On October 14, 2022, the Ontario Court of Appeal dismissed the appeal in AIG Insurance Co of Canada v Lloyd’s Underwriters,  OJ No 4509, 2022 ONCA 699, finding that extrinsic evidence relating to the duty to defend was “premature” and inadmissible in the duty to defend analysis as it could affect a finding in the underlying action.
The Forgets family purchased land, obtained a site plan, the required permits, and then built their family home. Approximately three years later, the City issued an order requiring the Forgets to remove, relocate or demolish their home due to ongoing erosion in the adjoining property that was impacting the stability of Forgets’ home. The Forgets brought a claim in the underlying action against the City for negligence, nuisance and trespass to land.
The City’s Insurers were Lloyd’s Underwriters (“Lloyd’s”) and AIG Insurance Company of Canada (“AIG”), providing General Liability Insurance. Both Insurers provided the City with coverage for the time period referenced in the underlying action. AIG agreed to defend the City, under reservation of rights for indemnity. Lloyd’s denied coverage. AIG then brought an application to determine whether Lloyd’s had a duty to defend which would require it to contribute to defence costs.
Counsel for both Insurers agreed that the operative provisions of their respective insuring agreements are “functionally identical”. The agreements provide coverage for property damage caused by an “occurrence” if it occurs during the policy period. The relevant part of the Lloyd’s Policy read as follows (para. 15):
- We will pay those sums that the “Insured” becomes legally obligated to pay as “damages” because of … “property damage” to which this insurance applies. We will have the right and duty to defend the “Insured” against any “action” seeking those “damages”. …
- This insurance applies to … “property damage” only if:
- The … “property damage” is caused by an “occurrence” … and;
- … occurs during the policy period.
The Exclusion Clause read as follows (para. 16):
This insurance does not apply to:
- Expected or Intended Injury
… “property damage” expected or intended from the standpoint of the “Insured”.
Lloyd’s took the position that damage to the Property was not caused by an “occurrence”, as required to engage coverage under the Policy. If there was an occurrence, Lloyd’s maintained that the Exclusion Clause ousted its duty to defend (para. 18).
The denial of an “occurrence” was based on a report prepared by a geotechnical firm as a preliminary assessment of the condition in the adjoining property, over two years prior to the City ordering the Forgets to move out of their residence. The report offered “potential remedial actions and recommendations” to mitigate further damage to the adjoining property, and it also referenced the Forgets’ home. Therefore, Lloyd’s argued that any property damage caused by the erosion problems had been manifested several years prior. The City’s failure to proceed with the recommended remediation meant that any ongoing damage to the residence was no longer “accidental” (para. 21).
With respect to the Exclusion Clause, Lloyd’s argued that after receipt of the report, from the “standpoint of the insured”, further property damage was expected. Therefore, even if there was an occurrence engaging the Policy, the Exclusion Clause applied.
The Application Judge concluded that the report was “preliminary” and could not fairly be construed as a “crystallizing event” after which ongoing damage to the residence could no longer be seen as accidental and had to be seen as “expected or intended” (para. 26). The judge also identified that the City had ongoing investigations of potential remediation and that the underlying action would determine the required standard.
The Application Judge found that the damage to the residence continued during the currency of the Lloyd’s Policy and that the evidence met the “mere possibility” test. Therefore, the underlying claim triggered Lloyd’s duty to defend.
ON Court of Appeal Decision
The Court of Appeal affirmed the Application Judge’s decision that Lloyd’s owed a duty to defend and included consideration of “extrinsic” and “premature” evidence in a duty to defend analysis.
The Court of Appeal relied on the SC decision in Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49 which established that a court may go beyond the pleadings and consider “extrinsic evidence referred to within the pleadings”. However, this approach cannot cause the duty to defend application to become “a trial within a trial” and the Application Judge should not review “premature” evidence, defined as “evidence which, if considered, would require findings to be made before trial that would affect the underlying litigation” (paras. 44 and 45).
The Court of Appeal found that the report was precisely the extrinsic evidence referred to in Monenco. As extrinsic evidence, the Application Judge was entitled to consider the report for the purpose of determining the substance and true nature of the allegations. However, because the report was not part of the pleadings, Lloyd’s could not rely on the report as it would risk a “trial within a trial” and lead to premature findings best left to the judge hearing the underlying trial. As such, the Application Judge was correct in not accepting the report as evidence of a crystallizing event such that the Exclusion Clause applied (para. 53).
Further, the Exclusion Clause did not apply as the underlying action alleged negligence and not intentional conduct that caused expected property damaged. Negligence allegations suggest the damage was fortuitous and an accident (para. 58).
The Application Judge determined that the evidence in this case met the “mere possibility” test and triggered the duty to defend. The Court of Appeal confirmed that extrinsic evidence will be considered “premature” evidence and inadmissible in a duty to defend analysis if it results in findings that will affect the underling litigation.
Determining whether a duty to defend has been triggered can be a complex analysis. Our lawyers at Whitelaw Twining can provide assistance on any type of coverage issue that may arise. Please contact any of our lawyers for assistance.
Written by Jeremy Ellergodt and articling student Alexandra Kulakova