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E D I TO R ’ S I N T R O D U C T I O N
IN THIS ISSUE
Borden Ladner Gervais LLP is pleased to present this second
1
Editor’s Introduction
edition of the Canadian Insurance Law Newsletter for the
2
Duty to Defend Claims
Arising out of Intentional
Conduct
5
Evidence in Bad Faith
Claims
7
Snowmobile Accidents
and the Ontario No-Fault
Regime
10
Blame It on the Drunk
11
Odd Lots
benefit of our clients and others interested in this constantly
evolving area of law. Our objective is to keep you abreast of
recent trends and developments of significance on a wide
variety of insurance law related topics.
This second edition canvasses recent developments relating to
the duty to defend, evidence that can be led in bad faith claims
and the special status afforded to snowmobile accidents under
the Ontario no-fault automobile regime. This edition also
contains articles and case commentaries of topical interest on
such matters as tavern liability, the concept of “courting the
risk” in Quebec, spoliation of evidence and the liability of
12
Just Released: Punitive
and Aggravated Damages
Award in Ontario Against
Disability Insurer
immunity in England.
13
Courting the Risk Not
Recognized in Quebec
We invite your comments and suggestions with respect to
14
Lender Beware
17
“Duty to Defend” Case to
be Heard by Supreme
Court of Canada
19
Spoliation of Evidence Update
20
U.K. Corner: The End of
Barrister’s Immunity in
England
appraisers. This edition’s U.K. Corner reviews a recent House
of Lords decision which has brought to an end barrister’s
questions, topics or concerns of special interest which you
would like to see addressed in future editions.
Keith N. Batten, Toronto office,
(416) 367-6103,
Email: [email protected]
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D U T Y T O D E F E ND C L A IM S A R I S I N G O U T O F
I N T E N T I O N A L C O ND U C T
In the recent decision of Non-Marine Underwriters, Lloyd’s of
London v. Scalera and the companion decision of Sansalone v.
Wawanesa Mutual Insurance Co., the reasons in both of which
were released on May 3, 2000, the Supreme Court of Canada
considered an insurer’s duty to defend an action for damages
against an insured alleging sexual battery, negligence and
breach of fiduciary duty arising out of a series of alleged sexual
assaults. In each case, the insured had a homeowner’s policy
that provided coverage for bodily injury claims arising out of
personal actions excepting “bodily injury or property damage
caused by any intentional or criminal act” (in Scalera) or
“bodily injury or property damage caused intentionally by
[the insured] or at [the insured’s] direction” (in Sansalone).
In both cases, of which Scalera was the lead case, the court had
no hesitation in finding that the insurer had no duty to defend
actions against the alleged perpetrator based on and arising
from intentionally caused injuries. This followed from the fact
that it is an inherent element of the tort of sexual battery that
an absence of consent be proved. If lack of consent is established, an intent to injure will be presumed and therefore
engage the intentional act exclusion. If consent is established,
the tort would not be made out and the defendant would have
no liability. In either case, the insurer had no duty to
indemnify and hence no duty to defend.
Although this will be good news to insurers, the subsequent
decision of the Ontario Court of Appeal in Godonoaga
(Litigation Guardian) v. Khatambaksh (June 12, 2000) has
quickly demonstrated that Scalera will likely be confined to
actions against the perpetrator and will not be extended to
prevent the defence obligation being engaged with respect to
independent claims against others, in this case, parents, that
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arise out of the perpetrator’s intentional
claims are entirely derivative in nature. The
conduct.
duty to defend will not be triggered simply
The decision of the court in Scalera on the duty to
negligence and intentional tort. If the alleged
defend can be summarized as follows:
negligence is based on the same harm as the
because a claim can be cast in terms of both
•
intentional tort, this will not allow the
Although the duty to defend is broader than
insured to avoid the exclusion for intention-
the duty to indemnify, where the allegations
ally caused injuries.
in the claim cannot be interpreted to engage
coverage, the duty to defend will not be
triggered.
•
The intentional act exclusion must be interpreted as requiring an intent to injure.
Where there is an allegation of sexual battery,
courts will conclude as a matter of legal inference that the defendant intended harm for
the purpose of construing exceptions of
insurance coverage for intentional injury.
•
A three-step process must be applied to determine whether a claim can trigger indemnity
and hence engage the defence obligation:
1.
3.
The court must then decide whether any of
the properly pleaded, non-derivative claims
could potentially trigger the insurer’s duty
to defend.
In both Scalera and Sansalone the court concluded
that the insurer had no duty to defend the alleged
claims of sexual battery, negligence and breach of
fiduciary duty. In particular, the court held that
the claims for negligence and breach of fiduciary
duty failed to trigger the defence obligation not
because they could not fall within coverage, but
because they were either not properly pleaded or
were derivative of the claim for sexual battery. As
The court should determine which of the
a result, those claims were also within the
plaintiff’s legal allegations are properly plead-
exclusion of injuries intentionally caused and
ed. The court must look beyond the choice of
were not covered.
labels selected by the plaintiff (a plaintiff
cannot change an intentional tort to a negli-
The court accepted that a properly pleaded claim
gent one simply by choice of words) and
could allege both intentional and non-intentional
must examine the substance of the allegations
tort. In that situation, the court must decide
contained in the pleadings. The object of this
whether the harm allegedly inflicted by the
exercise is to determine the true nature of the
negligent conduct is derivative of that caused by
claims and does not involve a consideration
the intentional conduct. If both the negligence
as to whether the claims have any merit.
and intentional tort claims arise from the same
Having determined what claims are properly
claim will be considered derivative, and it will be
pleaded, the court should determine if any
subsumed into the intentional tort for the
actions and cause the same harm, the negligence
2.
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purposes of the exclusion clause analysis. A claim
policy for the two boys or for the allegations
for negligence will not be derivative, however, if
against the boys’ mother arising from her instruc-
the underlying elements of the negligence and the
tion to her eldest son to join in the assault. The
intentional tort are sufficiently disparate to render
assertion of coverage by the parents was confined
the two claims unrelated. If the negligence claim
to the negligence claim.
is not derivative, the claim of negligence will
survive and the duty to defend will apply.
The court ruled that by virtue of the definition of
insured, the reference to “you” and “your” in the
The court noted two policy reasons in support of
exclusion, and the policy clause which provided
this analysis. The first is the premise that insur-
that “Each person insured is a separate Insured”,
ance is presumed to cover only negligence and
the correct interpretation of the policy was that
not intentional injuries. The second is that this
the parents and the two boys were each separately
approach will discourage manipulative pleadings
insured and that although the two boys would not
by making it fruitless for plaintiffs to try to con-
be entitled to coverage, the parents were under a
vert intentional tort into negligence.
different position under their separate policies.
Having been sued in negligence, which was not an
The limitation of the court’s ruling in Scalera on
excluded claim, the court held that the fact that
the blocking of “derivative” claims is reflected in
the pleadings alleged intentional assaults by their
the Ontario Court of Appeal decision in
sons did not disentitle the parents to coverage. In
Godonoaga. In this case, the infant plaintiff was
the course of its reasons, the court referred to the
assaulted after school by a group of students,
three-step process endorsed by the Supreme Court
including one of the defendants. The defendant’s
of Canada in Scalera. With particular reference to
mother witnessed the assault and sent her other
the issue of “derivative” claims, and the fact that
son to join in beating up the infant plaintiff, who
the claim against the parents could not be so char-
was seriously injured. The infant plaintiff and his
acterized, the court, noting the different facts from
mother brought an action against the two boys in
those in Scalera, stated as follows:
assault and battery and also sued the parents for
damages for negligence, pleading that they were
This is not a case where the plaintiff has
negligent in failing to instill reasonably accept-
attempted to “dress” the assaults of
able values in their sons, and in the alternative,
Houman and Maher in the guise of a negli-
for a failure to supervise. The parents sought to
gence suit. On the contrary, the allegations
engage coverage under their tenant’s policy which
of negligence constitute a separate tort and
excluded coverage for “bodily injury caused inten-
are directed against different parties. The
tionally by you or at your direction or resulting
alleged perpetrators of the assault do not
from your criminal acts or omissions”. The par-
claim they are entitled to a defence under
ties agreed that there was no coverage under the
the policy. The facts that support the
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negligence claim depend upon the fact of
other parties, such as parents and employers, for
the assault only to the extent that it is a con-
such matters as a failure to properly screen, train
sequence of the negligence. Thus, this is not
or supervise.
an attempt to represent an intentional tort
as a negligent one.
The net result of these cases, therefore, may be to
leave essentially unchanged, the coverage position
Although the effect of these recent cases is to clar-
adopted by many insurers when faced with
ify the fact that an alleged perpetrator of sexual
intentional tort claims.
assaults will not be entitled to coverage under a
liability policy because of the intentional acts
Keith N. Batten, Toronto office,
exclusion, it seems clear that the concept of
(416) 367-6103,
“derivative” claims will be confined to claims
Email: [email protected],
against the perpetrator and will not extend to pre-
co-authored with Ellie Y. Choi.
vent coverage for claims in negligence against
E V I D E N C E I N B A D FA I T H C L A IM S
In Whiten v. Pilot Insurance (1996), an Ontario
Following Whiten, plaintiffs have used some
jury awarded a plaintiff $1,000,000 in punitive
innovative approaches in prosecuting claims for
damages for her insurer’s bad faith denial of a
punitive damages as against their insurers. One
property damage claim. The size of this punitive
such approach is exemplified by the British
damages award given by the jury was unheard of
Columbia case of Chaplin v. Sun Life Assurance
in Canadian Courts; in fact the plaintiff had only
Co. of Canada et al. (March 29, 2000).
sought punitive damages in the amount of
$125,000 when she commenced her action. In
In Chaplin, plaintiff’s counsel alleged various
1999, the Ontario Court of Appeal subsequently
grounds in support of an award of punitive dam-
reduced the plaintiff’s punitive damages award to
ages. The primary allegation was that the insurer
$100,000, a still significant amount in light of
had intentionally misrepresented facts to the
the size of the plaintiff’s claim in that case
plaintiff. In particular, it was alleged that the
(which was for less than $300,000). An appeal
insurer’s letter denying the plaintiff’s claim for
to the Supreme Court of Canada is currently
long term disability benefits contained “mislead-
pending.
ing information” in that it said that there “was
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no evidence of total disability at this time” when
could give rise to an independent actionable
the insurer had in its possession a medical report
wrong if it was shown that the insurer’s conduct
which provided evidence of total disability.
was reckless or dishonest towards the plaintiff.
However, he found on the facts of the Chaplin
The plaintiff sought leave to introduce evidence
case that the insurer’s conduct was not reckless or
from five other claimants (who were not parties
dishonest towards that plaintiff.
to the Chaplin action but who were all represented by counsel for Mrs. Chaplin) as to how they
The trial judge ruled that the medical report in
had also been intentionally misled by the insur-
question did not support long term disability.
er. The plaintiff alleged that the insurer’s inten-
He further held that while the insurer could have
tional misrepresentation of facts to the plaintiff
phrased its termination letter a little better, the
and the five other claimants showed a pattern on
medical report and termination letter when read
the part of the insurer of recklessness or dishon-
as a whole bore no implication of recklessness or
esty in its claims handling process. Plaintiff’s
dishonesty. Accordingly, His Lordship accepted
counsel also went to great lengths in trying to
the insurer’s argument that since there was no
uncover evidence from the insurer to prove a bad
evidence of recklessness or dishonesty in the
faith corporate strategy to deny or discourage
Chaplin case, the plaintiff should not be allowed
claims. There was no such evidence, but a great
to introduce the alleged “similar fact evidence”
deal of pre-trial and court time was spent in
from the other five claimants.
defending against these allegations.
The ruling on the similar fact evidence sought to
To obtain an award of punitive damages against
be introduced in the Chaplin case is significant
an insurer, the plaintiff must prove that the
for insurers. It establishes that the plaintiff must
defendant has “committed an independent or
prove that the insurer has committed an
separate actionable wrong causing damage to the
independent actionable wrong as against her, not
plaintiff.” This requirement arises from the
others. It is only then that the plaintiff may be
Supreme Court of Canada decisions in Vorvis v.
able to adduce evidence from others as to how
Insurance Corp of British Columbia (1989) and
they too were “wronged” by the insurer. In
Wallace v. United Grain Growers Ltd. (1997). The
addition, for such similar fact evidence to be
plaintiff in Chaplin alleged that the insurer’s pat-
admissible, the acts compared must be so
tern of intentionally misleading conduct was suf-
strikingly similar that the similarities cannot be
ficient to constitute an independent actionable
attributed to coincidence.
wrong against Mrs. Chaplin.
Had the plaintiff succeeded in showing that the
At trial, Mr. Justice Holmes accepted that inten-
insurer had a practice of actively misleading
tionally misleading conduct by a disability insurer
insureds and was therefore entitled to an award
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CANADIAN
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of punitive damages, a further interesting issue
entitled to long term disability benefits) has
would have arisen: Can the same conduct of the
not yet been rendered.
insurer (having been “punished” already)
thereafter form the basis of a similar award in
Meanwhile, it is anticipated that the courts will
the actions commenced by the five so-called
continue to face new and novel arguments in
similar fact witnesses? Obviously, the court in
support of punitive damage awards against
Chaplin was not required to address the issue
insurers.
given the finding that the insurer had not misled
Mrs. Chaplin.
Vincent R.K. Orchard and
Sudhir K. Padmanabhan, Vancouver office,
In Chaplin, the plaintiff advanced several other
(604) 687-4126/(604) 687-4183,
grounds in support of an award of punitive
Email: [email protected] and
damages. Judgment on those grounds (along
[email protected],
with the plaintiff’s primary claim that she is
acted for the insurer in the Chaplin case.
S N OW M O B I L E A C C ID E N T S A N D T H E O N TA R I O
N O - FA U LT R E G I M E
The February 2000 decision of the Ontario Court
the threshold and deductible provisions apply to
of Appeal in Fortin v. Laplante has far reaching
“the owner of an automobile” that caused the
effects for plaintiffs and insurers in actions aris-
damage.
ing out of snowmobile accidents. A snowmobile
accident means an accident in which no automo-
The Court of Appeal held that a snowmobile
bile is involved.
was not an “automobile” for the purpose of the
Insurance Act, even though the Motorized Snow
The issue in the case was whether a snowmobile
Vehicles Act prohibits a person from driving a
fell within the definition of “automobile” in s.
snowmobile unless he or she is insured under a
224(1) of the Insurance Act, in order to deter-
motor vehicle liability policy in accordance with
mine whether in a negligence action, the defen-
the Insurance Act. The court wrote:
dant was entitled to the benefit of the threshold
and deductible provisions found in s. 267.1 of
If the consequences of this conclusion are
the Insurance Act, applicable to motor vehicle
that as a matter of statute or contractual
accidents between January 1, 1994 and
interpretation a person injured by a snow-
November 1, 1996. That section provides that
mobile rather than an automobile may be
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entitled both to no-fault benefits and to sue
2.
There is no Statutory Deductible from any
in tort without facing either the threshold
Claims for Non-Pecuniary General
or the deductible provisions of s. 267 of the
Damages Suffered by a Plaintiff in a
Insurance Act that is an issue of policy for
Snowmobile Accident
the Legislature. It does not, in my view,
alter the correct statutory interpretation.
The statutory deductible in respect of automobile
accidents after November 1, 1996 is established
The effects of this decision are wide ranging.
by s. 267.5(7) of the Insurance Act. That subsection is specifically limited to actions for loss or
1.
Plaintiffs Injured in Snowmobile Accidents
damage from bodily injury or death arising
are not Subject to the “Threshold”
directly or indirectly from use or operation of an
“automobile”. Since a snowmobile is not an
The “threshold” for accidents after November 1,
automobile, there is no deductible for claims
1996 is established by s. 267.5(5) of the
arising from injuries suffered in a snowmobile
Insurance Act. That section provides that the
accident.
owner of an “automobile”, the occupants of an
“automobile” and any person present at the
3.
There is no Special Treatment for Loss of
incident are not liable for non-pecuniary losses
Income Claims Suffered by Someone Injured
from bodily injury or death arising directly or
in a Snowmobile Accident
indirectly from the use or operation of the
“automobile”, unless as a result of the use or
Subsection 267.5(1) of the Insurance Act provides
operation of the “automobile” the injured per-
a special regime for loss of income claims
son has died or has sustained permanent seri-
advanced by persons injured in automobile acci-
ous disfigurement or permanent serious impair-
dents. Claims cannot be advanced for damages
ment of an important physical, mental or psy-
for income loss suffered in the seven days after
chological function. Since a snowmobile is not
the incident and claims for income loss or loss of
an “automobile”, that section does not apply to
earning capacity before trial are limited to 80%
claims arising out of snowmobile accidents in
of the net income loss. That section has no
which an automobile is not involved. There is,
application to snowmobile accidents.
therefore, no threshold which a plaintiff must
Consequently, plaintiffs in snowmobile accidents
pass in order to establish an entitlement to
will be entitled to advance a claim for the entire
damages for non-pecuniary loss.
amount of their lost income.
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Persons Injured in Snowmobile Accidents are
snowmobile accident is a person “insured under
not Required to Reduce their Claims by the
a motor vehicle policy issued in Ontario”, the
Amount of Collateral Benefits Received
claim advanced against him is not a claim
arising from the use of an “automobile”.
Subsection 267.8 provides that the damages to
Consequently, OHIP is entitled to assert a subro-
which a plaintiff injured “directly or indirectly
gated claim against such a defendant for the
from the use or operation of an automobile” is
healthcare expenses incurred on behalf of the
entitled shall be reduced by the amount of pay-
plaintiff.
ment received or available for collateral benefits.
Since a snowmobile is not an “automobile”, the
The effect of the decision of the Court of
plaintiff in an action arising out of a snowmobile
Appeal in Fortin v. Laplante is to remove snow-
accident will be entitled to claim for the entire
mobile accidents completely from the special
amount of lost income, even if he or she has
regime established by the Insurance Act and the
received statutory accident benefits or loss of
Ontario Health Insurance Act to cover motor
income benefits from another insurance plan. In
vehicle accidents. Claims arising out of snow-
effect, the plaintiff will receive double recovery
mobile accidents are to be treated in the same
unless it can be proven that the plaintiff did not
way as are claims for personal injury arising
pay for or give up any benefit in return for his
out of any other non-automobile cause, such as
entitlement to claim under the policy as per the
a slip and fall.
Supreme Court of Canada decision in
Cunningham v. Wheeler (1994).
Peter K. Doody, Ottawa office,
5.
OHIP is Entitled to Subrogate
(613) 787-3510,
Email: [email protected]
OHIP’s right to a subrogated claim for payments
made by it for healthcare benefits is established
by virtue of the provisions of s. 39(1) of the
Ed. Note: An application for leave to appeal
Fortin v. Laplante is pending before the
Ontario Health Insurance Act. By s. 30(5) of that
Supreme Court of Canada. We will
statute, however, that subrogation right does not
report on the outcome of the
exist where the personal injuries arose from the
application in our next edition.
use or operation of an automobile. Although
the defendant in an action arising out of a
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B L A ME I T O N T H E D R U N K
An Ontario judge, in a recent decision, has
tavern argued unsuccessfully that Smallwood was
offered some good news for tavern operators and
neither intoxicated nor showed any visible signs
their insurers. In his determination of the split
of impairment when he left the tavern that night.
of liability between the tavern and the drunk driver, the judge expressed his belief that the person
On the evidence, the judge found that
who drives after drinking to excess must be held
S m a l l wood consumed anywhere from 10 to 12
accountable for his or her actions.
beers while at the tavern. He further found
that Smallwood showed signs of intoxication
The facts in d’Entremont v. Smallwood (August 17,
which the tavern staff had failed to observe.
1999) are all too common. As suggested by the
While the tavern had a program of observa t i o n
trial judge, “[t]he events of May 18, 1991 were
in place at the time, the judge held that it wa s
over in a matter of seconds but their impact had
“insufficient” as it did not detect Smallwo o d .
a tragic effect on two young lives.” A truck oper-
In addition, the program failed to prevent the
ated by Mark Smallwood collided head on with a
service of alcohol to two of Smallwo o d ’s
car driven by Brenda d’Entremont. Smallwood
f r i e n d s, one of whom was so intoxicated that
was killed, just one week before he was to have
he called his wife to drive him home and she
been married. D’Entremont sustained cata-
had to recount the events to him the next day,
strophic injuries but survived.
and a second person who testified that he
himself had driven home while impaired that
The issue at trial was the liability of the tavern
night. Consequently, the tavern was found
Smallwood had attended the evening of the acci-
liable for causing or contributing to the
dent. The accident occurred around 10:00 p.m.
intoxication of Smallwo o d .
Smallwood had been at the tavern from approximately 5:30 p.m. until about 8:30 p.m. to 8:45
It should be noted that while the tavern had a
p.m. that evening. Smallwood was on his way to
program in place in an effort to avoid excessive
his fiancé’s house for dinner with his future in-
drinking and intoxication of guests, the judge
laws when the accident occurred.
specifically noted that no steps had been taken
to formally train staff about responsible beverage
The question for the judge was whether the tav-
service under the then Server Intervention
ern was responsible in law for causing or con-
Program.
tributing to the intoxication of Smallwood. The
11
CANADIAN
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In the end, the tavern was criticized for its failure
the trial judge, formal training in the area of
to have an effective system in place to monitor a
responsible beverage service is a preventable
guest’s consumption of alcohol. The judge
measure that ought to be taken by tavern opera-
assessed liability on the part of the tavern at
tors and encouraged by their insurers in an effort
15%, “believing that the person who drives after
to avoid the liability risks associated with alcohol
drinking to excess must assume the substantial
service. Today, in the Province of Ontario, Smart
portion of the blame.”
Serve Ontario is the available responsible beverage service training program. There are other
While this news is no doubt good news, the tav-
similar programs in British Columbia, Alberta,
ern and its insurer should not be lulled into a
Saskatchewan, Manitoba, Quebec, Nova Scotia,
false sense of security. Apportionment of liabili-
Prince Edward Island and the Yukon Territory.
ty is a question of fact dependent on the particular circumstances of each case. Every reasonable
Christine A. Zablocki, Toronto office,
precaution should be taken to protect against the
(416) 367-6031,
risks of drinking and driving. As suggested by
Email: [email protected]
OD D LOTS
• Peter Braund of the Toronto office delivered a
paper entitled “Offsets and Subrogation:
• On Friday, November 10, 2000, Christine
Zablocki of our Toronto office chaired a
General Principles and Selected Case Law
Canadian Bar Association - Ontario
Survey” on November 7, 2000 at the
conference, “Parties and Booze Don’t Mix:
Canadian Institute Conference on “Litigating
Alcohol Liability in the New Millennium”.
Disability Insurance Claims.”
Christine presented a paper on employer
host liability for the provision of alcohol
• Daniel Ayotte of the Montreal office chaired the
and other featured speakers, also from BLG’s
Canadian Institute Conference on
Toronto office, included Christine
“Construction: Recent Developments in
Fotopoulos on occupier’s liability and Kevin
Contracts, Litigation and Claims” held in
McGivney on liability of municipalities and
Montreal on November 23 and 24, 2000.
police forces.
Daniel also delivered a paper at that conference
on the subject of “Liability of Construction
Professionals: Extent and Limits”.
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J U ST R E L E A S E D : P U N I T I V E A N D A G G RA V AT E D D A M AG E S
A W A R D I N O N TA R I O A G A I N ST D I S A B I L I T Y I N S U R E R
On October 30, 2000, Mr. Justice Juriansz of the
ly insufficient to deter the defendant and
Ontario Superior Court of Justice granted judge-
other large insurers from similar conduct.
ment to the plaintiff in Clarfield v. Crown Life
It is conceivable that the insurer could save
I n s u rance Company, a case involving a claim for
that amount by refusing just one legitimate
disability insurance benefits. The court found
claim of a high-income earner. I see some
that Mr. Clarfield was totally disabled under the
advantage to an incremental evolution of
policy and further awarded him aggravated dam-
punitive damage awards, and I believe the
ages of $75,000 and punitive damages in the
ignominy of having its conduct denounced
amount of $200,000. Such large awards for
by the court will have some deterrent effect
aggravated and punitive damages are unprece-
on the defendant and some impact on its
dented in Canadian disability cases.
business interests.
The following words of the court indicate that
A more detailed review of Clarfield v. Crown Life
such large punitive awards may no longer be a
will be included in our next newsletter.
rarity in disability cases:
Sudhir Padmanabhan, Vancouver office,
If anything, [the size of the punitive dam-
(604) 687-41 8 3 ,
ages award] is out of balance with the
Email: [email protected]
defendant’s size... Viewed in strictly economic terms, an award of this size is gross-
13
CANADIAN
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C O UR T I N G T H E R I S K N O T R E C O G N I Z E D I N Q U E BE C
In an interesting unanimous judgment in Royal v.
tation and held that an intentional act cannot
Quebec Public Cura t o r rendered on April 5, 2000,
result from an imprudent or negligent act: there
the Quebec Court of Appeal held that the common
must be demonstrated an intention to harm by
law theory of “courting the risk” should not be
deliberately and voluntarily causing the injury or
recognized under Quebec law when dealing with
damage. It considered that such intention must
the issue of an intentional fault exclusion in an
apply not only to the act itself but also to its
insurance policy.
result, being damages directly related to the voluntary intentional act. The court concluded that
The facts of the case could almost serve as a script
Leblanc’s insurer failed to establish that Leblanc
for a “Mr. Bean” episode. The insured, Leblanc,
wanted to cause an explosion and that he was
had chosen to take his life by asphyxiation by turn-
aware that he would do so by igniting his cigarette
ing on the gas of his stove. A little later, he went
lighter. The insurer therefore failed to show intent
into his living room and lit a cigarette with a
to cause the damage.
lighter, which led to an explosion. Leblanc jumped
through a window and fell to the street. The build-
By dismissing the arguments of Leblanc’s insurer,
ing was heavily damaged. Royal, being subrogated
the court refused to recognize the common law
to the rights of the building owner, sued Leblanc’s
theory of courting the risk as relied upon by the
insurer as well as the Public Curator. In statements
insurer’s attorneys. The court held that the theory
given to Royal’s adjusters, Leblanc indicated that he
of courting the risk as such is incompatible with the
had not wished to harm anyone and only wished
current state of Quebec law, since in its 1976 Civil
to take his own life.
Code revision, the Legislative Assembly deleted
gross negligence as an acceptable exclusion.
Reversing the trial court’s decision finding that
Leblanc’s insurer did not have to respond to the
The decision has not been appealed to the Supreme
claim because of the intentional fault exclusion,
Court of Canada and is now the law of Quebec.
the Court of Appeal held that the only evidence of
fault was found in Leblanc’s declaration and
Claims managers will now have to apply a different
statements to the adjuster, but that they failed to
test to claims in Quebec that raise the issue of
show the intentional fault which would exonerate
courting the risk.
his liability insurer from paying Royal. The court
held that the concept of intentional fault con-
Robert E. Charbonneau, Montreal office,
tained in an exclusion clause of a liability insur-
(514) 954-2518,
ance contract should receive a restrictive interpre-
Email: [email protected]
14
WI NTER 2000/200 1
L E N D E R B E WA R E
The recent decision of Transamerica Life
Background/Facts
Insurance Company of Canada v. Elizabeth Hutton
et al. (June 14, 2000) may be helpful for insur-
In 1988, Transamerica made a loan in the
ers assessing their duties as lenders. The court
amount of $3,000,000 to 739666 Ontario Inc.
provides a list of items to be avoided, while
(“739666”), primarily on the security of a mort-
noting the flexibility of “industry standards for
gage of land owned by 739666 in Sarnia. A
insurance companies who invest in mortgages.”
retirement home known as Murphy Manor was
In the decision, Mr. Justice Cullity summarized
operated on the land by the defendant Elizabeth
the acts and omissions of Transamerica Life
Hutton (“Hutton”), the sole shareholder of
Insurance Company of Canada
739666.
(“Transamerica”) that were imprudent. These
are judged by reference to the reasonable expec-
739666 defaulted on the loan in 1989-1990, and
tations of persons regularly engaged in
Transamerica foreclosed on the mortgage and
commercial mortgage lending in Ontario, which
commenced an action in 1993, in which it
could appear to some to be the basis of a new
claimed damages in the amount of $7,500,000
or updated “industry standard”.
against 739666, Hutton, the appraiser, real estate
broker and Metropolitan Trust Company of
Mr. Justice Cullity held that part of this stan-
Canada who Transamerica had retained to dis-
dard required a lender who is alleging reliance
burse part of the loan funds, and to administer
on an appraisal report, to physically have the
and service the loan. BLG represented the
appraisal upon which reliance is alleged prior
appraiser Baayen who was retained by the real
to funding. It was not reasonable for a mort-
estate broker to provide an appraisal of Murphy
gage lender such as Transamerica to rely on an
Manor.
appraisal report that it could not even establish,
on a balance of probabilities, was in its posses-
Around the time of the loan, Transamerica had
sion prior to either the first or second loan
started to increase its mortgage lending. As busi-
advance of that particular investment. The
ness revenues expanded dramatically, invest-
court also recognized the significance of the
ments were sought more rapidly. The heat of the
assumptive nature of certain appraisal reports,
market in the mid to late 1980s attracted
such as the one at issue in the case, and recog-
Transamerica and other lenders. Transamerica
nized that appraising involves a significant
deferred installing the necessary precautions.
component of professional opinion.
Indeed, the court found that the individual in
15
CANADIAN
INSURANCE
LAW
charge of mortgage lending at Transamerica
expected of a reasonable lender, in that it
(Hennessy) did not have the training or experi-
advanced funds on the loan without making any
ence to underwrite loans.
effort to ascertain the degree of risk involved in
the transaction or instructing anyone else to
From 1987 onwards, concerns were raised with-
perform that function on its behalf.
in Transamerica about the need for additional
controls in its procedures for mortgage lending.
Prudent Lender Checklist
It was Hennessy’s opinion that Transamerica’s
lending could be accomplished efficiently by
The decision assists in providing a checklist of
delegating all lending responsibilities, and an
items which a prudent lender should follow
emphasis was placed on the insurance policies
before funds are advanced on a loan. The
carried by Transamerica’s legal counsel and
decision summarizes the acts and omissions of
other contractors. The business acumen of this
Transamerica with respect to the Murphy Manor
approach did not appear to impress the court.
loan that were unreasonable and imprudent,
The activities allegedly delegated by
judged by reference to the reasonable expecta-
Transamerica or activities it assumed were dele-
tions of persons regularly engaged in commer-
gated included appraising the value of the secu-
cial mortgage lending in Ontario. From the
rity; assessing the risks involved; assessing the
summary of imprudent acts, the following
protection required for a lender; and administer-
checklist for prudent lenders emerges:
ing and servicing the mortgages that the
company acquired.
Transamerica deferred hiring the necessary
underwriting staff to protect its own commercial
•
dures for their own protection;
•
Lenders must recognize, in the absence of an
agreement to the contrary, that mortgage
interests and in all but this one loan utilized
brokers act exclusively on behalf of the bor-
“outside underwriters.” For this loan,
rower in attempting to obtain the loan;
Transamerica did not even attempt to secure the
protection of outside underwriters prior to the
Lenders must have adequate internal proce-
•
first advance and the court found that
Lenders should not assume that mortgage
brokers engage in underwriting with respect
Transamerica failed to underwrite and failed to
to a loan in the absence of any discussion
effectively delegate underwriting responsibilities.
and agreement to that effect;
The responsibility for underwriting the loan simply “fell through the cracks.”
•
Lenders should not rely upon their legal
counsel or mortgage brokers to determine
In the decision, Mr. Justice Cullity was clear that
whether satisfactory appraisals have been
Transamerica’s conduct fell below what was to be
obtained;
16
•
WI NTER 2000/200 1
Lenders must communicate the responsibili-
The decision recognizes that there are questions
ties they expect their counsel and other con-
of judgment and approach on which reasonable
tractors to assume;
appraisers may differ. When assessing the potential professional negligence of an appraiser, it is
•
Lenders must review Appraisal Reports
useful to know that a court will consider this
before advancing funds;
aspect of professional judgment in determining
the reasonable standard of competence to be met
•
Without an agreement, instructions,
by a qualified appraiser. As the court noted:
communications, questions or supervision,
•
lenders cannot assume that the responsi-
As far as the attacks on the validity of
bilities of underwriting and due diligence
Baayen’s analysis and methodology are con-
will be exercised by one or more other
cerned, I am satisfied that the great majority
parties; and
of them involve questions of judgment and
Lenders must verify the information provided by the borrower or must ensure that the
commitment letter conditions are satisfied
prior to funding.
The Appraisal Report
Two aspects of the decision relating to the
appraiser Baayen are significant for professional
liability insurers and for appraisers. These
include the assumptive nature of the report and
the extent to which appraisal analysis and
methodology includes the application of professional judgment. Mr. Justice Cullity found that
the appraisal report was prepared by Baayen, as
instructed, on an assumptive or completion
basis, as opposed to a current or “as is” value,
and that no one at Transamerica appreciated the
significance of the assumptions. In fact, no one
at Transamerica read the appraisal report in
detail and no one verified that the assumptions
in the report had been fulfilled.
approach on which reasonable appraisers
may well differ.
These include disagree-
ments on whether the market would support
a capacity of 81 beds at $35 a day, on the
highest and best use of the property, the
treatment of comparable properties and the
determination of an appropriate capitalization rate and other variables involved in the
income approach to valuation contained in
the Appraisal Report.
. . . Suffice it to say that I am far from satisfied that the criticisms leveled at Baayen’s
methodology establish that it fell below the
reasonable standard of competence required
by a qualified appraiser considering this particular property on an assumptive basis. Nor
has it been demonstrated that the assumptions on which Baayen was instructed to rely
were so unreasonable that he should not
have accepted them, or that he failed to exercise sufficient effort, skill and judgment in
attempting to verify them.
17
CANADIAN
INSURANCE
LAW
Transamerica’s claim was dismissed as against the
Paul Scargall and Kimberley Vooro, Toronto office,
appraiser and real estate broker. Transamerica
(416) 367-6389/(416) 367-6224,
has not appealed the dismissal against the
Email: [email protected] and
appraiser and Baayen is now seeking repayment
of solicitor and client costs, which will only add
[email protected],
successfully acted for the appraiser.
to the losses Transamerica suffered due to its
poor lending practices.
“ D U T Y T O D E F E N D ” C A S E T O B E H E A R D B Y S U P R E ME
C O UR T O F C A N A DA
The Supreme Court of Canada has agreed to hear
Monenco subsidiaries and two other engineering
a case that may have significant implications for
groups. The expansion included the installation by
“duty to defend” disputes under insurance policies
the Monenco subsidiary of cables jacketed in
generally. Monenco Ltd. v. Commonwealth
polyvinyl chloride (“PVC”). Suncor sued Monenco
I n s u rance Co. involves a dispute between an engi-
and its subsidiary, alleging that a significant factor
neering firm and its comprehensive general liabili-
in the extensiveness of the fire’s destruction was
ty (“CGL”) insurer, which declined to defend the
the way in which the fire travelled along the PVC
firm against claims of negligence and breach of
cables from the fire’s source to other parts of the
contract. The key issue in the case is what evi-
plant. Suncor alleged that Monenco and its sub-
dence a court may consider in determining
sidiary breached their contract and breached vari-
whether a “duty to defend” has arisen. Is the
ous duties owed to Suncor. Monenco’s CGL policy
court restricted to the policy itself and the plead-
was part of a sophisticated program of insurance
ings in the underlying action? Or may a court
that included a professional liability policy and an
consider extrinsic evidence as well?
excess umbrella liability policy. Although
Monenco looked principally to its professional
In 1987, a fire destroyed a substantial portion of an
liability policy for defence coverage and indemnity,
Alberta tar sands plant owned by Suncor Inc. The
that policy carried a deductible of $1,000,000.
plant had been expanded over the previous decade
Monenco looked to the CGL policy with Common-
by a joint venture involving one of Monenco’s
wealth in an attempt to recover the $1,000,000
subsidiaries and two other engineering groups.
deductible. Commonwealth denied coverage and
The expansion included the installation by the
Monenco sued to recover its defence costs.
18
WI NTER 2000/200 1
Monenco’s claim came on for trial in the Supreme
ings in the Suncor action. Despite an earlier
Court of British Columbia. The parties agreed
Supreme Court of Canada decision that appeared
that a CGL policy was in force at the time of the
to rule out consideration of such evidence, the
loss and that it contained an agreement by
Court of Appeal went on to consider the contract
Commonwealth to pay Monenco’s legal defence
between the joint venture and Suncor, as well as
costs. The key question was whether either of two
the joint venture agreement.
exclusion clauses applied: a professional services
exclusion and a “turnkey” exclusion.
On the basis of these materials, the Court of
Appeal concluded that the joint venturers had
The trial judge held that the turnkey exclusion
agreed to design and construct a “turnkey project”.
exempted Commonwealth from any duty that it
Accordingly, their actions fell within the precise
might otherwise have had to defend Monenco in
words of the turnkey exclusion. The court held
the Suncor action. In an effort to show that the
that Suncor’s claim was therefore not one for
exclusion clauses applied, Commonwealth
which the CGL policy provided coverage and dis-
attempted to introduce a variety of evidence in
missed Monenco’s appeal.
addition to the CGL policy itself and the pleadings
in the underlying action by Suncor. The extrinsic
On March 16, 2000, the Supreme Court of
evidence included submissions made by Monenco
Canada granted leave to hear Monenco’s appeal.
during the negotiation of the CGL policy, details
The case will give Canada’s highest court a new
of Monenco’s insurance program, correspondence
opportunity to identify what evidence may prop-
between Monenco and its professional liability
erly be considered when determining whether a
insurer and evidence regarding the involvement of
contractual duty to defend arises. A decade has
the professional liability insurer in the settlement
passed since the court’s last authoritative state-
of the Suncor action. The trial judge declined to
ment in this area in the case of Nichols v.
consider this extrinsic evidence, since he found
American Home As s u rance Co. (1990), and the
that the exclusions in question were unambiguous.
result may have implications for all Canadian
The trial judge concluded that Commonwealth
insurers. We will follow this litigation and
had no duty to defend and, accordingly, he dis-
provide an update once the Supreme Court of
missed Monenco’s claim. Monenco appealed.
Canada has issued its decision.
The case proceeded to the British Columbia Court
Angus M. Gunn, Jr., Vancouver office,
of Appeal. In order to demonstrate that the
(604) 640-4084
turnkey exclusion applied, Commonwealth once
Email: [email protected]
again asked the court to examine extrinsic
evidence beyond the CGL policy and the plead-
19
CANADIAN
INSURANCE
LAW
S P O L I AT I O N O F E V I D E N C E – U P D A T E
In the last edition of this Insurance Newsletter,
appeal did not proceed. The Ontario Court of
we discussed some recent caselaw on spoliation
Appeal accordingly heard arguments in Spasic on
of evidence.
May 31, 2000, with the decision being delivered
on July 21, 2000.
“Spoliation of evidence” refers to the intentional
or reckless destruction of evidence. Canadian
Speaking for the court, Mr. Justice Borins
law has long recognized spoliation as an eviden-
allowed the appeal and set aside the order of the
tiary presumption - if a party destroys evidence,
motions judge which had struck the paragraphs
the court may invoke the spoliation principle to
in the Statement of Claim which pled the tort of
presume the worst against the spoliator. Some
spoliation of evidence. Justice Borins did not
recent cases have considered whether spoliation
substantively discuss the merits or elements of
of evidence can also be an independent tort,
the tort of spoliation of evidence, but focused
such that a person can be sued for intentionally
on whether a new or novel cause of action
destroying evidence.
should be struck at the pleadings stage.
Referring to the principles set out by the
At the time of our last article, the British
Supreme Court of Canada in Hunt v. Carey
Columbia Court of Appeal in Endean v. Canadian
Canada Inc. (1990), Justice Borins concluded
Red Cross Society (1998) and the Ontario
that a motion at the pleadings stage was not the
Divisional Court in Spasic Estate v. Imperial
appropriate forum to strike out a novel cause of
Tobacco Ltd. (1999) had concluded that there
action. In the circumstances, the claim should
was no need for a separate tort of spoliation of
proceed to trial, for full consideration based on
evidence in Canadian law. Both of these cases
the facts of the case. Justice Borins referenced
involved motions to strike pleadings which had
Madam Justice Wilson’s decision in Hunt as
claimed spoliation as an independent tort.
follows:
The Endean case was pending before the
The fact that a pleading reveals “a n
Supreme Court of Canada. An appeal from the
arguable, difficult or important point of
Spasic decision was on hold at the Ontario Court
law” cannot justify striking out part of the
of Appeal, awaiting the Supreme Court of
statement of claim. Indeed, I would go so
Canada’s decision. The Endean case ultimately
far as to suggest that where a statement of
settled, such that the Supreme Court of Canada
claim reveals a difficult and important
20
WI NTER 2000/200 1
point of law, it may well be critical that the
of the respondents resulted in harm to the plain-
action be allowed to proceed. Only in this
tiff by making it impossible for her to prove her
way can we be sure that the common law in
claim, then it will be for the trial judge, in the
general, and the law of torts in particular,
context of a complete record, to determine
will continue to evolve to meet the legal
whether the plaintiff should have a remedy”.
challenges that arise in our modern
industrial society.
We understand that the defendants in Spasic are
seeking leave to appeal to the Supreme Court of
In the result, the claim was allowed to go
Canada.
forward to trial. Justice Borins specifically stated
“there is no need to embark on a detailed con-
Patrick J. Hawkins, Toronto office,
sideration of the strength and weaknesses of the
(416) 367-6065,
law, including the Canadian law, on the tort of
Email: [email protected]
spoliation. If it is established that the conduct
U . K . C O R N E R : T H E E N D O F B A RR I ST E R ’ S I M M U N I TY
I N E N G L A ND
The recent House of Lords case in Arthur J. S.
For Canadian lawyers, one of the more remark-
Hall v. Simons (2000) called into question as a
able features of the majority reasons is the ring-
pivotal issue the immunity enjoyed by barristers
ing endorsement by Lords Steyn and Hoffmann
for more than two centuries from damage
of the Ontario decision of Justice Krever in
actions for negligence.
Demarco v. Ungaro (1979). In the reasons deliv-
By a 4-3 majority ruling, the court reversed the
tional endorsement:
ered by Lord Steyn there is the following excepunanimous opinion of five law lords in Rondel v.
Worsley (1967), which decision established the
In Canada an advocate had no immunity
principle that a barrister was immune from an
from an action in negligence before Rondel
action in negligence arising from his conduct as
v. Worsley was decided. In 1979 the ques-
an advocate.
tion was re-examined in great detail as a
result of the decision of the House of Lords
21
CANADIAN
INSURANCE
LAW
in Rondel v. Worsley . . . In Canada trial
in Canada. Krever J. examined that case
lawyers owe a duty to the Court. After a
and the Saif Ali case, as well as the few
detailed and careful review the Court
Canadian cases on the subject and
found there was no evidence that the work
explained the difference between the
of Canadian courts was hampered in any
Canadian and English legal profession.
way by counsel’s fear of civil liability. The
But I do not think it would be unfair to
Demarco case has been consistently fol-
summarize the pith of the judgment on the
lowed by Canadian courts. . . . I regard
divided loyalty argument as being that
the Canadian empirically tested experience
Canada had got on perfectly well without
as the most relevant. It tends to demon-
an immunity for over a 100 years and there
strate that the fears that the possibility of
was no reason to think that it needed to be
actions in negligence against barristers
introduced in order to encourage lawyers
would tend to undermine the public
to perform their duties to the Court. He
interest are unnecessarily pessimistic.
(Krever J.) s a id :
Lord Hoffmann also noted:
With respect to the duty of counsel to
. . . I cannot refrain from drawing attention
absence of immunity, counsel will be
to the experience in Canada.
tempted to prefer the interest of the
the Court and the risk that in the
It appears
that in that country no immunity was
client to the duty to the Court and will
claimed for law yers before Rondel v.
thereby prolong trials, it is my respect-
Worsley. Then in Demarco v. Ungaro, a firm
ful view that there is no empirical
of barristers and solicitors in Niagara Falls,
evidence that the risk is so serious that
Ontario found themselves sued by a former
an aggrieved client should be rendered
client for negligence in the conduct of a
remediless.
case in which he had been ordered to pay
$6,000 and costs. They argued that as long
Although a decision at first instance in
as the immunity in England was based on
Ontario, the careful and reasoned decision
the absence of a contract with a barrister, it
of Krever J. appears to have been treated as
could obviously have no application in
settling the law in Canada. It has not since
Canada. Law yers there contracted with
been challenged.
their clients. But now that the House of
Lords in Rondel v. Worsley had reissued the
So far as the memory of this author is con-
immunity with a newly minted rationale
cerned, the foregoing tributes by two members
there was no reason why the argument of
of the House of Lords in a landmark decision is
public policy should not also pass current
without parallel.
22
WI NTER 2000/200 1
For any reader facing a brief on either side of the
cases. The following excerpts from Lord Hope’s
issue of an action in negligence against an advo-
reasons summarize the position:
cate, to my mind the best statement of the issues
in such a case are those quoted by Lord Steyn
I consider that the risk is as real today as it
from the reasons of the Master of the Rolls
was in 1967 in this country and it was in
Bingham in Ridehalgh v. Horsefield (1994):
1988 in Australia that, if advocates in criminal cases were to be exposed to the risk of
Any judge who is invited to make or con-
being held liable in negligence, the exis-
templates making an order arising out of an
tence of the risk would influence the exer-
a d vo c a t e ’s conduct of court proceedings
cise by them of their independent judg-
must make full allowance for the fact that
ment in order to avoid the possibility of
an advocate in court, like a commander in
being sued. The temptation, in order to
battle, often has to make decisions quickly
avoid that possibility, would be to pursue
and under pressure, in the fog of war and
every conceivable point, good or bad, in
ignorant of developments on the other side
examination, cross-examination and in
Mistakes will inevitably be
arguments in meticulous detail to ensure
m a d e, things done which the outcome
that no argument was left untouched and
of the hill.
shows to have been unwise. But advocacy is
no stone was left uncovered. The exercise
more an art than a science. It cannot be
of independent judgment would be subor-
to
formulae.
dinated to the instincts of the litigant in
conducted
according
Individuals
differ in their style
and
person who insists in pursuing every point
approach.
It is only when, with all
and putting every question without any
allowances made, an advocate’s conduct of
regard to the interests of the court and to
court proceedings is quite plainly unjustifi-
the interests of the administration of jus-
able that it can be appropriate to make a
tice generally. As for the objection that to
wasted costs order against him.
accord advocates an immunity on this
ground which is not available to other pro-
Core Immunity
fessionals, the answer to it is as true today
as it always was. The exercise by other pro-
A thought provoking aspect of the dissent led by
fessionals of their duty to their clients or to
Lord Hope against the majority of the law lords
their patients may require them to face up
is that in his long speech, he and the other two
to difficult decisions of a moral or ethical
who agreed with him, centered their viewpoint
nature. But they do not have to perform
around the concept of core immunity and that
these duties in the courtroom, where the
the immunity should be retained in criminal
exercise of an independent judgment by
23
CANADIAN
INSURANCE
LAW
the advocate as to what to do and what not
When one considers the calibre of many persons
to do is essential to the public interest in
accused of criminal acts, at the very least this is a
the efficient administration of justice.
persuasive argument.
I would hold that it is in the public interest
For example, in the case of Rondel v. Worsley, the
that the core immunity of the advocate
civil action for damages for negligent advocacy
against claims by his client for negligence
was brought just short of the six year limitation
should be retained in criminal cases.
period by an accused/plaintiff based on ridicu-
I
would however hold that it can no longer
lous allegations. In that case, the accused was
be justified in civil cases.
defended by a barrister who accepted a “dock
brief” which brought remuneration of £2 4s 6d.
We are all aware that in criminal prosecutions,
unlike Scottish law, there are only two options:
‘guilty’ or ‘not guilty’. The high onus of proof,
‘beyond a reasonable doubt’, clearly contemplates that over the years many accused persons
who in fact committed crimes were found not
guilty because of failure in the opinion of jury
or judge to meet the high standard of proof.
This in turn carries the clear implication that if
clients who are accused are in a position to
exercise the sanction of a civil action for damages for negligence against their counsel, some
of the latter may yield to clients who insist on
trial conduct which is in breach of the barrister’s duty to the court; for example, prolonging
the examination/cross-examination of witnesses
beyond good judgment; or insisting during the
course of argument or cross-examination that
the accused was incapable for various reasons of
committing the criminal offence charged when
the counsel knew with certainty that the
contrary was the truth.
William L.N. Somerville, Q.C., F.A.C.T.L.,
Toronto office,
(416) 367-6267,
Email: [email protected]
WI NTER
2000/2001
I N S U R A N C E L A W G R O U P C O N TA C TS :
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Jeff Vallis
(403) 232-9404
Montreal
Jeremy Bolger
(514) 954-3119
Ottawa
Bryan Carroll
(613) 787-3506
Toronto
Borden Ladner Gervais LLP
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