



COURT OF APPEAL FOR ONTARIO

CITATION: Parkhill Excavating Limited v. Royal &
    Sunalliance Insurance Company of Canada, 2016 ONCA 832

DATE: 20161108

DOCKET: C61276

LaForme, Hourigan and Pardu JJ.A.

BETWEEN

Parkhill Excavating Limited

Plaintiff (Appellant)

and

Royal & Sunalliance Insurance Company of
    Canada

Defendant (Respondent)

AND BETWEEN

Parkhill
    Excavating Limited,

Arthur
    Thomas Barker and Randy Arthur Barker

Plaintiffs (Appellants)

and

Economical Mutual Insurance Company

Defendant (Respondent)

AND BETWEEN

BGS
    Homes Inc. and B.G. Scugog Inc.

Plaintiff

and

Board of
    Health for the Haliburton,

Kawartha,
    Pineridge District Health Unit,

The
    Corporation of the City of Kawartha Lakes,

Parkhill Excavating Limited,

Arthur Thomas Barker and Randy Arthur Barker

Defendants
(
Appellants
)

and

Northbridge General
    Insurance Corporation

Third Party (Respondent)

Lawrence G. Theall and Camille Dunbar, for the appellants, Parkhill
    Excavating Limited, Arthur Thomas Barker and Randy Arthur Barker

Marcus B. Snowden and Sébastien A. Kamayah, for the
    respondent, Economical Mutual Insurance Company

Mark M. O'Donnell, for the respondent, Royal &
    Sunalliance Insurance Company of Canada

Emily Stock, for the respondent, Northbridge General
    Insurance Corporation

Heard: September 29, 2016

On appeal from the judgments of Justice Susan E. Healey
    of the Superior Court of Justice, dated October 13, 2015.

Hourigan J.A.:

Introduction

[1]

The issue for determination on this appeal is whether the respondent
    insurance companies are obliged to provide a defence to Parkhill Excavating
    Limited (Parkhill), Arthur Thomas Barker and Randy Arthur Barker (together the
    appellants) under their respective Commercial General Liability (CGL)
    insurance  policies to an action commenced by BGS Homes and B.G. Scugog Inc.
    (BGS).

[2]

The motion judge ruled that the respondents are not obliged to provide a
    defence to the litigation. For the reasons that follow, I am of the view that
    the motion judge erred in law in her analysis of the issue, and that the
    respondents do have an obligation to provide a defence. Accordingly, I would
    allow the appeal, set aside the judgment below, and grant the appellants a
    declaration compelling the respondent insurers to provide a defence under their
    CGLs, subject to a determination of whether coverage is excluded under the
    Professional Services Exclusion and excluding a defence regarding the allegations
    of fraud, deceit and dishonesty as against Arthur Barker.

Facts

[3]

In 2004, BGS retained Parkhill to design, install and supervise the
    construction of 36 septic systems in homes it built and sold. Parkhill
    performed the work from 2004 to 2010.

[4]

In May 2010, the local health unit wrote to 25 homeowners warning them
    of potential problems with their sewage septic systems installed by Parkhill. Between
    May and August 2011, the health unit issued Orders to Comply under the
Building
    Code Act
, 1992, S.O. 1992, c.23
to 36 homeowners, which identified various contraventions, including: non-compliant
    filter medium, inadequate area of sand fill, improper grading in the vicinity
    of the sewage system, deficient pump chambers, and inadequate tank sizes. BGS
    and Tarion Warranty Corporation replaced the 36 septic systems in August 2011.

[5]

In 2012, BGS sued Parkhill for negligence and breach of contract
    relating to deficiencies arising from Parkhills design and installation work on
    the 36 septic systems (the Underlying Action). BGS alleges that from 2004 to
    2010 the appellants supplied and installed incorrect and non-compliant filter
    mediums, also known as filter sand, in the septic systems of all 36 homes. As
    well, BGS alleges that the calculations and designs Parkhill used to obtain the
    permits for the septic systems in 11 of the homes did not conform to the
    features of the houses, as larger tanks and septic beds were required under the
Building Code Act
.

[6]

The appellants have defended the Underlying Action and have commenced a
    third party claim against Robert E. Young Construction Ltd. (Young
    Construction). Young Construction is a wholesaler of sand and gravel products,
    including septic filter mediums. Young Construction supplied the allegedly
    deficient filter sand used in the septic systems in issue.

[7]

Parkhill carried CGLs from three insurance companies from 2004 to 2010.
    The policies issued by Economical Mutual Insurance Company (Economical)
    covered the period from October 10, 2003 to October 10, 2006; the policies
    issued by Royal & Sunalliance Insurance Company of Canada (RSA) covered
    the period from October 10, 2006 to October 10, 2007; and the policies issued
    by Northbridge General Insurance Corporation (Northbridge) covered the period
    from October 10, 2007 to October 10, 2010.

[8]

The appellants allege that each of the respondent insurers was on risk
    for a share of the relevant time and has a duty to defend them in the
    Underlying Action. The insurers deny that they have a duty to defend the
    appellants, relying on various exclusion clauses in their policies.

Judgment Below

[9]

The appellants commenced an action seeking an order or alternatively a
    declaration compelling the three respondent insurers to provide a defence to
    the Underlying Action. They then brought a motion for summary judgment. The motion
    judge found that the claim as pleaded fell within the coverage afforded by the
    CGLs. She held, at para. 43: The allegations in this case are of defective or
    faulty workmanship or materials, and therefore may constitute property damage
    caused by an occurrence, thereby triggering coverage.

[10]

Economical argued that it was not on risk during the relevant time and,
    therefore, there was no coverage under its policy. However, the motion judge
    found that Economical was on risk at the time of the occurrence. She reasoned
    that the Underlying Action seeks damages for costs incurred to remedy the
    defective septic systems installed. The faulty and defective workmanship in
    designing and installing the septic systems was the occurrence giving rise to
    the claim. Since the design and installation of the septic system occurred from
    2004 to 2010, and Economical was on risk from October 2003 to October 2006, the
    claim fell within the policy period.

[11]

Once the appellants proved that the claim fell within the coverage, the
    onus shifted to the respondent insurers to establish that an exclusion applied
    to preclude coverage. The motion judge found that the Your Work Exclusion in
    the respondents policies applied.

[12]

There are two versions of the Your Work Exclusion in the relevant
    policies. Version A is in Economicals policy and in Northbridges policy for
    2007-2010. It provides: Insurance does not apply to [] [p]roperty damage to
    your work arising out of it or any part of it and included in the
    products-completed operations hazard.

[13]

Version B is set out in RSAs policy and in Northbridges policy for
    2010-2012. That exclusion states: Insurance does not apply to [] [p]roperty
    damage to that particular part of your work arising out of such work or any
    part of such work and included in the products completed operations hazard.

[14]

The motion judge held, at para. 48, that the definition of your work
    in the policies applies to Parkhills work, and is captured within the
    definition of products-completed operations hazard.

[15]

With that ruling, the onus shifted back to the appellants to prove that
    the Subcontractor Exception to the Your Work Exclusion brought the otherwise
    excluded claim back into coverage. This exception to the exclusion states that
    the exclusion does not apply if the damaged work or the work out of which the
    damage arises was performed on your behalf by a subcontractor.

[16]

The motion judge found that the exception did not apply because the appellants
    had failed to discharge the burden necessary to demonstrate that Young
    Construction was a subcontractor, rather than a supplier. In making this
    determination, the motion judge relied on the characterization and nature of
    the relationship between Parkhill and Young Construction set out in the third
    party pleadings against Young Construction.

[17]

Given her finding on the Your Work Exclusion, the motion judge did not
    consider the alternative argument advanced by the respondents that coverage is
    also excluded under the Professional Services Exclusion in their respective
    CGLs.

Issues

[18]

This appeal raises the following issues:

(i) Whether the motion judge erred in not finding that the mere
    possibility that consequential damages are claimed in the Underlying Action triggered
    a duty to defend?

(ii) Whether the motion judge erred in holding that the Your
    Work Exclusion applies?

(iii) Whether the motion judge erred in holding that the
    Subcontractor Exception does not apply?

[19]

It is common ground among the parties, and I accept, that the
    standard of review on the motion judges analysis of the standard form
    insurance contracts in issue is correctness:
Ledcor Construction Ltd. v.
    Northbridge Indemnity Insurance Co
.,
    2016 SCC 37, and
MacDonald v. Chicago Title Insurance Co.
    of Canada
, 2015 ONCA 842, 127 O.R. (3d) 663, leave to
    appeal refused October 21, 2016 (S.C.C.).

[20]

The parties also agree that if the motion judge
    erred in her analysis of issue (i) above, then it is unnecessary to consider
    the remaining issues. As will be discussed below, it is my view that the motion
    judge did err in her consideration of issue (i). It is, therefore, unnecessary
    to consider issues (ii) and (iii).

[21]

In their factum the appellants seek an order
    allowing them to retain their own defence counsel at the expense of the
    respondent insurers. This relief was not requested on the motion below and was
    not addressed by the motion judge in her reasons. Accordingly, it will not be
    considered on this appeal.

Analysis

(i)

Legal Principles

[22]

The legal principles governing an analysis of
    whether an insurer has a duty to defend are well established. The insured has
    the initial onus of establishing that the allegations made by a plaintiff
    against it, if proven, would bring the claim within the insurance policy. The
    duty to defend is not dependent on the insured actually being liable or the
    insurer actually being required to indemnify. All that is required to trigger
    the duty is the mere possibility that a claim falls within an insurance policy
:
    Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada
, 2010 SCC 33, [2010] 2 S.C.R. 245, at para. 19. In considering this
    question, the pleadings shall be given the widest latitude to determine whether
    the mere possibility of a claim within the policy exists:
Nichols v.
    American Home Assurance Co.,
[1990] 1 S.C.R. 801, at p. 812.

[23]

Once the insured has satisfied the initial
    burden, the onus shifts to the insurer to establish that the claim falls
    outside of coverage as a consequence of the operation of an exclusion clause.
    Exclusion clauses preclude coverage when the claim otherwise falls within the
    initial grant of coverage:
Progressive
, at
    para. 27.

[24]

If the insurer can bring the claim within an
    exclusion, the burden then shifts back to the insured to establish that its claim
    falls within an exception to the operative exclusion clause. Exceptions do not
    serve to create coverage; they only bring an otherwise excluded claim back
    within coverage where the claim initially fell within the coverage:
Progressive
, at para. 28.

[25]

With respect to Your Work Exclusions, the case
    law generally establishes that where the claim is limited to the direct costs
    of repairing or replacing the defective work, such exclusions apply:
March
    Elevator Co. v. Canadian General Insurance Co.
, [1995]
    I.L.R. 1-3227 (Ont. Gen. Div.), at para. 27,
Alie v. Bertrand & Frère
    Construction Co.
, (2002) 62 O.R. (3d) 345 (C.A.), at para. 27. However, if
    consequential damage is alleged, the exclusion applies only with respect to the
    cost of repairing the insureds faulty work, and there is coverage for the consequential
    damage:
Progressive
, at para. 63.

(ii)

Principles Applied

[26]

The respondent insurance companies submit that
    the true nature of the Underlying Action is that the plaintiff is attempting to
    recover the costs it was forced to incur in correcting the deficiencies in
    Parkhills work. They submit that there is no allegation of any consequential
    damage, whether express or implied, in the Underlying Action.

[27]

This submission is inconsistent with the motion
    judges finding at para. 37 of her reasons:

The damages sought in the underlying action
    are approximately four times what Parkhill was paid to install the septic
    systems. The plaintiffs in the underlying action claim losses arising from
    deficiencies in the septic system.  At para. 44 of the claim, it is
    alleged that the [b]uilder has incurred costs and continues to incur costs performing
    remedial work necessary to satisfy the orders to comply.  Paragraph 51 of
    the claim alleges that the plaintiffs are expected to have to perform further
    remedial work at their own expense.  Paragraph 82 refers to the cost of
    remedial work including the higher cost of remedying work once the homes had
    been sold.  Accordingly, in addition to the question of whether defective
    work can be an accident, which has been answered affirmatively by
Progressive
    Homes
at paras.  42-50,
it is not at all clear from the claim that the damages sought
    are restricted only to the replacement of the allegedly deficient systems due
    to the work performed by Parkhill.
[Emphasis added.]

[28]

The motion judges finding that the damages claimed in the Underlying
    Action may not be restricted to the cost of replacing the allegedly deficient
    systems was well grounded in the pleadings. As she noted, the statement of
    claim makes repeated reference to remedial work. In particular, the claim for
    the increased cost of remedying work once the homes have been sold by
    implication engages consequential damages claims. There is no basis for
    appellate interference with this finding.

[29]

Having made that finding, the motion judge should have concluded that
    there was a mere possibility that claims for consequential damages were being
    asserted in the Underlying Action. That should have ended the analysis. The
    duty to defend would have been established as the potential consequential
    damages claims could not be excluded by the Your Work Exclusion (see
Progressive
,
at para. 63). The motion judge erred in
    going on to consider the applicability of the Your Work Exclusion because the
    exclusion could not apply to the consequential damages claims. It was, of
    course, also unnecessary to go on to consider the Subcontractor Exception to
    the exclusion.

Disposition

[30]

The motion judge erred in her analysis of the duty to defend. She should
    have concluded, based on her own factual findings, that there was a mere
    possibility that claims for consequential damages were being asserted in the
    Underlying Action, and thus the duty to defend had been established.
    Accordingly, I would allow the appeal, set aside the order below and grant a
    declaration that the respondent insurance companies are obliged to provide a
    defence to the Underlying Action.

[31]

There are two caveats to the foregoing. First, the motion judge did not
    consider the respondent insurance companies alternative argument that coverage
    is excluded by the Professional Services Exclusion. The declaration granted
    herein does not affect the rights of the respondents to advance that argument
    in this action or on a summary judgment motion.

[32]

Second, on the motion it was conceded that there is no obligation to
    defend Arthur Barker with respect to the allegations of fraud, deceit and
    dishonesty as against him.

[33]

The parties agreed that if successful the appellants are entitled to
    costs of the motion below on a full indemnity scale and I would so order. If
    there is any issue on the quantum of those costs, the parties may make brief
    written submission to this court. With respect to the costs of the appeal, the
    appellants are entitled to costs in the agreed upon amount of $15,000,
    inclusive of fees, disbursements, and taxes.

Released: November 8, 2016 CWH

C.W.
    Hourigan J.A.

I
    agree H.S. LaForme J.A.

I
    agree G. Pardu J.A.


