



COURT OF APPEAL FOR ONTARIO

CITATION: Daverne v. John Switzer Fuels Ltd., 2015 ONCA 919

DATE: 20151224

DOCKET: C60365

Hoy A.C.J.O., MacFarland and Lauwers JJ.A.

BETWEEN

Gerald Daverne and Jutta Daverne

Plaintiffs

and

John Switzer Fuels Ltd., Brian Lasher, Glenn
    Lasher Home Comfort Service,
McKeown & Wood Limited
and Parrsboro
    Metal Fabricators Ltd.

Defendants (
Respondent
)

and

AON Reed Stenhouse Inc.,
Federated Insurance
    Company of Canada
, GCAN Insurance Company, Aviva Insurance Company of
    Canada and Chartis Insurance Company of Canada (formerly American Home
    Assurance Company

Third
    Parties (
Appellant
)

Andrew A. Evangelista and Avi Cole, for the appellant

John A. Ryder-Burbidge, for the respondent

Heard: November 2, 2015

On appeal from the decision of Justice Graeme Mew of the Superior
    Court of Justice, dated March 31, 2015, with reasons reported at 2015 ONSC 1803.

LAUWERS J.A.:

[1]

The motion judge
    granted partial summary judgment in the third party action to the respondent
    insured, McKeown & Wood Limited and declared that the appellant insurer,
    Federated Insurance Company of Canada, has a duty to defend McKeown & Wood
    in the main action. The motion judge dismissed Federateds cross-
motion for summary judgment to dismiss the
    third party action against it based on the contractual limitation period in
    Federateds insurance policy. I would allow the appeal for the following
    reasons.

A.

THE FACTUAL BACKGROUND

[2]

The main action
    arises out of a fuel oil leak from a fuel tank that caused damage to the Davernes
    property. McKeown & Wood sold the fuel tank to the Davernes in 2000.

[3]

Sometime after
    the date of the last fuel delivery on January 9, 2008, the fuel tank began to
    leak. The Davernes discovered the leak and resulting damage on returning home
    from vacation in late January. They started the main action against McKeown
    & Wood and others on December 31, 2009, seeking compensation for the damage
    to their home and the additional living expenses that they incurred as a result
    of the leak.

[4]

Federated insured
    McKeown & Wood from at least 1999 until the expiry of the last policy on
    October 24, 2007, a few months before the leak. On February 11, 2010, McKeown
    & Wood advised Federated of the Davernes claim, having been served with
    the Notice of Action and Statement of Claim in the main action a few days
    before. By letter dated April 9, 2010, Federated denied coverage, stating:

As the occurrences occurred in
    January 2008, Federated Insurance will not be able to assist you with this
    claim. We did not insure McKeown and Wood Limited on the date of loss.

[5]

McKeown &
    Wood defended the main action, bearing its own legal costs, and brought a third
    party action against a number of insurers, including Federated, on March 15,
    2012.

B.

THE DECISION BELOW

[6]

The motion judge
    first addressed Federateds argument that a contractual limitation period in
    the insurance policy applied and the third party action was out of time, at
    paras. 24 to 57. He found that the contractual limitation period was
    unenforceable.

[7]

The motion judge
    then addressed Federateds argument that it did not have a duty to defend
    McKeown & Wood in the main action, at paras. 58 to 73. Federated asserted
    that the date of the occurrence for determining the date of loss happened
    after the policy expired. The motion judge disagreed, on the basis that the
    corrosion to the oil tank that led to the leak could itself be property
    damage covered under the insurance policy. He found, at para. 68, that the
    mere possibility is sufficient to trigger Federateds duty to defend.

[8]

The motion judge also
    rejected Federateds argument that the exclusion of coverage to damage to the
    oil tank, known as the your product exclusion, meant that there could be no
    coverage for property damage to the tank. He found, at para. 72, that the
    allegations in the Davernes Statement of Claim were broader, so that the
    application of the exclusion would be a matter for the trial judge to
    determine.

C.

THE ISSUES

[9]

This appeal
    raises three issues:

1)

What is the
    standard of review applicable to the motion judges interpretation of the
    policy?

2)

Did the motion
    judge err in finding that the one-year limitation period set out in Federateds
    insurance policy was not enforceable against the insured McKeown & Wood?

3)

If the one-year
    limitation period is not enforceable, did the motion judge err in his approach
    to ascertaining whether Federated owed McKeown & Wood a duty to defend the
    main action under the insurance policy?


D.

ANALYSIS

[10]

On the first issue, the standard of review applicable to the motion
    judges interpretation of the insurance policy is correctness. On the second
    issue, t
he motion
    judge erred in concluding that the one-year limitation period in the policy is
    not enforceable. It is therefore not necessary to address the third issue.

1)

The standard of review
    is correctness

[11]

In response to a
    question from the bench, the appellant took the position that the
    interpretation and application of the insurance policy falls into the
    deferential standard of appellate review demanded by
Sattva Capital Corp.
    v. Creston Moly Corp
.
, 2014 SCC
    53, [2014] 2 S.C.R. 633. Counsel for the appellant submitted that he had
    nevertheless shown reversible error, even on a deferential standard.

[12]

Since this appeal
    was heard, this court has determined that the correctness standard of review
    applies on standard form insurance contracts:
MacDonald v. Chicago Title
    Insurance Company of Canada
, 2015 ONCA 842 at para. 41.

As Hourigan J.A.
    observed
. 40: It
    is untenable for standard form insurance policy wording to be given one meaning
    by one trial judge and another by a different trial judge. This followed his
    comment, at para. 38, that: there is an important public policy argument
    that supports the adoption of a correctness standard for appeals involving the
    interpretation of standard form contracts.

[13]


In the case of insurance
    policies, which involve the interpretation of similar if not common language
    and the application of general principles of insurance law, the high degree of
    generality and precedential value justifies a departure from the deferential standard
    of appellate review.

[14]

Accordingly, correctness is the standard of review applicable to the
    motion judges interpretation of the insurance policy. Further, as I will
    explain below, several of the motion judges errors fall within the reviewable legal
    errors listed by Rothstein J. in
Sattva
, at para 53.

2)
    The one-year limitation period in the policy is enforceable

[15]

In my view, the
    contractual limitation period is enforceable and McKeown & Woods third
    party claim for a declaration that Federated owes it a duty to defend the main
    action should be dismissed.

(a) The limitation period in the policy

[16]

Section 148 of
    the
Insurance Act
, R.S.O. 1990, c. I.8, makes certain
    statutory conditions part of every fire insurance contract in Ontario. Statutory
    condition 14 is included in Federateds policy as clause 14 of the Basic
    Policy Statutory Conditions form that is included in the Basic Policy. It
    provides:

14.

Action:

Every action or proceeding against the insurer for the
    recovery of any claim under or by virtue of this contract is absolutely barred
    unless commenced within one year next after the
loss
    or damage
occurs. [Emphasis added.]

[17]

Clause 8 of the
    Additional Conditions of the Basic Policy form also applies:

8.

Applicability
    of Statutory Conditions and Additional Conditions
: The
Statutory
    Conditions
and Additional conditions
apply with respect
to all the
    perils insured by this policy
and to the liability coverage
, where
    provided, except where these conditions may be modified or supplemented by
    riders or endorsements attached. [Emphasis added.]

Clause
    8 applies the contractual limitations period in clause 14 to the other perils
    insured against in Federateds policy

and to the liability coverage provided by it.

(b) The policy
    is a business agreement

[18]

The
Limitations
    Act, 2002
, S.O. 2002, c. 24, Sch. B came into force on January 1, 2004. It
    introduced a general limitation period of two years, subject to the
    discoverability principle, for all claims other than those listed in Schedule A
    thereto. As the motion judge noted, at para. 28, s. 148 of the
Insurance
    Act
, which sets out statutory condition 14, is listed in Schedule A, and therefore
    remains in effect.

[19]

Section 22(1) of
    the
Limitations Act,
    2002
prohibited
    contracting out of a limitation period it established, apart from certain
    grandfathered exceptions permitted in ss. 22(2). By amendments to s. 22 that
    came into force on October 19, 2006, an exception to the "no contracting
    out" rule was permitted in the case of "business agreements"
    entered into on or after that date:
Legislation Act, 2006
, S.O. 2006,
    c. 21, Sch. F, s. 9(1). Subsections 22(5)-(6) were added to the
Limitations
    Act
, 2002
, and provide:

(5)  The
    following exceptions apply only in respect of business agreements:

1. A limitation period under this
    Act, other than one established by section 15, may be varied or excluded by an
    agreement made on or after October 19, 2006.

2. A limitation period established by
    section 15 may be varied by an agreement made on or after October 19, 2006,
    except that it may be suspended or extended only in accordance with subsection
    (4).

(6)  In
    this section,

business agreement means an agreement made by parties none of
    whom is a consumer as defined in the
Consumer Protection Act, 2002
;

vary includes extend, shorten and suspend.

[20]

But for the
    amendments adding ss. 22(5)-(6), the shorter limitation period in statutory
    condition 14 would only apply to the fire insurance elements of Federateds
    policy, because its application to the other coverage in the policy would have
    conflicted with the "no contracting out" rule in s. 22(1).

[21]

It is plain that
    none of the parties to Federateds insurance policy is a consumer, which is defined
    in the
Consumer Protection Act, 2002
to mean an individual acting for
    personal, family or household purposes and does not include a person who is
    acting for business purposes. The parties are business entities.

[22]

The motion judge
    acknowledged, at para. 29, this courts holding that an insurance policy
    covering various risks related to the operation of an insureds business fell
    within the definition of business agreement:
Boyce v. Co-Operators
    General Insurance Co
.
, 2013 ONCA
    298, 116 O.R. (3d) 56. If the policy is a business agreement within the
    definition in s. 22(6) of the
Limitations Act, 2002
, it is capable of
    overriding the otherwise applicable two-year limitation period.

(c)

The policy over-rides the statutory two-year limitation
    period

[23]

In my view,
    clause 14 of the Basic Policy Statutory Conditions, combined with clause 8 of
    the Additional Conditions, clearly varies the two-year limitation period
    provided for in the
Limitations
    Act, 2002
. In
Boyce
, this court found that nearly
    identical contractual limitation period language overrode the otherwise
    applicable statutory two-year limitation period.

[24]

The motion judge
    concluded otherwise, interpreting the phrase loss or damage in clause 14 as
    not including loss or damage suffered by a third party, such as the Davernes,
    who then seeks compensation from the insured. The motion judge, at para. 43,
    distinguished
Boyce
and the earlier decision of this
    court in
International Movie Conversions Ltd. v. ITT Hartford Canada
(2002), 57 O.R. (3d) 652, as cases dealing with first party claims against an
    insurer, rather than third party coverage such as the case here. I would not
    agree with the motion judge that the difference is a relevant basis on which to
    distinguish
Boyce
.

[25]

The motion judge
    found that applying clause 14 of the Statutory Conditions to the commercial
    general liability coverage creates an anomalous consequence and results in
    ambiguity. That ambiguity, he found at para. 54, should be resolved in favour
    of the person whose right is being truncated: citing
Berardinelli v.
    Ontario Housing Corp
.
, [1979] 1
    S.C.R. 275. Accordingly, he concluded that the policy did not over-ride the
    statutory two-year limitation period.

[26]

As I will
    explain, in interpreting the phrase loss or damage the motion judge was
    guided by inapplicable jurisprudence and failed to apply relevant
    jurisprudence. His interpretation was therefore based on incorrect principles.
    Further, the motion judge failed to give effect to the particular language at
    issue, namely clause 8 of the Additional Conditions, which specifically provides
    that clause 14 applies to the liability coverage under the policy. Therefore,
    even if his interpretation of the policy were owed deference, his interpretation
    cannot stand.

(d) Interpretation guided by inapplicable
    jurisprudence

[27]

The
    motion judge held, at para. 45, the phrase loss or damage, as used in clause
    14 and other places in the statutory conditions, is not readily adaptable to
    liability insurance coverage where the loss or damage which is the subject of a
    claim has been suffered by a third party who then seeks compensation from the
    insured: citing
Walker
    v. Sovereign General Insurance Company
, 2011 ONCA 597.
With respect, this is not the holding
    in
Walker
.

[28]

Walker
involved a direct action by a slip
    and fall victim against the insurer of the bankrupt business that owned the
    property on which the accident occurred. The insurance policy contained
    language applying the statutory conditions to the other perils. The statutory
    conditions were, however, subordinate to the policy conditions. The notice
    provision in statutory condition 8 required notice to be given to the insurer by
    a person to whom a part of the insurance money is payable, while the notice
    provision in the policy conditions allowed it to be given be given promptly by
    or for the Insured to the Insurer or any of its authorized agents. This court
    ruled that the latter prevailed in light of the policy language. The owner of
    the plaza had provided notice to the insurer in light of the tenants
    bankruptcy. This court found that adequate notice had been given.

[29]

There is no
    similar competition between different provisions of the insurance policy in
    this case. In my view,
Walker
is not applicable to this case. Moreover,
    the policy under consideration in
Walker
did not contain a provision comparable to clause 8 of the Additional
    Conditions in the policy at issue, which specifically provides that clause 14
    applies to the liability coverage under the policy.

[30]

The
    motion judge continued, at para. 53, and held that
KP Pacific Holdings Ltd. v. Guardian
    Insurance Co. of Canada
, 2003 SCC 25, stood for the proposition that: the
    statutory conditions, and in particular a limitation provision designed for
    first party claims, cannot be shoehorned into a policys commercial liability
    insurance coverage without contrived reconstruction and anomalous consequences.
    This, with respect, is not the relevant holding in

KP Pacific Holdings
.
In that case the insured was seeking
    coverage for a fire loss. Under the Part 5 fire insurance section of the
    British Columbia
Insurance
    Act
,
    it was out of time, but not under Part 2, the section of general application.
    Chief Justice McLachlin concluded, at para. 19:

I cannot conclude either from the language of s. 119 or its
    history that the Legislature intended a multi-risk policy such as this one to
    fall within Part 5 with all the attendant consequences, including a shortened
    limitation period. It follows that this policy, like any other policy that does
    not fit into a specific category, is governed by Part 2, the section of general
    application.

[31]

This,
    she noted, at para 20, may not represent the ideal solution for multi-risk
    comprehensive policies. In setting the context for the interpretation exercise,
    McLachlin C.J.C. gave a general critique of the B.C.
Insurance Act
, which dates from
    1925. She said that its structure was outmoded, and constituted a 
tangled historical thicket. By
    contrast, the relatively recent language of the
Limitations Act, 2002
and its permission for business agreements does not raise the same problems
    of interpretation and application.
In my view
    the ruling in
KP Pacific Holdings

offers no guidance applicable to this
    case.

(e) Failure to
    apply relevant jurisprudence

[32]


The motion judge erred in rejecting
    Federateds argument that its denial of defence coverage to McKeown & Wood
    could constitute loss or damage for the purpose of the limitation period in
    clause 14.

[33]

There is no
    reason not to apply the basic principle that the insured suffers a loss from
    the moment [the insurer] can be said to have failed to satisfy its legal
    obligation [under the policy of insurance]. Where the benefit of a duty to
    defend is denied, the insured suffers a loss caused by the insurers denial
    of a defence the day after the demand  is made:
Schmitz v. Lombard
    General Insurance Co
.
, 2014 ONCA
    88
,
at para. 20;

Markel Insurance Co. of Canada v. ING
    Insurance Co. of Canada
, 2012 ONCA 218, 109 O.R. (3d) 652, at para. 27.

[34]

I do not agree
    with the motion judge that
Schmitz
can be distinguished on the basis
    that it involved a first party claim for indemnity under an OPCF 44R (uninsured
    motorist coverage) endorsement, and not a third party claim for defence, as in
    this case. The point of distinction does not affect the application of the
    principle that the insured suffers a loss when the insurer fails to meet its
    legal obligation under the policy.

(f
)
    Failure to give effect to clause 8 of the Additional Conditions

[35]

Although the
    motion judge noted, at para. 37, that clause 8 of the Additional Conditions
    expressly purports to extend the application of the statutory conditions and
    additional conditions to the
liability
coverage,
    he failed to consider the effect of this clause, relying on this courts
    decision in
Walker
, despite acknowledging that the policy under
    consideration in that case did not contain a comparable provision.

(g) The policy is clear and unambiguous

[36]

In
Boyce,
this court considered virtually the
    same contractual language as clause 8 and found, at para. 12, that the policy,
    like the policy in
International Movie Conversions Ltd.
provides for a
    one-year limitation on claims in clear and unambiguous language. As Cronk J.A.
    observed, at para. 28 of
International Movie Conversions
: it is difficult
    to conceive how it could have been made more explicit. Her observation is apt
    for this case too.

[37]

Clause 8 is clear
    and unambiguous. It explicitly states that the statutory conditions apply to
    the liability coverage under the policy. The insurance policy at issue in this
    case is a business agreement for the purposes of s. 22 of the
Limitations
    Act, 2002
,
and the one-year contractual
    limitation period is enforceable by Federated against McKeown & Wood
.


(h) The claim
    for a defence is barred by the contractual limitation period

[38]

It follows that
    the one-year limitation period in the policy is enforceable and it began to run
    when Federated refused to provide McKeown & Wood with a defence in the main
    action, as was its legal obligation under the policy.

[39]

The third party
    claim was issued nearly two-years after Federateds April 9, 2010 letter
    denying coverage and effectively refusing to perform any duty to defend. In
    these circumstances, McKeown & Woods claim that Federated owed it a
    contractual duty to defend is barred by the one-year contractual limitation
    period. It is accordingly unnecessary to consider the third issue raised on
    this appeal.

3) Federateds
    duty to indemnify

[40]

The insurance
    policy contains two sets of obligations. The first is for Federated to defend
    the insured in any action for damages to which the insurance would attach if
    liability were found. The second is for Federated to indemnify the insured for
    damages which the insured becomes legally obligated to pay for
bodily injury or property damage
.

[41]

This appeal
    determines that Federated does not have a duty to defend the insured. That determination
    does not dispose of Federateds second potential obligation under the policy,
    that of indemnification. The motion judges statements on any duty on Federated
    to indemnify McKeown & Wood are not binding on the parties.

E.

DISPOSITION AND COSTS

[42]

Accordingly, I
    would allow the appeal on the narrow basis that the motion judge erred in
    finding that the one-year limitation period found at Clause 14 of the Basic
    Policy Statutory Provisions form of Federated`s insurance policy did not apply.
    That provision does apply and, as a result, Federated is relieved of its duty
    to defend McKeown & Wood in the main action.

[43]

The appellant is
    entitled to costs in the agreed amount of $10,000, all-inclusive, and to a
    reversal of the costs award in the court below.

Released:
    December 24, 2015

P. Lauwers
    J.A.

I agree
    Alexandra Hoy A.C.J.O.

I agree
    Jean MacFarland J.A.


