



COURT OF APPEAL FOR ONTARIO

CITATION:
Panasonic
    Eco Solutions Canada Inc. v. XL Specialty Insurance Company, 2021 ONCA 612

DATE: 20210910

DOCKET: C68282

Feldman, Paciocco and Coroza JJ.A.

BETWEEN

Panasonic Eco Solutions Canada Inc.

Applicant (Respondent/
Appellant by way of cross-appeal)

and

XL Specialty Insurance Company

Respondent (Appellant/
Respondent by way of cross-appeal)

W. Colin Empke and Anthony H. Gatensby, for the
    appellant

Jeffrey A. Brown and Callum J. Micucci, for the
    respondent

Heard: March 12, 2021 by videoconference

On appeal from the judgment of Justice Markus Koehnen of
    the Superior Court of Justice, dated March 9, 2020, with reasons at 2020 ONSC
    1502.

Feldman J.A.:

A.

Introduction

[1]

The issue on this appeal is whether the appellant insurer, XL Specialty
    Insurance Company, has a duty to defend its insured, the respondent Panasonic
    Eco Solutions Canada Inc., against two claims for breach of contract brought
    against Panasonic by a group of companies collectively operating as Solar Flow-Through
    Fund (Solar) in an arbitration proceeding. The insurance policy is a
    professional errors and omissions policy that excludes contractual liability
    claims unless the insured would have had the liability in the absence of the
    contract.

[2]

The application judge held that XL has a duty to defend one of the
    claims but not the other. XL appealed and Panasonic cross-appealed.

[3]

I would allow the appeal and dismiss the cross-appeal. XL has no duty to
    defend either claim.

B.

Background Facts Pleaded by Solar in its Arbitration Claim

[4]

Panasonic entered into two agreements with Solar. The first was an
    Engineering, Procurement, and Construction Agreement (the Engineering
    Agreement) that required Panasonic to procure, construct and install
    roof-mounted solar electricity generating systems. Solar planned to sell the generated
    electricity through 20-year contracts it had entered into with Ontarios
    Independent Electricity System Operator (the IESO). The Engineering Agreement
    required Panasonic to achieve substantial completion by a guaranteed date.
    Panasonic failed to do so, resulting in the IESO cancelling seven of its
    contracts with Solar.

[5]

In the arbitration claim, Solar pleaded that Panasonic failed to achieve
    substantial completion in breach of its contractual obligations and claimed liquidated
    damages of $92,309.62, the sole remedy provided in the Engineering Agreement for
    a contractors failure to reach substantial completion by the guaranteed date.

[6]

Solar further pleaded that following the cancellation, the three parties
     Panasonic, Solar and the IESO  entered into negotiations that resulted in
    the IESO reinstating two of the seven cancelled contracts with Solar, and re-issuing
    the remaining five contracts, but to Panasonic.

[7]

The re-issued contracts were part of an agreement between Solar and
    Panasonic, referred to as the Proceeds Agreement, although it was never
    finalized or signed. According to that agreement, Solar would provide its
    expertise for the five contracts that had been re-issued to Panasonic, and in
    exchange, Panasonic would pay Solar a portion of the proceeds from its sale of
    the projects. Solar anticipated that it would recover, at a minimum, its sunk
    costs of $1,300,000 on the re-issued contracts with the IESO.

[8]

In the arbitration claim on the Proceeds Agreement, Solar claimed
    damages for breach of contract, or in the alternative for negligent
    misrepresentation, or in the further alternative, for unjust enrichment. The
    negligent misrepresentation claim was based on Panasonics ongoing
    representations to Solar, in order to obtain its assistance with the re-issued
    projects, that it would pay Solar in accordance with the Proceeds Agreement,
    but Panasonic then failed to pay. The unjust enrichment claim was based on
    Panasonic enriching itself at Solars expense by retaining the full benefit of
    the sold re-issued projects and depriving Solar of compensation for its
    assistance.

C.

Findings of the Application Judge

[9]

The application judge noted that Panasonic had already received invoices
    from its defence counsel on the arbitration for $492,965.25, that the
    arbitration was continuing and that the defence costs were continuing to
    increase.

[10]

The
    XL policy insuring Panasonic is an errors and omissions policy, formally named
    a Professional and Contractors Pollution Legal Liability Policy. The policy
    covers monetary judgments that Panasonic becomes legally obligated to pay
    because of a claim resulting from an act, error or omission in Professional
    Services. XL agreed that Solars claim arises from the delivery of
    professional services.

[11]

Under
    the policy, XL has a duty to defend any claim against Panasonic to which this insurance
    applies regardless of the merits of the claim. Whether the insurance applies
    depends on the interpretation of the following exclusion and exception to the
    exclusion clause:

This Policy does not apply to any Claim  arising from the Insureds:

1. assumption of liability in a
    contract or agreement; or

2. breach of contract or agreement.

This exclusion does not apply to: (i) liability that the Insured
    would have in the absence of the contract or agreement

[12]

The
    application judge referred to the four principles applicable to an insurers
    duty to defend set out by the Supreme Court of Canada in
Monenco Ltd. v.
    Commonwealth Insurance Co.
, 2001 SCC 49, [2001] 2 S.C.R. 699, at paras. 28,
    33. He summarized these principles as follows:

(a) The duty to defend is distinct
    from, and broader than, the duty to indemnify. There may be a duty to defend
    even if the insurer may not ultimately be required to indemnify the insured.

(b) The court assumes that the pleaded
    facts are true.

(c) The court applies the pleaded facts
    to the policy wording.

(d) The duty to defend arises if the
    underlying complaint alleges any facts that might fall within coverage under
    the policy.

[13]

The
    application judge also referred to the principle that where the pleadings are
    imprecise, the insurers obligation to defend will be triggered where, on a
    reasonable reading of the pleadings, a claim within coverage can be inferred:
Monenco
,
    at para. 31.

(1)

The Claim under the Engineering Agreement

[14]

In
    its claim for liquidated damages under the Engineering Agreement, Solar relied
    on Article 13 of the Agreement which the application judge quoted in part:

[I]f a system has not reached Substantial Completion by the Guaranteed
    Substantial Completion date solely due to Contractors acts or omissions, Owner
    shall be entitled to receive as daily liquidated damages from Contractor

[15]

XL
    argued to the application judge that it had no duty to defend because Solars
    claim for liquidated damages arose out of Panasonics breach of contract in
    failing to achieve substantial completion by the guaranteed date in accordance
    with its contractual obligation, and was therefore excluded by the exclusion
    clause.

[16]

The
    application judge rejected this argument. He reasoned that Solars claim for
    liquidated damages arises out of Panasonics acts or omissions in failing to
    meet the guaranteed date, and Panasonics delay could have been caused by its
    negligence, in which case Solars claims could fall within coverage. It
    depended on the cause of the delay. Further, the fact that Solar did not plead
    negligence did not undermine the analysis as long as it pleaded facts that were
    capable of supporting the tort of negligence:
Non-Marine Underwriters,
    Lloyds of London v. Scalera
, 2000 SCC 24, [2000] 1 S.C.R. 551, at para.
    83.

[17]

The
    application judge was unable to determine on the record before him whether the
    damages Solar sought were attributable to negligence by Panasonic or to
    circumstances beyond Panasonics control. He presumed that this may be one of
    the issues in the underlying arbitration. The application judge noted, as an
    aside, that if it turned out that the delay was due to deliberate acts or
    omissions by Panasonic, as opposed to negligence, then there would be no
    coverage.

(2)

The Claim under the Proceeds Agreement

[18]

In
    its Notice of Arbitration against Panasonic, Solar pleaded that Panasonics
    failure to pay Solars share of the sale proceeds from the reissued projects was
    tactical and meant to sidestep its obligations to pay [Solar] anything for its
    work under the Proceeds Agreement.

[19]

The
    application judge concluded that Panasonics liability under the Proceeds
    Agreement was in effect a debt claim that arose under the contract and could
    not come within the exception to the exclusion. He also rejected the efficacy
    of the negligent misrepresentation and unjust enrichment claims. The negligent
    misrepresentation claim was based on representations by Panasonic that it would
    pay under the agreement, and was therefore based solely on Panasonics breach
    of the Proceeds Agreement by failing to make payments under it. The application
    judge further found that the unjust enrichment claim is excluded under the policy
    because the policy does not cover claims for equitable remedies.

D.

Issues on the Appeal and the Cross-Appeal

[20]

The
    question on the appeal and cross-appeal is the proper interpretation of the XL policy
    and its potential application to the arbitration claim, triggering the duty to
    defend. To answer that question, the following are the issues to be addressed:

1) The standard of review;

2) Principles of interpretation
    and application of insurance policies;

3) The proper interpretation
    of the exclusion clause;

4) Does Solars claim under
    the Engineering Agreement give rise to a duty on XL to defend the claim?

5) Does Solars claim under
    the Proceeds Agreement give rise to a duty on XL to defend the claim?

E.

Analysis

(1)

The Standard of Review

[21]

Both
    parties agree that the appeal involves the interpretation of a standard form
    policy of insurance. As a result, in accordance with the decision of the
    Supreme Court of Canada in
Ledcor Construction Ltd. v. Northbridge Indemnity
    Insurance Co.,
2016 SCC 37, [2016] 2 S.C.R. 23, the standard of review to
    be applied by this court is correctness. The court summarized the principle at
    para. 4:

4        In my opinion, the appropriate standard of review in
    this case is correctness. Where, like here, the appeal involves the
    interpretation of a standard form contract, the interpretation at issue is of
    precedential value, and there is no meaningful factual matrix that is specific
    to the particular parties to assist the interpretation process, this
    interpretation is better characterized as a question of law subject to
    correctness review.

(2)

Principles of Interpretation and Application of Insurance Policies

[22]

The
    first substantive issue is the principles governing the duty of an insurer to
    defend claims brought against the insured. In
Monenco
, the Supreme Court
    reviewed and restated the principles that govern the duty to defend. The first
    is the rule that the pleading by the claimant against the insured is what
    triggers the duty to defend. If the facts alleged in the pleading would, if
    true, require the insurer to indemnify, then the insurer has the duty to
    defend. The duty to defend is therefore broader than the duty to indemnify
    because it is triggered by the mere possibility of coverage:
Monenco
, at
    paras. 28-29. In addition, the pleadings themselves are to be interpreted
    broadly, with any doubt to be resolved in favour of the insured:
Monenco
,
    at para. 31. In that regard, where the claim alleges facts that might fall
    within coverage, the duty arises:
Monenco
, at para. 33. The required
    analysis is to determine the substance of the claim rather than merely the legal
    label chosen by the claimant.

[23]

The
    Supreme Court reviewed and summarized the general principles of policy
    interpretation that had been set out in previous Supreme Court case law
[1]
in its decision in
Progressive Homes Ltd. v. Lombard General Insurance Co. of
    Canada
, 2010 SCC 33, [2010] 2 S.C.R. 245, at paras. 22-24:

22      The primary interpretive principle is that when the
    language of the policy is unambiguous, the court should give effect to clear
    language, reading the contract as a whole.

23    Where the language of the insurance policy is ambiguous,
    the courts rely on general rules of contract construction. For example, courts
    should prefer interpretations that are consistent with the reasonable
    expectations of the parties, so long as such an interpretation can be supported
    by the text of the policy. Courts should avoid interpretations that would give
    rise to an unrealistic result or that would not have been in the contemplation
    of the parties at the time the policy was concluded. Courts should also strive
    to ensure that similar insurance policies are construed consistently. These
    rules of construction are applied to resolve ambiguity. They do not operate to
    create ambiguity where there is none in the first place.

24      When these rules of construction fail to resolve the
    ambiguity, courts will construe the policy contra proferentem  against the
    insurer. One corollary of the contra proferentem rule is that coverage
    provisions are interpreted broadly, and exclusion clauses narrowly. [Citations
    omitted.]

(3)

The Proper Interpretation of the Exclusion Clause

[24]

The
    policy begins with the coverage clauses and the duty to defend. Clause I.A.1 is
    the coverage clause that provides that XL will pay on behalf of the Insured
    for Professional Loss which the Insured becomes legally obligated to pay
    because of a Claim resulting from an act, error or omission in Professional
    Services.

[25]

The
    following are definitions of some of the terms referred to in the coverage
    clause:

Professional Services: Value Engineering, Field Changes to
    Design, Design/Build or Design performed by or on behalf of the Named Insured,
    and project or construction management services in connection with Contracting
    Services;

Contracting Services: Installation, maintenance, and repair of
    solar power arrays, commercial/residential battery storage, operation and maintenance
    services;

Professional Loss: a monetary judgment, award or settlement of
    compensatory damages

[26]

Under
    Clause VII.C, XL has the right and the duty to defend any Claim against the
    Insured seeking Professional Loss or Pollution Loss to which this insurance
    applies, including the right to select counsel, even if any of the allegations
    are groundless, false or fraudulent. In accordance with the case-law, XL has
    the duty to defend any claim if there is a possibility that there is coverage
    for it under the policy.

[27]

The
    policy contains a number of exclusions. The issue on the appeal is whether the contractual
    liability exclusion in Section IV, including the exception to the exclusion, applies.
    The clause provides:

This Policy does not apply to any Claim, Professional Loss

B. Contractual Liability

arising from the Insureds:

1.

assumption of
    liability in a contract or agreement; or

2.

breach of
    contract or agreement.

This exclusion does not apply to: (i) liability that the
    Insured would have in the absence of the contract or agreement

[28]

Applying
    the principles of interpretation from
Progressive Homes
, the first
    question for the court is whether this exclusion clause is ambiguous. If it is
    not, then the court is to give effect to the clear language, reading the contract
    as a whole. The clause contains both an exclusion and an exception to the
    exclusion. They form part of a whole clause and must be read together.

[29]

Looking
    at the contractual exclusion first, I see no ambiguity. The policy does not
    cover a claim that arises from an insureds assumption of liability in a
    contract or from an insureds breach of contract. Panasonic argues that the
    meaning and effect of this exclusion, read literally, is to nullify the
    coverage under the policy, because the insured always provides its professional
    services under a contract, as it did here.

[30]

This
    was the holding by the United States Court of Appeals for the Seventh Circuit in
Crum & Forster Specialty Insurance Company v. DVO, Inc.
,

939
    F. (3d) 852 (7th Cir. Ct. App. 2019), where the court considered a similarly
    worded exclusion and concluded that it was so broad as to render coverage under
    the policy illusory. However, in that case, unlike in the XL policy, the insurance
    policy did not contain an exception to the exclusion. If there had been no
    exception to the contractual liability exclusion in the XL policy, then in
    accordance with
Cabell v. The Personal Insurance Company
, 2011 ONCA 105,
    104 O.R. (3d) 709, if the exclusion rendered the coverage nugatory, the court
    may not give it any effect as it would not be within the reasonable expectation
    of the parties.

[31]

The
    next issue, therefore, is to determine the meaning and effect of the exception.
    The first question is whether the wording of the exception is also unambiguous.
    It excepts from the exclusion liability that the insured would have in the
    absence of the contract or agreement. In my view, read literally, the
    exception is ambiguous, because the insured would have no relationship with the
    claimant if there had been no contract or agreement between them under which the
    insured provided the professional services to the claimant. If they had no contractual
    relationship, no services would be performed, and there would be nothing to
    insure. That is clearly not what was intended.

[32]

Given
    that ambiguity, the court then applies the principles of contractual
    interpretation summarized in
Progressive Homes
to interpret the
    exception. Those principles direct the court to give the words the
    interpretation that accords with the reasonable expectations of the parties,
    and that provide a realistic result that is consistent with the interpretation
    given to similar policies.
[2]


[33]

Applying
    those principles, the meaning of the exception becomes clear. The policy
    continues to cover professional losses caused by the insured in performing its
    professional functions in its relationship with the claimant that arise in law,
    regardless of the terms of their contract. As the insurer XL submits, these
    would include liability for losses that third parties may suffer as a result of
    an insureds negligence in performing the professional services contract, as
    well as liability to the claimant for negligence in performing the contractual
    obligations under the doctrine of concurrent liability in contract and in tort:
    see
Central Trust Co. v. Rafuse
, [1986] 2 S.C.R. 147;
B.G. Checo
    International Ltd. v. British Columba Hydro and Power Authority
, [1993] 1
    S.C.R. 12; and
Winnipeg Condominium Corporation No. 36 v. Bird Construction
    Co.
, [1995] 1 S.C.R. 85.

[34]

This
    interpretation makes sense from the point of view of both the insured and the
    insurer, and gives effect to both their reasonable expectations, in light of
    the purpose of the professional errors and omissions insurance contract. The
    insurer will be responsible for the losses caused by the insureds negligent
    performance of its professional obligations; but the insurer will not indemnify
    the insured for any extra obligations it undertakes in a contract, or for the
    breach of any extra obligations that it undertakes in a contract.

(4)

Does Solars claim against Panasonic under the Engineering Agreement
    give rise to a duty on XL to defend the claim?

[35]

The
    claim by Solar is found in its Notice of Arbitration. The parties entered into
    the Engineering Agreement in January 2016. Panasonic agreed to procure,
    construct and install the solar electricity generating systems that were the
    subject of the agreements that Solar had with the IESO. Panasonic was
    responsible for achieving substantial completion of the projects by a guaranteed
    date, but it failed to do so in respect of 18 of them, causing the IESO to
    terminate seven of its contracts with Solar, although it later reinstated two
    of them. An arrangement was made among the parties to allow Solar to recoup its
    costs of the other five. That arrangement was the Proceeds Agreement that will
    be discussed later in these reasons.

[36]

Solars
    claim against Panasonic under the Engineering Agreement is for liquidated
    damages in the amount of $92,309.62, based on Panasonics obligation under Article
    13 of the Engineering Agreement to pay liquidated damages if a System has not
    reached Substantial Completion by the Guaranteed Substantial Completion Date
    solely due to Contractors acts or omissions. Article 13 provides in part:

The amounts payable under this Article
    13 shall be [Solar]s sole and exclusive remedy for [Panasonic]s failure to
    achieve Substantial Completion of a System by the Guaranteed Substantial Completion
    Date.

[37]

It
    goes on to state that the agreed amount of liquidated damages is not a penalty
    but represents a genuine pre-estimate of the damages that Solar would suffer as
    a result of the delay.

[38]

Therefore,
    while Panasonics delay was an act or omission in performing its professional
    obligations that caused loss to Solar that would have been covered by the XL
    coverage clause, by agreeing to the liquidated damages clause, Panasonic effectively
    contracted out of its insurance coverage. The exclusion excludes coverage for liability
    arising from breach of contract, and the exception does not apply because the obligation
    to pay liquidated damages is purely contractual and does not otherwise arise.
    Furthermore, because the Engineering Agreement provides that liquidated damages
    are Solars sole remedy, there is no way to read Solars pleading to claim any
    other or additional remedy for the delay.

[39]

A
    liquidated damages clause, such as this one, demonstrates the fairness of the
    contractual exclusion and exception clause of the insuring agreement, when it
    is interpreted in accordance with the reasonable expectations of the parties to
    that agreement. An insured is free to make whatever promises it wishes when it
    contracts to perform services, for example for remedies for its breach.
    Panasonic could have agreed to pay liquidated damages to Solar in any amount as
    part of the consideration for the contract. But it could not bind its insurer
    to that bargain. The insurer is only obligated to cover liability that the
    insured would have had without the contract.

[40]

The
    application judge erred in his application of the test for determining the duty
    to defend. He focused on the fact that Panasonic could be liable for negligence
    in its delay, which would be within coverage, but he failed to apply the
    exclusion and the exception to the exclusion to his analysis of the liquidated
    damages clause. In particular, he failed to note that the claim for liquidated
    damages was Solars sole remedy under its agreement. In other words, Solar had
    contracted out of any claim it may have had against Panasonic for damages for
    negligence. Therefore, it could not make a negligence claim against Panasonic
    in the arbitration.

[41]

The
    application judge therefore erred in law in his interpretation and, as a result,
    in his application of the exclusion clause by finding that XL has a duty to
    defend Panasonic against Solars claim for liquidated damages for breach of the
    Engineering Agreement. No duty to defend arises in respect of this claim.

(5)

Does Solars claim against Panasonic under the Proceeds Agreement give
    rise to a duty on XL to defend the claim?

[42]

The
    arbitration claim states that because of Panasonics delay and IESOs
    cancellation of five of Solars projects, Solars pre-construction costs loss
    was $1.3 million. In order to recoup that loss, Solar agreed with Panasonic
    that if Panasonic entered into agreements with IESO to complete the projects,
    Solar would provide certain services to help achieve timely completion. In
    exchange, Panasonic would pay Solar a portion of the sale proceeds, which Solar
    anticipated would amount to at least $1.3 million. That was the Proceeds
    Agreement, although it was never finalized in writing.

[43]

Panasonic
    completed and sold the projects, but it refused to pay Solar any portion of the
    proceeds of sale. Further, Solar claims that it worked in accordance with the
    Proceeds Agreement to help Panasonic achieve the sales, and that Panasonic regularly
    represented to [Solar] that its efforts in this regard were subject to the
    Proceeds Agreement. Solar claimed negligent misrepresentation, asserting that
    Panasonic owed it a duty of care and that it relied on Panasonics
    representations that it would be paid under the Proceeds Agreement. It also
    claimed that Panasonic enriched itself at the expense of Solar amounting to unjust
    enrichment, as well as breach of contract and breach of its obligations to act
    in good faith.

[44]

The
    application judge found that Panasonics liability under the Proceeds Agreement
    arose out of its assumption of liability under a contract and out of its breach
    of that contract, thereby falling squarely within the contractual exclusion. The
    claim could not come within the exception because Panasonic would not have had
    the liability to Solar to pay it following the sale of the projects, except
    under the contract. It amounted to a debt.

[45]

It
    was XLs position on the application that Solars claims come within the coverage
    clause of the policy but are excluded from coverage by the contractual
    liability exclusion clause. In respect of the Proceeds Agreement, coverage
    would presumably be based on Panasonics acts or omissions in carrying out its
    obligations under the Engineering Agreement that resulted in the delay and in
    Solars loss of its $1.3 million in costs thrown away. However, Solar resolved
    any claim it had in that regard by entering into the Proceeds Agreement.
[3]
It is the Proceeds Agreement that Solar seeks to enforce in the arbitration.

[46]

I
    agree with the application judge that the claim under the Proceeds Agreement is
    essentially for a debt owing. It arises under the contract. There would be no
    claim without the contract. Therefore, if the claim came within the coverage
    under the policy, it is excluded by the contractual liability exclusion clause
    and is not saved by the exception to the exclusion.

[47]

I
    also agree with the application judge that the claims for negligent
    misrepresentation and unjust enrichment do not give rise to a duty to defend.
    The negligent misrepresentation alleged against Panasonic is that it misled
    Solar into working on the promise that it would be paid under the Proceeds
    Agreement. This is based solely on Panasonics failure to make payments under
    the Proceeds Agreement, in breach of that contract. The contractual liability
    exclusion is triggered, and the exception to the exclusion does not apply. As
    the application judge found, the unjust enrichment claim is an equitable claim
    that is specifically not compensable under the XL insurance policy.

F.

Conclusion

[48]

I
    would allow the appeal and set aside the order of the application judge that
    found a duty on XL to defend the claim under the Engineering Agreement. I would
    dismiss the cross-appeal and uphold the order of the application judge that
    there is no duty on XL to defend the claim under the Proceeds Agreement. XL is
    entitled to its costs of the appeal fixed in the agreed amount of $12,500
    inclusive of disbursements and HST.

Released: September 10, 2021 K.F.

K. Feldman
    J.A.

I agree. David
    M. Paciocco J.A.

I agree. S. Coroza J.A.





[1]

Co-operators Life Insurance Co. v. Gibbens
, 2009 SCC 59, [2009] 3 S.C.R.
    605, at paras. 20-28;
Jesuit Fathers of Upper Canada v. Guardian Insurance
    Co. of Canada
, 2006 SCC 21, [2006] 1 S.C.R. 744, at paras. 27-30;
Scalera
,
    at paras. 67-71;
Brissette Estate v. Westbury Life Insurance Co.
, [1992]
    3 S.C.R. 87, at pp. 92-93; and
Consolidated-Bathurst Export Ltd. v. Mutual
    Boiler & Machinery Insurance Co.
(1979), [1980] 1 S.C.R. 888, at pp.
    899-902.



[2]

No case was brought to the courts attention where the same or
    a similar contractual liability exclusion and exception clause had been
    interpreted by a court.



[3]

I also note that because the liquidated damages clause provides
    the sole and exclusive remedy for Panasonics delay, it appears Solar has no
    claim for the $1.3 million lost costs under the Engineering Agreement if they
    arose from Panasonics delay in completion.


