UPDATE
The Court of Appeal dismissed an appeal from this decision on October 6, 2010, in very brief reasons: “It is uncontested that the appellant insurer has the onus to show that the exclusion is clearly and unambiguously operative. It cannot do that. The property here is not owned by the respondent although it once was. The exclusion cannot be read as if it was written both in the present tense and the past tense. It is in the present tense only.”
The other issues discussed in our original post were not addressed in the Court of Appeal’s decision and we’re not sure whether they arose in the course of argument.
ORIGINAL POST
In McGrimmon and Sholea v. The Personal Insurance Company, Mr. Justice Colin McKinnon had to decide whether a homeowner’s insurer owed a duty to defend insureds who had been sued by the purchaser of their home. The basis of the underlying action was that the vendors (Personal’s insureds) had sold to the plaintiffs a home which turned out to have numerous deficiencies. It was alleged that the home had been constructed negligently and that the vendors had misrepresented and failed to disclose to the plaintiff purchasers its true condition.
The Personal denied coverage to the vendors and a third party action was brought by the latter against the insurer.
The main action by the purchasers against the vendors was settled and the motion before Justice McKinnon was brought in the third party action. The vendors asked the court to find that their insurer, The Personal, owed a duty to defend them in the main action.
Justice McKinnon granted the motion and declared that The Personal owed a duty to defend.
The ruling will be of concern to insurers as it seems to extend liability coverage under a homeowner’s policy in a surprising way.
The insurer advanced the following arguments:
- in substance, the “occurrence” giving rise to the claim was one for breach of contract and breach of warranty, neither of which is covered by a homeowner’s policy; and
- the policy contained an exclusion for “damage to property you own, use or occupy” that negated coverage here.
Justice McKinnon rejected those arguments and found for the vendors/insureds. On the issue of the exclusion, counsel for The Personal argued that the “occurrence” giving rise to the claim was the representations made to the purchasers by the vendors while the latter still owned the house. McKinnon J. said, “were the exclusionary words cast in the past tense, I would agree” but that the exclusionary words must be interpreted in favour of the insured in the case of ambiguity.
It is not entirely clear to us what His Honour meant by his reference to “the past tense”, but based on earlier passages in his reasons, it appears that he would have given effect to the exclusion if it had read, “property you own, rent or occupy or had owned, rented or occupied”. He seems to have accepted the submission of counsel for the vendors/insureds, that the triggering event was the time the claim was made, with the result that the applicability of the exclusion was to be evaluated as of that time. By the time the claim was made, the property in question was no longer owned by the vendors and it seems to have been on this basis that His Honour concluded that the exclusion was inapplicable.
On the other issue, viz., whether the policy covered a claim that was, in substance, one for breach of contract, Justice McKinnon noted that the policy did not expressly exclude contractual liability and that, in any event, the “pith and substance” of the claim was for “negligence in general, negligent misrepresentation, negligent construction and negligent design. For these causes of action, the defendants are insured.”
We have some concerns about this decision although, in fairness, there might be some facts that are not recited in Justice McKinnon’s reasons for judgment that would address the points discussed below.
The first step in determining a coverage dispute is to look at the coverage afforded under the insuring agreement. Next, it is necessary to consider the extent to which coverage is withdrawn by policy exclusions. And finally, exceptions to exclusions must be looked at, since they have the effect of restoring coverage withdrawn by the exclusions.
Here, the insuring agreement said:
We will pay all sums which you become legally liable to pay as compensatory damages because of bodily injury or property damage.
You are insured for claims made against you arising from:
Personal liability – legal liability for unintentional body [sic] injury or property damage arising out of your personal actions anywhere in the world.
There is no suggestion, in the reasons, that there was any bodily injury suffered by the plaintiff purchasers. Assuming that to be so, the only other possibility is that there would be coverage for claims for compensatory damages because of property damage.
However, we do not see how the plaintiffs’ claim against the vendors could be said to be one for “compensatory damages because of property damage”. The reasons quote the overview paragraph of the statement of claim:
The Plaintiffs bring the within action with respect to the purchase and sale of the property; the faulty design and poor construction of the property; the negligent inspection of the property; the poor supervision of the design of the property; the inadequate repair and negligent regulation of the property; misrepresentations on the part of the defendant; the failure to disclose the condition of the property on the part of the defendants; and the breach of the defendants contractual duty of care, legislative, regulatory, fiduciary and other duties to the plaintiffs.
His Honour also said that “[t]he basis of the Plaintiffs’ claims is that after the closing date they discovered numerous defects and deficiencies with the house and the property.” Thus, it sounds like all of the damage to property complained of by the plaintiffs had already taken place prior to them having become the owners of the property. If so, the plaintiffs’ real claim was not for damage to their property, but for the economic loss that they had suffered by over-paying for an already-damaged house.
It seems to us therefore, that the claim against the insureds was not within the insuring agreement in the first place. There was no claim for compensatory damages for property damage; rather, the claim was for the economic loss that the plaintiffs suffered as a result of having been misled by the defendants about the pre-existing damage to the home. All of the “property damage” seems to have occurred while the defendants were still the owners. The liability of the defendants appears to have arisen not because they damaged someone else’s property but because of their failure to disclose the damage to their own property before selling it.
In the alternative, if it could be said that coverage was triggered under the insuring agreement, it seems to us that that coverage was withdrawn by the “property you own, use, occupy or lease” exclusion. When the property was damaged, it was owned by the insured. The subsequent transfer of the damaged property to the plaintiffs does not, in our view, vitiate the exclusion.