



COURT OF APPEAL FOR ONTARIO

CITATION:
Tedford v. TD
    Insurance Meloche Monnex, 2012 ONCA 429

DATE: 20120622

DOCKET: C54479

Lang, Epstein and Hoy JJ.A.

BETWEEN

Damon Tedford

Applicant (Respondent)

and

TD Insurance Meloche Monnex

Respondent (Appellant)

Marc D. Isaacs and Bonnie Huen, for the appellant

Danesh Rana, for the respondent

Heard: April 5, 2012

On appeal from the judgment of Justice Roydon J. Kealey
    of the Superior Court of Justice dated September 22, 2011, with reasons
    reported at 2011 ONSC 5500, [2011] I.L.R. I-5197.

Hoy J.A.:

Overview

[1]

TD Insurance Meloche Monnex appeals the application judges September
    22, 2011 decision that it has a duty to defend the respondent, Damon Tedford,
    in an action alleging he made negligent misrepresentations in the Seller
    Property Information Statement completed in connection with the sale of his
    home. In that action, the plaintiff purchaser pleaded that, as a result of the
    misrepresentations, she has incurred and will continue to incur repair costs,
    and has suffered anxiety, sleep disturbances, fatigue, stress, headaches and
    symptoms of depression (the Health Consequences).

[2]

At the time of the alleged misrepresentations, the respondent held a
    homeowners insurance policy issued by the appellant, which provides coverage
    for damages the respondent is obligated to pay because of Bodily Injury or Property
    Damage. The application judge concluded that the Health Consequences amounted
    to Bodily Injury, a duty to defend therefore arose, and that duty extended to
    the entire action. It is common ground that the damages the respondent may have
    to pay with respect to the repair costs do not constitute Property Damage under
    the policy. But for the alleged Bodily Injury, a duty to defend would not have
    arisen.

[3]

The appellant advances two arguments on this appeal.

[4]

First, it renews the argument made to the application judge that the
    true nature of the plaintiffs claim is one for economic loss arising out of a
    commercial transaction, the claim for Health Consequences is derivative of that
    claim and, as such, based on
Non-Marine Underwriters, Lloyds of London v.
    Scalera
, 2000 SCC 24, [2000] 1 S.C.R. 551, should not be determinative of
    whether the appellant has a duty to defend.

[5]

Second, it argues that, if it has a duty to defend, it should not be
    responsible for 100 per cent of the defence costs. Of the plaintiffs $185,000
    damages claim, at least $150,000 relate to repair costs. The plaintiff seeks
    damages of approximately $25,000 for Health Consequences. Since the amount of
    damages related to Health Consequences is small in comparison to the claim for
    repair costs, the appellant argues it would be unreasonable for it to bear the
    cost of defending the entire claim.

[6]

For the reasons that follow, I am not persuaded that the plaintiffs
    claim for Health Consequences is a derivative claim within the meaning of
    that term in
Scalera.
I do, however, conclude that, on the facts of
    this case, the appellant should not be responsible for 100% of the defence
    costs. To that extent, I would allow the appeal.

The Policy

[7]

The homeowners insurance policy issued by the appellant applies to
    accidents or occurrences that take place during the term of the policy.

[8]

In Coverage F, the appellant agrees:

To pay on behalf of the Insured all sums which the latter shall
    become obligated to pay by reason of the liability imposed by law upon the
    Insured ... as damages ... because of Bodily Injury or Property Damage.

[9]

Bodily Injury is defined as physical injury, sickness or disease,
    including death resulting therefrom, sustained by any person.

[10]

Property
    Damage is defined as loss of or physical damage to or destruction of tangible
    property, including loss of use thereof resulting therefrom, and includes loss
    of use of tangible property which has not been physically damaged or destroyed
    provided such loss of use is caused by an accident.

[11]

In
    the policy, the appellant also agrees:

With respect to such insurance as is afforded by this
    Policy under coverage F, the insurer shall

(1) defend any suit against an Insured alleging
    such Bodily Injury or Property Damage and seeking damages on account thereof,
    even if such suit is groundless, false or fraudulent; but the Insurer may make
    such investigation, negotiation and settlement of any claim or suit as it deems
    expedient;

[12]

The
    policy contains various specific exclusions from coverage. None are argued to
    be relevant.

[13]

The
    policy does not provide for allocation of defence costs where an insured is subject
    to both covered and uncovered claims and the same costs are incurred in the
    defence of both covered and uncovered claims.

Legal principles governing an insurers duty to defend

[14]

The
    following principles emerge from the case law governing the duty to defend:

1.

The insurer has a duty to defend if the pleadings filed against the
    insured allege facts which, if true, would require the insurer to indemnify the
    insured:
Monenco Limited v. Commonwealth Insurance Company
, 2001 SCC
    49, [2001] 2 S.C.R. 699, at para. 28.

2. If there is any
    possibility that the claim falls within the liability coverage, the insurer
    must defend:
Nichols v. American Home Assurance Co.
, [1990] 1 S.C.R.
    801, at p. 810.

3. The court must look
    beyond the labels used by the plaintiff to ascertain the substance and true
    nature of the claims. It must determine whether the factual allegations, if
    true, could possibly support the plaintiffs legal claims:
Monenco
, at paras. 34-35; Scalera, at
    para. 79.

4.  The court should
    determine if any claims plead are entirely derivative in nature, within the
    meaning of that term as set out in
Scalera
.
    A derivative claim will not trigger a duty to defend.

5.  If the pleadings are
    not sufficiently precise to determine whether the claims would be covered by
    the policy, 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.

6. In determining whether
    the policy would cover the claim, the usual principles governing the
    construction of insurance contracts apply, namely: the
contra proferentem
rule and the principle
    that coverage clauses should be construed broadly and exclusion clauses
    narrowly:
Monenco
, at para. 31;
    Scalera, at para. 70.  As well, the desirability, where the policy is
    ambiguous, of giving effect to the reasonable expectations of the parties:
    Scalera, at para. 71.

7. Extrinsic evidence that
    has been explicitly referred to in the pleadings may be considered to determine
    the substance and true nature of the allegations:
Monenco
, at para. 36; see
1540039
    Ontario Limited v. Farmers' Mutual Insurance Company (Lindsay)
,
    2012 ONCA 210.

The derivative claim issue

[15]

The
    appellant argues that the claim fo
r Health Consequences
    is derivative in
the sense that it flows from the economic loss
    allegedly sustained by the plaintiff as a consequence of the alleged
    misrepresentations, and not from the misrepresentations themselves.  The
    appellant bases this argument on
Scalera.

[16]

Scalera
, however,

is quite different from
    this case.
In
Scalera
, the plaintiff brought a civil suit for sexual
    assault. She claimed sexual battery, negligence and breach of fiduciary duty.
    The defendants homeowners insurance policy excluded coverage for bodily
    injury caused by any intentional or criminal act. The Supreme Court of Canada
    held that there was no duty to defend. Iacobucci J. described the negligence
    claim as merely derivative of the claim for sexual battery, and held that a
    derivative claim will not trigger a duty to defend.

[17]

What
    Iacobucci J. meant by derivative is important. He explained, at para. 85, that
    when the court is faced with a situation where both an intentional tort, which
    is excluded from coverage, and a non-intentional tort, are pleaded:

... a court construing an insurers duty to defend must decide
    whether the harm allegedly inflicted by the negligent conduct is derivative of
    that caused by the intentional conduct. In this context, a claim for negligence
    will not be derivative if the underlying elements of the negligence and of the
    intentional tort are sufficiently disparate to render the two claims unrelated.
    If both the negligence and intentional tort claims arise from the same actions
    and cause the same harm, the negligence claim is derivative, and it will be
    subsumed into the intentional tort for the purposes of the exclusion clause analysis.
    If, on the other hand, neither claim is derivative, the claim of negligence
    will survive and the duty to defend will apply ...
A claim should only be
    treated as derivative, for the purposes of this analysis, if it is an
    ostensibly separate claim which nonetheless is clearly inseparable from a claim
    of intentional tort.
[Emphasis added.]

[18]

In
    this case, only one cause of action  negligent misrepresentation  was advanced.
    The plaintiff does not allege that the respondent committed an intentional tort.
    The general damages for Health Consequences sought by the plaintiff represent a
    different category of damages resulting from the negligent misrepresentation,
    and not a derivative claim as contemplated by
Scalera.
I therefore see
    no error in the application judges assessment of the true nature of the bodily
    injury portion of the action.

The issue of apportionment of defence costs

[19]

Having
    regard to
Hanis v. Teevan
,

2008 ONCA 678, 92 O.R. (3d) 594, in
    my view, the application judge erred in requiring the appellant to defend the
    entire action without making provision for apportionment of the defence costs.

[20]

In
Hanis
, at para. 2, Doherty J.A. addressed how the costs of defending a
    lawsuit should be apportioned between the insurer and the insured when some,
    but not all, of the claims made in the lawsuit are covered by the policy:

Where there is an unqualified obligation to pay for the defence
    of claims covered by the policy, as in this case, the insurer is required to
    pay all
reasonable
costs associated with the defence of those claims
    even if those costs further the defence of uncovered claims. The insurer is not
    obligated to pay costs related solely to the defence of uncovered claims. [Emphasis
    added.]

[21]

In
Hanis
, the insured had denied its duty to defend and the defendant
    retained its own counsel and proceeded to trial. The issue of the insurers
    obligation to defend, and the apportionment of costs, was determined following
    trial. In this case, the respondent seeks to have the appellant assume the
    conduct of the defence, and the covered claims represent a small portion of the
    total damages claimed. Considerations not addressed in
Hanis
arise.

[22]

Hanis
establishes that an insurer is responsible for

all
reasonable
costs associated with the defence of a covered claim. As Doherty J.A.
    commented, at para. 23, the approach in
Hanis
is not unfair to the
    insurer: it does not result in an increase in the insurers liability for
    defence costs.

[23]

The
    respondent urged this court to follow
RioCan Real Estate Investment Trust
    v. Lombard General Insurance Co. of Canada
(2008), 91 O.R. (3d) 63 (S.C.),
    where the insurer was ordered to defend the entire action, although not all the
    claims were covered by the policy, and no order was made with respect to the
    allocation of costs.
RioCan
was decided before
Hanis
and is
    therefore not of assistance. Moreover, the facts in
RioCan
are
    different than those in this case. In
RioCan,
multiple theories of
    liability were advanced to support a claim for the same damages. The potential
    liability in respect of the covered claim was the same as that in respect of
    the uncovered claims.

[24]

I
    would direct, unless the parties otherwise agree, that the appellants counsel be
    instructed to defend both the covered and the uncovered claims, in a manner
    commensurate with the aggregate amount claimed, and that the respndent bear the
    costs of the defence, to the extent they exceed the reasonable costs associated
    with the defence of the covered claims. In determining the reasonable costs
    associated with the defence of the covered claims, it is appropriate to
    consider the quantum of the covered claims. It would be unfair to the insurer
    to fix it with defence costs that are disproportionate to the extent of its
    potential liability for the covered claim.

[25]

If
    the parties are unable to agree on an allocation of the costs, the appellant insurer
    shall be entitled to apply to the Superior Court of Justice for a determination
    of the allocation, in accordance with
Hanis
, after the matter is
    concluded or at such other time as the parties agree.

Costs

[26]

The
    appellant was unsuccessful on the derivative claim issue and successful on the issue
    of allocation of costs. In these circumstances, I would award the appellant costs
    of the appeal, inclusive of disbursements and taxes, in the amount of $5,000. I
    would set aside the costs order of the application judge and substitute the
    amount of $2,500, inclusive of disbursements and applicable taxes, payable to
    the appellant.

Released: June 22, 2012                              Alexandra
    Hoy J.A.

SEL                                                                  I
    agree S.E. Lang J.A.

I
    agree G.J. Epstein J.A.


