The Alberta Court of Appeal recently considered the scope of a duty to defend in a non-standard-form insurance contract. In favouring the insured’s interpretation and dismissing the appeal, the Court construed the duty to defend from the policy as a whole.
A cold warehouse storage business (Clauson) provided freezer space for two commercial customers to store pet food and vegetables. The frozen products were later discovered to be thawed and damaged and both customers sued Clauson for breach of contract and negligent performance of contract (Underlying Actions).
Clauson’s insurer (Intact) refused to defend Clauson or assume its defence against the Underlying Actions.
Clauson applied in Master’s Chambers for a declaration that Intact owed Clauson a duty to defend under their policy of insurance (the Policy). Master Farrington granted the declaration (orally) — concluding that the losses claimed in the pleadings by the customers could be insured losses under the Policy and therefore the duty to defend arose.
Intact appealed Master Farrington’s decision to Justice Dilts who dismissed the appeal. Justice Dilts found Intact’s duty to defend Clauson arose for the following reasons:
i) The Equipment Breakdown Consequential Form extends coverage for Clauson’s liability to third parties for loss of products under refrigeration due to spoilage when the loss arises solely from an accident;
ii) The Defence provision contained in the CGL [Commercial General Liability form] applies to the entire Policy;
iii) The [allegations in the Underlying Actions] on their face, if assumed to be true, could give rise to a claim under the Policy; and
iv) It is not appropriate for this Court to consider extrinsic evidence in determining whether a duty to defend arises.
Standard of review
The Court of Appeal determined the Policy was not a standard form insurance contract attracting a standard of correctness (per Ledcor Construction Ltd v Northbridge Indemnity Insurance Co, 2016 SCC 37):
…. there is no evidence that the grouping of various forms comprising [the Policy] constitutes a “standard form” policy widely in use. Rather, Intact’s conglomeration of over 20 forms appears to have been compiled with the aim of fully covering Clauson’s unique insurance needs as a cold warehouse storage business.
Interpreting the Policy was therefore governed by the traditional principles of contractual interpretation — examining the relevant documents and provisions when read as a whole — in the context of a deferential review of the decision below.
Intact had a duty to defend Clauson if the allegations in the customers’ pleadings, if proven true, would require Intact to indemnify Clauson for the claims. Citing from Progressive Homes Ltd v Lombard General Insurance Co of Canada, 2010 SCC 33:
It is irrelevant whether the allegations in the pleadings can be proven in evidence. That is to say, the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify. What is required is the mere possibility that a claim falls within the insurance policy. Where it is clear that the claim falls outside the policy, either because it does not come within the initial grant of coverage or is excluded by an exclusion clause, there will be no duty to defend.
The Court of Appeal also recognized the following principles:
- The duty to defend is broader than the duty to indemnify.
- The allegations in the Underlying Actions are to be interpreted broadly to determine whether the plaintiffs’ claims come within liability coverage. Once Clauson demonstrates that the plaintiffs’ allegations come within the insurance coverage, the onus shifts to Intact to show that the claims fall outside the coverage because of an applicable exclusion clause.
The Court also confirmed extrinsic evidence is not relevant to the determination of the duty to defend, which Intact had raised in the hearings below.
The Court noted the Policy was comprised of more than 20 forms with the declarations page providing: “The Policy Declarations together with the Supplementary Declarations, Policy Conditions, forms, riders and endorsements, if any, issued to form a part thereof, completes the Policy.”
Only four of the forms were relevant to the disposition of the appeal:
- The CGL;
- The Warehouse Legal Liability Form (Warehouse Form);
- The Equipment Breakdown Coverage – Standard Comprehensive (BM31);and
- The Equipment Breakdown Coverage – Consequential Damage (BM35).
Of the four, only the CGL and Warehouse Form contained “duty to defend” language. Intact argued the heading of the CGL provision limited the defence obligation:
DEFENCE, SETTLEMENT AND SUPPLEMENTARY PAYMENTS – COVERAGES A, B and D
With respect to the insurance afforded by the other terms of this Policy, the Insurer agrees:
(a) to defend in the name of and on behalf of the Insured, claims, suits or other proceedings that may at any time be instituted against the Insured for any accident or “occurrence” covered by this Policy. . .
The Court rejected that argument in favour of finding the duty to defend applied to the entire Policy. Four reasons support that finding:
- The meaning of “Policy” in the CGL form reflected the meaning in the declarations page.
- The declarations page was not a boilerplate provision and expressly aggregated the multiple forms and endorsements as collectively comprising the Policy held by Clauson. As the chambers judge noted, “[t]he Policy by definition is the collection of all of its components”.
- If Intact intended the duty to defend captured by the word “Policy” to mean only the CGL form, it should have expressly described that restriction.
- Intact assigned only one policy number to the entire bundle of approximately 150 pages of insuring documents.
Therefore, although the duty to defend is described in the CGL form and the CGL heading implied a limited application, the single meaning of “Policy” repeated in the CGL extended the duty to defend to the entire Policy.
The Court declined to consider Intact’s alternative argument that exclusions in the Policy (Warehouse Form) would render the Underlying Actions exempt from coverage. The Court noted ambiguities in that form and noted that two other forms could ground liability.
The Court also noted that the foregoing interpretation was consistent with the commercial reality “that Clauson, being in the business of a cold storage warehouse, would have expected its insurer to provide coverage, somewhere in the volume of forms, for the most basic aspect of its business – the safe warehousing of customers’ frozen products.”
The Court of Appeal’s decision provides several important reminders. In addition to reviewing the relatively low standard required to trigger a duty to defend, the Court’s analysis highlights the various interpretive aids available in construing an insurance policy.
On one hand, the insurer’s interpretation was not unreasonable from a face value reading of the CGL provision (and heading). However, the Policy as a whole and the singular meaning of “Policy” necessitated a more fulsome application of the duty to defend. In that respect, insurers are advised to ‘test’ a perceived limitation against the language of a policy as a whole. Failure to do so may not only yield unfavourable judicial findings, but may also result in enhanced costs awards — Clauson was awarded 40% of its actual solicitor and own client costs for the underlying proceedings.
 Intact Insurance Company v Clauson Cold & Cooler Ltd., 2018 ABQB 997 at para 34