The decision in AIG Insurance Company of Canada v. Lloyd’s Underwriters, 2022 ONCA 699 sprung from an underlying action between two homeowners and the City of Timmins.
According to court documents, the homeowners obtained a building permit from the city to build a new house. Their application to the city included a site plan and a Mattagami Region Conservation Authority (MRCA) permit, which “referred to an engineering report” that the MRCA required the homeowners to obtain before construction.
The homeowners moved into their new house in 2013. However, by 2016, a slope on an adjoining property “began to fail.” Erosion continued and by 2019, the homeowners received an order from the city to “remove, relocate, or demolish their home.”
The homeowners launched action against the city, claiming “negligence, nuisance, and trespass to land.”
According to court documents, the appellant, Lloyd’s Underwriters (Lloyd’s), and the respondent, AIG Insurance Company of Canada (AIG), “provided general liability insurance to the City during successive policy years in the period covered by” the underlying action.
The city “sought coverage for the Underlying Action from Lloyd’s and AIG, under their respective policies.” While AIG agreed to defend the city, Lloyd’s did not.
Therefore, AIG “brought an application to determine whether Lloyd’s had a duty to defend in connection with the Underlying Action.” AIG also sought “equitable contribution from Lloyd’s for the costs of defending the City in the Underlying Action.”
“At the time of the Application,” the court noted, “AIG had incurred approximately $60,000 in such costs.”
In response, Lloyd’s “maintained that the ‘occurrence’ alleged in the Underlying Action was effectively terminated” once the geotechnical firm, Amec Foster Wheeler Environment & Infrastructure, issued a report (AMEC Report), which was done “before the Lloyd’s Policy was on risk.”
Lloyd’s also argued that “after receipt of the AMEC Report, from the ‘standpoint of the insured’ (i.e. the City), further property damage was expected,” so the exclusion clause in Lloyd’s policy “ousted its duty to defend.”
The application judge, Justice William Black of the Superior Court of Justice, determined that “damage to the Property continued and progressed during the currency of the Lloyd’s Policy and that the evidence ‘more than [met]’ the ‘mere possibility’ test, thereby triggering Lloyd’s duty to defend.”
He also found that “Due to its preliminary nature and qualifying language,” the AMEC Report “could not fairly be construed as a ‘crystallizing event’ after which ongoing damage to the Property could no longer be seen as accidental and had to be seen as ‘expected or intended.’ ”
On appeal, Lloyd’s argued that Justice Black “erred in his treatment of the AMEC Report by: i. failing to apply the traditional ‘pleadings rule’ in the duty to defend analysis, which requires that allegations in the statement of claim be accepted as true; and ii. misapplying the law on the admissibility of extrinsic evidence referred to in the statement of claim by importing an additional requirement that such evidence must not be ‘controversial’ in order to be considered as part of the duty to defend analysis.”
In a decision released Oct. 14, Justice Eileen Gillese, writing for the Court of Appeal, determined that the “single issue” to be decided on appeal was: “did the application judge err in concluding that Lloyd’s has a duty to defend the Underlying Action?”
In her analysis, Justice Gillese described Justice Black’s determination as “inescapable.”
First, she determined that there was “No error in the application judge’s treatment of the AMEC Report.”
“While the AMEC Report is referred to in the pleadings, that does not make it part of the pleadings,” she explained, noting that a “plain reading” of Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49 shows the AMEC Report is “extrinsic evidence.”
“As extrinsic evidence,” she continued, Justice Black was “entitled to consider the AMEC Report for the purpose of determining the substance and true nature of the allegations.”
“However, because the AMEC Report was not part of the pleadings, it was not subject to the traditional pleadings rule,” she added, noting that Justice Black “did not accept that the AMEC Report was evidence of a crystallizing event such that the Exclusion Clause applied.”
Justice Gillese also found no error in Justice Black’s “conclusion that the Exclusion Clause did not apply.”
“The amended statement of claim does not allege intentional conduct on the part of the City that would suggest the property damage was expected or intended during the time that Lloyd’s was on risk,” she wrote, noting that “Neither the amended statement of claim nor the AMEC Report assists Lloyd’s in its contention that the Exclusion Clause applies and ousts its duty to defend.”
Justice Black, she added, “did not err in concluding that the City’s receipt of the AMEC Report was not the ‘crystallizing event’ Lloyd’s claimed it was. Nor did he err in not considering the AMEC Report when determining whether the Exclusion Clause applied.”
Justice Gillese, with Justices Grant Huscroft and Lorne Sossin in agreement, dismissed the appeal and awarded $10,000 in costs to AIG.
Counsel for the parties did not respond to request for comment before press time.
If you have any information, story ideas or news tips for The Lawyer’s Daily please contact Amanda Jerome at Amanda.Jerome@lexisnexis.ca or 416-524-2152.