The “Sudden and Accidental” Exception: Graham v. Canadian Direct Insurance
On August 28, 2007, the B.C. Supreme Court released reasons for judgment in Graham v. Canadian Direct Insurance, 2007 BCSC 1291.
The Graham decision is important because British Columbia courts have rarely addressed the scope of the “sudden and accidental” exception. This exception is often found in older form pollution exclusion clauses (Graham is not a “pollution” case, but uses the “sudden and accidental” exception which is found in pollution exclusions). The case provides a very recent and logical discussion of the scope of such exceptions. Notably, it does not follow approach taken by some American jurisdictions, which in essence replace the word “or” with “and” (i.e., sudden oraccidental).
Graham confirms that to trigger the “sudden and accidental” exception, the release or escape of pollution, water, etc., must be both “sudden and accidental”. Unless the release is both “sudden and accidental”, the exception does not apply, and the exclusion avoids coverage.
In Graham, the insured went on vacation over a weekend. As he was leaving home, he noticed his outdoor sprinkler was turned on. He assumed it was set to “automatic” and that it would therefore turn off by itself. In fact, earlier in the day he had turned it on to “manual” to power wash his driveway. When he left home he failed to turn the system to automatic, and the sprinkler continued operating in his absence. A few days later he returned home to find a sink hole in his lawn and significant damage to the foundation of his house.
Mr. Graham sought coverage from his insurer, Canadian Direct Insurance. The insurer successfully denied coverage on the basis of a water-damage exclusion clause which provided as follows:
We do not insure loss or damage caused by water unless the loss or damage resulted from . . . the sudden and accidental escapeof water or steam from a domestic appliance located outside your dwelling but such damage is not covered when the escape of water is caused by freezing.
In the United States, many jurisdictions find that if the discharge is either sudden or accidental, the pollution exclusion clause does not apply to avoid coverage. However, in light of the Graham decision, British Columbia courts are unlikely to follow that approach.
In considering whether escape of pollution is “sudden”, consider the temporal nature of the escape.
(a) Did the pollutants flow out of a suddenly ruptured pipe? Did pollutants flow because a machine broke down or exploded? If so, the escape may qualify as “sudden”.
(b) Were pollutants discharged continually over a long period? Did the insured pipe pollutants directly into a river over a long period of time? Did pollutants leach slowly out of a holding tank over a long period of time? In those cases, the escape may not qualify as “sudden”.
(c) If the escape is not “sudden”, then the exception is not engaged and the exclusion applies to avoid coverage.
Even if an escape of pollutants is “sudden”, it must also be “accidental” in order to engage the exception to the exclusion clause. Whether the escape is “accidental” may depend upon the insured’s state of mind (although this could be gleaned from circumstantial evidence). Unlike the insuring agreement, the intention is disconnected from the intention to ultimately damage; it is connected only to the intention to release or allow the escape of the substance in question.
(a) Did the insured intend to release pollution into the environment (i.e., piping pollution directly into a river or stream)? If so, the release is probably intended and therefore not an “accidental” release.
(b) Did the insured release the pollutants by mistake (i.e., leak in the seal of a holding tank, even if negligent)? If so, the release may be “accidental”.
Graham emphasizes the need to consider the exclusion clause in the context of all of the underlying facts. Therefore, any claim for coverage will require a detailed consideration of the manner in which pollution was released (temporal: sudden vs. slow prolonged release), and the insured’s practices in relation to the release (intentional vs. accidental).
Triggering Claims-Made Policies
Two recent cases consider the triggering of coverage under “claims-made” insurance policies: MWH International, Inc. v. Lumbermens Mutual Casualty Company, 2007 BCCA 164 and Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21.
In MWH International, Inc. v. Lumbermens Mutual Casualty Company, 2007 BCCA 164, the British Columbia Court of Appeal held that a “claims-made” professional liability insurance policy had not been triggered by the insured. The insured had given notice of an event from which it expected a claim could be made. Adopting a commercially sensible reading of the policy, the Court concluded that before the insurer’s defence obligations could be triggered, a third-party claim seeking damages must be made against the insured during the policy period.
The Supreme Court of Canada’s decision in Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21 predates MWH International. However, the B.C. Court of Appeal did not cite Jesuit Fathers in its reasons. Jesuit Fathers stands for the principle that under claims-made policies, during the policy period the injured third party must communicate an intention to the insured to hold the insured responsible for damages suffered. The insured’s speculation or investigations revealing that a future claim is likely is insufficient to trigger coverage.
The following practice tips may be drawn from MWH International and Jesuit Fathers.
1. The threat of a future lawsuit is insufficient to trigger defence obligations under insurance policies. This general principle may be applicable to all liability policies, whether claims-made or occurrence-based.
2. In relation to claims-made policies, during the policy period the injured third party must communicate an intention to hold the insured responsible for damages suffered. The potential for a future claim based upon the insured’s own speculation or investigations does not trigger coverage. The communication must be made directly or indirectly by the insured.
3. Costs incurred by an insured before a claim seeking damages has been commenced may not be recovered from the insurer.
(i) MWH International, Inc. v. Lumbermens Mutual Casualty Company, 2007 BCCA 164
In MWH International the insured’s coverage claim arose in the following context. The insured had performed certain work on a power-plant project. In April 2004, a major part of the structure of the project failed and was largely destroyed. The plant had to be shut down, with losses estimated at $50 million.
Two months after the project failed, the insured notified its insurer about the incident, in part, as follows: “Although no formal proceedings or formal claim has yet been advanced against [the Insured], [certain third parties] have intimated that a claim may well be made depending on the outcome of the current investigation into the cause of the failure . . .”. Subsequently, the insured asked the insurer to reimburse it for solicitors’ accounts relating to steps taken by the insured to protect its interests.
The insurer refused to pay the insured’s legal accounts, taking the position that it was not obligated to defend the insured unless and until a claim against the insured was actually made.
The Policy at issue contained the following standard “claims-made” insuring clause:
To pay on behalf of the INSURED all sums in excess of the retention amount stated in the Declarations which the INSURED shall become legally obligated to pay as DAMAGES as a result of CLAIMS first made against the INSURED and reported in writing to the Company during the POLICY PERIOD by reason of any act, error, or omission in PROFESSIONAL SERVICES rendered or that should have been rendered by or on behalf of the INSURED; provided always that such act, error, omission is committed during the POLICY PERIOD, or prior to the POLICY PERIOD and subsequent to the Retroactive Date stated in the Declarations
The Defence clause in the Policy required that “the [Insurer] shall defend any CLAIM against the INSURED seeking DAMAGES to which this insurance applies, even if any of the allegations are groundless, false, or fraudulent. . . .”
The Policy defined “CLAIM” as “a demand received by the INSURED for money or services, including the service of suit or institution of arbitration proceedings against the INSURED”; and “DAMAGES” as “a monetary judgment, award or settlement . . .”
The BCCA majority held (at para. 11) that “It is clear that, without a broader obligation than is found in [sections of] the policy as quoted, the Company could have had no obligation to defend based on the [insured’s June 2004 letter]. No CLAIM (a demand for money) against [the insured] seeking DAMAGES (a monetary judgment, award, or settlement) to which the insurance applies had been made. As the [insurer] says, there was nothing to defend.”
However, the insured cited an endorsement to the policy which purported to expand the definition of “CLAIM” to include “CIRCUMSTANCE” and that “CIRCUMSTANCE means an event reported during the Policy Period from which the insured reasonably expects that a claim could be made.”
The Court of Appeal noted that a “circumstance” could not be defended; only a third party claim seeking damages could be defended. The fact that “Claim” included “circumstance” did not mean that in every case throughout the Policy the “claim” was to be read as “circumstance”. As the Court held (para. 18): “. . . it stretches common usage to suggest that a circumstance or an event can be defended. It is claims against insureds that are defended. . . . it is not sensible to speak of settling a circumstance or an event.” And, further, “The endorsement modifies the definition of CLAIM to include CIRCUMSTANCE; it does not define it as a CIRCUMSTANCE.”
However, most notably, the Court simply looked to the literal wording of the defence clause in the Policy, which required that the insurer “defend any CLAIM against the INSURED seeking DAMAGES to which this insurance applies . . .” In June 2004, the third parties were not “seeking anything from MWH and certainly not a money judgment, award, or settlement to which the insurance applies.” (see para. 21). And, continuing, the Court observed:
. . . The most that could be said is that because of the CLAIM (i.e., the event) DAMAGES might be sought against [the Insured] that might be insured under the policy. There was no CLAIM against [the Insured] whereby DAMAGES were then being sought. There was at best only a CLAIM. It existed because of the event and the insured’s expectation of what might be sought against it.
. . . without a claim being made against [the Insured], there was no claim to consider in the context of the professional services coverage afforded by the policy.
The Court of Appeal then cited Supreme Court of Canada decisions in Nichols v. American Home Assurance Co.,  1 S.C.R. 801, Non-Marine Underwriters, Lloyd’s of London v. Scalera,  1 S.C.R. 551, and Monenco Ltd. v. Commonwealth Insurance Co.,  2 S.C.R. 699. In each case, the insurer involved was held to have no obligation to defend on the policy it had issued because the obligation was limited to defending claims to which the insurance applied, and on the pleadings no claim was made that could possibly require the insurer to indemnify the insured.
After reciting the principles derived from the Supreme Court of Canada’s “duty to defend” cases, the Court of Appeal concluded (at para. 25)
There are of course no pleadings here to be considered. Indeed, in June 2004 there was nothing but what the solicitors characterized as an “intimation” that a claim might be made against [the insured]. Despite this authority, [the insured] maintains pleadings are not essential to the assessment of an insurer’s obligation to defend, but whether that is so, there must at least be a claim the nature of which is such that if the claim were proven it would possibly fall within the terms of coverage. I am unable to see how it could be said that there existed in June 2004 a CLAIM against [the insured] seeking DAMAGES to which the insurance applies.
The Court of Appeal’s approach follows upon Supreme Court of Canada precedent on the scope of an insurer’s duty to defend. Furthermore, the approach adopted, as highlighted above, follows a commercially sensible reading of the policy.
While the Court of Appeal did not discuss the issue, it is necessary to clearly demark communications outlining possible future damages claims against an insured, and those which actually identify a claim seeking damages. The former communications are important to insurers in making underwriting decisions including whether to continue to insurer a policyholder in future. The latter actually trigger the insurer’s defence and indemnity obligations under the policy.
In MWH International the Court of Appeal did not discuss Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, which highlights this issue.
(ii) Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21
In Jesuit Fathers,the Jesuits were insured by a “claims made” policy issued by Guardian Insurance and covering the period 1988 to 1994. The insuring agreement provided as follows:
To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages, because of injury arising out of the rendering of, or failure to render professional services in the practice of the Insured’s profession, provided however, that coverage as provided herein shall apply only to claims which are first made against the Insured during the policy period as stated in the Declarations.
Thus, as in MWH International, coverage was only available for claims “first made against [the insured] during the policy period.”
The underlying facts in Jesuit Fathers are, in brief, as follows. Certain members of the Jesuit allegedly committed sexual assaults prior to the coverage period. During the period of cover, allegations of the abuse circulated in the community, a police and an internal Jesuit investigation ensued, and the Jesuits’ lawyer delivered notice to the Jesuits’ insurer (Guardian).
In his letter, the Jesuits’ lawyer identified the allegedly offending Jesuits, dates and locations of offending acts, nature of possible claims, and he named ten alleged victims including one Peter Cooper. Mr. Cooper sought to settle his case with the Jesuits. The other nine alleged victims were simply identified through the Jesuits’ internal investigations, and there was no indication of whether or not they would sue in future. The Supreme Court of Canada noted that the information provided by the Jesuits in their lawyer’s letter complied with notice requirements set out in the Policy.
After the policy expired in 1994, approximately 100 claims were made by alleged abuse victims. These claims involved allegations similar to those reported to Guardian by the Jesuits’ lawyer during the policy period. Guardian argued that there was no coverage as these claims were “first made” after the policy expired.
The Supreme Court of Canada explained that the Guardian policy included reporting obligations requiring the insured to report both occurrences and claims. The Court held that this did not mean that all occurrences were covered. Rather, it was necessary to consider whether the information provided during the coverage period constituted a “claim” for the purposes of the claims-made coverage.
Unlike the policy in MWH International, the Guardian policy did not define “claim”. However, LeBel J. held that the word “claim” considered in the context of the insuring agreement suggested that “. . . a claim must be actively made as opposed to merely being discovered. The Policy also distinguishes between a ‘circumstance or occurrence’ and a ‘claim’.”
The Supreme Court of Canada also considered the “common law doctrine” concerning claims requirements. In this regard, at para. 50, the Court set out the following passage from McLachlin J.’s reasons in Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co.,  1 S.C.R. 252:
The authorities establish that as a general rule, for a “claim” to be made there must be some form of communication of a demand for compensation or other form of reparation by a third party upon the insured, or at least communication by the third party to the insured of a clear intention to hold the insured responsible for the damages in question. [Emphasis added]
From this passage, the Supreme Court of Canada in Jesuit Fathers held as follows (at para. 51):
In essence, a claim at common law requires a third party to communicate an intention to hold the insured responsible for damages. Naturally, the third party may communicate through a representative, whether a legal representative such as a lawyer or any other advocate such as a band leader, a friend or a counsellor. The key is that the representative be accurately communicating the intent of the claimant and that it be done with the claimant’s full knowledge and approval. . . .
The Supreme Court of Canada cited with approval from Andy Warhol Foundation for the Visual Arts Inc. v. Federal Insurance Co., 189 F.3d 208 (2nd Cir. 1999) for the following propositions: “for an assertion or notice to the insured to be a claim it must be made by the party whose rights allegedly have been violated.” And, further, “To constitute a claim within the meaning of an insurance contract, the assertion must be made by or on behalf of the party making the claim.” LeBel J. concluded that “The requirement that the claimant be the source of the claim is sensible. Since the claimants own the right to damages, their permission is required to further pursue the claim whether through negotiations or legal action.”
The Supreme Court then applied the above principles to the facts. In relation to Peter Cooper, the Court explained that Mr. Cooper had “. . . informed the Jesuits, through his legal counsel, that he had suffered injuries due to the lack of administrative supervision at the Spanish School and inquired about the possibility of a legal settlement. . . .” The Court found this sufficient to constitute a “claim under the Policy.” In particular, “. . . It communicated an intention [by Mr. Cooper] to hold the Jesuits responsible for his injuries. The claim was made prior to the expiry of the policy . . . and, therefore, Guardian’s duty to defend was engaged, as it acknowledges.”
The Court then considered the series of claims which were made following expiry of the policy, but discovered by the Jesuits and reported to Guardian during the Guardian policy period. During the period covered by the Policy, the Jesuits had gained knowledge of the circumstances which eventually gave rise to the claims through review of publication of a newspaper article in 1988, internal Jesuit investigations, and reports from Jesuit parishioners. Further, the Jesuits had reported these circumstances to Guardian.
However, the Supreme Court of Canada found this insufficient to qualify as claims made during the policy period:
Other than the case of Peter Cooper, the Jesuits were not aware of any other persons intending to hold them responsible for damages arising from the situation prevalent at the SpanishSchool until after the expiry of the Policy. Since the claimants did not communicate during the coverage period, either directly or indirectly, their intention to hold the Jesuits responsible for the damages they suffered, the duty to defend is not engaged.
Concerning the nine other victims named in the Jesuits’ lawyer’s letter delivered during the policy period, the Supreme Court of Canada held that the trial judge erred in finding that these constituted claims made during the policy period. The Supreme Court of Canada noted that the identity of these nine alleged victims was discovered by the Jesuits during their own investigations. However, “Nothing in the record suggests that [the Jesuit’s investigator] had the permission of the named victims to communicate this information.” As such, the Court held that these did not constitute “claims” within the meaning of the policy, and, further:
Consequently, [the investigator] could not make a claim within the meaning of the Policy. Moreover, a claim would need to communicate an intention to hold the Jesuits’ responsible for injuries suffered at the Spanish School. Without the victims’ permission, either express or implicit, [the Jesuit’s investigator] could not communicate such an intention on their behalf. In fact, it is unclear whether the nine victims ever had such an intention. It was, therefore, an error for the trial judge to conclude that there were claims made by these nine individuals. Notably, his error has nothing to do with the form of communication, i.e. direct versus indirect. The error related to what was or, more accurately, what was not communicated.
In concluding, the Supreme Court of Canada explained that an occurrence policy would have covered the Jesuits in relation to the allegations made against them by the numerous alleged victims. However, their claims-made policy failed to afford coverage given that (with the exception of the Cooper claim) the “claims” were all made after the policy had expired or were never made at all (the nine alleged victims).
In short, pursuant to Jesuit Fathers, under claims-made policies the injured third party must actually communicate to the insured during the period of cover, either directly or indirectly, an intention to hold the insured responsible for damages suffered. Unless that occurs, the duty to defend is not engaged.
The Limitation Period Issue – Insurance Act, s. 22
In this article I summarize a number of British Columbia court cases which consider the date upon which the one-year statutory limitation period begins to run pursuant to section 22(1) of the Insurance Act, R.S.B.C. 1996, c. 226. I also provide practice tips to minimize controversy regarding the precise date upon which the limitation period begins to run.
Section 22(1) provides as follows: “Every action on a contract must be commenced within one year after the furnishing of reasonably sufficient proof of a loss or claim under the contract and not after.”
But what happens if the insured does not file a proof of loss? This may occur if the insured seeks to avoid its obligations under the policy, or it may occur where there is no general requirement to file a proof of loss (i.e., in relation to a claim under a Commercial General Liability policy).
Applying the one-year statutory limitation period in such cases may present difficulties. As the British Columbia Supreme Court recently noted in Lanki v Co-Operators Life Insurance Company, 2007 BCSC 1891 (at para. 42): “because of the poor wording of s. 22 [of the Insurance Act], the decisions [of the courts] are, to a degree, decided on a case-by-case basis.” Nonetheless, B.C. courts have repeatedly held that the limitation period in such cases begins to run once the insurer determines its liability, and clearly and unequivocally advises the policyholder concerning the insurer’s liability.
In order to minimize controversy surrounding the date upon which the one-year limitation period begins to run, consider the following:
- In relation to first party property loss cases, the adjuster should follow up with the insured to obtain a final proof of loss. However, note that submission of a final proof of loss by the insured does not necessarily mark commencement of the limitation period. If the final proof of loss is delivered before the insurer determines its liability, and coverage is later denied, the limitation period may begin to run from the later denial date. See Balzer v. Sun Life, 2003 BCCA 306).
- If the insured fails to provide a proof of loss, but the insurer has been making payments to the insured under the policy, consider including a letter with the final payment which specifically and clearly advises the insured that the insurer has now fulfilled its obligations under the policy and that further coverage is terminated, and to note commencement of the one-year limitation period. See Lanki v. Co-Operators Life Insurance Company, 2007 BCSC 1891.
- If the claim does not require submission of a proof of loss (for example, a claim for coverage under a Commercial General Liability Policy), ensure that a clear and unequivocal denial of coverage is sent to the insured. This will improve the insurer’s ability to rely upon that date as the commencement of the applicable limitation period. See Canadian Northern Shield v. Demers, 2004 BCSC 435.
The leading case concerning the one-year statutory limitation period is KP Pacific Holdings Ltd. v. Guardian Insurance Company of Canada (2003), 225 D.L.R. (4th) 193. In KP Pacific the Court considered whether the limitation period ran from the date of a fire loss giving rise to the insured’s claim, or from the date upon which the insured submitted a proof of loss to its insurer. The Supreme Court of Canada held (at para. 6), that “. . . we conclude that the limitation period of one year from filing proof of loss applies . . .”
But what happens if the insured does not file a proof of loss? Contrary to a common misconception, KP Pacific does not require that the insured submit a final proof of loss before the limitation period begins to run. If that were the case, insureds could always refuse to submit a final proof of loss to thwart commencement of the limitation period. This issue has been discussed in several cases.
In Canadian Northern Shield v. Demers, 2004 BCSC 435 (homeowner’s liability policy), the insured did not submit a proof of loss to the insurer as the policy was a liability policy. The insurer had refused to defend the insured. The Court held that in such cases the limitation period commences once the insurer issues a “clear and unequivocal denial” of coverage. As the Court explained (at paras. 23 to 26, (mphasis added):
That brings me to the second issue, namely the proper construction and application of s. 22 (1) of the Insurance Act. The difficulty with the language of s. 22(1) has been dealt with before in this court. In Mameli v. American Home Assurance Co.,  B.C.J. No. 188, 2002 BCSC 169, Clancy, J. concluded, at paras. 57-9, that the Act requiring “reasonably sufficient proof of loss” before the commencement of the running of the limitation period means that the insurer must make an unequivocal determination of its liability before the limitation period will begin to run. The commencement of the limitation period by way of a clear and unequivocal denial of coverage was also approved by the Court of Appeal in Balzer v. Sun Life Assurance Co. of Canada,  B.C.J. No. 1170, 2003 BCCA 306 at para. 43. If the petitioner made, and communicated to the respondents, an unequivocal decision to deny coverage, on the facts of this case, I am satisfied that the one year period within which the insured may bring action would start to run.
On the evidence, it is clear that Mr. Demers understood that he had been denied coverage as a result of his April 1995 telephone conversation with Ms. Senyk. He had to have recognized, as is made clear by his October 1997 letter to his own lawyer, that there may be some way of challenging the denial of coverage. If his lawyer did not take any steps on his behalf, following that letter, that cannot operate to extend any limitation period for taking action against the petitioner. [Emphasis added]
After his telephone conversations with Ms. Senyk, Ms. Dowdall and Mr. Allmark in July, 1999, Mr. Demers had to have understood that he had, again, been denied insurance coverage, notwithstanding the not guilty verdicts in the criminal proceedings. By November, 1999, when he wrote to the petitioner, he raised the possibility of the petitioner being brought into the civil actions as a third party, although he suggested that would occur at the instance of the plaintiff, Mr. Lee. There is nothing in the correspondence of the petitioner’s counsel, dated January, 2000, which would make the July, 1999 denial of coverage unequivocal. [Emphasis added]
Consequently, I conclude that the limitation period within which the respondents were required to commence action started to run, at the very latest, in July of 1999. Therefore, the third party notices, filed in December of 2000, were filed out of time. The petitioner is entitled to the declarations sought, namely that the respondents are not entitled to insurance coverage or indemnity, and that the petitioner is not obliged to undertake the defence of the respondents in either of the civil actions
The British Columbia Court of Appeal considered s. 22 of the Insurance Act in Balzer v. Sun Life Assurance Co. of Canada, 2003 BCCA 306, a disability insurance case, and held as follows (at para. 40):
It is at denial of coverage of termination of benefits that an insured would have reason to sue the insurer. That is when a limitation period should begin to run, not while benefits are being received, not on some later date when an insured decided to file a proof of loss or commence an action. This sensible result is at the root of the reasoning in the authorities cited to us.
In Knight Towing v. Guardian Insurance Company,  B.C.J. No. 432 (S.C.) the B.C. Supreme Court noted that an interpretation which requires that a proof of loss be filed before the limitation period begins to run could undermine the purpose of the section by enabling the insured to indefinitely prolong the matter. Thus, the court held that if the insurer denies coverage, there is no need for a proof of loss.
Most recently, in Lanki v. Co-Operators Life Insurance Company, 2007 BCSC 1891, a disability claim, the B.C. Supreme Court held (at para. 33) that the B.C. Court of Appeal decision in Balzer stands for the proposition that “. . . the limitation period runs from the date of the termination of the benefits, provided there is clear and unequivocal notice that the benefits will be terminated.” And, further (at para. 42), “. . . I apply the reasoning in Balzar and find that the limitation period runs from the date of the termination of the benefits and the refusal to pay further benefits, not the date of the notice of termination.”
To summarize, the courts apply a one year limitation period even though a proof of loss had not been filed. In the above noted decisions, the date marking commencement of the applicable limitation period was decided on a case-by-case basis (as noted in Lanki). In each case the period began to run when the insurer delivered a clear and unequivocal denial of coverage or the date of termination of coverage.
In order to clearly highlight the limitation commencement date, insurers should deliver a clear and unequivocal denial of coverage or, where payments are made under the policy, deliver a notice to the insured with the final payment explaining that the insurer’s obligations are now at an end, thus marking commencement of the applicable limitation period.
New Lessor Vicarious Liability Law in BC : The $1,000,000 Cap
The BC government recently amended the law concerning vicarious liability of automobile lessors. The new law caps lessors’ vicarious liability at $1 million. In some cases it may have the effect of eliminating lessor liability all together.
In the following short article, my colleague Don Lebans explains the recent changes in the law.
If you have any specific questions regarding the amendments or lessor liability generally, please feel free to contact Don Lebans at firstname.lastname@example.org or at (604) 654-2977.
New Lessor Vicarious Liability Law in BC : The $1M Cap
– Don Lebans, Branch MacMaster
On November 8, 2007, the British Columbia Government brought into force statutory amendments to the Motor Vehicle Act (s. 86) and to the Insurance (Vehicle) Act (s. 82.1) (formerly the Insurance (Motor Vehicle) Act). The amendments change the law of lessor vicarious liability in British Columbia.
For over ten years, vicarious liability provisions in B.C.’s Motor Vehicle Actdid not apply to lessors engaged in leasing vehicles under long-term lease agreements including the so-called “option to purchase”. However, the B.C. Court of Appeal ended that the lessors’ immunity with its 2006 decision in Yeung v. Au. As a result of the Yeung decision, all lessors became subjected to unlimited vicarious liability exposure, regardless of the duration of the applicable lease or whether or not it contains a purchase option.
Newly enacted amendments to the Motor Vehicle Act (s. 86) confirm that all lessors face vicarious liability for accidents involving the vehicles they leased. However, concurrent amendments to the Insurance (Vehicle) Act (s. 82.1) cap that liability at $1 million (or any greater amount that in the future may be identified by regulation or required by law to be carried as third-party liability insurance coverage).
While the statutory amendments are not entirely clear, the lessors’ $1 million vicarious liability exposure could be satisfied by motor vehicle insurance purchased by the lessee. Typically, vehicle leases require the lessee to purchase a specified amount of third-party liability coverage for the leased vehicle, and the lessor is then included on the policy as a “named insured”. The assumption is that the lessor, as a named insured, will be able to rely on that third-party liability insurance in answering a vicarious liability claim against it. Provided the lessee-purchased coverage is at least $1 million, the maximum vicarious liability of the lessor will then be satisfied, and the lessor should not be required to contribute any additional amounts toward resolution of the plaintiff’s claim for damages.
If this interpretation is correct, then the legislated amendments in B.C. will be determined in a manner similar to recent amendments to the Ontario’s insurance and motor vehicle legislation – the $1 million cap on lessor liability will be reduced by amounts recovered from insurance maintained by the vehicle lessee and driver, with the practical result that, so long as the lessee and driver have at least $1 million in coverage, the lessor will have no vicarious liability exposure.
Builders Risk Insurance – Faulty Workmanship Exclusion
The “faulty workmanship” exclusion was very recently considered by the B.C. Supreme Court in Ploutos Enterprises v. Stuart Olson, 2008 BSCS 271. In the Ploutos case, the insurer (Commonwealth Insurance Company) was entitled to exclude coverage for a general contractor based on the faulty workmanship exclusion.
The decision is notable for restating the necessity of damage to property other than the faulty item itself; and for emphasizing a policy rationale to support this interpretation.
Commonwealth Insurance Company issued a builders risk policy for a condominium project, with the developer, the general contractor (Stuart Olson) and Stuart Olson’s subcontractors as named insureds.
Hardwood flooring installed in the condominium failed and had to be completely removed and replaced using a different installation method. The suit concerned (i) determining the party responsible for the removal and replacement costs and (ii) whether the Commonwealth insurance policy provided coverage.
The Commonwealth policy had an exclusion clause for “the cost of making good faulty workmanship, construction materials or design unless physical damage not otherwise excluded by this Policy results, in which event this Policy shall insure such resulting damage.”
Commonwealth argued the exclusion clause operated because of faulty workmanship, faulty design and faulty construction materials.
The Court held that the exclusion clause applied. As such, Commonwealth was justified in refusing insurance coverage. The reasons may be summarized as follows:
1. The damaged item was the very thing that was designed in a faulty or improper manner or which constituted faulty workmanship. Moisture testing carried out on the hardwood flooring amounted to faulty workmanship. The lack of a moisture barrier amounted to a faulty design and faulty equipment.
2. There was no “resultant damage” to anything except the hardwood floor itself. Resultant damage is damage to some part of the insured property other than the part that was designed in a faulty manner.
3. Use of the word “unless” in the exclusion clause did not change its meaning (other forms of the exclusion use the word “but”).
4. The Court noted that even if it accepted that the word “unless” gave the clause some different meaning, the phrasing “shall insure such resulting damage” must be taken to mean that what is insured is resulting physical damage and only resulting physical damage.
5. Policy reasons suggested that the general contractor should not be able to recover. The Court held that “It would be an inappropriate spreading of the risk if an insured were able to recover such loss. The contractor or designer would theoretically be able to charge a full price for the work, save money by being careless, and then rely on the insurer to pay for the cost of correcting the mistakes.” The Court noted that a contrary argument would be inconsistent with the notion that “policies of insurance should be interpreted in a manner consistent with the general economic purpose of insurance.”
Insurance for Polluters – A Public Policy Perspective
In the following entry I consider whether commercial general liability (CGL) policy coverage should be afforded to the active long-term industrial polluter. Relying upon “public policy”, I outline arguments against coverage for such polluters.
While many old form CGL policies may be brought into play in relation to long-tail pollution claims (i.e., pollution releases spanning many years), certain key elements are typically present in all such policies. There must be (i) an “accident” or an “occurrence”, (ii) which causes “property damage” during the policy period, and (iii) a legal obligation upon the insured to pay damages in relation to the property damage. In other words, a third party must sue the insured for damages alleging that the insured is responsible for property damage which occurred during the policy period.A preliminary question is whether the traditional release of pollutants as a byproduct of industrial operations really constitutes an “accident” or “occurrence” potentially triggering coverage. In this entry I consider the issue from a public policy perspective: should we allow polluters to obtain coverage from their CGL policies?
Often, the industrial polluter discharged its waste byproducts directly into the environment for a variety of reasons: it was entitled to do so pursuant to government permit; the cost of treating waste prior to release would be too costly; lack of control equipment at the time of release; or belief by the industry that the release would not cause the sort of harm subsequently revealed by progress in environmental science. Regardless of the industry’s rationalization for discharging pollutants into the environment, the discharge is generally intentional and not an “accident”. The costs arising from this intentional act are essentially costs of doing business. As explained below, there are good reasons to prohibit such industrial polluters from accessing their CGL policies to obtain indemnity for their industrial activities.
From a public policy perspective, allowing insurance coverage to extend to the long-tail industrial polluter defeats a primary goal of our Canadian environmental legislation. This goal seeks to dissuade industry from engaging in polluting activities by imposing upon polluters the direct and immediate costs of pollution. In so doing, Canadian legislation compels industries to pay more attention to the need to protect ecosystems in the course of their economic activities. This goal has been called the “polluter pays” principle.
The Supreme Court of Canada recently drew attention to this feature of Canadian legislation in Imperial Oil Ltd. v. Quebec (Minister of the Environment):
The Quebec legislation reflects the growing concern on the part of legislatures and of society about the safeguarding of the environment. That concern does not reflect only the collective desire to protect it in the interests of the people who live and work in it, and exploit its resources, today. It may also be evidence of an emerging sense of inter-generational solidarity and acknowledgement of an environmental debt to humanity and to the world of tomorrow (114957 Canada Ltee (Spraytech, Societe d’arrosage) v. Hudson (Ville),  2 S.C.R. 241, 2001 SCC 40, at para. 1, per L’Heureux-Dube J.).
… To encourage sustainable development, that principle assigns polluters the responsibility for remedying contamination for which they are responsible and imposes on them the direct and immediate costs of pollution. At the same time, polluters are asked to pay more attention to the need to protect ecosystems in the course of their economic activities.
If an insurer shoulders environmental cleanup cost, the polluter deflects those costs to someone else, and avoids repercussions associated with its failure to “pay more attention to the need to protect ecosystems.” (per L’Heureux-Dube J. in Spraytech). The insured industry learns nothing, except that it can gain economically by avoiding the expenses incurred in treating its pollutants or minimizing discharge. Its insurers will simply shoulder the burden should it be required to clean its pollutants from the environment.
Despite the force of this argument, it has been rejected in at least one American decision: AIU Insurance Co. v. Superior Court (FMC Corp). However, the Court’s reason for rejecting the public policy argument do not apply in British Columbia as they related to an express American legislative mandate allowing insurance coverage for polluting activities. In this regard, the California Supreme Court held as follows:
Although one can readily conceive of arguments for and against permitting insurance against the costs of rectifying pollution, at the outset we note that such arguments are not pertinent to either of our inquiries in this case. Both CERCLA and the Hazardous Substance Account Act expressly permit responsible parties to insure against the costs of relief available under the legislation. . . . Thus, because Congress and the Legislature already have made the relevant public policy determinations, the issue before this court is not whether CGL policies may provide the coverage sought, but whether they do provide it according to their terms. The answer is to be found solely in the language of the policies, not in public policy considerations.
Unlike the U.S. Congress and state legislatures, the British Columbia legislature has not expressly permitted insurance against the costs of rectifying pollution.There is nothing new about prohibiting insurance coverage on public policy grounds, and Canadian courts have refused to allow insurance coverage to extend to insureds for public policy reasons.
Of particular interest and applicability is the public policy rationale relied upon to avoid coverage for punitive damage claims. This rationale was outlined in Fiske v. Hartford Insurance Co. of Canada. The Court refused to allow coverage for a punitive damages claim, holding as follows:
I have concerns that allowing insurance coverage to extend to awards of punitive or exemplary damage may reduce the intended effectiveness of such awards. I have concerns that interpreting insuring agreements in such a way is contrary to important principles of public policy.
To summarize, drawing from Canadian environmental legislation, the Supreme Court of Canada has expressed an important public policy principle: assigning to polluters the responsibility for remedying pollution in order to encourage polluters to pay more attention to the need to protect the environment. Canadian courts have shown a willingness to disallow insurance coverage to support “important principles of public policy” (Fiske). Hence, courts may validly prohibit polluters from accessing CGL insurance coverage.
Even if the “polluter pays” principle is not relied upon to avoid coverage without further inquiry, the principle should at least inform consideration of coverage under CGL policies. In particular, the principle comes into play when we consider the initial coverage trigger. The CGL insuring agreement requires that property damage be caused by “accident”, otherwise there is no coverage: “To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of property damage caused by accident.”
An “accident” is a fortuitous event: something unlooked for, unintended and unexpected. In Canadian Indemnity Co. v. Walkem Machinery and Equip. Ltd.,Pigeon J. held that “no dictionary need to be cited to show that in everyday use, the word is applied as Halsbury says in the passage above quoted, to any unlooked for mishap or occurrence.” And, per Robertson J:
The word ‘accident’ is not a technical legal term with a clearly defined meaning, and in the policy here it is to be read in its proper and ordinary sense. That sense is expressed in these definitions: “Any unintended and unexpected occurrence that produces hurt or loss” and “an undesigned, sudden and unexpected event”. Injuries are accidental or the opposite, for the purpose of indemnity, according to the quality of the results rather than the quality of the causes.
The issue was discussed earlier by the Ontario Court of Appeal in Crisp v. Delta Tile & Terrazzo Co,  O.W.N. 278 (Ont. C.A.). In that case, dust from terrazzo grinding in a basement permeated the rest of the house, causing damage. The Court of Appeal, per Aylesworth J.A. held as follows (at 279):
In our view, on the particular facts of this case, there was no accident within the meaning of that word as it appears in coverage B of the policy. That which happened, in our opinion, was the natural, foreseeable and probable consequence of the defendant’s acts. The defendant should have foreseen that such natural and probable consequences would ensue because the defendant and the defendant’s workmen, on the evidence, had actual knowledge of what would happen if the precautions, which they failed to take, were not taken. There was, in this sense, a deliberate courting of the risk with knowledge of the risk, there was an element of reckless conduct in the sense that they could not have cared whether or not the dust damage would ensue when they proceeded with the work in the way they did with the knowledge which they had. As I have said, the facts being such as I have described, we are all of the view that the defendant has failed to bring itself within the insuring clause to which I have referred.
The converse of an accident is a deliberate act. In Sansalone v. Wawanesa Mutual Insurance Co. (1997), 185 D.L.R. (4th) 57 (S.C.C.), the Supreme Court used language similar to that relied upon by the Ontario Court of Appeal in Crisp and held as follows:
. . . when the risk of injury is inherent in the insured’s deliberate act so that the injury is the natural and probable consequence of the act, the intention to commit the act is the intention to cause the injury, and the claim is therefore excluded from coverage.
In Sansalone,the Supreme Court was discussing the intentional act exclusion. But the exclusion clarifies the requirement that property damage be caused by accident. Therefore, the Supreme Court’s reasoning applies to the insuring agreement. Thus, in Canada under CGL policies, property damage is not caused by “accident” if the property damage was the natural and probable consequence of the insured’s act.
While there will be exceptions, it is probably fair to say that most industrial polluters will have an extremely difficult time convincing a court that they did not deliberately release pollutants into the environment; and that at the time of the release they did not appreciate that the natural and probable consequence of that act would be to pollute the environment (for example, a smelting company’s deliberate release of mine waste directly into a river). If the release was permitted, the industry might not have expected a cleanup demand by the very government that permitted the release. The industry might not have appreciated the enormous impact its pollution release was having upon the environment. But the focus of the inquiry is the intent of the insured’s actions, not the precise scope of the harm that actually manifests.
If the public policy rationale holding polluters responsible for their own activities is kept in mind, Canadian courts may well conclude that an industry’s discharge of pollutants into the environment fails to qualify as an “accident” under standard CGL policies. At minimum, a presumption ought to apply against an industrial polluter, a presumption that the environmental impact or “property damage” arising from its long-term industrial operations was not caused by accident but is the natural and probable result of the industrial activities. Adopting this approach accords with the insuring agreement’s requirement that property damage be caused by “accident”; and it furthers public policy objectives seeking to modify polluting activities by holding polluters responsible for their own acts.
Insurance Issues in Class Actions – How Many Occurrences or Claims?
I co-authored the following entry with Ward K. Branch of Branch MacMaster. Ward has expertise in both class actions and insurance law. Click on the link to view Ward’s class action blog. This article discusses issues which impact both of these areas of the law.
A class action can be an insurer’s worst nightmare. All the careful underwriting and claims management can be wiped out in an instant by a class action filing.
Insurance issues arise throughout the conduct of any class action, from considerations as to whether to file the claim in the first place, through settlement, and to final resolution should the case go to trial. This paper reviews insurance issues that are particular germane to class actions.
II. Is this Claim Worth Pursuing?
If a defendant to a potential class action has limited funds of its own, its ability to trigger insurance coverage should be considered in the plaintiffs’ decision to sue. This is so because the defendant’s insurance policy may be its only remaining asset, and therefore the only source of funds available to satisfy a judgment or settlement.
In routine claims, the need to consider this issue is less central. It is the magnitude of class action claims that brings this to the fore. Class actions are often brought after a major corporate error. That corporate error will often put the company on the brink of bankruptcy even disregarding the class action. Hence the magnified importance of insurance.
The problem for plaintiffs’ counsel is the difficulty in determining the extent of the available insurance prior to recovery. Sometimes it is necessary to file first, and ask the insurance questions later.
From a class action defendants’ point of view, this dynamic calls for early investigation and disclosure where appropriate. Specifically, if the defendant is able to show that the combination of corporate assets and available insurance is low, then the proposed class counsel may be convinced to discontinue or settle on favourable terms. This is because the class lawyer is working on contingency, and there is a general “rule of thumb” that the class claim must be at least $2 million in order to sustain efforts required to advance a class proceeding.
III. The Effect of Insurance Policy Limits and Deductibles on Potential Recovery
From the plaintiffs’ perspective, there are numerous insurance issues which ought to be considered in deciding whether there is a potential source of insurance money available to make the claim worth pursuing either before or after filing.
Key preliminary issues are insurance policy limits and deductibles. There are different sorts of policy limits including “aggregate limits”; “per occurrence limits” or per claim limits; “personal injury limits”; “tenants’ legal liability limits”, etc. The policy limits are typically set out in the declaration page of the insurance policy. These limits represent the most the insurer will pay under the policy depending on the nature of the claim.
While policy limits represent the upper-limit or ceiling of the insurer’s obligations, the policy deductible or self insured retentions represents the floor. Policy deductibles play a crucial role in determining whether claims will be recoverable against a defendant with limited assets.
Most modern Commercial General Liability policies are referred to as “occurrence” policies. Under this type of policy, coverage is triggered by property damage or bodily injuries occurring during the period of the insurance contract. For example, the insuring agreement may require the insurer “To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of property damage or bodily injury caused by an occurrence”. The word “occurrence” is typically defined in policies as “an accident or a happening or an event or a continuous or repeated exposure to conditions which unexpectedly and unintentionally results in personal injury, property damage or advertising liability during the policy period.”E&O policies, which are often claims-made policies, may use particular definitions for “occurrence”, or rely upon policy limits for “claims”. For example, consider the following lawyer’s professional liability policy wording: “Occurrence shall mean any alleged act, error or omission of an Insured which occurs in the performance of Professional Services for others; provided, however, that if more than one act, error or omission occurs or is alleged to have occurred in relation to the same professional service then all such acts, errors and omissions shall be deemed to be a single Occurrence.” (Discussed in Yang v. Canadian Lawyers’ Insurance Assn(1997), 147 D.L.R. (4th) 31 (Alberta C.A.))
In the context of a class action, the question is whether the policy per occurrence limits or the deductible applies to each individual class member’s injury, damages or claim; or whether the limit applies once and for all in relation to the entire class’ claim. The answer to this question may result in a wide variance in coverage available to the insured and, therefore, to the class.
For example, if the per occurrence policy limit is stated as $1,000,000, and there are 2,000 class members, each with a $50,000 claim, the policy limit may drastically curtail individual class member recovery (total claim = $50,000 x 2,000 class members = $100,000,000 total claim). However, if each class members’ individual claim represents a separate “occurrence”, then the $1,000,000 per occurrence limit may be sufficient to satisfy all claims.
Conversely, consider the situation of the policy deductible. Policy deductibles typically apply on a per occurrence basis. If the policy deductible applies to each class members’ claim, the class may be unable to access the defendant’s insurance. For example, consider again the case of the 2,000 class members, each with a $50,000 claim against the defendant. The total of all class members’ claims is $100,000,000 (2,000 class members x $50,000). Assume a policy per occurrence limit of $1,000,000. Assume each class member’s claim was the result of a separate occurrence. Assume a deductible of $100,000 applicable on a per occurrence basis. As each claim falls below the per occurrence limit, the defendant is unable to recover from its insurer thus potentially frustrating the class members’ ability to recover their judgment.
Following, we discuss the various approaches adopted by the courts in determining the number of occurrences flowing from a defendant’s alleged wrongs. Of note, Canadian courts have not addressed the issue directly in relation to standard Commercial General Liability coverages although there is some discussion of the issue in the E&O policy context. In contrast, the American courts have considered the issue in detail. We therefore begin with a discussion of the issue as developed in the United States. We then discuss the various Canadian cases which touch on the issue.In the United States, courts have adopted two different approaches to determine the total number of occurrences: the “cause theory” and the “effect theory”. (S. Plitt, J. Rogers and S. Gross, “Progressive Losses: Triggers of Coverage, Number of Occurrences and Allocation among Successive Policies”, in Construction Defects – Claims and Coverage (DRI, Chicago, Illinois: 2007), Part II, Chapter 3 at p .227)
The effect theory, which is the minority American view, “determines the number of accidents or occurrences by looking at the effect an event had, i.e., how many individual claims or injuries resulted from it.” (Nicor, Inc. v. Associated Elec. & Gas Ins. Servs. Ltd., 223 Ill. 2d 407 (Ill., 2006)). Thus, the “occurrence” is considered from the perspective of the injured party.
In contrast, the cause theory, which has been adopted by a substantial majority of the American courts, looks to the cause of the damages to determine the number of occurrences. The Supreme Court of Illinois explained the difference between these theories with reference to the following hypothetical example (Nicor):
The difference between these two approaches is illustrated by the following hypothetical. Assume that a motorist is traveling down a street lined with parked cars. Looking away from the roadway to change the station on his car’s radio, the motorist allows his vehicle to wander. As a result, his car strikes the sides of three of the parked cars in succession, damaging each of them. The owners of the three damaged vehicles sue, and the vehicle owner seeks indemnification from his automobile insurance carrier. Under the effect theory, the fact that three cars were damaged and three claims were filed would mean that there were three “occurrences” for purposes of determining liability coverage, absent specific policy language to the contrary. Under the cause theory, on the other hand, the fact that the damage to all three vehicles resulted from the same conditions and was inflicted as part of an unbroken and uninterrupted continuum would yield the conclusion that there was only one occurrence.
One U.S. Court recently defined the cause theory as follows: “Under the ‘cause’ analysis, the proper focus in interpreting ‘occurrence’ under a liability policy is on the number of events that cause the injuries and give rise to the insured’s liability, rather than the number of injurious effects.” (Lennar Corp. v. Great Am. Ins. Co., 200 S.W.3d 651, 682 (Tex. Ct. App., 2006)). Another Court noted that the inquiry focuses upon whether “[t]here was but one proximate, uninterrupted, and continuing cause which resulted in all of the injuries and damage. If so, there has been but one occurrence, even though several discrete items of damage resulted.” (Barthlomew v. Ins. Co. of N. Am, 502 F. Supp. 246, 251, quoting Truck Ins. Exch. V. Rohde, 49 Wash. 2d 465, 471) .
An example of the effect theory is found in Lombard v. Sewerage & Water Bd., 284 So. 2d 905 (La. S.C., 1973) in which 17 consolidated suits involving 119 plaintiffs were presented for review. The plaintiffs sought awards for damages allegedly caused to various buildings (their residences, a church, etc.). The damages were alleged to have been caused by activities in connection with a canal construction project and the city of New Orleans, the Sewerage and Water Board of New Orleans, a construction company and their insurer were named as defendants. The insurer argued that “the work carried on . . . falls within the definition of a single occurrence, for it is, in fact, an exposure to ‘substantially the same general conditions.’ Therefore, each policy limit of $50,000 is applicable.” The Court disagreed, considered the matter from the plaintiffs’ perspective, and found that there were numerous occurrences:
As a rational matter, however, it can hardly be said that this construction project lasting more than one year is a single “occurrence” within the contemplation of the quoted clause. Rather, we think it is more logical to view this project as a series of “occurrences” resulting in damages during the course of this prolonged undertaking. The word “occurrence” as used in the policy must be construed from the point of view of the many persons whose property was damaged. . . .
Another effect theory example is the case Exxon Corp. v. St. Paul Fire and Marine Ins. Co. 129 F.3d 781, which involved exposure of five individuals to fumes while transporting sludge from insured’s gas treating facility to waste facility. The Court found five separate “occurrences or accidents” within meaning of hull, protection and indemnity (P& I) and water pollution insurance policy, rather than a single occurrences. The alleged injuries were found to be discrete and occurred over a period of time, and the policy failed to define “occurrence” (resulting in the pro-policyholder interpretation).
The cause theory, which is the majority view, has not been applied in an identical fashion across the United States. Two divergent approaches have developed to determine the causative act or acts and therefore the number of occurrences. (Plitt, above). Courts either focus upon the nature of the insured’s liability (the “Insured’s Liability Approach”), or they take an immediate cause viewpoint (the “Immediate Cause Approach”). Both approaches find the same number of occurrences where the liability inducing act is also the most immediate cause of the damage. However, there are situations in which the specific liability inducing event is further removed from the actual damage suffered, and where that is the case the two approaches may result in a different answer to the number of occurrences.
An example of a case based upon the Insured’s Liability Approach is seen in Appalachian Ins. Co. v. Liberty Mutual Ins. Co. 676 F.2d 56 (3d Cir. 1982). In Appalachian, the insured (Liberty Mutual) settled a class action suit brought by a class of Liberty Mutual employees alleging sex discrimination as a result of employment policies adopted by Liberty Mutual in 1965. The insured then sought indemnification under an umbrella liability policy issued to it by Appalachian Ins. Co. in 1971. The district court found in favor of Appalachian.
The U.S. Court of Appeals, Third Circuit, affirmed the district court’s judgment. It found that the Appalachian insurance policy was an “occurrence” policy and that there was one occurrence for purposes of policy coverage. The court found that the single occurrence was Liberty Mutual’s adoption of discriminatory employment policies in 1965 even though that initial liability inducing event caused numerous individuals to suffer damages.
The following passage from the court’s reasoning exemplifies application of the cause theory and the Insured’s Liability Approach, i.e., a focus upon the insured’s liability as the “occurrence” or “occurrences” (citations and footnotes omitted):
. . . the Appalachian policy is of the “occurrence” variety because coverage is provided only when there is an occurrence within the policy period. The policy states that the insurer will indemnify Liberty for “all sums” which it “shall be obligated to pay by reason of the liability imposed upon (Liberty) by law … for damages on account of:-(i) Personal Injuries … caused by or arising out of each occurrence….” Although this language is sufficient for us to classify the policy as an “occurrence” policy our conclusion is reinforced by the fact that under the policy the deductible of $25,000 is applied on a per occurrence basis.
In order to ascertain whether there was an occurrence within the policy period we must identify the occurrence and then determine when it took place.
The general rule is that an occurrence is determined by the cause or causes of the resulting injury. “(T)he majority of jurisdictions employ the “cause theory’. Using this analysis, the court asks if “(t)here was but one proximate, uninterrupted, and continuing cause which resulted in all of the injuries and damage.’”
Applying the general rule to the facts of this case we agree with the district court’s finding that there was but one occurrence for purposes of policy coverage. The injuries for which Liberty was liable all resulted from a common source: Liberty’s discriminatory employment policies. Therefore, the single occurrence, for purposes of policy coverage, should be defined as Liberty’s adoption of its discriminatory employment policies in 1965. [Emphasis added]
The fact that there were multiple injuries and that they were of different magnitudes and that injuries extended over a period of time does not alter our conclusion that there was a single occurrence. As long as the injuries stem from one proximate cause there is a single occurrence. Indeed, the definition of the term “occurrence” in the Appalachian policy contemplates that one occurrence may have multiple and disparate impacts on individuals and that injuries may extend over a period of time.
While many female employees had suffered injuries or damages as a result of the insured’s wrongful act, the Court found only a single occurrence. As such, had the policy been triggered (it was not triggered for other reasons), only a single per occurrence policy limit would have applied.
The Ninth Circuit Court of Appeals adopted a similar causal approach in a coverage dispute flowing from a mass tort police brutality case, Mead Reinsurance v. Granite State Insurance, 873 F.2d 1185 (9thCir. 1988). In Mead the insured City had a self insured retention of $100,000; a Mead primary layer CGL for $900,000; and a Granite State excess policy for $5,000,000. The City and Mead wanted to minimize the number of occurrences in order to decrease their contributions to the damages award (presumably, total damages did not threaten to exceed the $6,000,000 total limit). Granite State wanted to increase the number of occurrences, which would extinguish or minimize its obligations by increasing contributions from the primary insurer and from the City because the self insured retention and CGL layer would be triggered multiple times.
In the underlying action, the insured City had been sued for certain statutory violations with multiple complaints alleging excessive police force, and one complaint alleging police harassment. The lower court declared the complaints constituted two occurrences. However, Granite State as excess insurer argued that the allegations arose from different police actions involving different injured parties. The courts disagreed, finding that because 11 of the complaints were premised upon the City’s deliberate indifference to the use of excessive force by the police, the fact that injured parties were different was not relevant in determining the number of municipal policies. The appellate court affirmed the lower court’s decision holding that as only two alleged municipal policies existed, each of the policies constituted a separate “occurrence” For a total of two occurrences.
This same causal approach was relied upon in Washoe County v. Transcon. Ins. Co., 110 Nev. 798, 801 (1994) in which an insured county was sued for breach of its duty to investigate employees of a day care center licensed by the county. Employees at the center molested numerous children over a three-year period. After achieving settlements in that action, the county sought indemnity from the insurer. The county argued that its liability stemmed from one ongoing act of negligence constituting one occurrence. Under its interpretation, the county would be able to recover on the combined settlement amount over $50,000. The insurer contended that the injuries to each child constituted separate occurrences and since none of the settlements exceeded the county’s $50,000 retained limit, the insurer owed nothing.
The court held that the insurer’s definition of occurrence improperly focused on the “effects” of the children’s injuries rather than the cause of those injuries. Under the causal approach, there was only one occurrence. The county “caused” the children’s injuries through its failure to act with the requisite care in the process of licensing the day care center. Its breach of this duty allowed the intervening conduct that directly injured the children. Thus, there was one occurrence and the policy was required to respond to the loss above the initial $50,000 retained limit (or deductible).
There are numerous other American examples similar to the above which focus upon the insured’s liability inducing event to determine the number of occurrences. To note just a few, consider Champion International Corp. v Continental Casualty Co., 546 F.2d 502, 504-506 (2nd Cir. 1976) in which the Court held that an insured’s sale of defective paneling to twenty-six manufacturers of vehicles resulting in damage to 1,400 vehicles was one “occurrence”; Colonial Gas Co. v. Aetna Cas. & Sur. Co., 823 F.Supp. 975, 983-84 (D. Mass. 1993) where the insured utility used insulation that was later banned, and this constituted one “occurrence” even though it was installed in 390 homes; Uniroyal, Inc. v. Home Ins. Co., 707 F.Supp. 1368, 1380-87 (E.D.N.Y., 1988) in which the court held that a manufacturer’s numerous deliveries of agent Orange to the military constituted one “occurrence” despite the insurer’s argument that each subsequent spraying in Vietnam constituted a separate “occurrence”; and Southern International Corp. v. Poly-Urethane Industries, Inc., 353 So.2d 646 (Fla. App. 1977)in which the policyholder’s roof sealing substance failed to hold, causing leaking in several tenants’ apartments with the Court finding this leaking constituted one occurrence and applied the lower “per occurrence” policy limit rather than the higher “aggregate” limit sought by the policyholder.
As noted above, there is another strand of the causal theory, the Immediate Cause Approach, which focuses upon the immediate cause of the injury or damage rather than the original liability inducing event. This approach is exemplified by Norfolk & Western Railway Co. v. Accident & Casualty Ins. Co. of Winterthur, 796 F. Supp. 929 (W.D. Va. 1992) in which employees of the insured Railway company allegedly suffered hearing loss through exposure to noise and the Railway’s failure to protect them from its hazardous effects. A dispute arose between the Railway and its excess insurers concerning whether the underlying claims against the insured for noise-induced hearing loss could be aggregated to push through the insured’s self-insured retention limits.
The insured Railway sought a declaration that the hearing loss was a bodily injury and that all of the underlying hearing loss claims arose out of one occurrence. In interpreting the policies, the court found the occurrence language was ambiguous but nonetheless denied the insured’s motion after determining that its arguments constituted an “implausible” interpretation of the insurance contract language to the extent that plaintiff sought a declaration that the claims against it arose out of a single occurrence.
On the occurrence issue, the Court held as follows (citations omitted):
The “cause” test is at the heart of the railroad’s legal argument in support of its single occurrence position. According to this test, the number of occurrences is determined by focusing on the cause of the alleged injuries which give rise to the claims with respect to which the insured seeks indemnity. In Owens-Illinois, Inc v. Aetna Casualty And Surety Company, 597 F. Supp. 1515 (D.D.C. 1984), the court applied the cause test to hold an insulation manufacturer’s manufacture and sale of a product containing asbestos to be a single occurrence for the purpose of determining liability with regard to numerous asbestosis claims against the manufacturer. The court explained: “. . . The calculation of the number of occurrences must focus on the underlying circumstances which resulted in the personal injury and claims for damage rather than each individual claimant’s injury.”
. . .
The railroad argues that the cause test, as applied to the facts of this case, dictates a holding of single occurrence. The difficulty that the court has with this argument is that it leads to a result which would defy common sense. The typical single occurrence giving rise to multiple claims is the automobile accident which gives rise to a chain of events which results in injury to several parties. . . . In this case, a wide variety of machines in a number of different locations’ created a variety of sounds over the course of a number of years. Railroad employees working near these machines suffered injury to their hearing as a result of exposure to these sounds. The railroad contends that its alleged negligence in failing to protect its employees from the hazards of this noise was the cause of the claimants’ injuries and therefore the single occurrence out of which all of these claims arose. While the railroad’s negligence may indeed have been a cause of the injuries, calling that negligence the single occurrence out of which the claims arose is nonsensical. [Emphasis added]
The railroad’s argument allows the cause test to sweep too broadly and arrives at a result which defies common sense. Many different sounds damaged the hearing of many employees in many places over the course of many years, making this case one in which multiple occurrences created multiple injuries. For the purpose of interpreting the policy language, a relevant occurrence might be the generation of noise by a particular machine or by a number of machines in a particular physical plant. It may even be the railroad’s negligence with regard to employees who work around a particular machine or in a particular plant. The occurrence contemplated by the language of the policies cannot logically be the railroad’s system-wide negligence with respect to its employees, however. The railroad’s argument is flawed to the extent that it removes any limit from the category of things which might be found to be a cause. By moving the analysis of cause to a level sufficiently general to support an interpretation which would maximize coverage, the railroad has attempted to convert the cause test into a rubber stamp which would justify coverage in every case. This is a misapplication of the cause test which leads to an implausible interpretation of the occurrence language. An implausible interpretation may not be given effect, even under a rule which favors indemnity where contract language is ambiguous.
A number of decisions from other American jurisdiction apply a similar approach to that relied upon by the Court in Norfolk Railway, and look to the immediate cause of the injury as the occurrence. See Plit, supra at p. 229. Examples, Nicor, Inc. v. Associated Elec. & Gas Ins. Servs. Ltd., 362 Ill. App. 3d 745, 750 (Ill., 2005); Koikos v. Travelers Ins. Co., 849 So. 2d 263 (Fla. 2003); Metro. Life Ins. Co. v. Aetna Cas. & Sur. Co., 255 Conn. 295, 328 (Conn., 2001).
As is often the case, this issue has not been addressed with the same level of detail in Canada. Following we note several Canadian cases touching on the issue. Each is unique to its own facts and policy language. These cases do not answer definitively whether Canadian courts would adopt the effect theory or the cause theory; and, if the cause theory, whether they would apply the “Immediate Cause Approach” or the “Insured’s Liability Approach”.
It does, however, seem at least likely that the prevalent American view – the cause theory – would be relied upon in Canada to determine the total number of occurrences. For example, while the Court was not specifically concerned with the number of occurrences, in Synod of the Diocese of Edmonton v. Lombard General Ins. Co., 2004 ABQB 803, the court held that “occurrence”, in a CGL policy that did not define the word, is a “liability inducing event” and, at para. 72, “The realization of the extent of damages as a later date, even if genuine, does not constitute an occurrence for insurance purposes. It is not a ‘liability inducing event.’” Taken one step further, this finding provides some support for adoption of the Insured’s Liability Approach under the cause approach.
We now turn to the limited number of Canadian cases that have considered the issue of the number of occurrences under liability policies.
The issue has been reviewed specifically in the class action context in Canadian Gas Association v. Guardian Insurance Co. of Canada.,  O.J. No. 5260 (Ont. Ct. of Justice (Gen. Div.). The Canadian Gas Association claimed that, under an E&O policy, the insurer (Guardian) was obliged to defend it with respect to claims brought against it for damages suffered by 10,000 homeowners. The Ontario New Home Warranty Program brought a class proceeding against the Canadian Gas Association on behalf of itself and the affected homeowners. Guardian claimed it was not obliged to defend the action on behalf of the Canadian Gas Association. It argued that the E&O Policy was applicable to the claims, but that the self-insured retention of $25,000 per claim applied separately to each of the 10,000 claims. It argued that as no single individual claim would exceed $25,000, it had no duty to indemnify or defend the Canadian Gas Association.
The Court disagreed, holding that at least with respect to a duty to defend, the self-insured retention of $25,000 was applicable once in respect of all of the claims in the action. The relevant E&O policy language provided as follows: “The insured shall retain as its own net retention loss as respects each claim that the amount stated ($25,000.).” And, “The limit of liability . . . applicable to ‘each occurrence’ is the total limit of the insurer’s liability for loss on account of all claims made against the Insured arising out of any one occurrence.”
The Court noted Guardian’s reliance upon two American authorities for the proposition that each homeowner’s claim was separate and distinct. However, the Court distinguished these cases, noting that neither concerned a class action.
In a class action the Court noted that the trial court has the power to award aggregate damages (at para. 25): “. . . it cannot be said that the class action must of necessity be one in which there must be an individual assessment of the individual claims of each class member.” Given this, the Court concluded that “It is, therefore, not clear at this point that the position of the respondent that there must be individual assessment of individual claims will in fact occur.” As such, the Court found that the E&O policy applied to afford a duty to defend. In full, the relevant part of the Court’s judgment follows (see commencing at para. 21):
Counsel for the insurer referred to 2 U.S. cases Burlington County Abstract Company v. QMA Associates Inc. N.J. 400 A.2d 1211 and Lamberton v. Travelers Indemnity Company Del. Supr. 346 A. 2d 167, each of which emphasizes the individual nature of claims which may have multiple sub-causes as opposed to a cause giving rise to a claim. In Lamberton a deductible was applicable to each claim (accident) against the professional invoking an Errors & Omissions Policy and not each injury claim even though they arose from the same cause (accident). Burlington dealt with a single deductible arising from a single broadcast even though there were numerous plaintiffs. None of the multiple E & O claims in those cases occurred in the context of a class action.
The respondent also referred to Class Actions by Michael Cochrane (Toronto: Canada Law Book, 1993).
“A class proceeding is an action brought on behalf of or for the benefit of numerous persons having a common interest. It is a procedural mechanism which is intended to prove on an efficient means to achieve redress for widespread harm or injury by allowing one or more persons to bring an action on behalf of many.”
. . .
With respect to assessment of damages, the authors [of Watson and McGowan, Ontario Civil Practice, 1998] note at p. 459 that the court is given a discretion as to how damages are to be assessed. In addition to individual proof and assessment of damages suffered by individual class members the court is given the power to direct a “aggregate assessment of damages” where the underlying facts permit is to be done with an acceptable degree of accuracy. Illustrations are given by the authors noting that “aggregate assessment” provides a particularly effective way of assessing damages where individual claims are small or where there is no economical way of determining each member’s individual loss
From a review of the Statement of Claim in the Underlying Action it cannot be said that the class action must of necessity be one in which there must be an individual assessment of the individual claims of each class member. On the face of the pleading itself, the claim is one brought by ONHWP for recovery of the damages it has suffered.
The question remains as to how the issue would be addressed after trial. Specifically, if the court found that it was not appropriate to make an aggregate award under the Class Proceedings Act, would the court then find that there were multiple occurrences? Or would it still be open to the court to apply the Cause theory to find a single occurrence?
This issue was considered in a proposed representative action in Kelly v. J.J. Lacey Insurance Ltd. (Trustee of),  N.J. No. 182 (Nfld. S.C., Trial Div.). The Court touched on the issue in relation to consideration of deductibles under a claims-made policy, triggered on the commencement of a claim against the insured rather than the occurrence of damage. The defendant and its insurer applied for an order striking out the representative or class aspects of the plaintiff’s claim, or, for an order that if the action were to continue as a representative action, a $10,000.00 policy deductible applied to each member of the class.
The defendant J.J. Lacey Insurance Ltd. was an insurance agency. The plaintiff, as representative of approximately 22,000 policy holders, claimed damages from Lacey for negligence, breach of contract and breach of fiduciary duty because of its placing policies with Hiland Insurance Limited. Hiland was in liquidation and Lacey was bankrupt. The plaintiff Kelly put himself forward as representative and agent of some 22,000 policy-holders, asserting that, even though they may have been wronged individually as policyholders, they enjoyed a common right of recovery against Lacey’s insurer because of a common breach of duty by Lacey.
The defendant’s application was allowed. The representative aspects of the plaintiff’s statement of claim were struck. Further, the Court held that in any event, the deductible of $10,000.00 in the insurance policy was applicable to the claim of each and every member of the class. Had the claim continued as a representative action, the insurance policy deductible would have applied to each claimant. The policy was not ambiguous. In this regard, the Court distinguished claims-made policies from occurrence policies. It noted that the deductible would apply to each individual claim made against the policy, not to each negligent act which may spawn a number of claims.
The Court reviewed the representative plaintiff’s argument on the deductible issue as follows:
 Kelly’s position is that, reading the policy as a whole, the word “claim” was intended to refer to the totality of the loss arising out of a single fundamental negligent act or omission. Here, counsel suggested, there could in fact be one or two negligent acts, depending on the results at trial. That is, if liability were found on the basis of the allegations in paragraph 11(a) of the statement of claim, the policy would respond to one fundamental act and would apply one deductible; if liability were found additionally on the basis of the allegations in paragraph 11(b), counsel suggested that there would in such a case be two fundamental acts or occurrences, and two applications of the deductible and of the limit of liability. She argued that while the policy on its face appears to be a claims-made policy, it “has overtones” of an occurrence policy. Any ambiguity, she said, should be resolved in favour of the insured.
. . .
 There is no ambiguity in the policy. It is a claims-made policy, not an occurrence policy, although I recognize the caution expressed by McLachlin, J., in the Reid Crowtherdecision, infra. The deductible of $10,000 applies to each individual claim made against the policy, not to each negligent act which may spawn a number of claims.
Kelly therefore supports application of the causal theory in Canada to “occurrence” policies: the “occurrence” is the “negligent act” which may spawn a number of claims (although the comments were made in obiter as the case concerned a claims-made policy).
The occurrence issue was discussed in a mass tort context (not a class action) by the Alberta Court of Appeal in Yang v. Canadian Lawyers’ Insurance Assn (1997), 147 D.L.R. (4th) 31 (Alberta C.A.), again under an E&O policy. Seven individuals (the “clients”) retained the insured lawyer (Wiese) to handle their money and investments under an immigration investment program. The trial judge found Wiese committed several negligent acts and errors in the handling of the moneys of the clients. Each of the seven clients suffered damages of $250,000. The trial judge further concluded that each respondent received a separate and distinct professional service, constituting numerous “Occurrences” under the lawyers’ professional indemnity policy. The appellant insurer argued that the professional service provided by the insured lawyer was as their real estate lawyer in the acquisition of a shopping centre which all of the clients as a group were engaged in acquiring. Therefore, it argued that there was only one Occurrence and liability should be limited to the policy limit of $1,000,000 (damages totaled $1,750,000).
The E&O policy obligated the insurer “To pay on behalf on the Insured all sums which the Insured shall become legally obligated to pay as damages arising out of an Occurrence . . .” The word “Occurrence” was specifically defined and differs from the definition used in most CGL policies: “Occurrence shall mean any . . . alleged act, error or omission of an Insured . . . and which occurs in the performance of Professional Services for others; provided, however, that if more than one act, error or omission occurs or is alleged to have occurred in relation to the same professional service then all such acts, errors and omissions shall be deemed to be a single Occurrence.”
The Policy defined “Professional Services” as “those services normally provided by a lawyer or notary public . . . within the context of the usual solicitor-client relationship …”
The clients argued that the insured lawyer performed a separate professional service for each of them that went beyond the real estate transaction for the group. There were seven separate retainers. The trial judge in the initial negligence action found that the lawyer represented each client individually. The clients agued that the acts did not all occur with respect to a real estate transaction to be carried out on behalf of a group, but occurred within the professional service being provided by Wiese to each of the of them individually. He acted for them individually with respect to their investment of funds. That being the case, all of the acts, errors and omissions done with respect to the handling of funds and securing the individual separate protection did not occur in the “same professional service”, and it followed that there was more than one Occurrence.
The Alberta Court of Appeal agreed, holding as follows (para 35):
The key phrase in the insurance provision is “same professional service”, found in the proviso of the definition of “Occurrence”. Under Coverage A.1, the insurer is obligated to pay “all sums which the Insured shall become legally obligated to pay as damages arising out of an Occurrence”. If the definition of “Occurrence” is inserted, the insurer is obligated to pay “all sums which the Insured shall become legally obligated to pay as damages arising out of any act, error or omission … which occurs in the performance of Professional Services for others”, provided that if “more than one act, error or omissions occurs … in relation to the same professional service, then all such acts, error and omissions shall be deemed to be a single Occurrence.”
I agree with the appellant [insurers] that the policy contemplates the possibility that multiple claimants may be subject to a single liability limitation by the finding of a single Occurrence. The phrase “same professional service” is, in my view, the policy’spoint of reference to determine whether multiple claimants are subject to such a limitation.
It is only where the acts, errors or omissions are with respect the “same professional service” that they are deemed to be one Occurrence. Thus, it is first necessary to determine what professional service is being performed, and for whom. Only then can one assess whether the multiple acts or errors occur within that same professional service. In simple terms, who retained the lawyer to do what service?
The Court went on to conclude that the services performed on behalf of the seven clients did not arise out of the “same professional service”, but arose out of separate retainers and separate professional services. As such, each client’s damages were caused by a separate occurrence.
To summarize, while there are no cases clearly on point, the Canadian authorities reviewed suggests that Canadian courts may adopt the causal theory for occurrence policies (Kelly v. J.J. Lacey Insuranceand in particular the Insured’s Liability Approach to that theory (Synod of the Diocese of Edmonton v. Lombard). However, the courts will carefully consider the actual policy language in relation to the allegations in the underlying action to determine whether that is so in any particular case.
Interestingly, the Causal Theory + Insured’s Liability approach helps the class in relation to a policy with low deductibles, but hurts the class in relation to policy with low per occurrence limits..
IV. The Aggregate Limit
For an insurer, the uncertainty regarding this debate can be mitigated by ensuring that careful attention is paid to the aggregate limit, which can control the ultimate extent of exposure regardless of the theory adopted. The aggregate limit is the most the insurer will pay for all occurrences falling under a single policy. For example, the policy may contain a $1,000,000 occurrence-limit, and a $5,000,000 aggregate limit. Consider a case of ten occurrences, each totaling $1,000,000, for a total claim against the insurer in the amount of $10,000,000. Despite the total claim, the insurer’s obligation is capped by the aggregate limit of $5,000,000.
V. Is there Excess Coverage?
The stated policy limits noted in the Declaration page do not necessarily tell the whole story. Most importantly, the insured may have multiple coverage layers: a primary and excess policy. The primary policy provides liability coverage up to a first limit layer; and then the excess policy takes over for a second layer of coverage. For example, the primary policy may provide a $1,000,000 per occurrence limit; and the excess policy may provide an additional $10,000,000 which is triggered once the primary policy has been exhausted. When seeking coverage information from the defendant in a class action, ensure the request is broad enough to include excess policies.
VI. Do Defence Costs Eat into Policy Limits?
Given the intense level of defence efforts devoted to class actions, this issue is vital. For example, it is not uncommon for defendants to devote between $250,000-$1,000,000 on the certification motion alone.
Commonly used CGL forms (such as IBC Form 2100) provide that defence and supplementary payments to the insured do not reduce policy limits. Where the policy is silent on the issue, the most prevalent approach is to find that the duty to defend does not deplete the limits. For example, in Mead Reinsurance v. Granite State Insurance, 873 F.2d 1185 (9th Cir. 1988) the Ninth Circuit Court of Appeals held that because an insurer’s duty to defend was separate from its duty to indemnify, its policy limits were not reduced by attorney’s fees and costs. In reaching this conclusion, the appellate court concluded that the lower court had erred in including such fees in determining the primary insurer’s ultimate net loss.
However, certain liability policies do provide that policy limits include defence and related costs. Depending upon the nature of the case, a $1,000,000 per occurrence policy limit might seem like a substantial source of funds; but those funds can be quickly depleted if the policy allows the insurer to draw upon the limits to fund the defence.
The flip-side of the defence cost effort is the effort put in by class counsel. If costs are payable in excess of the limits, then this exposure can serve as an additional source of funds. However, it should be noted that in many jurisdictions, costs are not payable by the losing party in the class proceeding context. (Costs are generally not payable in B.C., Saskatchewan, Manitoba, and Newfoundland. They are payable in Quebec, but only at the Small Claims Court level. The notable exception is Ontario).
This issue can have an effect on cross-border negotiations, as costs are generally not payable in the U.S. As such, insurers may have an additional exposure in Canadian litigation that is not present in the U.S.
Follow the money. This mantra is the key to every class action. And in the class action context, where the company is already reeling from the underlying problem, this usually requires a careful consideration of the insurance situation. Keeping a careful eye on the above issues is essential to determine whether a class action in a viable enterprise.As a defendant in a class action, consider your policy early. If the reality of the insurance situation is that the claim is not economic, advise class counsel early. In this entrepreneurial litigation, class counsel is attuned to consider the cold, hard economics of the litigation.
Retroactivity and British Columbia’s Health Care Costs Recovery Act
It is anticipated that British Columbia’s recent Health Care Cost Recovery Act will be proclaimed in force within the next several months. The entire Act is available on the B.C. Government’s website (as it stood following 3rd reading): https://www.leg.bc.ca/38th4th/3rd_read/gov22-3.htm
The Act will dramatically improve the Government’s ability to recover the the costs of health care services incurred on behalf of an injured person. In this regard, the Act compels insurers and injured persons to report certain information to the Government (including Actions commenced, and claims reported to insurers).
The Act purports to be retroactive, applying to personal injuries pre-dating commencement of the Act.
Despite certain broad retroactive wording, on close scrutiny the Act includes important qualifiers. For insurers, the obligation to report claims to government does not apply to claims that the insurer learned about BEFORE the Act came into force. For injured parties, there is no obligation to report to Government if the Action is commenced before the Act comes into force. Following I provide more detail.
Section 24 provides that “this Act applies in relation to any personal injury suffered by a beneficiary, whether before or after this subsection comes into force”.
Section 10 of the Act requires Insurers to provide information to the Government within 60 days of learning about a claim. However, this obligation DOES NOT apply in respect of a matter that the insurer learns of BEFORE the section comes into force.
So, if a person is injured before the Act comes into force, and the insurer learns about this injury after the Act comes into force, the insurer must report it to the Government. In contrast, if a person is injured before the Act came into force and the insurer learn about the injury before the Act comes into force, the insurer need not report this to the Government. However, as explained below, if an Action is commenced after the Act comes into force, the Government will learn about the matter from the plaintiff. At that point, the Government may request information from the Insurer concerning the matter, and the Insurer must provide the information to Government (pursuant to s. 10(3) and (4)).
Section 24 includes qualifications concerning retroactivity of the injured person’s obligations. In particular, the following sections of the Act do not apply if an Action is commenced before the Act comes into force:
(a) Obligation to Claim (s. 3). Section 3 requires that the injured plaintiff “include a health care services claim in that legal proceeding”. Such pre-existing Actions will not need to be amended by the plaintiff to include the government’s health care services claim.
(b) Requirement to Notify Government of the Claim (s. 4). Within 21 days after commencing a legal proceeding, the plaintiff must give written notice of the legal proceeding to the government. Again, this section does not apply to Actions commenced before the Act comes into Force.
(c) Final Disposition of Claim or Legal Proceeding (s. 5). Section 5 prohibits dismissal of a health care services claim unless the Court is satisfied that the government has been given a reasonable opportunity to appear and make representations. Again, this section does not apply to Actions commenced before the Act comes into Force.
Formal Offers – Insurance Considerations
British Columbia recently introduced a new Rule of Court concerning formal offers (Rule 37B). Rule 37B has replaced predecessor formal offer rules.
Rule 37B gives the Court discretion in deciding whether a successful party, which has delivered a formal offer, is entitled to an award of double costs.
In considering whether double costs are warranted, the Court is directed to consider a number of factors, including the relative financial circumstances of the parties.
The question is whether the Court may consider the defendant’s insurance coverage under the “financial circumstances” heading. This question was answered by the B.C. Supreme Court in Bailey v. Jang, 2008 BCSC 1372, released today.
In Bailey the Court (Hinkson J.) refused to consider the defendant’s insurance coverage. The Court accepted that the defendant was covered by ICBC, but said this was not relevant as part of the “financial circumstances” inquiry. Mr. Justice Hinkson found that the proper contest is between the actual defendant and the plaintiff, not the defendant’s insurer and the plaintiff. As the defendant and plaintiff were both of similar financial means, this factor did not favour the plaintiff. The defendant was entitled to double costs.
The Relevant section of Rule 37B provides as follows:
Rule 37B provides that where an offer to settle has been delivered:
4) The court may consider an offer to settle when exercising the court’s discretion in relation to costs.
5) In a proceeding in which an offer to settle has been made, the court may do one or both of the following:
(a) deprive a party, in whole or in part, of costs to which the party would otherwise be entitled in respect of the steps taken in the proceeding after the date of delivery of the offer to settle;
(b) award double costs of all or some of the steps taken in the proceeding after the date of delivery of the offer to settle.
(6) In making an order under subrule (5), the court may consider the following:
(a) whether the offer to settle was one that ought reasonably to have been accepted, either on the date that the offer to settle was delivered or on any later date;
(b) the relationship between the terms of settlement offered and the final judgment of the court;
(c) the relative financial circumstances of the parties;
(d) any other factor the court considers appropriate.
In Bailey v Jang, the Court held as follows (at paras. 29 to 35, concerning the insurance issue):
 The plaintiff asserts by affidavit that her annual income is between $33,000 and $34,000 per year, and that her share of the expenses in the apartment she shares with a friend together with her own monthly expenses amount to approximately $2000 per month.
 The plaintiff lists a debt to her lawyers of some $29,000 as well as other debts of a further $35,000, and swears that “If I am obliged to pay ICBC’s defence costs for this trial, I will be unable to meet my ongoing expenses and debts.” I have no evidence of the extent to which the plaintiff could arrange financing to address her position, but I do not accept that her present debts or even greater financial obligations could not be accommodated by financing. While the defendants argue that the plaintiff’s obligations to her counsel are a result of her refusal to accept their offer to settle, I do not see that the cause of the plaintiff’s debts is a relevant consideration. The fact is that she is indebted to her counsel.
 There are, however, two difficulties with the plaintiff’s position on this factor. First, she argues that her financial circumstances are difficult. This alone is insufficient to meet Rule 37B(6)(c).
 Second, she places her financial position against that of ICBC, as opposed to that of the defendants.
 While I accept that it is likely that most drivers in British Columbia are insured by ICBC, the wording of subrule 37B does not invite consideration of a defendant’s insurance coverage. There may be good policy reasons for this. Insurance coverage limits with ICBC are not universal, and will vary from insured to insured. Certain activities may result in a breach of an individual’s insurance coverage, or the defence of an action under a reservation of rights by ICBC. A plaintiff will not and likely should not be privy to such matters of insurance coverage between a defendant and ICBC.
 The contest in this case was between the plaintiff and the defendants, and the insurance benefits available to the defendants do not, in my view, fall within the rubric of their financial circumstances, any more than any collateral benefit entitlement that a plaintiff may have would affect that person’s financial circumstances for the purpose of determining their loss.
 There is no evidence before me as to the defendants’ financial circumstances. What little I do know of the circumstances of the defendant Pricilla C. Jang is that, at the time of the accident, she was driving her mother’s motor vehicle, and that she was employed as a parts delivery person for a motor vehicle dealership. That does not suggest to me that her financial circumstances are appreciably different from those of the plaintiff.
Sharing the Pain: Apportioning Defence Costs
Following is a brief discussion of case law concerning apportionment of defence costs between insurer and insured, and between insurers.
Liability insurers may be able to seek a time on risk or other apportionment to limit defence cost obligations to a percentage of the period across which any covered damage may have occurred or to only certain allegations against the insured: St. Paul v. Durabla (1996), 137 D.L.R. (4th) 126 (Ont. C.A.); Axa v. Guildford Marquis, 2000 BCSC 197; Hay Bay v. MacGregor,  O.J. No. 2049 (S.C.J.); Surrey (District) v. General Accident,  B.C.J. No. 849 (C.A.); Royal & Sun Alliance v. Fiberglass Canada Inc.,  O.J. No. 1275 and Alie v. Bertrand,  O.J. No. 4697 (C.A.).
The insured is required to contribute to the cost of years or allegations not covered by the insurer: Surrey (District) v. General Accident. In Continental Ins. Co. v. Dia Met Minerals Ltd.  B.C.J. No. 1293 (C.A.) the Court held as follows (at para. 18): “It seems both illogical and inequitable to require an insurer who has not sought to shirk its obligations, to bear the entire cost of defending a mixed claim in the face of clear terms that require it to pay the cost of defending only claims relating to the insureds’ officers as directors and officers of Dia Met, and that exclude losses arising from dishonest acts or the making of personal profits.”
See also Hay Bay v. MacGregor, at para. 46.
In Royal & Sun Alliance v. Fiberglass Canada Inc.,  O.J. No. 1275 (Ont. Ct. Gen. Div.) (last para): “As Royal & Sun Alliance insured for the period January 1, 1981 to January 1, 1985, four years out of the ten over which exposure took place according to the allegations in the New Brunswick action, and as there is no issue of breach of condition in respect of its policy, I am of the view that a reasonable order at this stage of the action is one which requires it to fund 40% of Fiberglas’s defence costs to date and on an ongoing basis. Those costs will be subject to assessment, however, on a solicitor and client scale. The order will be without prejudice to Royal to seek, at trial, contribution from some or all of the defendants in the action. It will also be without prejudice to Fiberglas to seek, at trial, payment from Royal of a higher percentage of its defence costs and on a more complete basis of indemnification than that which I am ordering. No order is made as against Halifax and Commonwealth at this time.”
Primary layer insurers may also be able to secure defence cost funding from excess layers. In this regard, in Alie v. Bertrand, the Court held that an excess insurer may have a duty to contribute to defence costs in some cases where it is likely that the claim would intrude into the lawyer of excess insurance.
In Boreal Insurance Inc. v. Lafarge Canada Inc.,  O.J. 1571 (C.A.) the Ontario Court of Appeal discussed Alie as follows (para. 36): “The Court found an equitable duty to defend, as the defence could be perceived as inuring to the benefit of the excess insurer. The duty to defend was found, notwithstanding that, in the end, no duty to indemnify was found.” However, the Court in Boreal went on to find that the decision in Alie did not apply on the facts, where the excess insurer could not have a duty to indemnify and, therefore, should not have to share in the burden of defence costs.
In ING Insurance Co. v. Federated Insurance Co,  O.J. No. 1718, the Ontario court of Appeal looked at the issue of allocation between primary and excess insurers. Federated appealed a cost order finding it had to indemnify ING for costs following a settlement. ING was the primary insurer and Federated was the excess insurer. The insured had been sued, along with two co-defendants, for roughly $9.37 million. ING had a liability limit of $2 million and Federated’s policy provided excess insurance of another $1 million. The claim settled in part with $2.178 million contributed from ING and $900,000 contribution from Federated. ING sought contribution from Federated to cover a portion of the defence costs. The trial judge found that Federated should bear defence costs in proportion to the amount it had contributed towards settlement.