The Ontario Superior Court recently addressed the evidence required to overcome the presumption of a duty to defend in the context of a liability insurance policy.
AIG Insurance Company of Canada ("AIG") brought an application seeking equitable contribution from Lloyds Underwriters ("Lloyds") towards the cost of defending the City of Timmins (the "City") in an action brought by two homeowners for damage caused to their properties between April 2016 and December 2019. The homeowners had alleged the slope on which their home was constructed was slowly failing due to drainage issues and inappropriate landscaping, excavation and regrading. The erosion had progressed over the years to the point that the City ordered the homeowners to vacate their properties in 2019, demolish their homes and cease use of the properties until the slope was stabilized.
Both Lloyds and AIG had issued Public Entity General Liability Insurance policies to the City in successive years, with AIG "on risk" for 2016 and 2017, and Lloyds "on risk" for 2018 and 2019. Both AIG and Lloyds policies contained effectively identical operative provisions providing coverage for property damage caused by an occurrence during the policy period. Further, both policies contained an "Expected or Intended Injury" exclusion. However, when the City requested a defence pursuant to the policies, only AIG responded; Lloyds refused to defend, maintaining the ongoing damage was not accidental or fortuitous after May 2017 and relying on the "Expected or Intended" exclusion to deny coverage.
During the application it was agreed that pursuant to Progressive Homes Ltd. v Lombard General Insurance Company of Canada, 2013 SCC 33, a duty to defend would exist if the insured was able to show a "mere possibility" that the true nature or substance of the claim, if proven, would trigger a duty to indemnify.
The determination of whether a defence was owed by Lloyds hinged on an engineering report prepared in May 2017 (the "AMEC Report") which set out recommendations on how to address the drainage and erosion issues at the homeowners' properties. Lloyds took the position that, as the report discussed the erosion issues, made recommendations, and raised the potential repercussions if no action was taken, once the report was provided to the City the loss had "crystallized". Essentially, Lloyds argued that after that point any further damage to the plaintiffs' properties was no longer an "accidental" or "fortuitous loss".
Further, Lloyds also relied on the "Expected or Intended" exclusion which stated that "this insurance does not apply to expected or intended injury," being "property damage expected or intended from the standpoint of the insured". On this issue, Lloyds argued that the terms "expected" and "intended" are two distinct words and therefore should be considered independently, according to their plain and ordinary meaning. As such, any property damage suffered after the AMEC Report was issued could be reasonably seen as "expected", providing grounds to deny coverage.
The Court had reservations in placing such weight on the AMEC Report, as caselaw cautions against allowing contested evidence in preliminary applications to prevent a "trial within a trial". Regardless, in considering the AMEC Report the Court observed that the report was clear in emphasising its preliminary nature, including being titled "Preliminary Drainage and Slope Condition Assessment" and noted that the report's authors made substantial efforts throughout to reinforce the preliminary nature of its content. As such the Court attributed little weight to the AMEC Report's "conclusions" and determined that it therefore did not support the weight Lloyds had attributed to it.
While acknowledging Lloyds' argument, the Court concluded the AMEC Report could not be seen as a "crystalizing event" such that further damage was "expected", thus engaging the Expected or Intended exclusion. Rather it was evidence that investigations and assessments into remediation of the issues were ongoing. The "manifestation theory" requires an active policy at the time the damage "manifested" to respond. The Court maintained this theory required clearer evidence of "manifestation", and concluded that the evidence showed the damage to the property continued throughout the period covered by the Lloyds policy.
The Court also addressed the applicability of the "Expected or Intended" exclusion clause relied on by Lloyds in denying coverage. AIG successfully argued, citing Alie v Bertrand & Frere Construction Co Ltd, 2002 ONCA, that before damage can be characterized as intended or expected, a certain degree of intentionality or knowledge was required. The Court found that while "expected" and "intended" are distinct terms with different meanings, more substantial evidence than a preliminary report was required in order to recharacterize the damage from being accidental or negligent to "expected" or "intended".
On this basis, the Court concluded AIG had more than met the test of showing there was a "mere possibility" that the claim triggered Lloyds' duty to defend. The Court was not required to decide the appropriate split of costs between the two insurers as counsel had already agreed that if a duty to defend existed, the reasonable split would be 50/50. As such, Lloyds was required to reimburse AIG for 50% of costs already incurred defending the City in the underlying action, and contribute equally to the City's ongoing costs in that action.
This case reinforces the ongoing difficulty insurers face when attempting to avoid a duty to defend and establishing there is no "mere possibility" that the nature or substance of a claim would trigger indemnification. More specifically, this decision illustrates the difficulty in establishing the "crystallization" or "manifestation" theory of damage. The evidentiary burden is high, and the evidence proffered must be determinative, providing clear conclusions or recommendations to an insured. A preliminary report, containing qualifying language, is insufficient to meet that burden.
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