Snow Removal Contractor’s Insurer Ordered to Defend Property Owner Under “Additional Insured” Endorsement

Further addendum: The appeal of this decision was to have been heard in April, 2009 but was abandoned before then.

Addendum: We have been advised that this decision is under appeal.

Riocan Real Estate Investment Trust (O&Y Properties Inc.) v. Lombard General Insurance Co. is a very interesting decision, just released, that deals with insurance coverage in “additional insured” situations. The ruling was made by Madam Justice Patricia C. Hennessy.

We regularly encounter this type of case in our office. Unfortunately, this is an area of law that seems to be quite poorly understood in Canada and as a result, the caselaw is uneven. However, Riocan is fairly typical of the usual situation and Justice Hennessy’s decision will certainly guide practitioners and courts in the future.

The case was an application brought by Riocan against Lombard, who insured Riocan’s snow removal contractor. Riocan sought a declaration that Lombard had a duty to defend it in two underlying personal injury actions arising from plaintiffs having  slipped and fallen on allegedly icy parking lots owned by Riocan.

Under Riocan’s contract with the snow removal company (“Palmer Paving”), the contractor had agreed to indemnify Riocan for losses suffered “as the result of anything arising from or related to the work [performed by Palmer].” The contract went on to say that “this indemnity applies whether [Riocan] is negligent or not.”

Palmer was also required to maintain a policy of insurance and to have its insurer (Lombard) name Riocan as an additional insured. (Unfortunately, the reasons do not quote the language of the underlying contract with respect to the insurance obligation.)

Often the first problem in these cases is that the insurer does not, in fact, name the “indemnitee” as an additional insured. However in this case, Lombard evidently did name Riocan as an additional insured.

The decision of Justice Hennessy refers to two certificates of insurance that were issued by Lombard to Riocan, confirming that it had added Riocan as an additional insured. However, there is no mention in Her Honour’s reasons of the additional insured endorsement itself. She relied on Lombard’s certificates to determine what coverage it had extended to Riocan.

This highlights one of the most common problems with the “additional insured” cases. Typically, there is an underlying contract whereby one party has agreed to have its insurer add the party as an “additional insured” or an “additional named insured” (the two terms are not synonymous). If the insurer does so, it will usually use its off-the-shelf additional insured endorsement and basically fill in the blanks. It will then issue a certificate of insurance, to evidence that the coverage exists.

This gives rise to a host of problems. First of all, it is rare, in our experience, to find that the wording of (a) the underlying contractual obligation; (b) the additional insured endorsement; and (c) the certificate of insurance, correspond with each other. Quite often, they are all different. And that is because insurers make no effort to try to match their endorsements with what their insured has contractually obliged itself to obtain. Worse, their certificates frequently describe coverage that is different from what is actually set out in the additional insured endorsement. (For an example of this problem, see Lacombe v. Don Phillips Heating, a decision of Master Beaudoin and one in which our office was involved.)

To the extent that the coverage in the endorsement departs from the obligation in the underlying contract, the insured might be exposed to damages for breach of contract.

It is important to recognize that the actual coverage comes from the endorsement, not from the certificate, as Justice Hennessy seems to have assumed. (Having said that, in one of the leading texts on the subject of additional insured endorsements, an entire chapter is devoted to a consideration of the relationship between the certificate and the endorsement. In the United States, there have been cases that have considered whether the certificate can be a basis for establishing the existence and the scope of coverage. The question has received a mixed response.)

To return to the present case, Lombard had refused to undertake the defence of Riocan and this led to Riocan’s application.

Justice Hennessy looked at the allegations in the two statements of claim and compared them with the two certificates of insurance. (As noted above, this was not the right approach; she should have looked to the wording of the endorsements, which might very well have been different from the certificates.)

In any event, the first certificate read as follows (and the other was in substantially the same language):

Re: …Snow Removal, Sweeping and Flushing…
It is hereby understood and agreed that RioCan Property Services, RioCan Holdings Inc and RioCan TEIT [sic; should be “REIT”] are added as additional insured but only with respect to the above noted contract and solely with respect to the operations performed by the original Named Insured.

This brings us to another recurring problem with these endorsements; what coverage do they provide?

After quoting from the certificates, Justice Hennessy characterized the coverage this way:

[14] Each of the underlying actions alleges negligence against the owner specifically for failing to properly maintain the parking lot free of ice and failing to salt or sand. The failures alleged in these claims could be attributable to the failure of the contractor to perform its obligations under the contract. These claims, if proven, would fall within the policy coverage and would therefore trigger a clear duty to defend Riocan as a name insured with respect to the work under the contract.
[15] However, in each of the actions, there are also claims asserting breaches of Riocan’s statutory obligation as an occupier. The contractor’s insurance coverage does not cover Riocan’s own negligent acts or breaches of the Occupiers’ Liability Act. For these claims the duty to defend Riocan is not independently triggered.

She went on to say, “there is no suggestion that the Lombard coverage includes coverage for all negligence of RioCan”. However, it is far from obvious that this is true (leaving aside the fact that her conclusion was based on the certificate, not on the endorsement).

Additional insured endorsements used in Canada typically track, more or less closely, a form that was created by the Insurance Services Office (“ISO”) in the United States. But the ISO stopped using that form in 1986. The old wording extended the definition of “insured” to persons named in a schedule to the policy, but only with respect to liability “arising out of” the work of the named insured.

Litigation in the U.S. about the meaning of the “arising out of” form of the endorsement led many courts to conclude that endorsements so worded required only an indirect causal connection, with the result that coverage was extended for the additional insured’s sole negligence.

This line of cases led the ISO to revise its form in 1986. The new (if 22 years can be called “new”) wording limits coverage to injury, damage etc. caused, in whole or in part, by the acts or omissions of the named insured or those acting on its behalf in the performance of its operations for the additional insured. For some reason, no one seems to use this wording in Canada.

The language used by Lombard is not precisely the same as either ISO form, but more closely resembles the pre-1986 wording by omiitting any reference to causation. (And in fact, the obligation created by the underlying contract was to indemnify Riocan against liability “arising out of activities of [Palmer]”.)

Justice Hennessy said, in her reasons, that claims against Riocan for breach of its statutory obligation as an occupier would not engage Lombard’s policy on its behalf. But surely if Riocan was exposed to liability as an occupier for failing to keep its parking lot free of snow and ice, it cannot be said that this did not “arise out of” Palmer’s failure to perform its contract.

Again, the problem is that insurers issue these endorsements using the same standard form in every case, without any consideration of what coverage is actually called for by the underlying contract entered into by their insureds.

Having found though, that some of the allegations made in the two actions against Riocan triggered Lombard’s coverage, while others did not, Justice Hennessy then considered how to deal with the situation.

Her Honour referred to the ruling of Mossip J. in D’Cruz v. B.P. Landscaping Ltd. In an earlier post, we criticized that decision. It held that an insurer was not obliged to defend an additional insured when it was already defending the named insured. However, Justice Hennessy chose not to follow D’Cruz (and we think she was right to do so).

Justice Hennessy noted that Justice Mossip had not had the benefit of the Court of Appeal’s recent decision in Appin Realty Corp. v. Economical Mutual Insurance Co. (another case in which our office is involved). (In that case, Economical Mutual is now seeking leave to appeal to the Supreme Court of Canada.) [Note: leave to appeal was refused by the S.C.C. in July, 2008.]

Lombard argued that forcing it to assume Riocan’s defence and to defend all of the “conflicting allegations” would place it in “an impossible position”. However, Justice Hennessy, relying on Appin, rejected the argument:

I am of the view that in most situations where there is a duty on an Insurer to defend some, or only one, of the claims made against an Insured and that claim embodies the true nature of the claim, a duty to defend the entire claim arises. This is so even where the pleadings include claims that may be outside the policy coverage. Conflict issues can be addressed in a number of ways. Counsel did not request me to deal with this issue.

In the result, she ordered Lombard to defend all of the allegations that had been made against Riocan in the underlying lawsuits.

As Her Honour noted (and as Lombard apparently argued), forcing the insurer to defend all claims (covered and not covered) can give rise to conflicts of interest. In the context of this case, the dilemma faced by the insurer is described in the following passage from Justice Hennessy’s reasons:

At this stage, the insurer submits that it would be placed in an impossible position if it were obliged to defend the conflicting allegations. For example, the insurer states that in order to properly defend the claim for negligence against the third party snow removal contractor it may plead and argue at trial that the contractor did fulfil its duties under the contract but that certain actions or omissions of the occupier were negligent or in breach of their statutory obligations. To the extent that the claim against the occupier is factually based on the scope of work of the contractor, the insurer could defend by raising the obligations of Riocan as an occupier. It is in the financial interest of the insurer to allege that any fault found, falls outside the scope of work of the contractor. In other words, “It is in the insurer’s interest that if liability is found, it be on a basis other than one falling under the policy.” In this way the insurer would not be obliged to indemnify Riocan. On the other hand, if the insurer is responsible to defend Riocan on all claims, it is working against its own interest.

As Justice Hennessy observed, she was not asked to deal with the fallout from this potential conflict. But this problem resembles the one that arose in Appin and that resulted in the motions judge and the Court of Appeal directing that the defence be handled by the insured’s own lawyers. That might be the next issue to arise in the Riocan cases…

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