Here, the underlying action alleges liability on the part of an auto insurer, for having failed to pay its policy limits into an interest-bearing account, for the benefit of injured claimants who were suing its insureds. While I’ve seen this issue raised several times before and I’m aware of one case in which a judge commented on it (Drummond v. Fortune, 1994 CarswellOnt 3964 (Ont. Ct. (Gen. Div.)), I hadn’t seen a case in which the question was raised directly as a basis for liability: is there an obligation on the part of a liability insurer to pay its policy limits into an interest-bearing account, for the benefit of claimants?

That question isn’t answered by the Court of Appeal decision. Rather, the question that arose here was whether the claim against the insurer was prescribed. The Court rejected the view of the court below, that the claim was barred by a one-year limitation period found in the policy. Instead, it held that the claim against the insurer was not an “action or proceeding against the Insurer under [the insurance contract] … in respect of the loss or damage to person or property” within the meaning of statutory condition 6(3)”. Therefore, the contractual limitation period (one year from the date on which the cause of action arose) did not apply.

It also held that the cause of action against the insurer was only complete when the insurer had an obligation to indemnify its insured.

The plaintiffs in the case had obtained judgment against Zurich’s insureds, for an amount slightly in excess of $2 million. Zurich’s policy limits were $1 million.

The following facts are relevant, to be able to understand the decision:

• The case arose out of a car accident in which the driver and three passengers died. The families of the deceased passengers sued the estate of the driver;
• On May 27, 1992, one group of plaintiffs offered to settle the quantum of damages at $1,657,032 (exclusive of interest and costs);
• On April 6, 1993, the independent counsel for the driver’s estate agreed with the assessment on behalf of the estate;
• On October 12, 1993, counsel for the parties met in chambers with Kennedy J., where minutes of settlement were entered into, with damages quantified as above;
• On December 3, 1993, the parties attended again before Justice Kennedy, to make submissions about prejudgment interest and costs. On that occasion, it was argued that Zurich had breached its duty of good faith to its insured, by not having settled the plaintiffs’ claims promptly and by having failed to pay its policy limits into an interest-bearing account and making that interest available to the claimants;
• On December 23, 1993, Zurich paid its limits into an interest-bearing account;
• On March 29, 1994, Zurich paid out the limits in agreed-upon proportions;
• On November 25, 1994, Justice Kennedy issued an endorsement dealing with interest and costs (almost a year following argument, it appears) and in his ruling, made some comments critical of Zurich’s failure to pay the policy limits into an interest-bearing account earlier than it did;
• On December 21, 1994, Justice Kennedy’s endorsement was sent to the lawyer for Zurich, who immediately sent it to the lawyer for the insured’s estate; and
• Consent judgments were taken out on August 21, 1995.

The insureds assigned to the plaintiffs their right to sue their insurer, Zurich, in exchange for a release of claims against the estate.

The plaintiffs sued Zurich on August 19, 1996, alleging breach of a duty of good faith owed to its insured (which had assigned to the plaintiffs its right to sue Zurich).

The motions judge, Mr. Justice Terrence Patterson, had held that the action was prescribed, based on the one-year limitation found in the statutory conditions of the standard auto policy (“in respect of the loss or damage to person or property [action] shall be commenced within one year next after the cause of the action arose”). His Honour held that the insured’s estate had known, at the latest, by December 21, 1994 (when its lawyers received Justice Kennedy’s endorsement, criticizing Zurich), that it had a possible claim against the insurer. On his analysis, the limitation period would have expired not later than December 21, 1995, making the action by the assignees out of time.

However, the Court of Appeal said, first of all, that the one-year limitation period did not apply. This was, it said, not a claim under the insurance contract at all. “On the contrary, this action contains a claim for breach of the independent duty of the utmost good faith, which an insurer owes to its insured. In Whiten v. Pilot Insurance Co., 2002 SCC 18 (CanLII), [2002] 1 S.C.R. 595, at para. 79, Binnie J. described the duty as ‘independent of and in addition to the breach of contractual duty to pay the loss’.”

For that reason, the applicable limitation period was held to be six years.

However, the Court of Appeal also allowed the appeal on the basis that the motions judge (sometimes referred to in the reasons as “the trial judge”) had interpreted the statutory conditions incorrectly. It held that the cause of action against Zurich did not arise until a point “when the liability of the Reid estate had been finally ascertained by judgment after trial or by settlement between the parties with the consent of the insurer”, which “[o]n the facts… did not occur until the issues of interest and costs had been resolved by the consent judgments that were taken out on August 21, 1995. It was at this time that the Reid estate had a liability to pay the third parties and it was at this time that it was entitled to demand indemnity from Zurich.”

Prima facie, this seems to be difficult to square with the Court of Appeal’s decision of a few days earlier, in Hamilton (City) v. Metcalfe & Mansfield Capital Corporation, dealing with the issue of when a claim is “discoverable”. There, the Court had held that a limitation period began to run as soon as the plaintiff knew that it had suffered some “damage”. It did not need to know its exact monetary loss for the cause of action to be complete.

However, the significance attached, in the Dundas case, to being able to quantify the claim before a cause of action would arise, stemmed from a requirement in statutory condition 6(2). It says, “[t]he insured shall not bring an action to recover the amount of a claim under this contract unless the requirements of statutory conditions 3 and 4 are complied with or until the amount of the loss has been ascertained as therein provided or by a judgment against the insured after trial of the issue or by agreement between the parties with the written consent of the insurer.” [Emphasis added] Until prejudgment interest and costs had been dealt with, the exact amount of the loss could not be ascertained.

So, in other words, if the one year limitation period in statutory condition 6(3) had applied, it would not have started to run until the amount of the loss had been ascertained, which occurred when the consent judgments were taken out, less than one year before the action against Zurich was commenced.

However, in fact, the one year limitation period did not apply, according to the Court. Rather, the six year limitation period in the former Limitations Act did. Obviously, on this analysis, statutory condition 6(2) would not have been relevant, so the cause of action would presumably not have arisen only when the precise amount of the claim was ascertained. However, the Court of Appeal did not comment on when the limitation period that it found to have applied would have started to run.

Unfortunately, the caselaw that has developed in Ontario has been somewhat inconsistent and, in a number of instances, has failed to address some key issues.

“Additional insureds” are a particular interest of mine so I will forewarn the reader that this post is considerably longer than usual.

This post was prompted by two very recent decisions. One came from the Court of Appeal: 1540039 Ontario Limited v. Farmers’ Mutual Insurance Company (Lindsay), 2012 ONCA 210 (CanLII). The other was a decision of Mr. Justice Stanley Kershman in Minto Developments Inc. v. Carlsbad Paving et al., 2012 ONSC 1574 (CanLII). I have some difficulties with both decisions.

1540039 Ontario Limited v. Farmers’ Mutual Insurance Company (C.A.)

In this case, a shopping centre tenant (“Design Depot”) had agreed, under the terms of its lease, to have its landlord named as an additional insured under a comprehensive general liability policy that it had with Farmers’ Mutual Insurance Company (Lindsay). A man was electrocuted while he was working on a pylon sign located in front of the plaza in question. His family members sued the landlord, alleging that it had been the owner and occupier of the plaza and had been negligent in its placement of the sign, had failed to warn of the danger posed by the sign and other similar allegations.

Hydro One was also sued (as owner of the hydro lines above the pylon sign), as was another person (“TRJ Signman”) who was alleged to have subcontracted to the deceased the work that led to his death.

The landlord sought to have the tenant’s insurer share in the cost of its defence. The tenant had not been sued, nor had any allegations implicating it been made in the pleadings.

However, the landlord had attempted to place before the court affidavit evidence to the effect that it had been the tenant, Design Depot, that had retained the deceased (or caused him to be retained), to place a sign advertising its business. The judge who had heard the application had refused to admit this “extrinsic evidence” because he considered that it would require him to make findings that would affect the underlying litigation. He would not have allowed the application, even if the extrinsic evidence had been admitted.

The landlord appealed to the Court of Appeal. The appeal was dismissed.

Much of the Court of Appeal’s decision had to do with the line of cases that have considered when and to what extent extrinsic evidence should be considered on a pleadings motion and, in particular, in deciding when a duty to defend has been triggered. I am not going to get into a discussion of those cases here, other than to say that I agree that the affidavit evidence tendered in this case did seem to go beyond the limits that have traditionally been established. Instead, I will focus on the aspects of the case that are relevant to the law relating to “additional insureds”.

For once, there seems to have been an actual additional insured endorsement issued by the insurer in this case. The endorsement cross-referenced the policy declaration, which provided that the landlord was an additional insured under the tenant’s policy “as landlord only”. According to the reasons of the Court of Appeal, once the cross-referenced passages were incorporated into the Endorsement, the latter would read as follows:

It is Hereby Understood and Agreed that [the appellant landlord] is added as an Additional Insured for the term of as of April 9, 2007 to January 14, 2008 but, only with respect to liability arising out of operations by or on behalf of Design Depot for interior decorating—home decor.

It is Further Understood and Agreed that the Additional Insured shall not be covered for other than “Insured Contract” as defined in the Insuring Agreements. [Emphasis added.]

(This seems a little surprising to me: the end result of the cross-referencing appears to have yielded a result that is quite a bit more restrictive than being insured “as landlord only”.)

The lease also contained an indemnity provision by the tenant, Design Depot, in favour of the landlord, but only with respect to occurrences on the leased premises and not elsewhere in the plaza.

As the application judge had done, the Court of Appeal refused to admit the extrinsic evidence that was aimed at showing that the tenant had hired the deceased. But in two paragraphs, the Court also rejected the argument that a duty to defend the landlord would have been triggered even if the extrinsic evidence had been admitted. It held that the “substance and true nature” of the claim against the landlord was on the basis of it being the owner and occupier of the property, not in its capacity as landlord:

The extrinsic evidence, if considered, would not create a possibility that the claims against the appellant may fall within the policy; it cannot convert claims against the appellant qua owner into claims against the appellant as landlord of the premises leased to Design Depot. The extrinsic evidence exception to the pleadings rule cannot be used to demonstrate that pleadings that say one thing really mean something else.

Oddly, there was no discussion in the reasons of the characteristics of being a “landlord” versus those of being an “owner” or “occupier”. Obviously, the two are separate concepts. However, I would have thought that there is at least some overlap. After all, there is an entire section of the Occupier’s Liability Act (section that is devoted to delineating the “obligations of landlord as occupier”. It could be argued, I would have thought, that the only reason that the landlord would have had a pylon sign at all was that this was a shopping plaza that was leased to other businesses.

There was also no discussion in the reasons of the court as to the proper interpretation of the limiting phrase in the additional insured endorsement: “arising out of the operations by or on behalf of [the named insured]“. As I will discuss below, this is an issue that has attracted considerable attention in “additional insured” litigation in other jurisdictions, but remarkably little in Ontario.

On the other hand, it is true that the pleadings did not point to the tenant, Design Depot, at all. So, even if it could be said that there was at least the possibility of the landlord being liable qua landlord and not just as owner, the pleadings did not identify which tenant was involved.

So, we end up with the rather paradoxical result, that no duty to defend was found to have been triggered, but after the trial, when the extrinsic evidence will have been heard, it might very well turn out that the landlord’s liability will be found to have arisen out of having been the landlord of Design Depot, such that there will be coverage for the landlord under the additional insured endorsement.

It isn’t supposed to happen this way: the duty to defend is intended to be triggered in all situations in which there is any possibility of there being a duty to indemnify.

Minto Developments v. Carlsbad Paving et al. (Sup. Ct.)

In the other recent decision, Mr. Justice Stanley Kershman was faced with an application by a prominent Ottawa developer to have Intact Insurance defend and indemnify it in an underlying slip and fall action. Intact was the insurer of a snow removal contractor, Carlsbad Paving, and Minto had contracted with Carlsbad to have itself shown as an additional insured in Carlsbad’s liability insurance policy with Intact.

Justice Kershman ordered Intact to both defend and indemnify Minto.

The plaintiff in the underlying action had slipped and fallen on ice in a parking lot owned by Minto. She sued Minto and Carlsbad. (Carlsbad had a contract with Minto, “requiring it to maintain the premises including but not limited to winter maintenance services”.)

Minto took the position that it was entitled to be defended and indemnified by Intact, Carlsbad’s CGL carrier. Intact refused, thereby precipitating this application.

Under the terms of its contract with Minto, Carlsbad was “required to keep in force for the duration of the contract, among other types of insurance, a comprehensive general liability insurance policy with limits not less than $2,000,000 and Minto Developments Inc. and/or the landlord and/or the condominium corporation was [sic] to be added as additional insureds with respect to Carlsbad’s operations under the Contract, in accordance with clause 1.6 of Schedule ‘A’. This insurance was to apply as primary and not excess insurance.”

Justice Kershman noted that a CGL policy had been issued to Carlsbad by Intact. He then said, “[t]he Certificate of Insurance in respect of the Intact Policy indicates that Minto Management Ltd. was added as an additional insured on the Certificate of Insurance with respect to the operations performed by Carlsbad under the Contract.” Thus, the determination that Minto was an additional insured under the Intact policy seems to have been made on the basis that its name appeared in a Certificate of Insurance, not that it was actually named in an additional insured endorsement.

As discussed below, under the heading, “Certificate of endorsement”, this is a problem that has often arisen in Ontario decisions dealing with additional insureds: what is the source of the coverage? Regrettably, the courts in this province rarely seem to undertake a rigorous analysis of this fundamental issue. And that is what seems to have happened in Minto: the argument evidently proceeded on the basis that the Certificate of Insurance that was issued by Intact actually conferred coverage. The word, “endorsement” does not appear in the reasons.

Another issue that rarely surfaces in the Ontario cases, and did not here, is the meaning of the language limiting the scope of coverage. Typically, the words used are, “arising out of the operations of the named insured”. (In Minto, the Certificate actually said, “with respect to the operations performed by Carlsbad under the Contract”.) This issue too is discussed below, under the heading, “Scope of additional insured coverage”.

Justice Kershman did not interpret the meaning of the language used in Intact’s Certificate. Indeed, practically no attention was paid to it. Instead, the question considered by the court was whether the “true nature” of the claim that had been pleaded against Minto. His Honour held that, “[l]ooking at the Statement of Claim, as a whole, this Court finds that the ‘true nature’ of the Statement of Claim was that of a negligence case in which the Plaintiff slipped and fell on ice in the parking lot near her home.”

Having made that determination, His Honour simply held that “[t]he Court sees no reason why, as an additional insured, Minto should not be indemnified by Carlsbad.” He ordered both Carlsbad and Intact “to provide and fund a full defence to Minto in the Underlying Action” and then went further (although possibly unintentionally) by adding, “There will also be a Declaration and Order that Carlsbad and/or Intact shall indemnify Minto for liability attributable to Carlsbad in the Underlying Action.”

(The use of the phrase, “attributable to Carlsbad” does limit the scope of the indemnity obligation somewhat, although that language did not appear in the Certificate of Insurance, so far as I can see. So the extent to which the phrase meshes with the words that actually did appear–”with respect to the operations performed by Carlsbad under the Contract”– is perhaps open to question.)

This decision actually raises another issue, separate from the “additional insured” one that I am addressing in this post. However, it is potentially of some significance, so I want to mention it briefly.

The reasons for judgment in Minto do not suggest that there was any argument addressed to the question of duty to defend vs. duty to indemnify. Generally speaking, the former is decided on the basis of the pleadings while the latter is determined on the basis of facts found at trial. That is because a duty to defend arises when there is a possibility of the claim falling within coverage, even if there is also a possibility that it will not be covered. However, a duty to indemnify is based not on what is alleged to have happened, but on what the court finds did happen.

In this case, counsel for Intact argued that the statement of claim had made a number of allegations against Minto that were not covered under Intact’s policy (e.g., “Inspection and monitoring of the premises; warning signs; breach of lease agreement; and occupier’s liability generally”.) On what basis it was found that Minto was entitled to a declaration, at the pleadings stage, that all possible outcomes at trial would entitle it to indemnity from Intact, was not clear. Certainly, such a finding, while not unheard of, would be quite exceptional. It may be that the ruling was made without adverting to the distinction between duty to defend and duty to indemnify.

However, I digress. What I wanted to address in this post is what I suggest is some confusion in the Ontario cases as to how to deal with questions involving additional insureds. So, having discussed the two most recent Ontario decisions, I will turn to a more general look at the caselaw in Ontario and compare it with approaches that have been taken elsewhere.

Certificate or endorsement?

Someone who is not a party to a contract of insurance can acquire rights under it by becoming an “additional insured” or an “additional named insured” (the terms are not interchangeable). That step is (or should be) accomplished by the issuance of an endorsement to the policy. Most insurers have their own form of additional insured endorsement for this purpose (although there is no standard wording for such an endorsement, which is another factor that had contributed to the extent of litigation on the subject).

The additional insured endorsement represents a modification of the contract between the insurer and the named insured. It is that document (as well as the policy as a whole) to which the court should look in order to determine just what coverage has been extended to the additional insured.

However, Ontario courts frequently do not look at the insurance contract itself (or even advert to the need to do so). Instead, they are often guided in their reasoning by the Certificate of Insurance that the insurer has issued to the additional insured. This was what happened in Minto. As noted above, Justice Kershman said that “[t]he Certificate of Insurance in respect of the Intact Policy indicates that Minto Management Ltd. was added as an additional insured on the Certificate of Insurance with respect to the operations performed by Carlsbad under the Contract.”

Now, in fairness to Justice Kershman and his colleagues, the fact is that very often, no additional insured endorsement even exists, so all they are left with is the Certificate of Insurance. (I am ignoring, for the moment, the many cases in which the insured’s contractual obligation to have another party added to its insurance policy goes completely unfulfilled.)

There is no indication in Justice Kershman’s reasons as to the status of the endorsement itself. Having recently had an additional insured claim with the Ottawa office of Intact myself, no endorsement ever surfaced in that case either, so it may well be that the Certificate of Insurance is all that was before Justice Kershman. (In my case, Intact’s policy declarations did refer to an additional insured endorsement form, but that form never surfaced. And, in fairness to Intact, if it is indeed its practice not to actually issue an endorsement, it does not seem to be alone in this. I am aware of other insurers whose underwriting practice is not
to issue endorsements at all but to extend coverage by way of certificates, as it appears may have been done in the Minto case. Such an approach, of course, is quite incorrect. The insurer’s issuance of a certificate does not amount to compliance with the contractual obligation that its insured has undertaken in its own extrinsic contract with the additional insured, to arrange for a modification of its contract with its own insurer.)

The problem with this approach is that certificates do not confer coverage by a modification of the contract. Rather, a certificate is intended to do just that: certify to the additional insured that the contract between the insured and the insurer has been modified to reflect the obligation assumed by the insured in its extrinsic contract with the additional insured.

The certificate should track precisely the language of the additional insured endorsement. However, even when insurers issue an additional insured endorsement, as they should, often they then issue certificates that contain somewhat different language. They are then potentially faced with a discrepancy between the coverage that was actually extended (the endorsement) and that which they have represented to exist (the certificate). That is what happened in Lacombe v. Don Phillips Heating Ltd., 2005 CanLII 33036 (ON SC), a decision of Master Robert Beaudoin (as he then was) in which I acted for the additional insured. There, the endorsement itself limited the coverage to “liability arising out of the operations of the named insured”, but there was no mention of this in the certificate.

Thus, when the certificate is either all that exists or when its language does not conform to that of the endorsement, coverage will usually fall to be determined on the basis of misrepresentation: what did the insurer lead the additional insured to believe the coverage to be and did the additional insured rely on that representation to its detriment? Coverage might then be determined on the basis of an estoppel analysis.

One American commentator has described the endorsement-certificate issue as follows:

A certificate of insurance is a form confirming the existence of the named insured’s coverage. It is merely proof that the named insured has insurance. It is not, by its terms, a contract of insurance. In SLA Property Management v. Angelina Casualty Co., the court held that the terms of the insurance contract prevailed over the language of the certificate of insurance because the certificate “served merely as evidence of the insurance” and was not a part of the insurance contract.

It is not unusual, however, for a certificate to be issued stating on its face that the certificate holder (the general contractor or developer) is an additional insured with respect to the policies referenced in the certificate. In those cases, some courts are willing to hold that the certificate confers additional insured status upon the general contractor or developer, even if the policies referenced in the certificate were never formally endorsed with additional insured endorsements.[Footnotes omitted] (Spevacek, Ledwith, Newman & Lennes Jr., “Additional Insured and Indemnification Issues Affecting the Insurance Industry, Coverage Counsel, and Defense Counsel—Legal Advice and Practice Pointers”, FDCC Quarterly, October 1, 2001.)

And in fact, the proposition that a certificate does not create coverage was endorsed by a British Columbia case, Williams (Guardian ad litem of) v. B.C. Conference of the Mennonite Brethren Churches, 2010 BCSC 791 (CanLII), which quoted with approval the following passage from the leading U.S. text, Couch on Insurance:

Certificates of insurance are often issued to the designated certificate holder as proof that the named insured has insurance to cover work or operations being performed for the certificate holder named as an additional insured on the named insured’s insurance policy.
However, the presentation of a certificate of insurance alone does not create coverage or legal obligations between the insurer and certificate holder. Generally, a certificate of insurance is not considered to be a part of the insurance contract; it is merely evidence of the insurance.
Accordingly, a certificate of insurance cannot contradict the terms of a policy but instead only provides information as to the contents of the policy.

In accordance with the above principles, a certificate of insurance cannot create a contractual relationship between an insurer and an alleged insured if the policy itself does not provide for such a relationship. In other words, no additional insured relationship exists where a certificate of insurance has been issued identifying an individual as an additional insured without corresponding language in the policy or endorsement thereto which would include that individual or entity as an additional insured.

[Emphasis added and footnotes omitted by Dillon J.]

Whether an insurer could successfully deny coverage on the basis that it had issued only a certificate of insurance and not an actual endorsement is debateable. The point is, that Ontario courts (and, let’s be fair, Ontario lawyers) have so far not even identified the issue.

This whole area (the interplay between certificates and endorsements in the additional insured context) is complicated: the leading textbook on the subject devotes an entire chapter to a discussion of it. Unfortunately, I have yet to see an Ontario decision in which the issue has even been recognized.

And, it is perhaps unnecessary to say, that even in cases in which an endorsement exists and a certificate has been issued, it is not unusual to find that not only is there a disconnect between the certificate and the endorsement, neither one of them actually extends the coverage that the named insured has undertaken to obtain in its extrinsic contract with the additional insured, thereby leaving the named insured exposed to a claim for breach of the covenant to insure. So, in other words, it is not unheard of to find that (a) the extrinsic contract between the named insured and the additional insured, in which the former undertakes to have the latter added to its insurance policy; (b) the additional insured endorsement; and (c) the certificate of insurance issued to the additional insured, all contain provisions that do not dovetail with each other.

In any event, in the Minto case, the issue was not addressed: all parties evidently proceeded on the basis that coverage was conferred and defined by the Certificate of Insurance that was issued to Minto by Intact Insurance.

Scope of additional insured coverage

The next question is, what coverage does the additional insured receive? In Minto, the Certificate of Insurance indicated that “Minto Management Ltd. was added as an additional insured on the Certificate of Insurance with respect to the operations performed by Carlsbad under the Contract”. However, the court did not analyze the meaning of the phrase, “with respect to the operations performed by [the named insured] under the Contract”.

As I have said, there is no standard language used in additional insured endorsements. Different insurers employ different language, when they bother to issue additional insured endorsements at all.

Typically though, what the insurer will try to do is to confine the coverage extended to the additional insured to the liability that that entity faces as a result of the actions or inactions of the named insured. In other words, insurers don’t want to provide the same third party liability coverage to the additional insured that they extend to the named insured. Doing so will probably at least double the risk that they assume. There is usually no underwriting that accompanies the inclusion of the named insured (and therefore, no assessment of the risk of insuring it) and minimal or no premium charged for the endorsement. Thus, extending to the additional insured the same coverage as has been given to the named insured would represent a significant increase in risk, with little or nothing in the way of corresponding premium dollars.

How to accomplish this objective, of limiting the scope of the coverage to the additional insured? Ontario insurers usually do so using some variant of language used in a form issued in 1985 by the U.S. Insurance Services Office (“ISO”), which read as follows:

WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of ‘your work’ for that insured by or for you.

However, in the United States, “[c]ourts repeatedly interpreted the phrase ‘arising out of’ to require only an indirect causal connection between the named insured’s operations and the injury or damage”. (Gibson, Ligeros, Malecki, The Additional Insured Book (6^th ed.), International Risk Management Institute, 2011, p. 181).

Partly as a result of the way in which this language was interpreted in the United States, that ISO form was replaced there in 2004. The newer form that replaced it defines “insured” to include persons named in a schedule, but only with respect to liability for injury caused by the acts or omissions of the named insured or those acting on behalf of the named insured.

Canadian authorities

However, it appears that Canadian insurers, when they do issue an endorsement, continue to use language similar to that in the 1985 ISO endorsement. Variants that have been seen in the Ontario caselaw include:

• “with respect to the operations performed by [the Named Insured] under the Contract” (Minto v. Carlsbad);
• “but only with respect to their interest in the operation of the named insured” (D’Cruz v. B.P. Landscaping Ltd.
  2007 CanLII 26602 (ON S.C.)) and (Harris v. Memorial Boys’ and Girls’ Club Inc., 2008 CanLII 34360 (ON SC));
• “but only with respect to liability arising out of the contractor’s operations” (Atlific Hotels & Resorts v. Aviva Insurance Company of Canada, 2009 CanLII 24634 (ON SC);
• “solely with regard to liability arising out of the operations of the named insured” (Lacombe v. Don Phillips Heating Ltd., 2005 CanLII 33036 (ON SC));
• “but only with respect to the above noted contract and solely with respect the operations performed by the original named insured” (Riocan Real Estate Investment Trust (O&Y Properties Inc.) v. Lombard General Insurance Co., 2008 CanLII 16073 (ON SC));
  
• “but only insofar as their legal liability arises vicariously out of the negligent operations of the Named Insured” (Waterloo (City) v. Economical Mutual Insurance Company, 2006 CanLII 43498 (ON SC)) [Certificate];
  
• “but only with respect to liability arising out of the operations of the named insured” (Waterloo (City) v. Economical Mutual Insurance Company, 2006 CanLII 43498 (ON SC)) [Endorsement];
  
• “but only with respect to liability arising out of the operations of the named insured” (Cadillac Fairview Corporation v. Oakridge Landscape Contractors and Lombard Canada, 2010 ONSC 4535 (CanLII)); and
  
• “but only with respect to the operations of the Named Insured as stated in the declarations of this policy” (ING Insurance Co. of Canada v. Sportsco International L.P., 2004 CanLII 14366 (ON SC)).
  

What does this language mean? Practically no attention has been paid to the question by the Ontario courts. Indeed, there is a general assumption that additional insured endorsements do not cover the additional insured’s “own negligent acts” (see, for example, the Riocan v. Lombard case, at para. 14), but without any analysis as to the basis for the conclusion.

One of the few Ontario cases that even considered the meaning of “arising out of” was Waterloo v. Economical Mutual. Justice Flynn said that the words “have been interpreted in the cases to include such meanings as ‘originating from’, ‘growing out of’, ‘flowing from’, ‘incident to’, or ‘having connection with’.” Just how those meanings integrated into the additional insured endorsement itself was left less clear. The judge in that case found no duty to defend the additional insured, on the basis that the “operations” of the named insured “was merely the site or occasion” of the accident giving rise to the claim.

The courts of British Columbia have paid closer attention. An example is the decision of Madam Justice Dillon of the British Columbia Supreme Court in Williams (Guardian ad litem of) v. B.C. Conference of the Mennonite Brethren Churches, 2010 BCSC 791 (CanLII). Her Honour noted that the phrase, “arise out of the operations of the named insured” had been liberally interpreted in B.C.:

Insurers of the named insured frequently argue that they are not liable to defend the additional insured on the basis that the allegations against the additional insured arise out of the additional insured’s independent actions and do not “arise out of the operations” of the named insured. Several British Columbia decisions have had occasion to interpret the words “arising out of the operations” of the named insured in this context. In Monenco Ltd. v. Commonwealth Insurance Co.,1999 BCCA 129 (CanLII), 1999 BCCA 129 at para. 11, aff’d
2001 SCC 49 (CanLII), 2001 SCC 49, Madam Justice Southin endorsed a broad reading of the words in favour of coverage for the additional insured:

To put it another way, the claim in the underlying action is a claim “arising out of” this project. I do not find it necessary to refer to the authorities quoted … on the meaning of the phrase “arising out of”. Suffice it to say that if this project had not existed, there would have been no claim, ergo the claim arises out of it.

(The Monenco case, which went to the Supreme Court of Canada, did not deal with an additional insured endorsement, but did consider the meaning of “arising out of” in the context of a policy exclusion.)

Justice Dillon referred, in her reasons, to a number of other B.C. cases, in all of which a duty to defend the additional insured was found in the context of language that limited coverage to claims “arising out of the operations of the named insured” or something similar. Two Ontario cases (D’Cruz v. B.P. Landscaping Ltd. and Atlific Hotels and Resorts Ltd. v. Aviva Insurance Company of Canada)
were distinguished.

The approach taken by the British Columbia courts to interpretation of “arising out of the operations of the named insured” is generally to see whether there is “a clear nexus on the pleadings between the [operations of the named insured], the alleged negligence and the alleged injury”. (Cowichan Valley School District No. 79 v. Lloyd’s Underwriters, Lloyd’s, London, 2003 BCSC 1303 (CanLII), 2003 BCSC 1303 (In Chambers), quoted with approval in Liu v. Chu, 2009 BCSC 753 (CanLII).)

On the other hand, in Kinnear v. Canadian Recreational Excellence (Vernon) Corporation, 2010 BCSC 1899 (CanLII), Madam Justice Beames of the B.C. Supreme Court reviewed the B.C. jurisprudence and the “nexus” test and concluded that none of the plaintiff’s allegations related to the operations of the named insured (a hockey team). She said that “I am satisfied something more is required than the mere attendance by the plaintiff at the game or…a temporary departure from the game to find better food than CRE or NORD [owner and operator of the facility where the game was being played] offered inside the multiplex”.

In 2010, the British Columbia Court of Appeal considered the proper interpretation of “solely with respect to the liability which arises out of the activities of the named insured”. (This phrase appeared in a certificate of insurance that the named insured’s insurer had issued, but the B.C. Court of Appeal did not consider the impact on coverage that the absence of an additional insured endorsement might have had.)

The Court of Appeal formulated the appropriate test this way:

[A]s Madam Justice Rowles in Hannah
explained, there is more to causation than a connection of the “but for” variety. However, a connection is required, indeed a connection is the essence of causation and the concept of “but for” is familiar to all in the law of negligence, see for example
Resurfice Corp. v. Hanke,
2007 SCC 7 (CanLII), 2007 SCC 7, [2007] 1 S.C.R. 333. This concept is easily stated in other words. For example, in
Monenco
at para. 23 the Supreme Court of Canada approved this expression of the “but for” test:

…if this project had not existed, there would have been no claim, ergo the claim arises out of it.

It seems to me we need say no more than that the essence of the issue is, as Justice Binnie observed in
Lumbermens
at para. 14 replicated earlier, there must be an unbroken chain of causation to engage the potential liability of the insurer.

American authorities

In the United States most cases that have considered additional insured endorsements containing language like, “arising out of the activities of the named insured”, have interpreted the coverage liberally. According to the authors of The Additional Insured Book (6^th ed.), International Risk Management Institute, 2011, “[t]hat language has consistently been interpreted to apply even to the additional insured’s sole negligence as long as the claim had some causal connection to the work the named insured was hired to do” (at 169). As noted above, that is what evidently what led the ISO to develop a new additional insured form, providing coverage only for liability caused, in whole or in part, by the acts or omissions of the named insured.

It may be that a test requiring “some causal connection” (as described in the quoted passage) approximates the “clear nexus” approach of the courts in British Columbia, as discussed in the previous section. (The “unbroken chain of causation” test referred to in the Kinnear case is arguably a more restrictive one.) In fact, in Vitty v. D.C.P. Corp., 633 A.2d 1040 (N.J. Super. Ct. App. Div. 1993), the court was considering the meaning of “arising out of” and held that only a “substantial nexus” and not a direct causal connection was required in order to engage the indemnity obligation.

The form of additional insured endorsement that has been most commonly been used in the United States, since 2004, is the ISO CG 20 10 (“Additional Insured—Owners, Lessees or Contracts—Scheduled Person or Organization”). It provides:

Section II – Who Is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for “bodily injury”, “property damage” or “personal and advertising injury” caused, in whole or in part, by:

1. Your acts or omissions; or
   
2. The acts or omissions of those acting on your behalf;
   

in the performance of your ongoing operations for the additional insured(s) at the location(s) designated above.

This language is obviously quite a bit more restrictive than the “arising out of the named insured’s operations” approach, although it has apparently received less attention from U.S. courts than did its “arising out of” predecessor. However, so far as I can determine, none of the Ontario cases has dealt with language resembling that of the 2004 version of CG 20 10.

Conclusion

Thus, it seems to me that the jurisprudence that has developed in Ontario, dealing with additional insured endorsements, has generally failed to address a number of fundamental issues. The two key ones though, are: (a) the relationship between the underlying contract, the additional insured endorsement and the certificate of insurance; and (b) the actual meaning of the language used in the endorsement, assuming that one even exists.

I also find it surprising how loose many insurers’ underwriting practices seem to be in relation to both the issuance of additional insured endorsements and certificates as well as to the language employed in both.

Doubtless, there will be more opportunities to discuss these issues as other cases are decided.

The plaintiff was injured in a single vehicle accident in 2006. He was the owner of the car, which was insured with Allstate. After the accident, the plaintiff was found alone in the passenger seat. He claimed to have no recollection of the accident or the events leading up to it. Although the plaintiff claimed that someone else had been operating his car, he was charged with impaired driving.

The plaintiff sued Allstate under the unidentified motorist coverage. After that action was underway, an individual named Lemieux came forward and admitted to being the driver of the car at the time of the accident.

The impaired driving charges were dropped against the plaintiff. Lemieux was added as a defendant in the lawsuit, in place of Allstate. However, Allstate denied coverage to Lemieux, on the basis that his licence had been under suspension for many years, which was a breach of statutory condition 4. Allstate had itself added to the action as a statutory third party.

Apparently, counsel for the plaintiff then proceeded on the assumption that because of Lemieux’s policy breach, the most that the plaintiff could recover in the lawsuit was the statutory minimum limits of $200,000, for which Allstate would have been absolutely liable under s. 258(4) of the Insurance Act. After the pre-trial though, the plaintiff’s lawyer   “determined that the plaintiff would have to access his underinsured coverage on the basis that a violation of the O.A.P. 1 Ontario Automobile Policy by Lemieux for being unlicensed would not disentitle the plaintiff access to his OPCF 44R Family Protection Coverage”. As a result, this motion was brought for leave to add Allstate as a defendant, with a claim being made against it pursuant to its underinsured coverage in the OPCF-44R endorsement.

Master Pope dismissed the motion. She concluded that in light of the definition of “inadequately insured motorist”, the claim against Allstate could not succeed. Master Pope accepted Allstate’s argument, which she summarized as follows:

Allstate submits that if it is found that Lemieux was driving the plaintiff’s vehicle, and aside from the fact that his liability coverage may be reduced to $200,000 on the basis that he had a suspended license breaching Statutory Condition 4 – Authority to Drive of the Standard Automobile Policy – OAP1, the plaintiff will be unable to prove that Lemieux meets the definition of “inadequately insured motorist” because the definition states that an inadequately insured motorist means “. . . the identified driver of an automobile for which the total motor vehicle liability insurance . . . obtained by the owner or driver is less than the limit of family protection coverage.” In other words, since the motor vehicle liability insurance obtained by the owner, here the plaintiff of $1 million, is equal to the limit of family protection coverage of $1 million, the definition of “inadequately insured motorist” as set out in s. 1.5(a) cannot be met.

So far, so good. I agree with all of this.

But what I am having some difficulty in understanding is why it would even be necessary to claim directly against Allstate? If Lemieux was, in fact, the driver and if he was driving with the consent of the plaintiff, then why wouldn’t the plaintiff, in his capacity as owner, be liable for Lemieux’s negligence? A breach of statutory condition #4 by the driver doesn’t affect coverage for the owner, so long as the owner has not “permitted” the driver to operate the insured vehicle without being authorized by law to do so. (This will normally require some knowledge on the part of the owner: see a recent example, Wawanesa v. SC Construction Ltd., 2012 ONSC 353 (CanLII).) Assuming that the plaintiff in the present case knew nothing about Lemieux’s licence suspension, it seems pretty unlikely that he (the plaintiff) would be found to be in breach of statutory condition #4.

So, to put it bluntly, why couldn’t the plaintiff have sued himself, in his capacity as owner of    the car and recovered his judgment in full from Allstate?

I would not have thought that the answer would be as simple as, “no one can sue himself” (although Master Pope’s reasons actually do say, in a somewhat different context, that the plaintiff “cannot claim against himself”). In fact, that is not always true. In Dionisi v. Dionisi, 1983 CarswellOnt 684, 1 C.C.L.I. 268, 42 O.R. (2d) 597, 149 D.L.R. (3d) 563, [1983] I.L.R. 1-1677 (H.C.), for example, Mr. Justice R.E. Holland permitted a husband to advance an FLA claim against himself, as owner of the car in which his wife had been killed as a passenger.

The present case strikes me as an analogous situation to that in Dionisi.  However, I suspect that I’m overlooking something more fundamental. Help!

In this case, the plaintiff roofing company, Continental, contracted to do work on the defendant’s building. During the course of the work on the defendant’s roof, substantial damage resulted from a leak. The roofer sued for the contract price and the defendant counterclaimed for compensation for the damage to its building.

Both before and after Contintental began its work, the defendant had enlisted the assistance of one Bruce Caughill, an architect and engineer, to act as a consultant about the roof. He had undertaken inspections and had made recommendations with respect to repair or replacement of the roof.

Mr. Caughill had prepared a number of reports for the defendant that were served on Continental. The defendant plans to call Mr. Caughill to give opinion evidence at the trial, scheduled for August, 2012. On this motion, Continental asked for an order that the reports and the testimony of Mr. Caughill were inadmissible.

Continental argued that:

• Mr. Caughill’s evidence was not necessary as it was not outside the experience or knowledge of the trial judge;
• he had opined on the “ultimate issues”, thereby usurping the role of the trial judge; and
• he was biased in favour of the plaintiff, due in part to his long business relationship with it.

Although the reasons do not address the question, it appears that the defendant had made no attempt to have the witness sign a Form 53, the acknowledgement of an expert’s duty.

Justice Koke reviewed the genesis of the 2010 reforms to Rule 53. The rule now sets out requirements governing the contents of an expert’s report and provides for the signing of the acknowledgement of an expert’s duty. Rule 4.1.01 is also new: it codifies “the duty of an expert”.

He then considered the question, “To Whom Does Rule 53.03 Apply?” This issue has received quite a bit of attention from the courts lately and Justice Koke discussed the jurisprudence, which has dealt with the testimony of treating health practitioners (Slaght v. Phillips and Burgess v. Wu), official investigators (Hall v. Kawartha Karpet & Tile Co.), and practitioners who assess claimants for accident benefits insurers (McNeill v. Filthaut). He observed that “[r]ecent cases have held that Rule 53.03 is limited in its application to witnesses who are hired as ‘litigation experts’ and have not had any involvement with the subject matter of the litigation or either of the parties.”

His Honour concluded that Rule 53.03 was not intended to apply to experts such as this one, who have not been retained as “litigation experts”:

The amendments to the rule were intended to eliminate the use of “hired guns” or “opinions for sale” in civil litigation, which resulted in potentially biased evidence being given at trial. In the case of Mr. Caughill and looking at the mischief that Rule 53.03 was intended to address, I do not find him to be a typical “hired gun” or just a “litigation expert” in the circumstances of this case.

Justice Koke held that the trial judge could deal with issues of bias. On the question of usurping the role of the trial judge on the ultimate issue, he felt that this was unavoidable but that “the trier of fact will make a decision based on the totality of the evidence”.

Thus, the expert’s testimony was allowed: “Mr. Caughill is permitted to provide opinion evidence at trial with respect to the methods and procedures used by the defendant in carrying out the roof repairs, and any failures associated therewith, and with respect to the cause of the leakage of water into the building”.

In this case, the party calling the expert had obtained and served reports from the expert. But why? If Rule 53.03 does not apply to non-litigation experts, what obliges a party to serve a report? Section 52 of the Evidence Act does impose certain requirements with respect to reports of “practitioners” under the Regulated Health Professions Act, 1991 but even that provision does not say that doctors cannot testify as experts unless they have provided a report that summarizes their testimony.

So, I’m looking forward to the next logical step in the evolution of the judicial exposition of Rule 53.03: at some point, a court will be asked to decide whether there is anything that prevents a party from calling a non-litigation expert in exactly the same manner as if the person were a fact witness (i.e., without a report, a summary of qualifications, an acknowledgment of duty and the other requirements imposed by Rule 53.03).

In a similar vein, what is one to make of the requirements of Rule 31.06(3), which deals with obtaining information about experts during examination for discovery. It says:

(3) A party may on an examination for discovery obtain disclosure of the findings, opinions and conclusions of an expert engaged by or on behalf of the party being examined that are relevant to a matter in issue in the action and of the expert’s name and address, but the party being examined need not disclose the information or the name and address of the expert where,

(a) the findings, opinions and conclusions of the expert relevant to any matter in issue in the action were made or formed in preparation for contemplated or pending litigation and for no other purpose; and

(b) the party being examined undertakes not to call the expert as a witness at the trial.

The word, “expert” is not defined in the Rules. And Rule (3) uses the term, “expert”, while Rule 53.03 speaks of “expert witness”.

Still, it seems pretty clear that the language of Rule 31.06(3), “an expert engaged by or on behalf of the party being examined”, is referring to what Justice Koke calls “a litigation expert” in the context of Rule 53.03. Does that mean that Rule 31.06(3) only applies to such experts? If you have happen to have in your file a report from an expert witness whom you did not retain for the litigation, does that mean that the other parties are not entitled to the information about that expert evidence that is set out in Rule 31.06(3)? (Of course, in this scenario, the report itself would have been produced, because it would not be privileged. But as for the other information contemplated by Rule 31.06(3), that’s a different question.)

Stay tuned!

This is an important decision, especially for those of us who bring most of our motions for summary judgment before masters. In it, Master MacLeod discusses the scope of powers that masters can exercise on such motions in light of the Court of Appeal’s decision in the Combined Air cases, which interpreted the amendments to Rule 20.

The facts of 90 George St. aren’t of much significance beyond this case, but Master MacLeod’s general observations are. I don’t think I can do much better than to quote the eleven principles distilled by the Master from the authorities:

a. The court hearing a summary judgment motion must first determine if there is a genuine issue that could be successful at trial.

b. There is no genuine issue if the law clearly shows that one of the parties cannot succeed. For example if the Supreme Court of Canada has determined that the cause of action does not exist or if a release, contract or statute allows of only one interpretation.

c. There is no genuine question of fact if the party relying on a key fact that is essential to success at trial cannot prove it. In determining that issue, the court may draw a negative inference under Rule 20.02 (1) if it is appropriate to do so. The court may reject evidence that could not persuade a trial judge such as a bald self serving affidavit, an affidavit that is illogical or internally inconsistent, or an affidavit that is demonstrably incorrect because, for example it purports to rely on wording in a document or contract which is misquoted or nonexistent.

d. In assessing the sufficiency of the evidence, the court must consider whether or not it is just to draw a negative inference and the extent to which it is reasonable to require a party to put its best foot forward at this particular point in time, whether the motion is premature, whether the responding party has been denied access to critical evidence.

e. In an appropriate case if a summary judgment motion would impose an unreasonable and disproportionate procedural burden in advance of discovery, the motion should be stayed.

f. Another factor to be considered in assessing whether the responding party has met its responsibility to put its best foot forward will be the complexity of the evidence. The genuine appreciation test should inform this analysis in my view.

g. A plaintiff moving for summary judgment must show firstly that the plaintiff can prove all elements of the case and secondly that there is no merit to the defence. A defendant moving for summary judgment could do so either on the basis that the plaintiff cannot prove its case or that there is an absolute defence or both. In addition summary judgment may be available on evidentiary grounds or on legal grounds or a combination of the two.

h. If summary judgment would have been granted under the previous rule then it is self evident that it also meets the test under the amended rule. If the evidence or the law demonstrates there is no genuine issue to be tried then summary judgment should be granted.

i. In the case of a genuine issue of law, the master may refer the matter to a judge to decide the question of law if the master is of the view that the only genuine issue is a question of law that could be determined without a trial. (Rule 20.04 (4)) Even if the sole genuine issue is a question of law, it is open to the master to dismiss the motion for summary judgment if it appears the question of law is such that it would require a trial for resolution. In making that decision, the court should now apply the full appreciation test.

j. If there is a genuine question of fact or of mixed fact and law then the master must apply the full appreciation test and may grant summary judgment if the question can be determined without a trial. This will seldom be the case for the master because the powers added to the rule in Rule 20.04 (2.1) and 20.04 (2.2) are not accessible to masters. Thus there will be a class of cases in which notwithstanding that there is a genuine issue that could be tried, a judge can decide the merits without a trial whereas a master cannot.

k. If summary judgment is refused or granted only in part then the master may have recourse to the powers of the court set out in Rule 20.05 but must heed the admonishment of the Court of Appeal in Combined Air that Rule 20.05 cannot be used to grant the very summary judgment that the court has just refused. Rule 20.05 may be used to salvage the resources that went into the summary judgment motion but it is not to be used to effectively order a trial that resembles the motion that was dismissed. [footnotes omitted]

One question that I have is, what happens if the master hearing the motion for summary judgment determines that there is an issue of fact or mixed fact and law that he or she cannot resolve because of not having the new powers conferred by the amendments to Rule 20? Say, for example, an adjudication depends on an evaluation of the credibility of a deponent. Making such an evaluation is something that judges, but not masters, can now do on motions for summary judgment, pursuant to Rule 20.04(2.1) 1. In such a situation, would a motion returnable before a master simply be dismissed or would it be adjourned to be heard by a judge? If the former is the case, bringing motions for summary judgment before masters becomes a somewhat higher-risk proposition.

(In  an earlier decision, Pershadsingh v. Thompson, 2010 ONSC 4943 (CanLII), Brown J. complained that “I am not the only judge in this region who has complained about having to get down on one’s hands and knees to organize into piles, on the floor, the materials filed with the court.” He added that, “apart from trading ribbon-tied bundles of paper for cirlox-bound volumes of paper thrown into bankers’ boxes, and the entry of filed documents into a computer ledger, instead of onto a handwritten ledger, one really wonders how much the document and file management systems maintained by the Government of Ontario in this Court differ from those that existed back in 1867″.)

In the Romspen case, it was not so much the waste of his own time that was on his mind as it was the needless running around that the lawyers before him had had to do (and the concomitant expense to their clients).

Under the heading, “Just how broken is the document management system of the Superior Court of Justice?”, Justice Brown’s reasons began in a somewhat whimsical tone:

I suppose that on a sunny, unusually warm, mid-March day one should be mellow and accept, without complaint, the systemic failures and delay of this Court’s document management system. The problem is that from the perspective of the members of the public who use this Court, delays caused by our antiquated, wholly-inadequate document management system impose unnecessary, but all too real, costs on them.

The case involved the sale of condominium units by a Receiver. As part of this process, it had filed sealed appraisals of some of the units. However, it had (understandably) filed only one copy of each appraisal. His Honour needed multiple copies and so, “a two-track process unfolded”. He sent a member of his staff to a nearby court building, where sealed documents for Commercial List matters are kept, to try to retrieve the documents. Simultaneously, counsel for the Receiver also tried to obtain copies through her office. Each was successful but in both cases, the task took one hour.

And the consequences of that one hour delay? On my part, none. I walked across the plaza, picked up a latte at Starbucks, came back and continued working on a reserve from yesterday. A most mellow approach, but I have learned that as matters presently stand one cannot fight the City Hall bureaucracy that is the Court Services Division of the Ministry of the Attorney General.

But the consequences to the litigant, the court-appointed receiver? A delay of one hour, involving the expenditure of additional counsel time, higher legal fees, an increase in the expenses of administering the receivership, and a consequent reduction in the net recovery for the creditors of the project.

Justice Brown acknowledged that perhaps both he and counsel should always assume the worst, based on their past experience in the courts, and come prepared with multiple copies of the documents: “I suppose counsel could not go wrong by always operating on the basis that this Court’s document management system will fail and always bring duplicate copies of everything.” But he deplored the need to resort to such measures. Instead, he said that “the real solution” was, “consign our paper-based document management system to the scrap heap of history and equip this Court with a modern, electronic document system.”

His Honour outlined the system that, he said, he dreamt of, an electronic system in which, once documents had been filed electronically, they would be accessible to judges and others “through a web-based system”.

But then, he awoke from his reverie:

Yes, Virginia, somewhere, someone one must have created such a system, and perhaps sometime, in an another decade or so, rumours of such a possibility may waft into the paper-strewn corridors of the Court Services Division of the Ministry of the Attorney General and a slow awakening may occur.

Entertaining though His Honour’s remarks were, the problem that he identifies is very real. Those who come to the court system from this business world (or really, from almost any other world) would be shocked to discover how backwards the filing system is. This auditor’s report, written almost ten years ago, chronicled the collapse of Ontario’s ill-fated “Integrated Justice Program” and lamented the Province’s “antiquated computer and information systems”.

Sadly, the cost of Justice Brown’s lattes will likely have reached triple digits by the time he gets the system of which he’s been dreaming.

In 2007, the City made a $10 million investment in asset backed commercial paper. The investment was to mature about two months later but some three weeks after the purchase, the market for this form of investment collapsed. The City and others took certain steps to try to preserve the status quo, such as entering into a standstill agreement but ultimately, commenced this lawsuit two years less a day after the maturity date of the notes. This was several months past the two-year anniversary of the date on which the notes had been purchased. The City has never received any payment on the notes.

The defendants raised a limitation defence and the motions judge agreed with their position. She dismissed the action as having been brought out of time.

Although several causes of action were apparently pleaded, the argument in the Court of Appeal focused on the claim for negligent misrepresentation. The City advanced a number of arguments in response to the limitation defence but in this post, I am only going to discuss the main one. The City argued that it had only “discovered” its damage on September 26, 2007, the date on which the note had matured and on which default in payment was made. (Section 4 of the Limitations Act, 2002 provides that the two-year limitation period runs from the day on which the “claim was discovered”. Section 5 sets out the criteria for when a claim is “discovered” and one of them is knowledge (or imputed knowledge) that “injury, loss or damage had occurred”. This was the key phrase for purposes of the decision.

The Court of Appeal held that the City’s cause of action was complete, not when there had been default in payment but when it discovered that it had been misled about the asset structure underlying the notes. There seems to have been no dispute that the City had come to that realization more than two years prior to the commencement of the action.

Writing for the court, Laforme J.A. said:

The City’s position that damage occurred when the Devonshire notes matured also fails to appreciate the distinction between damage and damages. Damage is the loss needed to make out the cause of action… Insofar as it relates to a transaction induced by wrongful conduct, as I have explained, damage is the condition of being worse off than before entering into the transaction. Damages, on the other hand, is the monetary measure of the extent of that loss. All that the City had to discover to start the limitation period was damage.

He also noted that “The City was aware that it had incurred some loss” more than two years prior to commencing the suit even though it did not know the extent of the damages and that “for the purpose of negligent misrepresentation claims, damage is the condition of being worse off than if the defendant had not made the misrepresentation”.

The City argued that the motions judge’s decision would have started a limitation period running “when the aggrieved party foresees or ought to foresee that future harm is inevitable”. However, Laforme J.A. rejected this interpretation of Justice Frank’s reasons. He said that he did not understand her “to say that foreseeability of future loss can trigger the limitation period” and reiterated that, for the limitation period to start running, the City had to have known that it had incurred a loss.

The latter clarification is reassuring: it seems clear that apprehension of some future loss will not trigger the commencement of the limitation period. But one is still left wondering just how concrete must the “knowledge” of loss be in order to start the limitation period? Here, it does seem that there was evidence upon which the court could reasonably conclude that the City of Hamilton had not just had a vague sense of unease about its investment. The motions judge found:

Mr. Boychuk acknowledged that he knew by the time he signed the Montreal Accord that the City would suffer a loss. He knew that the City would not be able to redeem its notes on the maturity date, that there were no buyers for the Notes at that time – at least not on a full recovery basis – and that if the Montreal Accord was successful, it would result in the conversion of the short term Devonshire Notes into longer term floating rate notes. Mr. Boychuk acknowledged that this would result in a present value loss to the City.

But what of a less sophisticated litigant? Is a subjective belief that one will probably be “worse off” and will suffer (or even has suffered) some sort of loss, all that is required? Or does that belief have to be founded on some more objective basis before the limitation period will begin to run? What if, in fact, the claimant has not yet suffered a loss by the time he thinks he has?

Certainly, I think that Justice LaForme’s emphasis on the distinction between “damage” and “damages” is welcome, particularly in the context of the Limitations Act, 2002. (It can be difficult to keep the two concepts separate though. Section 1 of the Negligence Act begins, “Where damages have been caused or contributed to by the fault or neglect of two or more persons” when probably, “damage” would have been a better choice.)

The plaintiff was a designer who worked on the renovation of the defendants’ home. He sued under Rule 76 for unpaid fees of $40,000. The defendants responded with a counterclaim of $750,000, alleging cost overruns.

Although the parties had not agreed on a discovery plan, counsel for the plaintiff had proposed one. Counsel for the defendants indicated that he would be withholding his agreement to the plan until the parties had exchanged lists of documents.

At the defendants’ examinations for discovery, thirty three undertakings were given. There were also some refusals that were later converted into undertakings. At the time that the plaintiff’s motion was brought, none of the undertakings had been answered. However, by the time the motion was argued, only a few of the undertakings remained outstanding.

In his reasons, the Master dealt with the various unanswered undertakings and established a timetable for the completion of the discovery process.

He then turned to the issue of costs. He noted that the moving party (the plaintiff) had spent 11.8 hours in preparation for the motion and had incurred actual costs of $5,519.81. The defendants’ preparation time was three hours, resulting in an actual costs of $2,957.78. Based on this information, the Master fixed partial indemnity costs at $2,900 plus disbursements. However, he then had to go one step further, to review the conduct of each party, leading up to the motion. This was because the plaintiff was arguing for costs on a substantial indemnity basis and the defendants contended that the plaintiff should be deprived of costs altogether. This led the Master to “the somewhat unsavory exercise of reviewing correspondence and e-mail passing between counsel”.

A rather painstaking analysis followed. The Master’s description of the communications between counsel on both sides will probably be, to many litigation lawyers, reminiscent of many of their own files, with a certain amount of posturing and threats.

The defendants argued that the plaintiff should be deprived of costs because:

1. there was no discovery plan in place and specifically no deadline had been agreed upon for answering undertakings;
2. it was precipitous and unreasonable to bring the motion when there had been a commitment to answer the undertakings; and
3. insisting on unreasonably strict adherence with the Rules of Civil Procedure is a breach of principles of civility particularly when the defendants had cooperated in moving the action forwards with rapidity and were prepared to set a pre-trial and trial date.

The Master rejected the defendants’ argument. He found that counsel for the plaintiff had been courteous (albeit firm) throughout and that he could not be faulted “for giving notice in advance of what he intended to do and then doing what he said he would do” (i.e., move to compel compliance with the undertakings).

Master MacLeod also refused to penalize the plaintiff for the fact that no discovery plan had been finalized. He said that “the rule requiring a discovery plan and requiring consideration of the Sedona Canada guidelines is not designed to impede the progress of actions nor to provide a new weapon to resist production or discovery motions”.

The Master questioned why litigants do not routinely set deadlines for undertakings to be answered:

I have never understood why parties at discovery do not include a time for answering undertakings in the undertaking itself. The party giving the undertaking should know how long or how difficult or how expensive it will be to seek the requested information. The parties know if there is merit in holding off on answers to undertakings while settlement discussions unfold or if the answers are critical to either a negotiated or an adjudicated resolution. In fact just such an approach was proposed by an OBA working group following the report of the Ontario Discovery Task Force:

“Before agreeing to an undertaking, be clear on the feasibility of fulfilling it, and set out agreed timelines for fulfilling the undertaking. Phrase undertakings carefully to correctly reflect what information will be provided.”

In the end, the Master declined either to deprive the plaintiff of costs or to penalize the defendants with an award of costs on a substantial indemnity scale.

The decision does make it clear though, that a party who gives fair warning of an intention to move to compel compliance with undertakings and then follows through can expect to receive an award of costs, even if the undertakings are answered by the time the motion is heard.

MxI appealed, principally with respect to the trial judge’s use of a ten year period for the calculation of the disgorgement of profits. The Court of Appeal rejected that argument on the basis that such a calculation is very much driven by the facts and that the trial judge had evidence to support his choice of that period here. MxI’s appeal was dismissed.

GasTOPS cross-appealed Justice Granger’s refusal to order a permanent injunction. The cross-appeal too was dismissed.

The Court of Appeal concluded its reasons by sharply criticizing the duration of the lawsuit:

[96] I wish to conclude with an expression of concern about the length of time that this proceeding took. There is no doubt that it involved significant stakes, and some issues that were not easy. But it took seven years. The evidentiary portion of the trial took three and a half years. There were 295 days of evidence and 70,000 pages of exhibits. Written submissions occupied more than 3,000 pages and took a further year and a half. The reasons for judgment took another two years, and ran to 668 pages.

[97] It is important to reiterate that the principle of proportionality is a vital prerequisite to an efficient and effective justice system. Counsel and especially the trial judge have a responsibility to manage the processes with this in mind. It is difficult to conclude that a trial of this length and a record of this magnitude were necessary to resolve the issues in this case.

Interestingly, this trial was conducted “electronically”, with counsel, the trial judge and the witness all having computer monitors before them. Documents were imaged in Summation and were accessed and displayed in that fashion.

Justice Granger (who is now retired) has long been a strong proponent of the use of technology in litigation and has written approvingly of the Summation software in particular and has given presentations in which he has advocated the approach used in the GasTOPS case.

The use of litigation technology is a cause that I too strongly support. However, based on the dim view that the Court of Appeal has taken of the end result in GasTOPS, it might be time to go back to the drawing board…

Although no evidence is permitted on a motion to strike, brought under Rule 21.01, the plaintiff argued that this was, in substance, a motion under Rule 25.11, on which the court is permitted to receive evidence.

Master Haberman noted that the defendant doctor had not filed a factum on this motion but had filed one on his own motion to strike. In that factum, the defendant had said, “the statement of claim, as it is currently pleaded, fails to allow the defendant or the court to ascertain precisely the issues in dispute, nor does it permit the defendant to respond to the allegations” [emphasis added by court]. The master found the highlighted portion significant:

Despite having asserted in his factum that he is unable to respond to the allegations raised by the plaintiffs in their statement of claim, Lee has filed no evidence to support his position and now asserts that the issue is not relevant. This leaves the plaintiffs with no ability to refute the statement. Though, at the end of the day, the court may well give it little weight, this is not a risk the plaintiffs wish or should have to take.

On that basis, she granted leave to the plaintiff to examine the defendant with respect to issues raised by his motion to strike the claim, including his contention that the form of the statement of claim made it impossible for him to respond to it.