This month, the Court of Appeal has released two decisions dealing with an insurer’s “duty to defend”.Kohanski v. St. Paul
The first is Kohanski v. St. Paul Guarantee Insurance Company. The issue in the case was whether a duty to defend arose under a directors’ and officers’ liability, which contained what is known as an “insured v. insured” exclusion. This exclusion applies when one insured sues another.
In the Superior Court, the insured had obtained a finding that a duty to defend had been triggered. This was on the basis of U.S. caselaw, which said that the rationale for the “insured v. insured” exclusion was to prevent collusive lawsuits between insureds. It was argued here, that where the court could be satisfied that no collusion was taking place, there was no need to apply the exclusion. The motions court judge had accepted this argument and declined to apply the exclusion.
The Court of Appeal reversed that decision. It ruled that the exclusion was unambiguous and should be applied, regardless of the policy reasons that might have underlain its insertion into the insurance contract.
We aren’t going to get into the nuts and bolts of the “insured v. insured” exclusion (which is so esoteric that only one other Canadian case had discussed it when this appeal was argued). What is of broader interest though, is the Court of Appeal’s approach to the interpretation of the insurance policy. It is well established in Canadian caselaw, that exclusion clauses are to be construed against the insurer. But the Court made it clear that this rule of construction only applies where the policy language is ambiguous. If there is no ambiguity, then there is no basis for a court to do anything but give effect to the plain meaning of the exclusion. As the Court of Appeal noted, “Trite though it may be, an insurer has the right to limit coverage in a policy issued by it and when it does so, the plain language of the limitation must be respected.”
Djepic v. Kuburovic
The second case is Djepic v. Kuburovic. This was yet another in what has become a stream of Court of Appeal decisions dealing with the phrase, “ownership, use or operation”. In this case, the words appeared as part of an exclusion in a homeowner’s insurance policy. The case arose out of an incident in which the plaintiff had been blinded in one eye by a bungee cord while he and a friend were securing a mattress to the roof of the plaintiff’s car. He sued the friend, Kuburovic, who sought liability coverage under both the plaintiff’s auto insurance policy (arguing that he, Kuburovic, was an insured) and under his own homeowner’s policy.
This decision dealt with the issue of whether the auto insurer and/or the homeowner’s insurer had a duty to defend Kuburovic.
In the Superior Court, it was held that neither insurer owed a duty to defend. Kuburovic was not an insured under the auto policy and liability was found to have been excluded under the homeowner’s policy, which did not cover claims arising from the “ownership, use or operation of any motorized vehicle”.
The Court of Appeal upheld the dismissal of the action as against the auto insurer. It agreed that it would strain the language of the Insurance Act to characterize the defendant as an “occupant” of the car when the accident occurred.
But the appeal was allowed in relation to the homeowner’s insurer. The Court of Appeal ruled that because this was a “duty to defend” motion only and the precise way in which the accident had occurred was not yet known, there was at least a possibility that the injury had not arisen from the ownership, use or operation of the car. For example, the bungee cord might have been defective or damaged. That possibility was enough to trigger a duty to defend.
The Court went further, and discussed the issue of “concurrent causation”. It noted that it was also possible that the injury had resulted from an activity involving the plaintiff’s car (and this cause would have been excluded under the homeowner’s policy), as well as a non-auto related cause:
To illustrate this, let us assume, for example, that the injury in this case had occurred, in part, as a result of a defective bungee cord and that the claim had been brought not only against Kuburovic but also against the manufacturer of the cord. In that case, it would be open to a court to find the manufacturer liable if it concluded that the defective manufacture and supply was a concurrent cause of the injury. To the extent that Kuburovic may have supplied the cord and is alleged to have failed to test the strength of the cord or warn of the state of the cord, the situation is quite similar. Kuburovic may be liable on the basis of negligent supply, a non-auto related cause, as well as his negligence in loading the van.”
Finally, the defence argued that the Court of Appeal’s 2004 decision in Axa Insurance v. Dominion of Canada General Insurance prevented the court from interpreting the very same phrase (“arising from the use of a motorized vehicle”) narrowly in the case of an exclusion clause and broadly in the case of an insuring agreement. (Axa v. Dominion was another lawsuit arising from an errant bungee cord.)
The Court rejected the defence argument. The main basis on which it distinguished the Axa decision was that in that case, there had been an agreed statement of facts, so the facts were not in dispute. In the Djepic case, on the other hand, no facts had been agreed to; the motion had proceeded solely on the basis of the allegations in the statement of claim. Since it was at least possible that the exclusion might not apply, depending on how the evidence emerged at trial, a duty to defend was owed.
Our firm has yet another “ownership, use or operation” case coming up in the Court of Appeal next week, so there may be more developments on this front in the near future…