Sep 21, 2020

[Strathy C.J.O., Lauwers and van Rensburg JJ.A.]

Counsel:

Rebecca Huang, for the appellant

Marcus B. Snowden and Pearl Rombis, for the respondent

Keywords: Contracts, Interpretation, Insurance, Coverage, Commercial General Liability Insurance, Additional Insureds, Meaning of “Arising Out Of The Operations Of”, Duty of Good Faith, Civil Procedure, Costs, Vernon Vipers Hockey Club v. Canadian Recreation Excellence (Vernon) Corp., 2012 BCCA 291, Amos v. Insurance Corp of British Columbia, [1995] 3 S.C.R. 405, Lumbermens Mutual Casualty Co. v. Herbison, 2007 SCC 47, Citadel General Assurance Co. v. Vytlingam, 2007 SCC 46, Waterloo (City) v. Economical Mutual Insurance Co., 2006 CanLII 43498 (Ont. S.C.), Great Atlantic & Pacific Co. of Canada Ltd. v. Economical Mutual Insurance Co., 2013 ONSC 7200, Oliveira v. Aviva Canada Inc., 2017 ONSC 6161, Boucher v. Public Accountants Council for the Province of Ontario (2004), 71 O.R. (3d) 291 (C.A.), Canadian Pacific Ltd. v. Matsqui Indian Band, [1995] 1 S.C.R. 3

FACTS:

The appellant, Sky Clean Energy Ltd. (“Sky”), is a developer of solar energy projects. Sky entered into contracts with Marnoch Electrical Services Inc. (“Marnoch”) for the construction of two such projects. Pursuant to these contracts, Marnoch agreed to name Sky as an insured under its comprehensive general liability insurance policy with the respondent, Economic Mutual Insurance Company (“Economical”). However, the insurance certificates issued to Sky by Marnoch’s insurance broker provided that Marnoch’s liability insurance applied to Sky “but only with respect to liability arising out of the operations of Marnoch”.

Fires occurred at both projects, and as a result, Sky incurred liabilities for remediation costs and loss of revenue. It settled these liabilities and then sought to recover those damages, first against Marnoch, then against Economical. The trial judge found that the design of the solar systems which caused the fire were Sky’s responsibility. Marnoch played no role in the decisions to purchase or install the faulty equipment used at the two project locations. Therefore, the trial judge concluded that Sky’s liability did not “arise out of the operations” of Marnoch.

ISSUES:

(1) Did the trial judge err in interpreting the insurance policy and in finding that Sky’s liability did not “arise out of the operations” of Marnoch?

(2) Did the trial judge err in finding that Sky’s claim was barred by a breach of Condition Four of the policy or, alternatively, in failing to grant relief from forfeiture?

(3) Did the trial judge err in finding that Economical had not breached its duty of good faith and declining to award punitive damages?

(4) Did the trial judge err in awarding excessive costs?

HOLDING:

Appeal dismissed.

REASONING:

(1) Did the trial judge err in interpreting the insurance policy and in finding that Sky’s liability did not “arise out of the operations” of Monarch?

No. This issue turns on the interpretation of the words “arising out of the operations”. Referring specifically to the decision in Vernon Vipers Hockey Club v. Canadian Recreation Excellence (Vernon) Corp., 2012 BCCA 291, the trial judge noted that “arising out of” means more than simply a “but for” test and requires an “unbroken chain of causation” and “a connection that is more than merely incidental or fortuitous.” In Vernon, the Court followed several leading Supreme Court decisions that similarly interpreted the words “arising out of” and “arising from”, including: Amos v. Insurance Corp of British Columbia, [1995] 3 S.C.R. 405; Lumbermens Mutual Casualty Co. v. Herbison, 2007 SCC 47; and Citadel General Assurance Co. v. Vytlingam, 2007 SCC 46.

The British Columbia Court of Appeal in Vernon also considered the meaning of the word “operations”, and found that it “is a word of sufficiently broad meaning as to include the creation of a situation, or circumstance, that is connected in some way to the alleged liability. It does not necessarily imply an active role by the named insured in creation of the liability event.” The Ontario Court of Appeal found the approach in Vernon, which the trial judge adopted, to be consistent with Ontario precedents, namely: Waterloo (City) v. Economical Mutual Insurance Co., 2006 CanLII 43498 (Ont. S.C.); Great Atlantic & Pacific Co. of Canada Ltd. v. Economical Mutual Insurance Co., 2013 ONSC 7200; and Oliveira v. Aviva Canada Inc., 2017 ONSC 6161.

In short, the Court agreed with the trial judge’s finding that Marnoch’s connection with the failure of the electrical equipment was “merely incidental”. While the fire would not have occurred but for the fact that Marnoch ordered and installed the equipment in the course of its operations under the contracts, the proposition in Vernon requires a stronger connection. Ultimately, the decision to select and approve the equipment to be installed in the projects rested with Sky, and Sky chose and approved the equipment that failed. The Court found that Marnoch was little more that a bystander to the decisions of Sky. While Marnoch’s role was sufficient to satisfy a “but for” connection to Sky’s liability, it was crucially insufficient to cross the threshold into a connection “more than merely incidental or fortuitous”.

(2) Did the trial judge err in finding that Sky’s claim was barred by a breach of Condition Four of the policy or, alternatively, in failing to grant relief from forfeiture?

Due to the Court’s conclusion on the first issue, it was unnecessary to consider this issue.

(3) Did the trial judge err in finding that Economical had not breached its duty of good faith and declining to award punitive damages?

No. Sky contended that Economical breached its duty of good faith by: (a) initially denying coverage without conducting an investigation; (b) interpreting the Additional Insured Endorsement too narrowly and ignoring the judicial interpretation in cases like Great Atlantic; and (c) failing to follow its own claims procedures, as it did not appoint an adjuster or investigate Sky’s losses.

In regard to the first argument, the trial judge found that Economical’s delay did not rise to the level of bad faith. Second, he found that the Great Atlantic case was materially different in that it involved allegations of negligence against the additional insured and the named insured, while in the present case, Sky did not allege negligence against Marnoch. Third, the trial judge found that Economical had an objectively reasonable basis on which to deny coverage and was not required to make further investigations. This was due to the fact that by the time Sky made a claim under the policy, Economical knew that the equipment had been selected by Sky, not Marnoch. The Court of Appeal agreed with the trial judge on all three findings.

(4) Did the trial judge err in awarding excessive costs?

No. The Court reiterated that a trial judge’s award of costs is entitled to a high degree of deference, and unless the trial judge considered irrelevant factors, failed to consider relevant factors, or reached an unreasonable conclusion, an appellate court must respect the decision. The Court found that the trial judge appropriately considered the reasonable expectations of the parties, and that because the issues were clearly important to the parties, the claim was prosecuted and defended with vigour. In a claim with considerable amounts at stake such as this, a plaintiff can reasonably expect the defendant to mount a thorough defence. Just as the plaintiff can expect to receive substantial costs if successful on those claims, it can expect to pay a substantial costs award if unsuccessful. Therefore, the Court found that the trial judge’s costs award was fair and reasonable.

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