Court finds duty to defend exists on property formerly owned by insured

This case involves an application to determine whether an insurer has a duty to defend an action against an insured in relation to a claim for property damage to property formerly owned by the insured.  The property was sold, and the insurer argued that there was an exclusion policy in respect of property "owned" by the insured, and therefore, it had no duty to defend.

The court held that the exclusion for property damage to property owned by the insured was not intended to apply to situations where the property had been transferred to a third party, and a duty to defend arose.  The judge held that "the exclusion cannot be read as it was written both in the present tense and the past tense.  It is in the present tense only."

Hector v. Piazza [2011] O.J. No. 971, March 4, 2011, Ontario Superior Court of Justice, P.B. Annis J.

The defendant in the underlying action purchased a four-unit apartment building in October 2001 for the purpose of renovating and redeveloping it, and in 2006 sold the property the plaintiff.  In 2009, the plaintiff sued the defendant, alleging there was settling of the basement foundation.  The plaintiff's claim alleged negligent construction, negligent misrepresentation, and breach of contract.  The defendant was insured by AXA Insurance Canada under a commercial general liability policy that covered the property from October 15, 2001 to October 15, 2002.  The defendant brought this motion seeking a declaration that AXA had a duty to defend him on the basis of the claims for negligent construction.

AXA resisted the motion on two bases.  It argued that there was no duty to defend because the claims for negligent construction were derivative of the claims for breach of contract.  AXA argued that one of the necessary conditions for the plaintiff's claim in negligence was ownership of the property, and this condition was fulfilled only because of the contract of purchase and sale for the property.  The motions judge noted that in order for one claim to be derivative of another, significant constituent elements and circumstances of the derivative claim must be subsumed by the dominant one, such that its pith and substance could be said to be incorporated in the other.  He further noted that it would be challenging to convince a court that a negligence claim is subsumed in one of contract unless the contractual duties were generally the same as alleged to arise in the duties of care in negligence.  In this case, the pleadings raised disparate causes of action with different constituent elements with different stipulations as to the conduct giving rise to liability and providing for reparation.  The motions judge concluded that because the negligence claim was completely disparate from the contract claim, they could not be considered related and the negligence claim could not be said to be derivative of the claim in contract.

AXA also argued that it had no duty to defend on the basis of the exclusion in the policy which provided that the insurance did not apply to "property damage to property owned by the insured".  The insured argued that the obvious intent of the liability provisions of the policy was to insure against claims by third parties for damage to their property.  It was not intended to insure for damage against the insured's own property when he was the owner.  Such risks were intended to be covered by property insurance.  On that basis, the insured argued that the purpose of the exclusion was to make the insured look to his property insurance coverage for indemnification with respect to losses to the insured's own property.  The court accepted the insured's argument that it was not the intention of the exclusion to deny third party liability claims such as the plaintiffs, and that to apply the exclusion in such a way would create an unforeseen coverage gap not contemplated by the parties at the time they entered into the agreement.

In the result, the court held that the exclusion clause was inherently ambiguous within the context of the insurance policy, but that its historical context and its relationship to first party property coverage suggested that the exclusion was not intended to apply to situations where property had been transferred to a third party.  In the result, the court concluded that the insurer had not met its onus to demonstrate that the exclusion clearly and unambiguously excluded coverage, and therefore it had an obligation to defend the insured in the underlying action.

This case was digested by Emily M. Williamson and edited by David W. Pilley of Harper Grey LLP. If you would like to discuss this case further, please feel free to contact them directly at ewilliamson@harpergrey.com or dpilley@harpergrey.com or review their biographies at http://www.harpergrey.com

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