COVERAGE AND EXCLUSIONS UNDER CGL POLICIES: A Survey of Recent Decisions by Canadian Courts

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1 COVERAGE AND EXCLUSIONS UNDER CGL POLICIES: A Survey of Recent Decisions by Canadian Courts by R. Glen Boswall Clark Wilson LLP tel [email protected]

2 TABLE OF CONTENTS PART I: OVERVIEW...1 INTRODUCTION...1 WHAT IS THE CGL POLICY?...1 GENERAL RULES OF INSURANCE POLICY INTERPRETATION...2 PART II: COVERAGE...2 BASIC COVERAGE PROVISIONS...2 The 1978 Wording...2 The 1987 Wording...3 LEGALLY OBLIGATED TO PAY...3 The 1987 Wording...3 The 1987 Wording...5 COMPENSATORY DAMAGES...5 The 1987 Wording...5 The 1987 Wording...6 BODILY INJURY...6 The 1978 Wording...6 The 1987 Wording...8 INJURY TO PHYSICAL OR TANGIBLE PROPERTY...9 The 1978 Wording...9 Coverage for Intangible Property Damage...9 Preventative Measures Taken to Prevent Damage...10 Incorporation of a Defective Part Into a Larger Whole...12 The 1987 Wording...12 ACCIDENT AND OCCURRENCE...13 Accident v. Intentional...13 Accident...14 "Occurrence" and the 1987 IBC Wording...16 PART III: EXCLUSIONS...17 GENERAL RULES FOR INTERPRETING EXCLUSIONS...17 BODILY INJURY TO EMPLOYEE OF INSURED...17 The 1978 Wording...17 The 1987 Wording...19 BODILY INJURY CAUSED INTENTIONALLY...20 The 1978 Wording...20 The 1987 Wording...21 CONTRACTUAL LIABILITY EXCLUSION...21 The 1978 Exclusion...21 The Exceptions...23 The 1987 Wording Clark Wilson LLP

3 p. ii AUTOMOBILE EXCLUSION...24 The 1978 Wording...24 Arising Out Of...25 Ownership, Maintenance, Use or Operation...26 The 1987 IBC Wording...27 EXCLUSION FOR PROPERTY IN CARE, CUSTODY AND CONTROL...28 THE "PRODUCT ITSELF" EXCLUSION...29 The 1978 Wording...29 The 1987 Wording...30 THE "WORK PERFORMED" EXCLUSION...30 The 1978 Wording...30 The 1987 Wording...32 PART IV: CONCLUSIONS Clark Wilson LLP

4 COVERAGE AND EXCLUSIONS UNDER CGL POLICIES: A SURVEY OF RECENT DECISIONS BY CANADIAN COURTS I. PART I: OVERVIEW A. INTRODUCTION How comprehensive is today's comprehensive general liability policy? The answer to this question is complicated by the fact that some of "today's" policies are based on the 1987 Form 2100 issued by the Insurance Bureau of Canada ("IBC") which has largely remained untested by the courts. There has been considerable judicial interpretation of IBC's 1978 CGL policy wording and based on that, the average insurer would say the CGL policy is too comprehensive. Upon learning exactly what is and is not included in the CGL policy, the average insured would say she or he could drive a truck through it and not bump into any coverage. The bulk of the recent cases covered in this paper deal with the liability policies similar to the IBC 1978 CGL policy wording. This is so for three reasons. First, there has been little judicial consideration of the newer policy wording. Second, because many of policies which followed the 1978 wording were "occurrence" based, insurers will continue to face claims where that wording will be in issue. Third, the judicial consideration of the 1978 based policies provides a guide as to how the courts will look at the 1987 based policies. This paper begins with a brief discussion of the CGL policy and rules for interpreting it. After that, each section of the paper will begin with the 1978 wording of a particular coverage or exclusion clause. I will follow this with a discussion of the drafter's intent in designing the clause and the judicial interpretation of it. Finally, I will discuss how the 1987 wording of the clause may changes things. B. WHAT IS THE CGL POLICY? The CGL policy represents an attempt by the insurance industry to provide a product that will protect the insured from third party liability for unexpected personal injury or property damage resulting from the insured's negligent behaviour or the behaviour of those for whom the insured is responsible. Because the insurer cannot protect against all risks and still provide an affordable product, coverage is restricted by the definitions of "personal injury" and "property damage" and by specifically excluding certain items from coverage. The CGL policy is primarily used in commercial settings but similar protection can be obtained in home owner or tenant insurance and other non-commercial policies.

5 p. 2 C. GENERAL RULES OF INSURANCE POLICY INTERPRETATION The courts have always presumed that the drafter of a contract is in the best position to shape the terms to suit her or his own view of the deal and thus the other party to the contract is at a disadvantage. For this reason, if there is any ambiguity in the contract, a court will interpret it in favour of the non-drafter. The courts apply this rule of contract interpretation with special vigour to insurance policies because of the perceptions that the drafter of the agreement, the insurer, is more sophisticated than the insured and better able to withstand the financial consequences of having the policy interpreted against it. It is far from certain that these perceptions hold true in the modern commercial context but nevertheless, the basic interpretation principle remains and has been refined into three subrules 1, 1. The objective in construing a policy's coverage of liability must be to give effect to the policy's dominant purpose of indemnity; 2. Ambiguity in an insurance contract must be construed in favour of the insured; and, 3. The court should ordinarily strive to give effect to the objectively reasonable expectations of the insured. The word "objectively" in the third rule means that when interpreting an insurance policy, the court will not look at what the particular insured expected when entering the agreement (a "subjective" view) but rather at what the average insured would reasonably expect in the circumstances. Keeping these rules of interpretation in mind will help the reader understand how the courts came to the decisions summarized in this paper and anticipate how a court may react to your own coverage decisions. II. PART II: COVERAGE A. BASIC COVERAGE PROVISIONS 1. The 1978 Wording The basic coverage provided by the 1978 CGL is as follows: 1 Privest Properties Ltd. v. The Foundation Company of Canada, [1991] I.L.R (B.C.S.C.) per Drost J. at 1355 citing Couch on Insurance 2d, paras. 15:41, 15:14, 15:16 and 15:74

6 p. 3 Coverage A - Bodily Injury To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as compensatory damages because of bodily injury. Coverage B - Property Damage To Pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as compensatory damages because of property damage caused by accident. 2. The 1987 Wording There is not much change in the 1987 wording other than that bodily injury and property damage are now contained in one clause under "Coverage A". COVERAGE A. BODILY INJURY AND PROPERTY DAMAGE LIABILITY 1. Insuring Agreement. a. We will pay those sums that the insured becomes legally obligated to pay because of "bodily injury" or "property damage" to which this insurance applies.... B. LEGALLY OBLIGATED TO PAY 1. The 1987 Wording Both Coverage A and Coverage B use the phrase, "legally obligated to pay". Instead of the words "legally obligated to pay", some policies use "liability imposed by law". Courts have given both phrases the same meaning. A straightforward reading of the phrase "legally obligated to pay" would give the average insured the impression that she or he was covered for all areas of legal liability to others, including liability under statutory, tort and contract law. This was, in fact, the coverage the drafters likely intended to provide. 2 The courts, however, have historically restricted this phrase to exclude liability under contract. Therefore, a insured who breached a contract through negligence was not covered for the resulting liability to the other party to the contract. The judicial treatment of this phrase is largely based on an erroneous interpretation of the Supreme Court of Canada's H.A. Sanderson, The Comprehensive General Liability Policy: The Insuring Intent (1990), at p. 53.

7 p. 4 decision in Andrews v. George. 3 coverage clause which stated, In that case, the Supreme Court dealt with a differently worded TO PAY on behalf of the Insured all sums which the insured shall be obligated to pay by reason of the liability imposed by law upon the Insured or by written contract for damage to or destruction of property of others... (emphasis added) In Andrews, the Supreme Court ruled that the phrase, "liability imposed by law" was qualified by the phrase "or by written contract" such that the former must cover only tortious liability. Many courts in subsequent cases cited Andrews as authority to restrict the meaning of "liability imposed by law" and "legally obligated to pay" to damages in tort even though there was no corresponding phrase in those cases such as the "or by written contract" phrase in Andrews. This misunderstanding can be seen in the recent decision of the Nova Scotia Court in Kentville (Town) v. Gestas Inc. et al. 4 In that case, the insured town had an errors and omissions policy which provided coverage for all sums which the insured was legally obligated to pay to a third party as damages for any claim resulting from municipal administration. The town dismissed two policemen who then started a series of arbitrations and appeals which resulted in the town having to pay lost salary and legal costs. The insurer refused to indemnify the town on the grounds that these were not sums that the town was "legally obligated to pay". The court agreed. On the strength of Andrews, the court ruled that contractual liability was not covered and held that lost wages for wrongful dismissal flowed from the employment contract. A shift back to the interpretation of "legally obligated to pay" intended by the original drafters can be seen in the British Columbia Supreme Court case of Cultus Lake Park Board v. Gestas Inc. 5 This case concerned an insured municipality which was covered by a municipal liability policy. The municipality leased land to a food vendor and agreed as a condition of the lease that it would not lease any areas within 300 yards to any other food vendor. The municipality subsequently leased land to three other parties who sold food and the original vendor sued for breach of contract. The insurer refused to indemnify the municipality on the ground that damages for breach of contract were not damages which the municipality was "legally obligated to pay" within the context of the insurance policy. The court considered many of the previous cases dealing with the phrases "legally obligated to pay" and "liability imposed by law", including Andrews, which supposedly restricted coverage to claims in tort. The court concluded that each of the cases excluded liability in contract only because the wording of other parts of the particular insurance policy in question made it clear that contractual liability was not covered or because the court was dealing with a situation in which the insured was trying to claim coverage 3 [1953] 1 S.C.R.19 4 [1989] I.L.R (N.S.S.C.) 5 (1992), 12 C.C.L.I. 1 (B.C.S.C.)

8 p. 5 for a business risk that was not within the proper realm of liability insurance. The Cultus Lake court found no such factors in the case before it and ruled that the phrase "legally obligated to pay" covered contractual liability. The case is presently under appeal. Whether the insured will be "legally obligated to pay" within the meaning of a CGL policy is not determined by the way a lawsuit against the insured is worded. In the British Columbia case of Surrey (District) v. General Accident Assurance Co. of Canada 6 the court was asked to determine whether the insured municipality, the District of Surrey, was entitled to coverage under its CGL policy. The insured District of Surrey had been sued by Peace Portal Properties, which owned a golf course. Over two or three decades, urbanization had increased drainage and flooding problems in Surrey. In June, 1981, Peace Portal complained to the District about increased flooding of its golf course. The company asked the District to share the costs of repairing and replacing a concrete flume in order to accommodate the increasing flows from a creek which crossed the golf course. The District declined and Peace Portal expended $100,000 on the work. In 1986, Peace Portal sued Surrey alleging negligence, nuisance and unjust enrichment. The claim for negligence was eventually abandoned and it turned out the nuisance claim was statute barred. The District was ultimately ordered to pay the claim for unjust enrichment and turned to its liability insurer for coverage. The insurer refused to cover the loss, saying that unjust enrichment did not fall within the meaning of "legally obligated to pay" under the policy. The District sued the insurer and the court ruled that the policy did not exclude claims because the successful cause of action against the District was framed in a particular way. The underlying claim was for property damage caused by tortious conduct and that was covered by the policy. 2. The 1987 Wording The phrase "legally obligated to pay" is still used in the 1987 CGL wording. If the Cultus Lake decision signals a judicial trend back towards the interpretation intended by the original drafters, no redrafting is needed. C. COMPENSATORY DAMAGES 1. The 1987 Wording The insured must be liable for "compensatory damages" before she or he is entitled to coverage for bodily injury or property damage. There is no definition of the term in the 1987 policy. Black's Law Dictionary 7 gives a good overview of what "compensatory damages" includes: "Compensatory damages are such as will compensate the injured party for the injury sustained, and nothing more; such as will simply make good or replace the loss caused by the wrong or 6 [1994] B.C.J. No. 27 (S.C.) 7 (6th ed. 1990) at 390

9 p. 6 injury. Damages awarded to a person as compensation, indemnity, or restitution for harm sustained by him. The rationale behind compensatory damages is to restore the injured party to the position he or she was in prior to the injury." Under this definition punitive damages would be excluded but what about a penalty created by statute? In the American case of Cummings v. Board of Education Oklahoma City, 8 the court ruled that a pecuniary liability created by statute, operating as a punishment to a wrongdoer, and having no relation to the actual loss sustained by the person who sues for its recovery, is a "penalty" and not a "compensatory liability" created by statute. If the sanction imposed by a statute is not in the form of a fine or penalty but rather an order to pay compensation, different considerations apply. It seems likely such sanctions would qualify as "compensatory damages". The Ontario case of Peterborough (City) v. General Accident Assurance Company, 9 addressed a slightly different issue. The City of Peterborough asked the court to determine if Peterborough's liability policy covered damages caused to a third party when the City breached a statute. Under section 24(1) of the Ontario Construction Lien Act, the City was forbidden to make certain payments on construction contracts when it had notice of liens involving the project. The City negligently made payments in breach of the statute and some lienholders sued for damages. The Court ruled that any liability would fall within the policy's terminology of "compensatory damages". 2. The 1987 Wording As seen above, the 1987 wording still uses the term "compensatory damages" as a prerequisite for basic coverage. There is still no definition of the term within the policy. D. BODILY INJURY 1. The 1978 Wording IBC's 1978 CGL policy wording defines "bodily injury" as follows: "bodily injury" means bodily injury, sickness or disease sustained by any person which occurs during the policy period, including death at any time resulting therefrom. There has been little dispute in the courts as to what constitutes bodily injury but there has been considerable debate as to when it occurs. Until recently, almost all CGL policies were "occurrence" based, i.e. there is no coverage unless the damage occurs during the term of P.2d [1994] I.L.R. para

10 p. 7 the policy. For trauma caused injuries, it is usually a simple matter to tell when the bodily injury occurred. For slowly developing diseases the answer is not so clear. One of the primary concerns of liability insurers today is the field of toxic torts. A major development in this area has been the increased awareness of the long term effects of exposure to asbestos fibres. To address the difficulty of determining when bodily injury occurs in such cases the courts have developed several theories or rules to determine when insurance coverage is triggered. These rules have also been applied in certain property damage cases and were discussed in some detail by the British Columbia Supreme Court in Privest Properties Ltd. v. The Foundation Company of Canada, 10 a case involving asbestos based fireproofing in a Vancouver office building. Under the exposure rule, there is an occurrence of bodily injury for each exposure to the substance which eventually caused damage. Each insurer who provided coverage during the years of exposure is liable for a pro rata share of the damage. The assumption behind this rule is that the ultimate disease is a result of the cumulative exposure to the harmful substance over time. Even if the initial exposure or some particular subsequent exposure to the harmful substance may have been the actual culprit, all insurers will still be required to indemnify the insured. The manifestation rule provides that the material time for the occurrence of bodily injury is when its symptoms first manifest themselves or the disease has been diagnosed. The insurer with the policy in effect at this time would be solely liable. This rule seems unfair as events which eventually caused the disease may have occurred long before the insurer's policy came into effect. Judicial dissatisfaction with the exposure and manifestation rules led to some courts using a hybrid rule sometimes known as the multi-trigger rule. Under this rule, all insurers providing coverage from the time of the initial exposure to the harmful substance up to and including when the symptoms appeared or the disease was diagnosed, are obliged to indemnify the insured for bodily injury damages. More in line with traditional legal theories of causation is the injury-in-fact rule. This rule forces the insured to prove that bodily injury happened within the policy period. This will require expert evidence to show when the first signs of the disease occurred, whether or not the injured party was then aware of them. This could prove impossible in cases of asbestosis. These theories have mostly been canvassed in the United States. No particular theory has predominated on either side of the border but recently, an Ontario court expressly rejected the manifestation rule in St. Paul Fire & Marine Insurance Co. v. Durabla Canada Ltd supra, note, at p (1994), 19 O.R. (3d) 631 (Gen. Div.)

11 p. 8 Another issue that has arises in "bodily injury" cases is whether the policy covers consequential damage, that is, damage one or more steps removed from the original injury. The basic policy term provides coverage for "all sums which the insured shall become legally obligated to pay as damages because of bodily injury." This wording seems to imply that an insured is covered for any damages that would not have occurred but for the injury. However, the courts have been reluctant to interpret the coverage provision so broadly. Instead, the courts look to see if the damage has a direct relationship to the injury. The court also determines whether the damage could reasonably have been expected by the person who caused the original injury (the "reasonable proximity" or "reasonably foreseeable" test). In G.B. Catering Services Ltd. v. Beckley et al., 12 the insured food supplier provided contaminated luncheon meats to a G.B. Catering Services who, in turn, sold the meat to a local caterer, Creative Party Services. Creative used the meat to make lunches for Ontario Provincial Police officers engaged in a high-profile security operation involving Pope John Paul's visit to Ontario in Several officers became very ill and subsequently commenced actions against G.B. Catering and Creative. Those companies, in turn, launched actions against the insured supplier seeking indemnity and claiming for economic loss alleged to have been suffered through the adverse publicity that resulted from the illnesses suffered by the O.P.P. officers. The supplier's liability insurer settled all the claims save those concerning the adverse publicity. The insurer said that claim was not for "damages because of bodily injury". The supplier asked the court to decide the coverage issue and argued that the adverse publicity was damage that occurred because of the bodily injury suffered by the officers. The court ruled that the adverse publicity was not the direct result of the bodily injury but rather was caused by the intervening and independent acts of others in creating the bad publicity. Therefore, there was no obligation upon the insurer to indemnify or even defend the supplier for this claim. 2. The 1987 Wording As mentioned above, the 1987 wording places both bodily injury and property damage within Coverage A. There has been no change in the definition of "bodily injury" but the reader should note that the new policy provides coverage for bodily injury and personal injury. Care should be taken not to confuse the two. The new policy provides a separate coverage section, Coverage B, for "personal injury liability". Section V defines "personal injury" as: 8. "Personal Injury" means injury, other than "bodily injury", arising out of one or more of the following offences: a. False arrest, detention or imprisonment; b. Malicious prosecution; 12 [1994] I.L.R (Ont. Ct. Gen. Div.)

12 p. 9 c. Wrongful entry into, or eviction of a person from, a room, dwelling or premises the person occupies; d. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organizations goods, products or services; or e. Oral or written publication of material that violates a person's right of privacy. E. INJURY TO PHYSICAL OR TANGIBLE PROPERTY 1. The 1978 Wording The definition of "property damage" in the IBC's 1978 CGL policy is as follows: "Property damage" means (1) Physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) Loss of use of tangible property which has not been physically injured or destroyed provided such loss or use is caused by an accident occurring during the policy period. What constitutes a physical injury to physical or tangible property is probably one of the most litigated questions under the CGL policy. 2. Coverage for Intangible Property Damage Earlier versions of the CGL policy had used the term "injury" rather than "physical injury" and "property" rather than "tangible property". The intent of the drafters was likely to provide coverage only for injury to or destruction of tangible property but the original wording led some courts to grant coverage beyond that. Insurers were sometimes ordered to indemnify insureds for liability arising from damage to intangible property such as the goodwill of a business. 13 The 1978 wording was designed to clarify the original intent of the drafters which was to exclude intangible property damage. A recent case that focused on the difference between tangible and intangible property within the context of CGL policy coverage was Privest Properties Ltd. v. The Foundation Company of Canada Ltd. 14 which dealt with an insured who fireproofed an office building using a spray which contained asbestos. Years later, the building owners discovered the asbestos and were forced to remove it and replace it with a safe product. The owner sued the insured for the costs of removing and replacing the fireproofing material and for the loss of rental revenue while the repairs were being done. There were several insurers on risk over the years and in a court application to determine which insurer, if any, would be obliged to provide 13 H.A. Sanderson, supra, at pp supra, note 1

13 p. 10 coverage, they argued that the claims for removing the asbestos, the loss of rental revenue and the loss of building value did not constitute claims for property damage under their policies. Some of the CGL policies covered "damage or injury to property including the loss of use thereof", others covered "damage or injury to or loss of use of tangible property" while the remainder covered "physical injury to tangible property or loss of use of tangible property which has not been physically injured". The court ruled that claim for removing and replacing the fireproofing material was not in itself a claim for damage to tangible property and thus did not trigger coverage. The claims for loss of property value and loss of rental income could only be claims for damage to the intangible economic interests the owners had in the building. Coverage for such claims was not available from those insurers who restricted coverage to tangible property but the other insurers remained "on the hook". It should be noted that the owners did not claim that the presence of the asbestos actually constituted damage to the building and thus the court did not address that issue. 3. Preventative Measures Taken to Prevent Damage The courts have looked at the question of whether preventative measures taken before actual physical damage occurred could be considered an "injury to property". The facts of Bankers Trust Company v. Hartford Accident and Indemnity Company 15 case were that fuel oil leaked from the insured's warehouse into the ground and then into an adjacent river. In addition to repair and restoration costs, the insured had to bear the costs of steps taken to prevent further damage. The court found that the insurer had to compensate for this latter expense even though it was for work to prevent damage rather than to repair it. The court mentioned at page 374 of its judgement, "... if the policy did not cover this situation, [the] plaintiffs could have allowed the oil to continue to pollute the river and its shores, causing further social damage and damage to third parties, and ironically ultimately costing [the insurer] even more money." The British Columbia appears to have gone in the opposite direction in the 1993 case of MacMillan Bloedel v. Youell. 16 In its reasons for judgement the court acknowledged that this question had never been directly addressed by any other Canadian or Commonwealth court. The court also noted that there would be no difference in principle between non-marine liability coverage and the charterparty hull policy which was before the court. In her Reasons for Judgment, Madam Justice Southin referred to two U.S. cases, Leebov v. U.S. Fidelity & Guarantee 17 and Broadwell Realty Service v. Fidelity & Casualty Co. of New York, 18 in which coverage was awarded for the cost of preventative acts. She did not cite any case to the contrary F. Supp. 685 (S.D.N.Y. 1) 16 (1993), 79 B.C.L.R. (2d) 326 (C.A.) A. 2d 82 (Pa.S.C. 1960) A. 2d 76 (N.J.S.C., 1987)

14 p. 11 effect. Nevertheless, the MacMillan Bloedel court held that the insured in this case was not entitled to indemnity for such costs. In MacMillan Bloedel, the insured had chartered a freighter and taken out a common form of hull policy underwritten by London insurers. The policy included a sue and labour clause with respect to "the goods and merchandises and ship". During a voyage from New Orleans to Taiwan, the U.S. Coast Guard checked the cargo and advised that it was in danger of overheating and spontaneously combusting. The ship put into port in Long Beach, where the coal was unloaded and allowed to cool and the damaged cargo holds were repaired. The coal was ultimately loaded onto another vessel, which completed the trip to the Orient. Justice Southin noted that the vessel had been in grave danger of fire at sea. She also pointed out that if it had been lost, the charterers' liability, and therefore the claims under the hull insurance, would have greatly exceeded the policy limits. The ship itself was valued at $24,000,000; and the crew might also have been lost. By comparison, the cost of unloading at Long Beach was less than $2,000,000. Despite all of these considerations and in the absence of any precedent to support its decision, the Court of Appeal held that the insured's costs of preventing such a catastrophe were not recoverable. The Court apparently disregarded statements in the U.S. cases that it was "strange" and even "folly" for insurers to argue that such claims were not covered. In Leebov, the Pennsylvania Supreme Court (which is the final court of appeal for that state) stated as follows: "It would be a strange kind of argument and an equivocal type of justice which would hold that the [insured] would be compelled to pay out, say, the sum of $100,000 if the [insured] had not prevented what would have been inevitable, and yet not be called upon to pay the smaller sum which the [insured] actually expended to avoid a complete disaster." it this way: In Broadwell Realty, the Superior Court of New Jersey (Appellate Division), put "It would be folly to argue that the insured [is] required to delay taking preventative measures, thereby permitting the accumulation of mountainous claims of the expense of the insurance carrier. Stated another way, the policy does not require the parties to calmly await further catastrophe. Abatement measures designed to prevent the continued destruction of... property are plainly compensable under the policy." (emphasis added) The B.C. Court of Appeal was clearly not moved by such statements. In the Province of British Columbia it now appears that there is no available coverage for such

15 p. 12 preventative measures. That is the good news for insurers. The bad news is that insurers are required to indemnify for the catastrophic losses which may occur when an insured stands back and lets them occur. That is because, although the ultimate loss will be compensable, measures taken to prevent it from occurring will not. 4. Incorporation of a Defective Part Into a Larger Whole Another question that has frequently vexed the courts is whether there should be property damage coverage for liability arising from the incorporation of a defective part into a larger whole. In the 1977 American case of United States Fidelity & Guaranty Company v. Nevada Cement Company 19 the insured supplied cement to a construction project. After the cement was used, the general contractor discovered that it threatened the stability of an entire building and did shoring work to reduce the danger. The court ruled that the insured was covered for the shoring costs as the supply of the defective cement which threatened the structural integrity of the building amounted to property damage. Defective concrete was also involved in the more recent Alberta case of Carwald Concrete & Gravel v. General Security Insurance Co. Canada. 20 In Carwald the insured provided poor quality cement that was poured over pipes and electrical work. It was later discovered that the concrete would have to be replaced which would mean discarding the encased pipe and electrical work. The court ruled that even though the pipe work and electrical wiring had not suffered any destruction, they were rendered useless by the concrete and therefore were physically injured within the context of the CGL policy. In the British Columbia case of Gulf Plastics Ltd. v. Cornhill Insurance Company Limited 21 the court followed the reasoning in Carwald when dealing with a defective ingredient in the manufacture of plastic bags. The court found that when the insured's defective ingredient was incorporated into a third party's plastic sheets, the sheets were deprived of one of their essential elements, the ability to seal under heat treatment. The court ruled that this constituted property damage to the sheeting under the CGL policy. 5. The 1987 Wording IBC's 1987 CGL policy definition of "property damage" has been shortened but still has the same effect as the 1978 wording. It reads, "Property damage" means: a. Physical injury to tangible property, including all resulting loss of use of that property; or b. Loss of tangible property that is not physically injured P 2d 1335 (1977) 20 [1986] 17 C.C.L.I. 241 (Alta. C.A.) 21 [1990] I.L.R

16 p. 13 To deal with situations such as that which arose in the Privest asbestos fireproofing case, the drafters of the 1987 policy have introduced the following new exclusion clause: This insurance does not apply to: k. "Property damage" to "impaired property" or property that has not been physically injured, arising out of: The definition section provides, 1) A defect, deficiency, inadequacy or dangerous condition in "your product" or "your work"; "Impaired property" means tangible property, other than "your product" or "your work", that cannot be used or is less useful because: a. It incorporates "your product" or "your work" that is known or thought to be defective, deficient, inadequate or dangerous;... If such property can be restored to use by: a. The repair, replacement, adjustment or removal of "your product" or "your work";... Under the new exclusion, an insured would not be covered for liability arising from the loss of use of an office building while asbestos fireproofing or insulation, installed by the insured, was removed and replaced. Note that this clause would not affect the results of cases such as Carwald and Gulf Plastics as the defective part had become so integrated with the larger item that the latter could not be restored by the removal, repair or replacement of the defective part. F. ACCIDENT AND OCCURRENCE 1. Accident v. Intentional The basic coverage provisions in IBC's 1978 CGL policy wording require an "accident" to trigger coverage for property damage but make no such requirement for bodily injury. The 1978 wording does carry an exclusion for bodily injury caused intentionally by or at the direction of the insured. This next section will focus on the meaning the courts have read into the term "accident" which is not itself defined in the IBC 1978 CGL policy. Intentional bodily injury will be explored later.

17 p Accident The original liability policy drafters thought that "accident" would be interpreted to cover only unexpected or fortuitous events giving rise to sudden damage. 22 For the most part the courts fulfilled the drafters' expectations concerning coverage for unexpected or fortuitous events but differed widely as to whether "accident" also meant "sudden". Perhaps the most quoted definitions of "accident" in the context of insurance liability policies come from the case of Canadian Indemnity Company v. Walkem Machinery & Equipment Ltd. 23 at both the British Columbia Court of Appeal and the Supreme Court of Canada levels. At the Court of Appeal Robertson J. stated, "The word 'accident' is not a technical legal term with a clearly defined meaning, and in the policy here it is to be read in its proper and ordinary sense. That sense is expressed in these definitions: `any unintended and unexpected occurrence that produces hurt or loss' and 'an [undesigned], sudden and unexpected event'. Injuries are accidental or the opposite, for the purpose of indemnity, according to the quality of the results rather than the quality of the causes." 24 The Court of Appeal's decision was upheld by the Supreme Court of Canada. In the latter court's decision, Pigeon J. stated, "'Accident' covers... any unlooked for mishap or untoward event which is not expected or designed or any unexpected personal injury resulting from any unlooked for mishap or occurrence. The test of what is unexpected is whether the ordinary reasonable man would not have expected the occurrence, it being irrelevant that a person with expert knowledge, for example of medicine, would have regarded it as inevitable." 25 These extracts highlight two principles. First, the term "accident" will be examined from the point of view of the average person, not an expert in the field of insurance or law. This is consistent with the principle that the court must give a policy a meaning that meets the reasonable expectations of the insured. Second, the court will not look at whether the act was deliberate but whether the result was expected. The second principle has been the more difficult one to apply. What happens if the insured deliberately engages in a dangerous activity and one of the known risks materializes 22 H.A. Sanderson, supra, at p (1973), 38 D.L.R. (3d) 265 (B.C.C.A.), upheld [1975] 5 W.W.R. 510 (S.C.C.) 24 (1973), 38 D.L.R. (3d) 265 (B.C.C.A.) at p [1975] 5 W.W.R. 510 (S.C.C.) at p. 514

18 p. 15 and causes damage? What if deliberate damage must be done to remedy a problem created by the insured's negligence? In the 1963 case of Candler v. London & Lancashire Guarantee & Accident Co. of Canada 26 an insured fell to his death from a thirteenth floor hotel room balcony after standing on the railing to demonstrate his bravery. The Ontario High Court considered whether the death was accidental within the meaning of the insured's life insurance policy. In order to determine this, the court looked at whether the insured foresaw the consequences of his risky act. The court found that although he did not intend to fall, he was aware of that risk when he stepped onto the railing and therefore his death was not accidental. An insured must deliberately assume a risk of damage to be outside coverage. That the insured should have known of the risk involved is not enough to deny coverage unless the insured was so reckless that it must be assumed she or he knew of the risk. In the 1990 case of J & P Holdings Ltd. v. Saskatchewan Mutual Insurance Company 27 the insured was held to have been negligent in carrying out a contract to repair a gasoline pump and underground pump system. The Saskatchewan Court of Queens Bench ruled that the resulting damage was caused by an accident under the insured's liability policy. Wright J. stated, "I do not accept the argument that negligence and breach of contract on the part of the [insured] do not fall within the meaning of `by accident'. I concede that where the negligence complained of constituted recklessness the result might be different..." 28 In Supercrete Precast Ltd. v. Kansa General Insurance Co. 29 the British Columbia Supreme Court was asked to decide whether a liability policy would cover property damage done deliberately to remedy a problem caused by the insured's negligence. The insured supplied tension support cables to a contractor to use in construction of a bridge. After the cables were installed on certain piers and sealed in, it became apparent that the cables were faulty and could not be properly tensioned. Although it is not clear from the written decision, it appears that the general contractor had to break off and replace the original pier caps to remove and replace the faulty cables. The general contractor sued the insured which in turn looked to its liability insurer for indemnity. The insurer refused and the insured asked the court to determine if there was coverage under its liability policy. The insured claimed that the failure of the original tensioning system was an accident and that caused the damage. The court rejected the claim on two grounds. First, the court ruled that any damage to the pier caps was done at the direction of the general contractor as part of the work required to remedy the defect in the original tensioning system and thus was not "an unlooked for mishap", i.e. not an accident. In other words, the damage to the pier caps was 26 [1963] I.L.R. para (Ont. H.C.) 27 [1990] I.L.R (Sask. Q.B.) 28 id at page 10, 420; see also Mutual of Omaha Insurance v. Stats [1978] 2 S.C.R (1990), 45 C.C.L.I. 248 (B.C.S.C.)

19 p. 16 not caused directly by the failure of the tensioning system but rather the deliberate and intervening actions of the general contractor. Second, the court ruled that even if the damage to the pier caps could be said to have been caused by the failure of the tensioning system, such damages were the result of faulty planning, design or poor workmanship. The court then cited authorities for the proposition that damage resulting from faulty planning and poor workmanship cannot be characterized as accidental. 30 It can be argued that the court in Supercrete was wrong on at least the first ground it relied upon to reject coverage. Although the destruction of the pier caps was done at the direction of the general contractor, the destruction was necessary because the cables were sealed into the bridgework. Arguably, this comes close to the fact patterns in Carwald Concrete and Gulf Plastics Ltd., discussed above, where the incorporation of a defective part into a larger item constituted property damage to the larger item if it was thereby rendered useless or deprived of an essential item of value. 3. "Occurrence" and the 1987 IBC Wording As mentioned above, one of the reasons the original CGL policy drafters had used the term "accident" was to restrict coverage to sudden damage. Insurers were afraid that slowly developing damage, such as that caused by leaking oil tanks, would be too costly. Despite the drafters' intentions, the courts differed widely on whether the term "accidental" covered only sudden damage. As a result there was confusion in the insurance industry about what coverage was being granted. 31 To end this confusion the IBC 1987 CGL policy wording uses the word "occurrence" rather than "accident" as a coverage trigger. The new basic coverage provisions state: We will pay those sums that the insured becomes legally obligated to pay as compensatory damages because of "bodily injury" or "property damage" to which this insurance applies.... The "bodily injury" or "property damage" must be caused by an "occurrence".... "Occurrence" means an accident, including continuous or repeated exposure to the same general harmful conditions. The definition of "occurrence" expressly expands coverage to include gradual property damage but retains the word "accident" so that damage must still be unintended and unexpected. 30 On this point see also Greenan v. Maber Construction (1992), 14 C.C.L.I. (2d) 139 (N.B.C.A.) and Ellet Industries v. Laurentian P & C Ins. Co. (unreported) Van. Reg. C936355, July 8, 1994, B.C.S.C. 31 H.A. Sanderson, supra, at p. 102

20 p. 17 III. PART III: EXCLUSIONS A. GENERAL RULES FOR INTERPRETING EXCLUSIONS Thus far we have explored the basic coverage clauses for bodily injury and property damage. Once an insured has come within the terms of these clauses, coverage is triggered. Triggering coverage, however, is only the first hurdle. If the insured's claim falls within any of the policy exclusions, coverage is removed. Finally, some exclusions contain exceptions which neutralize the effect of the exclusion and return coverage. The next part of this paper explores some of the CGL policy exclusions and their exceptions. Exclusion clauses are subject to the same general rules of insurance contract interpretation outlined in Part I of this paper but there are some rules particular to exclusion clauses. They are as follows: 1. Exclusions are to be read narrowly and interpreted most favourably to the insured. 2. Exclusions limit or restrict the existing coverage. They do not grant or enlarge coverage. Therefore, an exception to an exclusion does not provide or enlarge coverage beyond what is given in the basic coverage provisions. 3. A matter encompassed by an exception to an exclusion only takes the encompassed matter out of the effect of that particular exclusion. The matter still remains subject to any other exclusion. B. BODILY INJURY TO EMPLOYEE OF INSURED 1. The 1978 Wording Bodily injury claims by an employee against her or his employer are generally barred by Workers Compensation legislation. 32 Nevertheless, the 1978 CGL wording includes an exclusion for employee injuries. The exclusion states: This insurance does not apply to: (e) bodily injury to any employee of the Insured arising out of and in the course of his employment by the Insured, but this exclusion does not apply to liability assumed by the Insured under an incidental contract; "incidental contract" means any written agreement which is a lease of premises, easement agreement, agreement required by 32 See Workers Compensation Act, R.S.B.C. 1979, c. 437, s. 10

21 p. 18 municipal ordinance, sidetrack agreement or elevator maintenance agreement. In the modern business world, many persons who would normally be viewed as employees have agreements that indicate they are independent contractors. Sometimes these arrangements are legitimate and in other cases they represent veiled attempts to circumvent Workers' Compensation laws, tax laws and the like. In deciding whether the CGL policy covers injuries to these people, the courts look beyond the "independent" label the parties have put on their service agreement and examine the facts underlying their relationship. The British Columbia case of Walden v. Danger Bay Productions Ltd. et al. 33 concerned two actresses who were injured during the filming of a television series. The actresses sued the production company which in turn sought coverage from its insurer. The insurer refused to indemnify the production company or even defend it in the lawsuit, insisting that the actresses fell within the employee exclusion in the insurance policy. The production company took the position that the actresses were independent contractors and added the insurer as a third party to the lawsuit and asked the court to determine if the exclusion applied. The trial judge examined the actresses' contracts and noted terms such as there were terms like "employ", "employee" and "employee for hire". These seemed to indicate a traditional employment relationship but, on the evidence before the court, the judge determined that these terms were merely included to establish that the actresses had no intellectual property rights in the television series. The judge then went on to examine several traditional tests for determining whether an employer/employee relationship exists. The theory behind the control test is that the more control the "employer" exerts over the work, the more likely the one doing the work is an employee. The trial judge found this test difficult to apply in cases where some form of art is at the centre of the relationship but determined that the actresses retained a significant degree of control over how their characters were portrayed. The profit test assumes that the more risk of profit or loss under a contract, the more likely the party is an independent contractor. The court noted that there was a chance of additional profit for the actresses under their collective agreement and their individual contracts but little risk of direct loss. However, in terms of a career path the possibility that the series might fail was a risk borne by the actresses. The trial judge also looked at the tool ownership test. Under this test, the more ownership the worker has over the tools for the job, the more likely she or he is an independent contractor. The production company stressed that it owned the sets and equipment but the court noted the actresses owned the skills used in bringing the character to life. This latter point seems somewhat strained as any employee or truly independent contractor uses their own skill on the job. 33 [1994] I.L.R (B.C.C.A.)

22 p. 19 The judge next looked to see whether the actresses were full-time or exclusive workers for the production company and determined that they were not. Finally, the judge applied the specified result test wherein independent contractor status is more likely in the case of an agreement to achieve a specified result than to provide services generally. The judge found that the actresses were doing more than providing services generally. Ultimately, the trial judge ruled that while no one test was conclusive, the force of all of them indicated the actresses were independent contractors and thus the employee exclusion in the liability policy did not apply. The insurer cited the case of MacKenzie v. Jevco Insurance Management Inc. 34 where a stunt person was found to be an employee but the trial judge distinguished it from the facts at hand saying the stunt person in MacKenzie had much less independence in the way in which he performed his job and the financial risks he took. The judges findings were upheld on appeal. 2. The 1987 Wording The 1987 wording is more detailed: This insurance does not apply to: d. "Bodily injury" to an employee of the insured out of and in the course of employment by the insured. This exclusion applies: a) Whether the insured may be liable as an employer or in any other capacity; and b) To any obligation to share compensatory damages with or repay someone else who must pay compensatory damages because of the injury. This exclusion does not apply: i) To liability assumed by the insured under an "insured contract"; or ii) To employees on whose behalf contributions are made by or required to be made by the insured under the provisions of any workers compensation law. "Insured contract", mentioned in the second last clause, has largely the same definition as "incidental contract" under the 1978 wording. 34 [1987] 1 I.L.R

23 p. 20 C. BODILY INJURY CAUSED INTENTIONALLY 1. The 1978 Wording The IBC 1978 CGL policy wording for the intentional bodily injury exclusion is straight forward and reads as follows: This insurance does not apply to: (g) bodily injury caused intentionally by or at the direction of the Insured; As when examining whether property damage was caused by "accident", a court trying to determine whether bodily injury was intentional will look at the degree of recklessness in the insured's behaviour. In the recent Ontario case of Vandergunst v. Montgary Food Enterprises 35 the plaintiff sued to recover damages for personal injuries caused by a beer glass thrown at him by the insured. The insured was charged and convicted of assault causing bodily harm in a criminal court and the insurer refused to defend or indemnify her in the civil action. The insurer said that the incident came within an exclusion for "bodily injury or property damage caused intentionally by you or at your direction or resulting from your criminal acts or omissions." The duty of an insurer to defend under a CGL policy is wider than its duty to indemnify. A discussion of the difference between the duty to defend and the duty to indemnify is beyond the scope of this paper but in brief, an insurer must defend an insured if the plaintiff alleges facts that, if proven at trial, would come within coverage. If such an allegation is made, the insurer must defend. If all allegations pointing to coverage are disproved at trial, the insurer is not obliged to indemnify the insured although the insured might be obligated to pay damages related to matters outside coverage. 36 In Vandergunst the court ruled that the insured had a duty to defend the insured. The court said that the criminal conviction did not necessarily mean that the insured fell within the exclusion. While the insured could not use the civil trial to re-litigate the issues surrounding the criminal conviction, she could possibly mitigate the effect of the conviction by introducing evidence to explain the circumstances surrounding it and thereby come within coverage. Flinn J. stated, "The question arises as to whether the concept of transferred intent, if established by the [insured] in the civil action, would avoid the exclusion found in the policy. The [insured] may be able to receive a verdict to the effect that while she intended to throw the glass, she did not intend to hit the plaintiff. This would explain 35 (1992), 10 C.C.L.I (2d) 109 (Ont. H.C.J.) 36 For a more detailed analysis, see N.P. Kent, The Defence of Partially Covered Claims (1992)

24 p. 21 the conviction, i.e. she committed an assault and bodily damage ensued." 37 It might be shown at trial that the insured was sufficiently reckless that her acts would be construed as being intentional, just as the insured's fall from the balcony in Chandler was not considered an accident. However, at the coverage hearing, the court accepted that the insured might be able to prove facts that would show that, even though she deliberately threw the glass, she was not wilfully reckless as to the possibility that the plaintiff would be injured. This was enough to oblige the insurer to defend her in the civil action. What the court seems to have overlooked, is that the injury resulted from the insured's criminal act in throwing the glass. The exclusion for injuries resulting from criminal acts or omissions is not in the IBC 1978 CGL wording but did form a part of the policy in Vandergunst. The insured clearly fell within this portion of the exclusion and it is not known why the court did not apply it. 2. The 1987 Wording The 1987 IBC policy wording makes an "occurrence" the triggering event for both property damage and bodily injury. As mentioned above, the definition of "occurrence" includes the term "accident". Nevertheless, the exclusion to prevent coverage for intentional damage still exists. It states, This insurance does not apply to: a. "Bodily injury" or "property damage" expected or intended from the standpoint of the insured. This exclusion does not apply to "bodily injury" resulting from the use of reasonable force to protect persons or property. Leaving aside the question of whether the entire exclusion is unnecessary, the final portion of it appears to be superfluous. If an insured's actions are "reasonable force to protect persons or property", the insured should not be liable to any third party for any bodily injury or property damage caused. It is therefore unclear why the exception for reasonable force was added to the exclusion. D. CONTRACTUAL LIABILITY EXCLUSION 1. The 1978 Exclusion In the IBC 1978 CGL policy wording, the contractual liability exclusion reads: This insurance does not apply to: (a) liability assumed by the Insured under any contract or agreement except an incidental contract, but this exclusion 37 id, at p. 112

25 p. 22 does not apply to a warranty of fitness or quality of the Named Insured's products or a warranty that work performed by or on behalf of the Named Insured will be done in a workmanlike manner. "Named Insured's products" means goods or products manufactured, sold, handled or distributed by the Named Insured or by others trading under his name, including any container thereof (other than a vehicle), but shall not include a vending machine or any property other than such container, rented to or located for use of others but not sold. This exclusion was designed to withdraw from coverage the insured's liabilities under "hold harmless" agreements but the exclusion has been interpreted by the courts to apply to all liabilities the insured assumes under its contact with another. 38 Under the interpretation given by the courts, a duty of care arising from the contractual relationship is not enough, by itself, to make the exclusion apply. It only applies if the insured, in its contract with a third party, has expressly assumed liability for the damage that occurred. In other words, the existence of a contract between an insured and a third party may create a common law duty of care on the insured not to cause damage to the third party but this alone will not cause the insured to fall within the exclusion. However, if the insured adds a term to the contract that expressly states that the insured will be responsible for any such damage, or damage for which the insured would not ordinarily be liable, the exclusion applies. The exclusion does not apply when damage is caused to persons who are not a party to the contract. When a contract is involved, injured parties often claim damages in tort and for breach of contract. This raises the question as to whether an insurer can refuse to defend such an action based upon the contractual liability exclusion. In BP Canada Inc. v. Comco 39 the insureds owned property containing a BP retail gasoline outlet which they operated. The insureds entered into a contract with BP Canada Inc. wherein the insureds agreed they would bear the responsibility for any liability, losses or damages arising from the escape of gasoline product from the gasoline storage system. Gas leaked from a cracked coupling in the storage system and the insureds' and some neighbouring properties were contaminated. BP Canada cleaned up the contaminated soil in compliance with its statutory duties and government directives and sued the insured in tort and contract for recovery of the cost. One of the insurers refused to defend or indemnify the insureds on the ground that the insured's liability to BP Canada Inc. had been assumed under contract and thus fell under the contractual liability exclusion in the insurance policy. The court noted that BP Canada had sued 38 H.A. Sanderson, supra, p (1990), 49 C.C.L.I. 298 (Ont. S.C.)

26 p. 23 in contract and tort and ruled that the insurer had a duty to defend the action because of the possibility that the insured's might be found liable in tort and not in contract. Of course, if the insured was found liable in contact at trial, the insurer would have no obligation to indemnify. 2. The Exceptions The contractual liability exclusion builds in exceptions for incidental contracts, warranties of fitness or quality and warranties of workmanlike performance. These will be canvassed briefly in this section. Incidental contacts are contracts that virtually every business must assume as an ancillary part of operations. Incidental contracts that are specifically named as exceptions are leases, sidetrack agreements (agreements for the use of short railroad tracks aside the main track, to store idle freight cars) and elevator maintenance agreements. These agreements must be in writing to come within the exception. Sale of Goods legislation in each of the Canadian provinces import warranties of fitness or quality into any sale of goods whether or not such a warranty is expressly given in the written contact. The exception returns coverage for this and any other warranty of fitness or quality given by the seller. Note that the coverage is only for damage caused by the defective product and not for the product itself which is excluded by the "product itself" exclusion to be discussed below. Similarly, the exception for warranty of workmanlike performance returns coverage only for damage caused by the insured's work and not for the cost of re-doing of the work itself which is covered by another exclusion to be discussed later. 3. The 1987 Wording The 1987 IBC wording for the contractual liability exclusion is as follows: This insurance does not apply to: b. "Bodily injury" or "property damage" for which the insured is obligated to pay compensatory damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for compensatory damages: 1) Assumed in a contract or agreement that is an "insured contract"; or 2) That the insured would have in the absence of the contract or agreement. "Insured Contract" means: a. A lease of premises; b. A sidetrack agreement;

27 p. 24 c. An easement or license agreement in connection with vehicle or pedestrian railroad crossings at grade; d. Any other easement agreement; e. An indemnification of a municipality as required by ordinance, except in connection with work for a municipality; f. An elevator maintenance agreement; or g. That part of any other contract or agreement pertaining to your business under which you assume the tort liability of another to pay compensatory damages because of "bodily injury" or "property damage" to a third person or organization, if the contract or agreement is made prior to the "bodily injury" or "property damage". Tort liability means a liability that would be imposed by law in the absence of a contract or agreement. An "insured contract" does not included that part of any contract or agreement that indemnifies an architect, engineer or surveyor for injury or damage arising out of: 1) Preparing, approving or failing to approve maps, drawings, opinions, reports, surveys, change orders, designs or specifications; or 2) Giving directions or instructions, or failing to give them, if that is the primary cause of the injury or damage. The reader should not assume that the use of the term "compensatory damages" in the new exclusion wording means that punitive damages or penalties will be included. As mentioned above, exclusions only limit coverage, they do not create it. Under the new basic coverage provisions, the insured is covered only for sums she or he is legally obligated to pay as compensatory damages for bodily injury or property damage. There is no primary coverage for punitive damages or penalties and none can be created by an exclusion clause. The new wording has dealt with the old case law which denied coverage for contractually assumed liability even though that liability also existed independently of the contract. Coverage is now expressly outlined for that situation. The new exception for "insured contracts" has replaced and expanded the old category of "incidental contracts". The inclusion of item "g." appears to reverse the intention of the original drafters to exclude save harmless agreements from coverage. E. AUTOMOBILE EXCLUSION 1. The 1978 Wording The 1978 IBC exclusion reads,

28 p. 25 (b) bodily injury or property damage arising out of the ownership, maintenance, use or operation by or on behalf of the insured of any automobile; "automobile" means any self-propelled land motor vehicle, trailers or semi-trailers while attached thereto or unattached (including its equipment mounted on or attached thereto) other than any of the following or their trailers, accessories and equipment: (i) vehicles of the crawler type (other than motorized snow vehicles); (ii) tractors (other than road transport tractors designed to haul trailers or semi-trailers), road rollers, graders, scrapers, bulldozers, paving machines and concrete mixers (other than concrete mixers of the mix-in-transit type); (iii) other construction machinery or equipment mounted on wheels but not self-propelled while not attached to any selfpropelled land motor vehicle; (iv) self-propelled land motor vehicles used solely on the premises of the Insured. This exclusion was designed to eliminate any coverage under the CGL policy that should be provided by automobile insurance. 2. Arising Out Of The words "arising out of the ownership, use or operation" of an automobile have been interpreted by the Supreme Court of Canada as follows: "the words 'claims arising out of... the ownership, use, or operation... of any motor vehicle' as used in this exclusion can only be construed as referring to claims based upon circumstances in which it is possible to trace a continuous chain of causation unbroken by the interposition of a new act of negligence and stretching between the negligent use and operation of a motor vehicle on the one hand and the injuries sustained by the claimant on the other." 40 In other words, if between the use of the automobile and the injury or damage, there is some intervening and causative act that is sufficiently distinct from the normal activities we associate with the ownership, use or operation of an automobile, there will be coverage. In the 1960 case of Law Union & Rock Insurance Co. v. Moore's Taxi Ltd. 41 a taxi company was hired to transport mentally handicapped children to and from school. Part of the instructions to 40 Law Union & Rock Insurance Co. v. Moore's Taxi Ltd., [1960] S.C.R. 80 per Ritchie J., at supra

29 p. 26 the drivers was that they were to only let children out on the side of the street where their home was located. One taxi driver let a child out on the opposite side of the street and the child was hit by another vehicle. The court held that the driver's, and thus the insured company's, liability came from activities that took place after the vehicle was stopped. The act of letting the child cross the street was not sufficiently connected to the use, ownership or operation of the taxi that the injuries "arose" out of the use, ownership or operation of it. The exclusion did not apply. 3. Ownership, Maintenance, Use or Operation In 1975, the Supreme Court of Canada found in Honan v. Gerhold 42 that "ownership" of a motor vehicle lies with the registered or bare legal owner unless it can be shown that exclusive beneficial or equitable title lies with another. For example, when a parent buys a car primarily for the use of the children but also uses the vehicle herself or himself, "ownership" would still reside with the parent. If the children exclusively used the car, the parent would not be an owner. In the 1956 case of Stevenson v. Reliance Petroleum Ltd. 43 the Supreme Court of Canada looked at the words "use" and "operation". Rand J. stated, "The expression "use or operation" would, or should... convey to one reading it all accidents resulting from the ordinary and well known activities to which automobiles are put, all accidents which the common judgment in ordinary language would attribute to the utilization of an automobile as a means of different forms of accommodation or service." In the 1989 case of Prudential Assurance Co. v. Manitoba Public Insurance Corp. 44 the Manitoba Court of Queens Bench looked at the meaning of the words "operation" and "use" under the CGL policy automobile exclusion as well as exceptions for "machinery or apparatus... mounted on or attached to a motor vehicle". In that case the insured owned a truck designed to transport concrete and pump it out at work sites. The insured was operating the pumping mechanism at a site when the pumping equipment struck an electrical wire, causing damage to third party's vehicle. The insured carried liability insurance which excluded coverage for "property damage arising out of the ownership, maintenance, use or operation by or on behalf of the insured of any automobile" but with an exception for "machinery or apparatus, including its equipment mounted on or attached to a motor vehicle trailer or semi-trailer, while such machinery or apparatus is in actual use or operation for its functional use at the site of operations." 42 [1975] 2 S.C.R [1956] S.C.R (1989), 40 C.C.L.I. 139 (Man. Q.B.)

30 p. 27 The Insured also had a Manitoba Public Insurance Corporation (M.P.I.C.) motor vehicle policy which covered the insured for damage arising out of the "ownership, use, or operation of an insured vehicle" but excluded coverage for "the loss or destruction of property of another, arising directly or indirectly out of the use or operation of equipment attached to an insured vehicle for a purpose other than the operation of the vehicle." A dispute arose as to whose policy covered the damage. The court found that the damage fell within the exclusion in the M.P.I.C. policy and within the exception to the exclusion in the liability policy. The court rejected the liability insurer's argument that "attached" or "mounted" refers only to the type of machinery that is not permanently fixed to the vehicle and can be removed rather than equipment that forms a permanent and integral part of the vehicle. It is easy to see why the court found that the damage fell within the coverage left by the exception to the liability insurer's exclusion. It is not clear why the court found that the M.P.I.C. insurance did not also provide coverage. The M.P.I.C. exclusion only applied to damage arising out of the use of equipment attached to the vehicle for a purpose other than the operation of the vehicle. M.P.I.C. argued that the words "operation of the vehicle" must be confined to the driving and mechanical operation of the actual vehicle and do not include the "use" of vehicle (i.e. use of the equipment). The court did not appear to follow this argument and that course is consistent with Stevenson but in the end the court held that the M.P.I.C. exclusion applied. Somehow damage arising from the use of the pumping equipment, which the court held to be a part of the purpose for which the truck was designed, was excluded as damage arising out of "the operation of equipment attached to the insured vehicle for a purpose other that the operation of the vehicle". 4. The 1987 IBC Wording The 1987 IBC policy has expanded the wording of the basic automobile exclusion and decreased the wording used in the definition of "automobile". The basic exclusion states, This insurance does not apply to: e. 1) "Bodily injury" or "property damage" arising out of the ownership, use or operation by or on behalf of the insured of: a) Any "automobile"; b) Any motorized snow vehicle or its trailers; c) Any vehicle while being used in any speed or demolition contest or in any stunting activity or in practice or preparation for any such contest or activity; or d) Any vehicle which if it were to be insured would be required by law to be insured under a contract evidenced by a motor vehicle liability policy, or any vehicle insured under such a contract, but this

31 p. 28 exclusion does not apply to the ownership, use or operation of machinery, apparatus or equipment mounted on or attached to any vehicle while at the site of the use or operation of such equipment. 2) "Bodily injury" or "property damage" with respect to which any motor vehicle liability policy is in effect or would be in effect but for its termination upon exhaustion of its limit of liability or is required by law to be in effect. The definition section provides, "Automobile" means any self-propelled land motor vehicle, trailer or semi-trailer (including machinery, apparatus, or equipment attached thereto) which is principally designed and is being used for transportation of persons or property on public roads. The new wording clearly expresses the intention of the original drafters to exclude coverage that should be provided by automobile insurance. In addition, the wording closes a loophole in the 1978 wording that allowed coverage for damage caused in automotive races or demolition derbies. By deleting the word "maintenance" from the old exclusion, the new wording means those engaged in automotive repair are covered by the policy. F. EXCLUSION FOR PROPERTY IN CARE, CUSTODY AND CONTROL The exclusions for property damage to property in the insured's care custody and control are virtually identical in the 1978 and 1987 IBC policy wordings. The 1978 exclusion reads, This insurance does not apply to: (h) property damage to (3) property in the care, custody or control of the insured or property as to which the insured is for any purpose exercising physical control This exclusion was designed to exclude coverage for damage to property that should be covered under insurance specifically designed for property, such as bailee insurance, fire insurance and so on. Further, the exclusion takes out of coverage risks that the drafters believed were the business risks that should be borne by the business persons themselves H.A. Sanderson, supra, at p. 147

32 p. 29 Insured's cannot always escape the effect of this exclusion by contracting out the "care and custody" part of their operations. In the 1990 case of Burrard Motor Inn Ltd. v. Laurentian Pacific Ins. Co. 46 had a liability policy which excluded coverage for loss of property "entrusted to the insured for safekeeping". The insured operated a hotel in which a parking garage was operated by another company on lease from the insured. Hotel guests were permitted to park free in the garage on a space-available basis. One guest left his car on the parking lot where a thief broke into it and stole $14,000 worth of property. The guest sued the hotel, the insured made an claim to the insurer and the insurer declined to defend the action based on the exclusion. The insured asked to court to determine if the insurer had a duty to defend. The court held that having parked his car in the lot which formed part of the hotel complex, albeit a lot leased by the hotel to another company, the guest was entitled to expect that reasonable steps would be taken by the hotel to protect his property. Responsibility for the safekeeping of the guest's car fell within the provisions of the exclusion which removed any duty upon the insurer to defend the action. G. THE "PRODUCT ITSELF" EXCLUSION 1. The 1978 Wording The 1978 "product itself" exclusion reads, This insurance does not apply to: (i) property damage to the Named Insured's products arising out such products or any part of such products; "Named Insured's products" means goods or products manufactured, sold, handled, or distributed by the Named Insured or others trading under his name, including any container thereof (other than a vehicle) but shall not include a vending machine or any property other than such container, rented to or located for the use of others but not sold. The "product itself" exclusion was designed to ensure that the CGL policy was not used to underwrite the cost of repairing or replacing the insured's own faulty products. In her text, The Comprehensive General Liability Policy: The Insuring Intent, Heather A. Sanderson gives an excellent overview of the judicial interpretation of this exclusion. 47 A product falls within the exclusion if the insured sells or distributes it, regardless of whether it is one the insured regularly sells distributes. The product is not "handled or sold" within the meaning of the exclusion if it is merely touched or repaired unless the item was consciously placed into the channels of commerce. The term "manufactured" refers to products 46 (1990), 43 C.C.L.I. 186 (B.C.S.C.) 47 H.A. Sanderson, supra, pp

33 p. 30 made by the insured and sent out into the channels of commerce but does not include equipment or items adapted by the insured for its own operations. "Sold" refers to products of the insured that have been acquired by third parties pursuant to agreements that fall within the definition of contracts of sale, as contained in the various provincial Sale of Goods acts. A "container" is any object that is designed or deliberately chosen by the insured to facilitate the physical handling of its goods or products. 2. The 1987 Wording The wording in the 1987 IBC policy has not changed greatly from the 1878 wording. It reads, This insurance does not apply to: i. "Property damage" to "your product" arising out of it or any part of it. "Your product" means: a. Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by: 1) You; 2) Others trading under your name; or 3) A person or organization whose business or assets you have acquired; and b. Containers (other than vehicles), materials, parts or equipment furnished in connection with such goods or products. "Your product" includes warranties or representations made at any time with respect to the fitness, quality, durability or performance or any of the items included in a. and b. above. "Your product" does not include vending machines or other property rented to or located for the use of others but not sold. H. THE "WORK PERFORMED" EXCLUSION 1. The 1978 Wording The IBC 1978 CGL wording of the "work performed" exclusion is as follows:

34 p. 31 This insurance does not apply to: (j) property damage to work performed by or on behalf of the Named Insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith; As with the "product itself" exclusion, the drafters of the "work performed" exclusion did not want the CGL policy to guarantee the quality of what the insured was selling. For example, the risk that repair work may have to be re-done is a risk that must be borne by the insured repair person. However, the insured is covered for any damage to other property caused by her or his faulty repairs. The term "work" refers not only to the actual physical activity but also to the end result of the activity. 48 Determining what the "work" is when the exclusion is applied to real life situations depends on who is doing the "work". The "work" or "product" of a general contractor is the entire project for which the contractor was engaged. 49 The "work" of a subcontractor would be the particular job for which she or he was employed. In the 1990 case of J & P Holdings Ltd. v. Saskatchewan Mutual Insurance Company, 50 an insured was negligent in carrying out a contract to repair a gasoline pump and underground pump system. The faulty repairs caused damage to the system and a sizeable gasoline spill. The owner of the pump system claimed for damage to the system, the cost of having someone else do the repairs and the cost of cleaning up the gasoline spill. The insured claimed against its insurer which refused to defend the action on the grounds that the damage was not caused by "accident" or it fell within the "work performed" exclusion. The insured asked the court to determine the coverage issue and both of the insurer's arguments were rejected. The focus of the case was on whether or not there had been an accident and little attention was paid to the "work performed" exclusion. With regard to the latter, Fraser J. said only, "With the greatest of respect, the plaintiff's claims have nothing to do with 'property damage to work performed by or on behalf of the Named Insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith'. The complaint is that Western breached its contract and acted negligently." It is easy to see why the exclusion did not apply to the damage to the pump system or the clean up of the gas spill. These were damages to other property caused by the faulty repairs and were enough to trigger the insurer's duty to defend the action. However, the trial judge may have gone too far in saying the injured parties claims had nothing to do with the 48 H.A. Sanderson, supra, at p Privest Properties Ltd. v. The Foundation Company of Canada Ltd. et al., supra at p (B.C.S.C.) at [1990] I.L.R (Sask. Q.B.)

35 p. 32 "work performed" exclusion. The injured party did claim for the cost of repairing the pump system. Presumably that would include re-doing the repairs for which the insured was originally hired. That cost would come within the exclusion and the insurer would not be obliged to indemnify the insured for any damages awarded for that portion of the claim. The "work performed" exclusion was also raised in the Privest case. The court ruled that this exclusion removed coverage for the cost of removing and replacing the asbestos based fireproofing material from the office building but would not exclude coverage for any damage to other property in the building caused by the asbestos. An insurer trying to determine whether the damage sustained was to the insured's work should carefully scrutinize the work orders or contracts. In the Ontario case of J.N.A. Distributors v. Permacool Mechanical Systems Inc. 51 the insured specialized in installing commercial heating and cooling systems. The insured re-routed the piping on several of the plaintiff's compressors, installed two new compressors and a rooftop condensor. The insured's negligent installation of the condensor caused damage to other parts of the refrigeration system including the compressors. The insured subsequently went into receivership and the plaintiff asked the court to determine if the insurance policy covered the damage to the compressors. The insurer argued different exclusions applied but primarily relied upon the one that excluded damage to "work performed by or on behalf of the insured arising out of the work or any portion thereof...". The plaintiff argued that the contract with the insured was in two parts. One part was for the installation of the condensor and the second part was the connection of the compressor and cooling units to the condensor. The plaintiff asserted that neither part involved work on the compressor and thus the exclusion did not apply. The court noted that rerouting the compressors necessarily involved performing "work" on the compressors. Further, the court reviewed the work orders and concluded the defendants work was a modification of the plaintiff's cooling system and thus the defendant performed work on the system as a whole. 2. The 1987 Wording The wording of IBC's 1987 "work performed" exclusion has changed greatly from the 1978 version. The new wording is as follows: This insurance does not apply to: (h) "Property damage to: 6) That particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it [1994] I.L.R (Ont. Ct. Gen. Div.)

36 p. 33 Paragraph 6) of this exclusion does not apply to "property damage" included in the "productscompleted operations hazard"... (j) "Property damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard". This 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. The definition section of the policy provides, 9. a. "Products-completed operations hazard" includes all "bodily injury" and "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work" except: 1) Products that are still in your physical possession; or 2) Work that has not yet been completed or abandoned.... c. This hazard does not include "bodily injury" or "property damage" arising out of the existence of tools, uninstalled equipment or abandoned or unused materials. 12. "Your work" means:... a. Work or operations performed by you or on your behalf; and b. Materials, parts or equipment furnished in connection with such work or operations. "Your work" includes warranties or representations made at any time with respect to the fitness, quality, durability or performance of any of the items included in a. or b. above.

37 p. 34 The new wording is confusing. It appears that the drafters were intending to exclude damage to work arising after the work had been completed. However, the wording arguably leaves insurers open to coverage that was not intended. It seems that damage to "work" is only excluded from coverage if it comes within the definition of the "products-completed operations hazard". There is an exception in the definition of the "products-completed operations hazard" for work that has not yet been completed or abandoned. This could mean that the insured would be covered for her or his own faulty work if the damage to the work occurred away from any premises the insured rented or owned and before the work was completed or abandoned. This would be a great expansion of coverage from the 1978 policy and it is doubtful that this is what the drafters intended. It remains to be seen what the courts will do with it. IV. PART IV: CONCLUSIONS In their efforts to protect insured's the courts have interpreted sections of the IBC 1978 CGL policy wording such that many of the intentions of the drafters in designing those sections were thwarted, although a few were exceeded. Some of the results were higher premiums and confusion in the marketplace as to what was and was not covered. The 1987 wording is an attempt to steer liability coverage back towards the insurers original intention to give the insured protection, at an affordable price, from fortuitous and unexpected risks but not from normal business risks. The new wording remains largely untested by the courts and thus it remains to be seen to what extent the drafters' expectations will be met. R. Glen Boswall Coverage and Exclusions Under CGL Policies: A Survey of Recent Decisions by Canadian Courts T / [email protected] CWA