Two insurers both had duty to defend city in property damage claim: Ontario Court of Appeal

The Ontario Court of Appeal has agreed with an application judge’s conclusion that two insurance companies both had a duty to defend a mutual policyholder in a progressive property damage claim.

In AIG Insurance Company of Canada v. Lloyd’s Underwriters, 2022 ONCA 699, two individuals moved into a new home, which they constructed after obtaining a building permit from the City of Timmins, ON, in 2013. In 2016, the adjoining property’s slope started to erode, affecting the stability of the homeowners’ property. In 2019, the city issued an order requiring the homeowners to remove, relocate, or demolish their residence.

The homeowners filed the underlying action against the city and others relating to the property damage that occurred between April 2016 and December 2019. They alleged that the city’s negligence caused or contributed to the property damage due to ongoing drainage issues, slope instability, and erosion.

The city sought coverage from AIG Insurance Company of Canada, which provided general liability insurance coverage to the city in 2016 and 2017, and from Lloyd’s Underwriters, which covered the city in 2018 and 2019. AIG brought an application asking whether Lloyd’s had a duty to defend and seeking equitable contribution from Lloyd’s for the costs of defending the city in the underlying action.

In response, Lloyd’s argued that an “occurrence” did not damage the property such that coverage under its policy was engaged. The “occurrence” that the underlying action alleged was effectively terminated in May 2017 when the City received a geotechnical firm’s report, which offered potential remedial actions and recommendations to mitigate further damage to the adjoining property, Lloyd’s said.

Lloyd’s also contended that, even if there was an “occurrence,” its policy’s exclusion clause applied and ousted its duty to defend. Lloyd’s said that, because the city received the report before its policy was on risk, the city should have expected any property damage occurring afterward.

The application judge ruled that Lloyd’s had a duty to defend in the underlying action.

Exclusion clause inapplicable: appeal court

The Ontario Court of Appeal dismissed the appeal. First, it found no errors in the application judge’s treatment of the geotechnical firm’s report.

Lloyd’s asserted that, because the amended statement of claim referred to the report, the judge should have accepted the report’s contents as true, as the traditional pleadings rule required.

The appellate court rejected this argument. The report was extrinsic evidence as defined in the case of Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49 and was not part of the pleadings, although the pleadings referred to it, the appellate court said.

Second, the Court of Appeal saw no errors in the application judge’s conclusion that the exclusion clause was inapplicable. The report was “premature” evidence as defined in Monenco and did not support Lloyd’s contention that the exclusion clause ousted its duty to defend, the court said.

The appellate court thus held that the judge made no errors in determining that the city’s receipt of the report was not a “crystallizing event” as Lloyd’s alleged. The judge properly refrained from considering the report when deciding whether the exclusion clause was applicable, the court concluded.