Fridays with Rogers Partners

At our weekly meeting, Heera Elize Sen discussed the recent Court of Appeal decision, Kerk-Courtney v. Security National Insurance Company (TD General Insurance Company), 2024 ONCA 676, where the court considered the issue of whether an insurance company owed a duty to defend and indemnify its insured. The Court of Appeal found that the application judge had erred in his reasoning, but had correctly concluded that the insurance company did not have a duty to defend or indemnify in the present case.

Facts

The underlying action arose out of the sale of a residential property, pursuant to an Agreement of Purchase and Sale, by the appellants in 2016. The purchasers sued the appellants in 2018, alleging that there were problems with the house and the appellants had misrepresented its condition at the time of the sale.

Before they sold the property, the appellants had home insurance coverage with the respondent insurance company. In 2021, two and a half years after the purchasers had sued them, the appellants reported the lawsuit to the insurance company and requested coverage for the action under the home insurance policy.

The insurance company denied coverage and in 2022, the appellants commenced an application seeking a declaration that the insurance company had a duty to defend and indemnify them in respect of the purchasers’ action. The application judge dismissed their application, finding that the respondent had no duty to defend or indemnify the appellants.

The application judge concluded this on the basis that the Agreement of Purchase and Sale had an “entire agreement” clause that made it impossible for the purchasers’ negligence-based tort claims against the appellants to succeed, and that the purchasers’ other claims were all captured by exclusions in the policy. Since he found this, he did not address any of the other grounds of the coverage denial raised by the respondent insurance company.

Issues

The Court of Appeal identified four issues that needed to be answered:

1. Whether the application judge applied the proper legal test for determining an insurer’s duty to defend;
2. Whether the application judge erred in finding that the allegations made in the underlying action were not unambiguously excluded from the coverage for “property damage” in the policy;
3. Whether the application judge erred in finding that the “entire agreement” clause precluded the purchasers from successfully claiming damages in tort against the appellants for negligent oral misrepresentations, and that coverage for the purchasers’ other claims was excluded by the policy; and
4. Whether any of the alternative grounds raised by the respondent relieved them of the obligation to indemnify and defend.

Analysis

Issue 1: Did the application judge correctly instruct himself on the legal test to determine an insurer’s duty to defend?

The Court of Appeal found that the application judge correctly picked the three-step Scalera test from Non-Marine Underwriters, Lloyd’s of London v Scalera, 2000 SCC 24, to determine whether the insurance company owed a duty to defend the appellants:

1. First, a court should determine which of the plaintiff’s legal allegations are properly pleaded.
2. At the second stage, the court should determine if any claims are entirely derivative in nature.
3. Finally, the court must decide whether any of the properly pleaded, non-derivative claims could potentially trigger the insurer’s duty to defend.

The Court found that the application judge also correctly relied on the principles governing an insurer’s duty to defend as set out by the Court of Appeal in Tedford v. TD Insurance Meloche Monnex, 2012 ONCA 429.

Issue 2: Did the application judge err in finding that the allegations in the pleading were not unambiguously excluded from the coverage for “property damage” in the policy?

The respondents had argued that the purchasers’ claim that they bought the property for a higher price because of the misrepresentations did not fall within the ambit of “property damage” as defined in their policy. According to the insurance company, in order to be covered for legal liability, “the appellants’ actions, or their ownership, use or occupancy of the premises, must cause physical damage to tangible property or loss of use of that tangible property.” In this case, however, it is alleged that because of the appellants’ conduct, the purchasers thought the property was in better condition and therefore paid more for it.

The Court rejected this line of argument, and agreed with the application judge in referring to Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33. In that case, the Supreme Court of Canada held that courts should avoid importing tort concepts in interpreting “property damage” in the context of an insurance policy, and that it is not obvious that defective property does not constitute “property damage”. Justice Rothstein clarified that whether specific property falls within the definition of “property damage” is to be determined on evidence at trial.

The Court of Appeal here held that the application judge’s conclusion that the claim was not unambiguously excluded from constituting “property damage” flowed correctly from a reasonable and generous reading of the purchaser’s pleadings.

Issue 3: Did the application judge err in relying on the “entire agreement” clause to determine the contractual liability exclusion?

The Agreement for Purchase and Sale had contained an “entire agreement” clause which provided that the Agreement and any attached schedules constituted the entire Agreement.

Relying on Soboczynski v. Beauchamp, 2015 ONCA 282,where the Court of Appeal said that entire agreement clauses limit reliance on representations made prior to the signing of the contract, the application judge concluded that the entire agreement clause in this contract “precluded any possibility that the purchasers’ claim in tort based on alleged negligent misrepresentation prior to signing of the contract would be successful”.

Having determined this, the application judge further found that the insurance company’s duty to defend was excluded because:

1. Any intentional misrepresentations would be excluded as the insurance policy excluded coverage for intentional acts; and
2. Since the rest of the claim flowed from the contractual provisions in the agreement and schedule, the insurance policy’s contractual liability exclusion clause precluded the duty to defend because the appellants would not be exposed to any liability but for entering into the agreement. 

The Court of Appeal disagreed, and said that the judge had erred by improperly predetermining an issue in the underlying action: “whether the entire agreement clause would defeat the purchasers’ claim to the extent it was based on the alleged oral misrepresentations”. The Court held that this was not relevant to the issue of whether there was coverage for claims made in that actions. Whether or not a defence will be successful at trial is not a basis for the denial of coverage in the context of the duty to defend.

The Court of Appeal further rejected the application judge’s determination regarding the contractual liability exclusion clause, finding that since this conclusion rested on the foundation of the mistaken finding regarding the “entire agreement clause”, it also could not stand as a basis for denying coverage.

Issue 4: Do any of the alternative grounds raised by the respondent for denying coverage to the appellants relieve the respondent of its obligation to indemnify and defend?

The Court of Appeal considered that the policy states that the insured must “promptly” give notice to the insurer after an accident or occurrence for which coverage is claimed, and “immediately” send any legal documents or written communications received regarding the accident. The insurance company said the appellants breached this by defending the underlying action for over two years before giving notice of the claim.

The appellants argued that it was only during examinations for discovery that it became clear that the underlying action related to allegations of negligence, in addition to intentional acts which are not covered by the policy, at which point which they promptly gave notice.

The Court of Appeal rejected this argument, finding that the fact that the appellants failed to appreciate the underlying action related to allegations of negligence as well as intentional acts did not suspend the reporting obligation. Furthermore, a claim for negligent misrepresentation was clearly asserted in the statement of claim.

The appellants argued that they should then be granted relief of forfeiture under s. 129 of the Insurance Act, as their late notice constituted “imperfect compliance” as opposed to non-compliance with the policy, and that they were not acting in bad faith.

The court affirmed the three factors that should be considered for relief of forfeiture as stated in Pinder Estate v. Farmers Mutual Insurance Company, 2020 ONCA 413:

1. The reasonableness of the insured’s conduct;
2. The gravity of the breach; and
3. The disparity between the value of the property forfeited and the damages caused by the breach.

The Court found that the appellants’ delay in reporting was not reasonable, and accepted the respondent’s argument that the decisions undertaken with respect to the defence of the underlying action by the appellants prior to notice, irreversibly prejudiced, and damaged the respondent’s ability to defend the claim successfully.

Conclusion

Therefore, the Court dismissed the appeal, finding that on the basis of the late notice, the respondent was entitled to deny coverage, and so there was no duty to defend.