Additional Insured Entitled to Defence, But Only A Limited One

Atlific Hotels and Resorts Ltd. v. Aviva Insurance Company of Canada is the latest chapter in the ongoing (and evolving) story of “additional insureds”. The latest installment was written by Mr. Justice Edward P. Belobaba.

In the underlying lawsuit, the plaintiff had slipped and fallen at the Deerhurst Resort one winter evening. She sued the resort and the contractor whom Deerhurst had hired to remove snow and ice from its premises.

The snow removal contractor was insured by Aviva. One of the terms of the agreement between the contractor and Deerhurst required that the contractor have the resort added to his policy with Aviva as an additional insured. This was done. Justice Belobaba’s reasons don’t provide much detail about the policy wording however they do say that Deerhurst was an additional insured “but only with respect to liability arising out of the contractor’s operations”. Presumably, this wording appeared in an additional insured endorsement to the CGL policy issued by Aviva but if so, it would have been preferable to have this spelled out in the reasons. The Canadian cases often don’t focus on where the grant of coverage languge comes from. (In the Riocan v. Lombard, for instance, the policy language was taken from certificates of insurance rather than from the policy itself. While discrepancies in wording between the two can give rise to its own set of issues, the wording of the actual policy should always be the starting point.)

We’ll return to the wording of the coverage grant later in this post.

Aviva was defending the underlying lawsuit for the named insured snow removal contractor but not on behalf of Deerhurst. In the application before Justice Belobaba, Deerhurst was seeking an declaration that Aviva was required to undertake its defence. Justice Belobaba ruled that Aviva was required to defend some, but not all of the allegations against Deerhurst.

His Honour said that the underlying claim really broke down into three types of allegations:

(i) negligence on the part of all of the defendants relating in various ways to the removal of snow and ice;

(ii) negligence on the part of the Deerhurst defendants in the operation and management of the hotel, including inadequate lighting and the lack of non-slip matting on the walkways, the failure by management to cancel the evening program at the conference centre so that the guests could have stayed in their rooms, the failure to cut the program short so that the participants could have returned to their lodgings sooner and more safely, and the failure to offer the plaintiff temporary overnight accommodations in the main lodge until the walkways were cleared of snow and ice and made safe for use;and

(iii) occupier’s liability.

 (This is very typical of these types of cases, so Justice Belobaba’s grouping is useful.)

Aviva ackonwledged that it was required to defend the “snow and ice” claims but argued that because it was already defending the named insured against all of these allegations, it had discharged that obligation. In making this argument, it relied on the decision of Mossip J. in D’Cruz v. B.P. Landscaping. We expressed our disagreement with Justice Mossip’s reasoning in an earlier post. Justice Belobaba also rejected her reasoning, saying:

[The Deerhurst defendants] cannot ignore the claims that are being made against them by the plaintiff merely because the insurer is providing a defence for an unrelated co-defendant. The fact that Aviva will have to pay two defence counsel or perhaps agree to a single independent defence counsel is, in my view, a necessary consequence of its contractual obligation. On this point, I respectfully disagree with the reasoning in D’Cruz v. B.P. Landscaping Ltd., [2007] O.J. No. 2704 at para. 16.

That took care of the “snow and ice” category of the underlying claim. More problematic were the other two types of claim: Deerhurst’s alleged negligence in the operation and management of the hotel and occupier’s liability. Justice Belobaba held that Aviva did not owe Deerhust a defence to the allegations in the latter two groups.

There are two important issues that arise on this part of the ruling. Unfortunately, only one of them is discussed in Justice Belobaba’s reasons.

The first issue is whether a duty to defend some allegations made against an additional insured means that the insurer must defend all of the allegations in the underlying suit, even if not all of them are within coverage. Justice Belobaba held that the answer was “no”.

On this point, counsel for Deerhurst relied on the Riocan decision, where Justice Hennessy had said:

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.

Justice Belobaba distinguished Riocan. He said that Justice Hennessy’s reasoning means that where a duty to defend is triggered, that duty will only extend to to claims that “embody the true nature of the [overall] claim”:

 In other words, if after a careful examination of the entire pleading, a court finds that a particular claim that potentially falls within coverage captures “the true nature of the overall claim”, i.e. the essence of the entire action, then the insurer is obliged to defend the entire action. This makes sense.  It is also what the Supreme Court concluded in Non-Marine Underwriters, Lloyd’s of London v. Scelara, [2001] 1 S.C.R. 551: “In determining if a claim falls within coverage, courts are not bound by the labels chosen by the plaintiff, but must determine the true nature of the claim stated in the pleadings.” (at para. 138).  That is, the true nature of the overall action.

Here, His Honour felt that the last two categories of the claim (occupier’s liability and negligence by Deerhurst in operation and management of the resort) were not part of the “snow and ice” claim which had triggered Aviva’s duty to defend. He said that the allegations of negligence in the management and operation of the hotel were “formidable and can stand on their own”. Accordingly, he ordered Aviva to defend the “snow and ice” part of the underlying claim but dismissed the application as it pertained to the balance of the claim.

It is perhaps debateable whether the snow and ice claim represented the “true nature of the claim”, so as to make the dictum in Riocan applicable and trigger a duty to defend for the other two categories of claim. The ontological differences between the three categories of claim are not, to us, all that clear. We understand the general approach that His Honour took to this issue but think that the coverage bar would benefit from a more detailed analysis of “essential claim”.

The second issue impacts, in part, on the first and it is: what is the coverage provided by an additional insured endorsement that contains the limitation found in this case, which was apparently, “but only with respect to liability arising out of the contractor’s operations”? Justice Belobaba said that only the “snow and ice” claims fell within the coverage, but he did not interpret just how far that coverage extended. As is usually the case in Canadian decisions on additional insured endorsements, everyone seems to have assumed that the endorsement did not cover claims against Deerhurst that related to management and operation of the resort or for claims of occupier’s liability. But is that so clear?

As we have discussed in previous posts on this subject, the far more-developed US jurisprudence on this issue might leave some room for doubt. There, the meaning of the phrase, “arising out of” in additional insured endorsements has been extensively litigated and a number of courts have construed it to have a much broader meaning than is generally assumed to be the case in this country. As a result, the standard wording of the additional insured endorsement form issued by the Insurance Services Office (“ISO”) in the United States was revised, some twenty years ago, to change “arising out of” to “caused by”. In Canada however, the “arising out of” wording is still commonly used.

Based on some of the American caselaw, it might be arguable that the coverage grant in this case did extend to Justice Belobaba’s second and/or third categories. The following are some examples of the broad construction that some US courts have employed:

  • Where the insurer grants coverage to an additional insured for liability arising out of the named insured’s work, the additional insured is covered without regard to whether the injury was attributable to the named insured or the additional insured. BBL-McCarthy, LLC v. Baldwin Paving Co., 285 Ga. App. 494, 646 S.E.2d 682 (2007), cert. denied, (Sept. 10, 2007).
  • If a liability insurer fails to define “additional insured” so that coverage is provided only to the extent the additional insured is held liable for the named insured’s acts or omissions arising out of and in the course of operations, but grants coverage for liability arising out of the named insured’s work, the additional insured is covered without regard to whether injury was caused by the named insured or the additional insured. Vitton Const. Co. v. Pacific Ins. Co., 110 Cal.App.4th 762, 2 Cal.Rptr.3d 1,3 Cal. Daily Op. Serv. 6413,3 Cal. Daily Op. Serv. 6548,2003 Daily Journal D.A.R. 8047 ( Cal.App. 1 Dist. 2003) review filed (2003).
  • In McIntosh v. Scottsdale Insurance Co., 992F2d 251 (10th Cir 1993), it was held that an endorsement that conferred additional insured status “only with respect to liability arising out of the named insured’s operations” was ambiguous as to whose negligence was excluded from coverage and accordingly, had to be construed in favour of the insured.

The authors of an American text, The Additional Insured Book, (5th ed.), have said, “[u]nless and until insurers modify the ‘arising out of’ wording or limit the coverage it provides by additional provisions, courts are unlikely to alter their approach to interpreting the phrase broadly”. In Canada though, the issue never seems come up at all.

Leaving aside the question of what the grant of coverage in this case actually meant, was Justice Belobaba correct in concluding that the duty to defend was triggered only for those parts of the underlying claim that could be said to form part of the “essential overall claim”? Counsel for Deerhurst relied on the following passage from the decision of the Court of Appeal in Halifax Insurance v Innopex, [2004] O.J. No. 4178: “if there is a possibility that any of the claims are captured by [the insurer’s] coverage, [the insurer] has a duty to defend those claims”. However, Justice Belobaba said that it was unclear whether the word, “action” meant “the entire action”. He distinguished Innopex on that basis.

In Hanis v. U.W.O. 4027 5 C.C.L.I. (4th) 277, 67 O.R. (3d) 539, 30 C.C.E.L. (3d) 275 (Ont. Sup. Ct.), affd. sub nom. Hanis v. Teevan, 2008 ONCA 678 (CanLII), Mr. Justice Denis Power said, “if there is a duty on an Insurer to defend some, or only one, of the claims made against an Insured, a duty to defend the entire claim arises in most situations. This is so even where such cause of action are only potentially within the policy coverage-i.e., the duty arises if there is a mere possibility that a claim within the policy may succeed”, citing the Alberta Court of Appeal’s decision in Modern Livestock v. Kansa General Insurance Co. (1993), 18 C.C.L.I. (2d) 266 (Alta. Q.B.), affd. 24 C.C.L.I. (2d) 254, 77 W.A.C. 167 (Alta. C.A.). Justice Power’s decision was upheld by the Court of Appeal, but this particular point was not addressed.

The authorities do seem to suggest that where a clear demarcation can be drawn between covered and non-covered claims, the duty to defend would arise only in relation to the covered claims. (In that event, of course, issues of defence cost allocation might still have to be dealt with, if there was overlap in the steps that had to be taken in defence of the two categories of claim.) Where things become more difficult (and this brings us back to the interpretation to be placed on the words, “arising out of” in the coverage grant) is when there is ambiguity as to what is and what is not, a “covered claim”.

We note the observation made by Justice Belobaba, that the appeal in the Riocan case, which was to have been heard by the Court of Appeal last month, was abandoned before hearing. So, it appears that we will have to keep waiting for appellate clarification of the issues surrounding the additional insured endorsement.

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