Canada: Named Insured And Additional Insured: Same Policy, Different Coverage

In the recent decision, Sky Solar (Canada) Ltd. v. Economical Mutual Insurance Company, 2019 ONSC 4165, the Ontario Superior Court of Justice undertook a comprehensive overview of three fundamental concepts of insurance law, namely, the scope of coverage, forfeiture and the duty of good faith.

This decision is of interest to insurers, as it clarifies the coverage language contained in Additional Insured Endorsements in the context of commercial general liability insurance. Furthermore, it provides clear demarcation between reasonable and improper conduct by insurers when assessing coverage.

Facts

Sky Solar (Canada) Ltd. (Sky Solar) is a developer of solar energy projects. In April 2012, Sky Solar and Marnoch Electrical Services Inc. (Marnoch) entered into two contracts for the construction of solar energy projects in Brampton and Bolton, Ontario. Pursuant to these contracts, Marnoch agreed to provide specified insurance coverages to Sky Solar.

Firstbrook, Cassie & Anderson Limited (FCA), Marnoch's insurance broker, issued certificates of insurance confirming that Economical Mutual Insurance Company (Economical) had issued a commercial general liability policy (Policy) in connection with the projects. The certificates of insurance issued to Marnoch named Sky Solar as an Additional Insured under the Policy. Marnoch provided these to Sky Solar concurrently.

The Policy included an Additional Insured Endorsement, which stated:

A defective transformer caught fire at one of the solar project locations. Sky Solar investigated the fire and, in spite of its conclusions, continued to use the same transformer from the same manufacturer at both project locations.

In November and December 2012, Sky Solar sold the solar energy projects to Firelight Solar Limited Partnership (Firelight). However, months later, another transformer ignited. This second fire caused total shutdowns at both solar energy project locations. Firelight claimed remediation costs and loss of income against Sky Solar based on contractual warranties.

Sky Solar settled the warranty claims with Firelight. In exchange, Firelight reassigned the benefit of Marnoch's contractual warranties to Sky Solar. In September 2013, Sky Solar commenced arbitration proceedings against Marnoch for all of its losses resulting from the fires. An arbitral award dismissed Sky Solar's claim, and the Superior Court of Justice dismissed the appeal that followed.

Desperate to minimize its losses, Sky Solar commenced an action against Economical and FCA. For the purposes of this blog post, we draw particular attention to three issues involving Economical. First, whether Sky Solar's liability to Firelight is liability arising out of the operations of Marnoch. Second, whether Sky Solar forfeited coverage by failing to comply with conditions set out in the Policy. And third, whether Economical breached a duty of good faith owed to Sky Solar.

Decision

Scope of coverage: The loss did not "arise out of the operations of" Marnoch

The Court stated that "there [was] insufficient proximity between the decision taken by Sky Solar to continue to use the transformer and the failure of the transformer [...], on the one hand, and Marnoch's operational actions to order and install the transformer, on the other hand" to conclude that Sky Solar's liability to Firelight arose out of Marnoch's operations.

Sky Solar argued that "arising out of the operations of the Named Insured" must be given a broad meaning. The Court accepted this assertion and further explained, with reference to case law, that the words "arising out of" have been interpreted to include such meanings as "originating from", "growing out of", "flowing from", "incident to", or "having connection with" (Waterloo (City) v. Economical Mutual Insurance Co, 2006 CarswellOnt 8451, at paras 30-31).

In addition, the Court noted the phrase "arising out of" in the Additional Insured Endorsement should be construed as requiring "an unbroken chain of causation" and a connection that is more than merely incidental or fortuitous (Vernon Vipers Hockey Club v. Canadian Recreation Excellence (Vernon) Corporation, 2012 BCCA 291, at paras 28-52).

This conclusion drew upon the following findings in the arbitral award:

• Marnoch's scope of work was limited to the installation of solar equipment;
• Sky Solar designed the photovoltaic system, the wiring and the type of equipment to be installed;
• Sky Solar turned to Marnoch for help in locating an appropriate replacement transformer after the first fire;
• Sky Solar was left to decide exclusively whether or not to accept the replacement transformer;
• Marnoch was not asked for its views on the suitability of the replacement transformer, nor did it have expertise or technical knowledge to assess the relative advantages of different transformers; and
• Sky Solar confirmed its approval of the replacement transformer.

In the Court's view, the decision respecting the transformers to be installed at the solar project location rested entirely on Sky Solar. In other words, Marnoch located an appropriate replacement transformer, but ultimately Sky Solar approved the replacement. This "broke" the chain of causation required by the Additional Insured Endorsement.

Forfeiture: Sky Solar forfeited coverage by failing to comply with the conditions of the Policy

While the Court concluded that the Additional Insured Endorsement did not cover Sky Solar, it agreed to comment on Economical's forfeiture submissions. Put briefly, the Court held that Sky Solar did not comply with the conditions of the Policy.

Economical argued that regardless of whether Sky Solar had coverage under the Additional Insured Endorsement, Sky Solar did not comply with the Policy when it "admitted liability to Firelight, settled Firelight's claim, and voluntarily paid Firelight amounts for remediation costs and loss of revenue without [Economical's] consent". Stated differently, Economical relied on the insured's post-loss duties to communicate and cooperate with the insurer.

Sky Solar addressed this with four submissions. First, Sky Solar maintained that Economical could not rely on the conditions of the Policy because it was not set out in the certificates of insurance in Sky Solar's possession. The Court rejected this interpretation of the law by stating that the certificate "is nothing more than evidence of coverage, but cannot and does not create a separate and different policy or impose new duties on the insurer".

Second, Sky Solar denied that it failed to comply with the conditions because the Policy used the words "you" and "your" to refer to the "Named Insured", being Marnoch, which had provided a notice of loss to Economical via FCA. The Court, again, rejected that interpretation. An Additional Insured is not relieved from its obligation to comply with the Policy. In any event, the notice requirement was only one of several conditions. Another hurdle remained; Sky Solar had settled a claim without Economical's consent.

Third, Economical lost the right to rely on the conditions when it advised Sky Solar of its denial to defend and indemnify under the Additional Insured Endorsement. The Court flatly countered this submission because Sky Solar paid a settlement amount to Firelight before asking Economical to defend the claim. The insurer may lose certain rights under a policy when it refuses "to defend an insured in circumstances where the policy stipulates that a defence is required." However, that was not the case here.

Fourth, Sky Solar argued that it was entitled to relief from forfeiture because the evidence demonstrated that Economical would deny coverage regardless of compliance with the conditions of the Policy. Furthermore, Sky Solar argued that it mitigated its damages by settling with Firelight, and thus Economical was in no way prejudiced. Unsatisfied with the evidence adduced by Sky Solar regarding the absence of prejudice, the Court ultimately reasoned that there was "non-compliance," as opposed to "imperfect compliance" with the Policy; therefore, if there had been coverage under the Policy, Sky Solar would have forfeited such coverage.

Duty of good faith: Economical did not act in bad faith

Although Economical initially denied that Sky Solar was an Additional Insured, Economical quickly acknowledged Sky Solar's status as an Additional Insured less than two weeks later. The Court found that this conduct did not amount to bad faith.

Additionally, the Court noted that denying coverage without appointing an adjuster or conducting an investigation into the second fire did not breach the duty of good faith owed to the insured. Economical had denied coverage on an objectively reasonable basis, specifically, on the basis that Sky Solar had approved the transformers—not Marnoch.

Lastly, Sky Solar maintained that Economical improperly attributed different coverage to Marnoch and itself despite their identical status as insureds under the Policy. While this may make sense theoretically, the Court disagreed because coverage would have been tailored to each customer's individual risk exposure. The Additional Insured Endorsement had clear language to that effect.

Takeaway

This decision highlights the importance of reviewing insurance policies prior to their issuance when the obligation to obtain insurance for a construction project falls squarely on another party. Indeed, an organization should consider whether an Additional Insured Endorsement is satisfactory in light of its risk exposure. If not, the construction contract should explicitly require that the organization be a Named Insured instead of an Additional Insured.

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