Appeal set aside the summary judgment, noting that the motion judge had not adequately considered and resolved factual disputes in finding that there was no genuine issue for trial.
Although not technically a subrogated claim (because no insurance was obtained so no insurance claim was advanced), the principles and arguments that were in play are relevant to subrogated claims.
One particular point of interest was the issue of when the leaks caused damage and the resulting question of whether the premises were even insurable given that the water leaks may have been pre-existing. The defendant conceded that if the premises were not insurable for whatever reason, the tenant would not be bound by the covenant to insured.
As a result the Court of Appeal set aside the summary judgment motion given that there were genuine issues in play that required a trial. This case underscores a point made in prior blogs on this site and others – read the lease or whatever underlying agreement is in play carefully and understand how the obligations of the parties fit within the factual matrix. It will be different in every case.
For those keeping score, subrogating insurers have been coming up on the short end of the stick in cases involving commercial leases. The Court of Appeal’s decision in Royal Host v. 1842259 Ontario (released May 18, 2018) goes the other way in permitting an insurer of a landlord to advance a subrogated action against an at fault tenant. On that basis alone, it is worth a close look.
The lease in issue in Royal Host contained provisions we often see in commercial leases. The landlord was required to obtain fire insurance and the tenant contributed financially to the premiums for that insurance. The lease contained a provision that the tenant was not relieved of any liability arising from or contributed by its acts, fault or negligence.
The motion judge ruled in favour of the tenant and dismissed the subrogated action commenced by the landlord’s insurer, relying on what he called the ‘general rule’ in the Supreme Court of Canada’s risk shifting trilogy ( Agnew-Surpass v. Cummer-Yonge, 1975 CanLII 26 (SCC) ,  2 S.C.R. 221; (ii) Ross Southward Tire v. Pyrotech Products, 1975 CanLII 25 (SCC) , and (iii) T. Eaton Co. v. Smith et al., 1977 CanLII 39 (SCC) ) that ‘subrogation rights will be limited where a landlord covenants to pay for the insurance and agrees to look to its own insurer for any loss’. On appeal, Ontario’s Court of Appeal overturned the motion judge and permitted the matter to proceed. The appeal court relied on a number of lease provisions which in their view made it clear that the risk of loss by fire was to be borne by the tenant if they were responsible for the loss.
The Trilogy is the starting point for the analysis of commercial leases in subrogation claims in the Canadian environment and is worthy of brief review. In Surpass , the landlord covenanted to maintain fire insurance on the premises. There were no tenant repair covenants in the lease. The lease did require the tenant to take good and proper care of the leased premises, “except for reasonable wear and tear…and damage to the building caused by perils against which the lessor is obligated to insure hereunder”. The landlord’s insurer was precluded from subrogating in Surpass, and with good reason. There was a clear relationship between the tenant’s covenant to repair and the landlord’s covenant to insure. The provisions worked together harmoniously – the tenant was not required to repair if the damage was caused by a peril against which the landlord was required to insure.
In T. Eaton, the lease provisions were similar although the tenant’s covenant to repair was not tied in any way to the landlord’s covenant to insure as it had been in Surpass. Despite this distinction, the Supreme Court found in favour of the tenant and prevented the landlord’s insurer from subrogating. In effect, the covenant to insure trumped the covenant to repair.
How did the Court of Appeal reach a different result in Royal Host? The devil is in the details as they say and in this case, the details are the lease provisions. Specifically, the section of the lease that required the landlord to obtain insurance also included the following language:
Notwithstanding the Landlord’s covenant contained in this Section 7.02, and notwithstanding any contribution by the Tenant to the cost of any policies of insurance carried by the Landlord, the Tenant expressly acknowledges and agrees that
- the Tenant is not relieved of any liability arising from or contributed to by its acts, fault, negligence or omissions, and
- no insurance interest is conferred upon the Tenant, under any policies of insurance carried by the Landlord, and
- the Tenant has no right to receive any proceeds of any policies of insurance carried by the Landlord.
The effect of using the word ‘notwithstanding’ is to provide a limited circumstance in which the benefit conferred to the tenant will not apply; namely when the tenant’s ‘acts, fault, negligence or omissions’ result in loss or damage. The parties had turned their minds to the issue of which party was to bear the risk of loss in this circumstance and despite the landlord’s covenant to insure, the lease precluded the tenant from enjoying the benefit of that insurance if the loss resulted from its negligence.
It is worth noting that the motion judge in this case repeatedly referred to the ‘general rule’ derived from the Trilogy which was to limit subrogation rights when the landlord agreed to obtain insurance. The Court of Appeal disagreed with this interpretation and clarified that the Trilogy did not pronounce a general rule of application nor did it enunciate freestanding principles. Rather, ‘the principles drawn from the trilogy are contractual in nature. They are conclusions that flow from and reflect the particular provisions of the leases that were in issue in those cases’. This underscores the first rule in analyzing subrogation rights when commercial leases are involved: try to discern the intention of the parties based on the lease language. https://bit.ly/2KCPH0p
That is of course a subjective question and one that you won’t find an explicit answer for in the case of Konopka v. Traders. However, you will read about what is not considered to be reasonable conduct in the context of an OAP 1 policy breach. In Konopka, the elderly insured fell ill while driving to her cottage and permitted her unlicensed husband to drive her vehicle to a nearby parking lot where they intended to stop and rest until she felt better. Shortly after taking the wheel, the unlicensed husband caused an accident. There was no dispute that the insured was aware that her husband was unlicensed and as a result on the face of it she was in breach of the ‘authorized by law to drive’ provision in section 4(1) of the policy. The insurer denied coverage as a result.
The court noted that a breach of this nature was subject to a strict liability standard which required that the insured to establish that she took all reasonable steps to avoid the particular event. The reasonableness standard requires a consideration of the nature of the breach, what caused it and all of the surrounding circumstances that explain the act or omission. The court ultimately determined that it was not reasonable for the insured to allow her husband to drive. It is worth noting that the court relied in large part on the discovery transcript of the husband which betrayed a level of confusion and an inability to focus. The court ultimately concluded that the husband was someone ‘who simply cannot get his bearings’ and as a result it was not reasonable to allow him to drive, regardless of the circumstances.
This case is fact driven but provides a good counterpoint to the decision of Ontario’s Court of Appeal in Kozel v. Personal. In that case, the insured was also in breach of section 4(1) for driving while she was not authorized by law to drive. However, in that case the license suspension was the result of a failure to respond to a license renewal notice which was considered to be a ‘relatively minor breach’. In contrast, allowing an elderly individual who had an ‘inability to get his bearings’ and who had not driven in more than 20 years was something quite different and ultimately, not reasonable. https://bit.ly/2KoWLxQ
What do you do at work that is considered ‘under the direction’ of your employer?
The answers to this question are endless. A more interesting question: what do you have to be doing at work not to be ‘acting under the direction’ of your employer? That question is at the heart of the decision in Oliveira v. Aviva , a Court of Appeal decision released this week. The applicant sought coverage and a defence for claims brought against her by a hospital patient for damages as a result of applicant’s alleged accessing the hospital records of a patient who was not under her care. The crux of the case turned on whether the applicant (defendant in the lawsuit) was an insured under the policy issued by Aviva. The policy would provide coverage if the allegations in the underlying Statement of Claim alleged conduct took place while the applicant was acting under the direction of the named insured but only with respect to liability arising from the operations of the named insured.
Because the policy provided coverage for ‘invasion or violation of privacy’, also referred to as the tort of intrusion upon seclusion (which would include accessing records in an unauthorized manner) the court held that the policy was by definition intended to cover offensive conduct that would presumably not be authorized by the insurer. In that case, how can coverage be denied for conduct that on the face of it would appear to be covered?
Acting under the direction of the employer relates not to control how the work is done or actual oversight at the moment of the incident (in this case when records were improperly accessed) but rather flows from the relationship generally and ‘control’ over incidental features of the of the employment such as directing when and where to work and having the right to terminate the employment.
Whether the alleged misconduct arose out of the operations of the named insured was also in issue. The insurer argued that hospitals operations are to provide care and because the employee was not within the patient’s circle of care, her conduct did not fall within the operations of the hospital. The court rejected this argument, noting that the ‘operations’ of the hospital included creating, collecting and maintaining medical records. The underlying claim against the applicant (defendant) for which coverage was sought related to allegations about the unauthorized access to those medical records.
Ultimately however, in reading the decision, the irresistible inference is that the court accepted that because the policy covered ‘intrusion upon seclusion’, it could only be read to cover the alleged misconduct. As a result to deny coverage for the very conduct that the policy was intended to cover would be perverse. It is also consistent with the underlying interpretive imperative of insurance policies – coverage should be interpreted broadly and exclusions should be interpreted narrowly.
A FSCO arbitrator has confirmed that the first insurer that receives a completed application for accident benefits is required to adjust and pay the claim, even if the insurer is taking an off-coverage position.
In Cankaya v. Intact / Cankaya v. Unifund, the claimant was working on the engine of a 2001 BMW vehicle he was about to repair at his mechanic shop. The cooling fan or other part of the BMW broke apart and flew into his face. He sustained multiple injuries. He was acting in the course of his self-employment as a garage repairman when the incident occurred.
At the time of the incident, the claimant was insured with Unifund under a standard Ontario Automobile Policy (OAP 1), which insured his personal vehicle. He was also insured with Intact under the standard Ontario Garage Automobile Policy (OAP 4). Both policies were valid at the time of the incident.
The claimant submitted an application for accident benefits to Unifund on January 10, 2014. On March 27, 2014, Unifund advised the claimant that he was precluded from receiving any accident benefits under his policy because of the garage exclusion under section 1.8.4 of the OAP 1.
On April 15, 2014, the claimant’s lawyer wrote to Unifund and advised about the Intact policy. The claimant’s lawyer encouraged Unifund to pursue a priority dispute against Intact, pursuant to O. Reg. 283/95 . Unifund refused to do so.
On June 18, 2014, the claimant submitted an application for accident benefits to Intact. Intact denied the application on the basis that it was not the first Insurer to receive a completed application.
The claimant did not receive any benefits, so he applied for mediation and arbitration at FSCO. A preliminary issue hearing was held to determine a number of issues, the main one being whether FSCO had jurisdiction to determine whether section 1.8.4 of the OAP 1 could relieve Unifund of its obligations to respond/adjust and pay benefits, pursuant to section 2.1 (6) of O. Reg. 283/95. In other words, could FSCO determine coverage or was that issue reserved for a priority dispute?
Priority Dispute Scheme ( in a nutshell)
Section 2.1 (6) of O. Reg. 283/95 requires the first insurer who receives a completed application for accident benefits to respond and pay benefits pending the outcome of any priority dispute with another insurer. In Kingsway v. Ontario (2007), the Court of Appeal stressed that the “pay now, fight later” principle is vital:
Section 2 of regulation 283 is critically important in the timely delivery of benefits to victims of car accidents. The principle that underlies section 2 is that the first insurer to receive an application for benefits must pay now and dispute later. The rationale for this principle is obvious: persons injured in car accidents should receive statutorily mandated benefits promptly; they should not be prejudiced by being caught in the middle of a dispute between insurers over who should pay, or as in this case, by an insurer’s claim that no policy of insurance existed at the time.
Where an insurer receives a completed application and believes that another insurer has priority over it for the claims, O. Reg. 283/95 allows the insurer to compel the other insurer(s) to participate in a priority dispute. The entire procedure is contained in the Regulation and disputes are resolved in private arbitration, pursuant to the Arbitration Act, 1991.
O. Reg. 283/95 has strict timelines: When an insurer receives a completed application for accident benefits, it has 90 days from the date of receipt to investigate priority and to give a target insurer written notice of the dispute, pursuant to section 3. An insurer that fails to give written notice within that 90-day period is barred from pursuing priority against the other insurer, unless it can show, firstly, that 90 days was not enough time to make its determination and, secondly, that it made reasonable investigations during those 90 days. These two “saving provisions” are often difficult to satisfy.
Section 4 requires the insurer giving notice under section 3 to also give the claimant a Notice to Applicant of Dispute Between Insurers form, which is a prescribed document that advises the claimant of the dispute and the name or names of the other insurer(s) who might have priority over the claims. The claimant is given 14 days to object to the transfer of their file. If the claimant objects, he or she becomes a participant in any proceeding to determine priority. The Superior Court held recently that the notice under section 4 must be given within 90 days after the insurer receives the claimant’s completed application for benefits.
Once an insurer gives its written notice, subsection 7 (3) states that any arbitration to decide the issues between the parties must be initiated within one year from the date the insurer paying benefits gave its priority dispute notice.
As noted above, Unifund rejected the application on the basis that the claimant was subject to the garage exclusion under section 1.8.4 of the OAP 1. Having determined that there was no coverage under the policy, Unifund refused to adjust and pay benefits pending the outcome of any priority dispute with Intact. Actually, Unifund refused to initiate a priority dispute against Intact.
Meanwhile, Intact refused to adjust the claim on the basis that it was not the first insurer to receive an application for accident benefits. Essentially, Intact argued that Unifund was the first insurer to receive an application, so only Unifund was compelled to pay now and dispute later.
The first issue was whether FSCO had jurisdiction to determine whether section 1.8.4 of the OAP 1 could relieve Unifund of its obligations under section 2.1 (6) of O. Reg. 283/95. The arbitrator relied on previous FSCO decisions (Vieira and Royal & SunAlliance and Chubb, 2004 FSCO App) and Bianca v. Wawanesa, 2004 FSCO Arb) and held that FSCO did not have jurisdiction to make that decision.
Put another way, FSCO (and the courts, and likely the LAT) often determines whether a particular claimant was involved in an “accident”. This is a general coverage issue that applies to a claimant regardless of where she applied for benefits. If she was involved in an “accident”, she is entitled to benefits from at least one insurer. If she was not involved in an “accident”, she is not entitled to benefits from any insurer. FSCO has jurisdiction to make this determination.
However, where there is no issue as to whether a claimant was involved in an “accident”, any other coverage issues (i.e., whether the claimant is an “insured person” under a particular policy) is determined in a priority dispute between insurers. FSCO does not have the jurisdiction to make that determination.
Although FSCO does not have jurisdiction to determine coverage in a priority dispute, it t is well settled law that FSCO has the jurisdiction to determine whether an insurance company complied with section 2.1 (6) of O. Reg. 283/95. The test is whether there is a sufficient nexus between the claimant and the target insurer. For example, in Vieira, there was a nexus even though the policy under which the application was made was not in force at the time of the accident.
It is easy to see the nexus between Mr. Cankaya and Unifund: At the time of the accident he was a named insured of Unifund. Therefore, Unifund’s obligations under section 2.1 (6) of O. Reg. 283/95 would have been triggered when its insured applied for benefits under his policy. It would be open to Unifund to rely on any exclusions under section 31 of the SABS to deny certain benefits. Unifund could also pursue a priority dispute against another insurer, such as Intact. In this case, it failed to do both.
Consequently, the arbitrator found that Unifund was required to adjust the claims and pay benefits:
Given my findings above in Issue 1, Unifund is obliged to respond and adjust Mr. Cankaya’s application for statutory accident benefits. This finding is necessary so Mr. Cankaya may be treated fairly and receives benefits under the SABS to which he is entitled. As well it is consistent with the purpose and rationale of O. Reg. 283/95.
Except in the most unusual circumstances, any insurer in Unifund’s position should take the safe route: They should accept the application, pay the benefits, and dispute priority.
If Unifund was correct that there was no coverage under its policy, the file would have gone to Intact and Unifund would not be responsible for paying benefits.
However, Unifund failed to pursue priority against Intact, so the merits of the dispute will never be resolved because the priority dispute would be time-barred. Accordingly, Unifund is now saddled with the responsibility to pay benefits indefinitely, regardless of whether priority rested with another insurer.
See Cankaya and Intact, FSCO A14-009220 Unifund Assurance Company v The Dominion of Canada General Insurance Company, 2016 ONSC 4337 (CanLII), <http://canlii.ca/t/gshr3> [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]
A FSCO arbitrator has ruled that a child who fell off a fire truck at a birthday party was not involved in an automobile “accident”.
In Carr v. TD, the five-year-old claimant was attending a birthday party for a classmate at her classmate’s home. Her classmate’s father and grandfather were volunteer firefighters for the Town of Niagara-on-the-Lake. After obtaining the necessary permission, they brought a fire truck owned by the Town to the birthday party. The children attending the birthday party were invited to tour the fire truck. When the children were touring the truck, the truck was stationary and the engine was off. As the children toured the fire truck, the classmate’s grandfather walked around talking to their parents and educating them on the use of the truck. The claimant apparently lost her footing and fell as she went down the steps getting off the truck. She was injured when she hit the ground.
As a result of the incident, the claimant applied to TD (her father’s insurer) for accident benefits. TD denied the claim on the basis that the claimant was not involved in an “accident”, as that term is defined in section 3 (1) of the SABS:
3. (1) In this Regulation,
“accident” means an incident in which the use or operation of an automobile directly causes an impairment or directly causes damage to any prescription eyewear, denture, hearing aid, prosthesis or other medical or dental device.
The arbitrator considered the “purpose” and “causation” tests that have evolved in the jurisprudence over the years. For the “purpose” test, the question is whether the incident resulted from the ordinary and well-known activities to which the automobile (fire truck) was put.
The arbitrator agreed with the claimant that getting out of a fire truck is the normal use of a vehicle, and in determining normal use and operation, the individual characteristics of the truck must be taken into account. The arbitrator accepted that the use of the fire truck at the birthday party was a normal use of the truck in the circumstances.
However, the arbitrator held that the use of the truck in this instance did not involve the fire truck being used as an automobile. She found that the vehicle was being used as a “display for entertainment and/or educational purposes”. She held, “Although the evidence indicates that this was a legitimate use of the truck, it was not a type of use or operation contemplated by Section 3(1).”
The ongoing saga continues as to whether unusual incidents involving vehicles are automobile “accidents”.[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]
The task force looking at reform of FSCO has issued a preliminary position paper today calling for a new structure with broader supervisory jurisdiction. It appears that insurance issues would come under the watch of two Superintendents, one for market conduct and product issues, and another Superintendent of Prudential Matters.
The panel is inviting feedback.
For more info and to read the paper: Ministry of Finance[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]