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Canada: On-Risk E-Bulletin @ Gowlings - April 14, 2011

19 April 2011
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Insurance
Edited by Paul Stein & Tanya Frizzell Insurance

Related Headlines
Message From the Executive Editors
Proper Formation Is Fundamental To The
Insurance Contract (Singleton Urquhart
In this issue of Gowlings' On-Risk E-Bulletin, Gowlings' LLP)
professionals examine: Supreme Court Clarifies When Insurance
Must Respond To Defend Construction
Deficiency Claims (Blaney McMurtry LLP)
a. The Supreme Court of Canada's analysis of the duty to defend in Canadian Insurance Regulators Release
the recent decision of Progressive Homes Ltd. v. Lombard General Issues Paper Regarding MGA Distribution
Insurance Co. of Canada; Model (Stikeman Elliott LLP)
"Takaful" - Islamic Insurance (PwC
b. The practical effect of without prejudice offers as discussed by the Management Services LP)
Alberta Court of Appeal in Mahe v. Boulianne; Property and Casualty Demutualization –
The Start of Something New (Blake,
c. Coverage for fortuitous settlement in property damage claims and Cassels & Graydon LLP)
the application of a settlement exclusion clause as determined by Leveraging the P&C Distribution Channel
the Alberta Court of Appeal in Engle Estate v. Aviva Insurance for Success – Part One (PwC
Company of Canada; Management Services LP)
OSFI Releases Final Reinsurance
d. The Ontario Court of Appeal's views on the preconditions to Regulatory Guideline and Guidance on
subrogation under a standard mortgage clause in Farmers' Mutual Reinsurance Security Agreements
Insurance Company (Lindsay) v. Pinder; and (Stikeman Elliott LLP)
OSFI Finalizes Guidance for Reinsurance
e. The credit of settlement monies paid pursuant to a Pierringer Security Agreements and Reinsurance
agreement towards the damages awarded at trial in the Alberta Practices (Torys LLP)
Court of Appeal decision in Bedard v. Amin. Steering Through The New Auto
Insurance Rules (Soberman LLP)
We hope you find this issue of On-Risk to be informative and look forward Progressive Homes Ltd. v. Lombard
to any comments or questions you might have in respect of the topics General Insurance Co. Of Canada, 2010
discussed. Please feel free to contact either of us or the authors of the SCC 33 (Blaney McMurtry LLP)
articles below for further information.
Related Functions
Ask Gowling Lafleur
INSURER'S DUTY TO DEFEND: Henderson LLP a question
Policy and Pleadings over Principles Bookmark this Article.
PROGRESSIVE HOMES LTD. v. LOMBARD GENERAL INSURANCE
CO. OF CANADA Email a colleague with a
synopsis and link to this
article
By: Heather Gray, Toronto Printer-friendly version of this
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Follow our Canada feed on
Brief Background Twitter! (LawNewsAmerica)

Progressive Homes Ltd. ("Progressive") was hired as a general contractor

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Progressive Homes Ltd. ("Progressive") was hired as a general contractor Do you find this article useful?
to build four housing complexes for the British Columbia Housing
Management Commission ("BC Housing"). The complexes leaked and, Not
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as a result, suffered significant rot, infestation and deterioration. BC
Housing sued Progressive for breach of contract and negligence. Rank

Progressive submitted the claim to its CGL carrier, Lombard General

Insurance Co. of Canada, who ultimately denied coverage on the basis
that the claim did not trigger its duty to defend. Lombard argued that the
damages were the expected consequence of faulty workmanship and did
not constitute "property damage" caused by "accident". The British Columbia Supreme Court and Court of
Appeal agreed, following a line of reasoning adopted in B.C. in Swagger Construction Ltd. v. ING Insurance
Company of Canada and GCAN Insurance Company v. Concord Pacific Group Inc. The Courts relied on
general principles such as, "property damage" refers to damage to the property of a third party and that
defective construction is not fortuitous. To find otherwise, held the majority of the Court of Appeal, "flies in
the face of the underlying assumption that insurance is assigned to provide for a fortuitous contingent risk".

The Supreme Court of Canada disagreed and overruled the decision. In doing so, it reconciled B.C.'s
jurisprudence with a divergent line of cases from Ontario and Saskatchewan, Bridgewood Building Corp. v.
Lombard General Insurance Co. of Canada and Westridge Construction Ltd. v. Zurich Insurance Co., which
favoured a broader reading of the coverage grant in similar liability policies.

Analysis

While several different policy wordings were at issue, the basic features of the coverage grants were the
same. Lombard owed Progressive a duty to defend for property damage caused by an accident.

(i) Property Damage

Lombard relied on prior jurisprudence for the proposition that "property damage" in a CGL policy cannot
mean damage to one part of a building caused by the failure of another part of a building and, therefore, must
mean damage to the property of a third party. Justice Rothstein, speaking for a unanimous court, roundly
rejected this interpretation holding:

I would construe the definition of "property damage" according to the plain language of the definition, to
include damage to any tangible property. I do not agree ... that the damage must be to third-party property.
There is no such restriction in the definition.

The pleadings described water leaking in through windows and a deterioration of the building components
resulting from water ingress and infiltration. The Supreme Court held that this met the low threshold in a duty
to defend analysis of showing that the pleadings reveal a possibility of coverage.

(ii) Accident

In this case, the definition of "accident" being considered was, generally:

"Accident" includes continuous or repeated exposure to conditions which result in property damage neither
expected not intended from the standpoint of the Insured.

Lombard argued that a defective building is the result of defective workmanship and cannot be an
"accident". The Supreme Court held that absent policy language to the contrary, it could not be said that
defective workmanship was never an accident. Whether defective workmanship will be seen as accidental
will depend on the alleged circumstances and the definition of "accident" in the policy.

The Supreme Court also rejected the suggestion that allowing for the possibility that defective workmanship
could be accidental offended the concept of fortuity. Where the pleadings do not make reference to
intentional conduct, which would suggest that the damage was expected or intended, then there remains a
possibility that the damage was fortuitous.

Though the decision in this case is not groundbreaking, it is a strong reminder of the primacy of the policy
and the pleadings in a duty to defend analysis. In that regard the decision serves as a signal to the industry
to (a) ensure that its wording is in line with its underwriting intent; and (b) ensure that a claim is evaluated
based on the pleadings and not principles.

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based on the pleadings and not principles.

THE POWERFUL EFFECT OF INFORMAL OFFERS

By: Taryn Burnett, Calgary

The Alberta Court of Appeal addressed the effect of without prejudice offers in Mahe v. Boulianne. In Mahe,
the Alberta Court of Queen's Bench awarded the plaintiff $700,000 at trial for injuries sustained when he fell
from a power pole. On appeal, damages were reduced to $365,000. After the trial judgment was rendered,
the appellant offered the plaintiff $500,000, being the appellant's insurance policy limit. The plaintiff rejected
the offer. The appellant sought double costs from the date of the offer.

The plaintiff argued that the offer does not attract double costs as it did not make reference to the Rules of
Court dealing with formal offers, nor did it indicate that it was made as a Calderbank offer. It was simply a
settlement offer made on a "without prejudice" basis.

The Alberta Court of Appeal held that "without prejudice" offers can be referred to when the merits of the
dispute have been decided. At para. 10, the Court stated that:

...The Rules of Court do not specify that any particular form of offer is required to trigger its costs
consequences, and an offer need not make reference to costs. The parties are presumed to know the law,
including the provisions of the Rules of Court. In any event, even informal offers that arguably do not comply
with the Rules can have an effect on costs: Fullowka v. Royal Oak Ventures Inc., 2008 NWTCA 9 (CanLII),
2008 NWTCA 9, [2008] 12 W.W.R. 60, 437 A.R. 390 at paras. 23-5. While informal offers do not restrict the
court's discretion over costs, they are nevertheless a relevant consideration. The appellant made a generous
offer that exceeded his eventual liability, and he is entitled to double costs of the appeal after the offer was
made.

This decision stresses the importance of explaining to clients the risks and benefits associated with offers,
whether they are formal offers under the Rules of Court or informal offers made on a without prejudice basis.
This decision further stresses the wide discretion exercised by the court in awarding costs. Finally, this
decision confirms that all settlement offers may be considered by a court in assessing costs.

FORTUITOUS SETTLEMENT NOT EXCLUDED BY SETTLEMENT EXCLUSION CLAUSE

By: Erin Runnalls, Calgary

Summary

In its decision in Engle Estate v. Aviva Insurance Company of Canada, the Alberta Court of Appeal
addressed the interpretation of an insurance contract purporting to exclude damage to buildings caused by
settlement.

The Court focused on finding an interpretation from the whole of the contract that promoted the parties' true
intent at the time of entering into the contract. On this basis, the Court held that the settlement exclusion
clause was interpreted only to exclude damage to buildings caused by natural settlement forces and not
damage to buildings caused by fortuitous causes, as the parties' reasonable intention in entering into the all-
risk insurance policy was to insure against fortuitous circumstances.

Background Information

The respondent, Engle Estate, owned a commercial building and leased the premises to a number of
commercial tenants. The respondent secured an all-risk insurance policy with the appellant, Aviva Insurance
Company of Canada.

After lot excavation commenced on a high-rise condominium adjacent to the respondent's building, the
respondent's tenants began to notice cracks developing in the floors, walls and ceilings of the building. The
building had been in good condition prior to the commencement of the excavation activity on the adjacent

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building had been in good condition prior to the commencement of the excavation activity on the adjacent
lot. The respondent's expert opined that the settlement damage to the respondent's building was caused by
the excavation activity on the adjacent lot, and specifically by inadequate underpinnings and shoring together
with vibrations, shaking and the destabilizing effects of the deep excavation.

The respondent reported the matter to the appellant insurer. The insurer denied the respondent's claim on
the basis that the all-risk insurance policy excluded loss or damage caused by settlement:

5. PERILS INSURED

This form, except as herein provided, insures against all risks of direct physical loss of or damage to the
property insured.

6. EXCLUSIONS ...

B) PERILS EXCLUDED

This form does not insure against loss or damage caused directly or indirectly: ...

1) to "buildings" by: ...

(iii) settling, expansion, contraction, moving, shifting or cracking unless concurrently and directly caused
by a peril not otherwise excluded in Clause 6.B. hereof;

The trial judge concluded that the exclusion clause did not apply. The trial judge interpreted the settlement
exclusion clause to apply only to settlement-related damages caused by natural forces and not to settlement
which results from non-natural causes.

Interpretation of Settlement Exclusion Clause

The Court of Appeal framed the question on appeal as follows: Does the exclusion clause exclude coverage
for damages or loss from settlement no matter the cause, or only damage or loss that occurred naturally?

The insurer argued that the exclusion clause was not restricted only to settlement from natural forces and
cited a number of Canadian cases that have interpreted settlement exclusion clauses to exclude settlement
damages however caused. The insured sought to distinguish the Canadian cases on the basis of the
different wording of the settlement exclusion clauses at issue in those cases, and urged the Court to follow
the American interpretation of similar provisions. The Court noted that the Canadian cases relied upon by
the insurer were distinguishable in that the exclusion clauses excluded settlement as a type of damage,
whereas the exclusion clause at issue explicitly included the words "caused by".

The Court of Appeal cited the applicable principles governing the interpretation of insurance contracts, but
focused almost exclusively on finding an interpretation from the whole of the contract that promoted the
parties' true intent at the time of entering into the contract.

The Court agreed with the trial judge that "settling" is commonly understood to mean that which is expected
and occurs naturally. The Court found the wording of the settlement exclusion clause to be instructive as to
the parties' intent in this regard, as the specific terms, namely "expansion, contraction, moving, shifting or
cracking", suggested to the Court that the clause was meant to exclude damages for passive, gradual, or
naturally occurring events.

The insurer argued that the language used, particularly the words "directly or indirectly", evidenced the
parties' intent that the exclusion clause apply to both naturally occurring and fortuitous settlement. However,
the Court found that the words "directly or indirectly" were used elsewhere in the contract and, in a number of
instances, qualified by words such as "whether natural or man-made". Therefore, the Court held that the
words "directly or indirectly" did not necessarily evidence the intent as argued for by the insurer, and the
drafters could have employed more precise language to include fortuitous causes as was done elsewhere in
the contract.

Finally, the Court concluded that the reasonable intention of the parties to such an all-risk insurance policy is
that the settlement exclusion clause applies to naturally occurring settlement, but not settlement that occurs
otherwise. The Court found this interpretation to be consistent with the underlying purpose of all-risk
insurance policies as understood by the parties to protect against fortuitous events. If the parties had

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insurance policies as understood by the parties to protect against fortuitous events. If the parties had
intended the anomalous result that the excavation activity on the adjacent lot causing damage to the
respondent's building would be covered with the exception of settlement-type damage, then the parties
should have expressly said so in the contract.

PRECONDITIONS TO SUBROGATION UNDER STANDARD MORTGAGE CLAUSES

By: Tanya Rocca, Toronto

Summary

In Farmers' Mutual Insurance Company (Lindsay) v. Pinder, the Ontario Court of Appeal confirmed that there
are two preconditions to an insurer's right to subrogation under standard mortgage clauses. First, the insurer
must make payment of the loss award, or part of it, to the mortgagee. Second, the insurer must establish a
claim that it has no liability to the mortgagor insured.

Facts

The Pinders held an insurance policy on their home with Farmers' Mutual Insurance Company ("Farmers'
Mutual"). The home was subject to a five-year mortgage with the Bank of Montreal. After a fire damaged the
Pinders' home, they submitted a claim to Farmers' Mutual for damage and repairs to the home, and
additional living expenses. Farmers' Mutual denied the claim on the grounds that the Pinders failed to notify
the insurer of a material change in the risk, thereby voiding the policy, and that the Pinders made willfully
false statements with respect to their claims, vitiating their right to recover.

Under the Standard Mortgage Clause of the insurance policy, the Bank of Montreal submitted a proof of loss
seeking payment of the balance of the mortgage loan outstanding. Farmers' Mutual paid the Bank the
principal balance of the mortgage.

The Pinders initiated an action against Farmers' Mutual seeking a declaration that the insurance policy was
valid and binding, and Farmers' Mutual commenced an action seeking recovery of the amount paid to the
bank, relying on its right of subrogation under the Standard Mortgage Clause.

Farmers' Mutual brought a motion for summary judgment in its action against the Pinders. In response, the
Pinders brought a motion for the consolidation of the two actions. The motion judge granted summary
judgment against the Pinders and stayed the Pinders' claim.

The Pinders appealed the decision, seeking an order dismissing Farmers' Mutual's motion for summary
judgment and an order directing that the two actions be tried together.

The Appeal

The issue on appeal was whether the sole precondition for the insurer's claim to a subrogation right under
the Standard Mortgage Clause was the insurer paying the mortgagee any part of the loss award under the
insurance policy. The Court of Appeal rejected the cases relied upon by the motion judge and completed a
general survey of the function and effect of the Standard Mortgage Clause within the policy.

The court recognized that the Standard Mortgage Clause has been a standard part of insurance policies for
well over a century, and cited the unanimous decision of the Supreme Court of Canada in Caisse populaire
des deux rives v. Société mutuelle d'assurance contre l'incendie de la vallée du richelieu.

In that case, Justice L'Heureux-Dubé found that though part of the policy between the insurer and insured,
the Standard Mortgage Clause constitutes a second and separate insurance contract between the insured
and the mortgagee. This two contract theory is firmly embedded in North American insurance practice and
protects the mortgagee's interest in the insured property even when the insured has done something to void
the policy.

After reviewing the preconditions to the right of subrogation, the purpose of the Standard Mortgage Clause,
and the commercial atmosphere in which insurance is contracted, the court held that the second precondition
in the Clause should be interpreted to require that the insurer establish a claim that the insured mortgagor

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in the Clause should be interpreted to require that the insurer establish a claim that the insured mortgagor
has voided the policy. This conclusion avoids a construction that would render the insurance coverage the
insured mortgagor has purchased to cover the mortgage debt ineffective.

The Ontario Court of Appeal recognized that this approach to the language of the Standard Mortgage Clause
has been applied throughout the North American insurance industry for decades. A review of Canadian and
American jurisprudence and commentary reinforced the conclusion that there are two preconditions to the
insurer's entitlement to subrogation under the Standard Mortgage Clause.

The judgment granted by the motion judge was set aside and replaced with an order dismissing Farmers'
Mutual's application for summary judgment and granting the Pinders' motion that Farmers' Mutual's action be
consolidated or heard together with their action. The Supreme Court of Canada refused to grant leave to
appeal.

MONIES RECEIVED PURSUANT TO PIERRINGER AGREEMENT CREDITED AGAINST DAMAGES

AWARDED AGAINST NON-SETTLING DEFENDANT

By: Lindsay Gluck, Calgary

Summary

The 2010 Alberta Court of Appeal decision in Bedard v. Amin deals with whether settlement funds paid by a
settling defendant to a plaintiff pursuant to a Pierringer agreement should be deducted from the damages
awarded at trial. The question called for a balancing of competing policy objectives: public interest in
encouraging settlement of multi-party litigation, versus the rule against double recovery in tort claims.

The Court of Appeal held that the trial Judge did not err in coming to the conclusion that, on the current state
of Canadian law, the rule against double recovery in tort claims must outweigh the public interest in
encouraging settlement of multi-party litigation. The appeal was dismissed, with the result that the amount of
settlement monies paid under a Pierringer agreement, net of the cost incurred in the claim against the settling
defendants, should be deducted from the damages awarded at trial.

Competing Public Interests

The Supreme Court of Canada has made it clear that the primary goal of tort damages is compensation of
the injured person, not punishment of the tortfeasor. In rare circumstances, courts have recognized
exceptions to the rule against double recovery, primarily in the case of insurance proceeds and generally on
the principle that the plaintiff has paid for the insurance and should not be deprived of the benefit for which he
has contracted. Like appellant courts in Ontario and British Columbia, the Court of Appeal declined to find a
similar exception for settlement proceeds on the well accepted theory that the settlement monies received
are directly related to the plaintiff's claim against both the settling and non-settling defendants for damages
sustained. In such circumstances a plaintiff is not entitled to receive more than the damages awarded by the
court at trial.

While the appellants argued that requiring settlement proceeds to be deducted from damage awards would
discourage settlement, the Court of Appeal ultimately held that the rule against double recovery outweighed
the risk of discouraging settlement.

The monies received by the plaintiff under the Pierringer agreement were credited to the damages awarded
against the non-settling defendant at trial. Only the net settlement proceeds, after an appropriate deduction
for costs incurred in the claim against the settling defendants, were set off against the damage award at trial.
This is a significant aspect of this decision, because the non-settling defendant was effectively exposed to
the plaintiff's legal expenses.

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.

Specific Questions relating to this article should be addressed directly to the author.

Do you have a question for the author?

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Other Information about Gowling Lafleur
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View Popular Related Articles on Insurance from

Canada
Proper Formation Is Fundamental To The Insurance

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Proper Formation Is Fundamental To The Insurance

Contract (Singleton Urquhart LLP)
Most insurance coverage disputes involve policy
language that fails to define clearly the
respective rights and obligations of the parties.
In a recent case, however, the British Columbia
Supreme Court needed to take an additional
step—it first had to determine which documents
comprised the insuring agreement before it could
interpret the policy’s language.

Swiss Cheese D&O Insurance (Bennett Jones LLP)

Directors’ and officers’ insurance contracts are
often riddled with clauses that, while seemingly
reasonable and well-intentioned, can lead to
bizarre court decisions

Property and Casualty Demutualization – The Start

of Something New (Blake, Cassels & Graydon LLP)
One of Canada’s largest property and casualty
(P&C) insurance companies, The Economical
Mutual Insurance Company, recently announced
its intention to demutualize.

Leveraging the P&C Distribution Channel for

Success – Part One (PwC Management Services
LP)
Aligning business models to support customer-
driven innovation and growth is the most
significant transition facing the insurance
industry today.

Progressive Homes Ltd. v. Lombard General

Insurance Co. Of Canada, 2010 SCC 33 (Blaney
McMurtry LLP)
This morning the Supreme Court of Canada
released its decision in Progressive Homes Ltd.
v. Lombard General Insurance Co., on review
from the British Columbia Court of Appeal

Supreme Court Clarifies When Insurance Must

Respond To Defend Construction Deficiency Claims
(Blaney McMurtry LLP)
In Progressive Homes Ltd. v. Lombard General
Insurance Co., 2010, S.C.C. 33, the Supreme
Court of Canada recently ruled on an insurer’s
duty to defend a general contractor in the
context of a construction deficiency claim.

Canadian Insurance Regulators Release Issues

Paper Regarding MGA Distribution Model (Stikeman
Elliott LLP)
On February 9, the Agencies Regulation
Committee of the Canadian Council of Insurance
Regulators (CCIR), the umbrella group of
Canadian insurance regulators, released a long-
awaited issues paper on life insurance MGAs,
entitled Managing General Agencies Life
Insurance Distribution Model.

OSFI Finalizes Guidance for Reinsurance Security

Agreements and Reinsurance Practices (Torys LLP)
On December 24, the Office of the
Superintendent of Financial Institutions (OSFI)
released in final form its Guidance for
Reinsurance Security Agreements (the RSA
Guidance) and Guideline B-3, Sound
Reinsurance Practices and Procedures,
following public consultations on draft versions
issued in August 2010.

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