JANUARY 2002

Supreme Court of Canada: Public Activity and Limitation Periods

In Berendsen v Ontario, [2001]S.C.C. 55, the Supreme Court of Canada, affirmed the practice of the courts of limiting the ability of public authorities to claim the protection of the shorter limitation periods that some provincial statutes contain, against lawsuits for damages for wrongful conduct in the performance of a public duty, to the cases where the activity involved is clearly a public activity. The SCC reiterated that the question, in each case, is whether the particular activity that caused the injury was of a public or private nature and applied the guidelines it set out in Des Champs v. Conseil des écoles séparées catholiques de langue française de Prescott-Russell, [1999] 3 S.C.R. 281 for determining that question. In Berendsen, the SCC held that the disposal of waste asphalt was primarily of a private character, even though carried out by the province pursuant to its public duty to maintain the roadway. The SCC stated that it was the actual activity, not the duty, which determined whether the act was of a public or private nature for the purpose of deciding whether the 6 month limitation period in the Ont. Public Authorities Protection Act or the 6 year limitation period in the Ont. Limitations Act applied. The asphalt had been disposed of on private lands under an agreement with the landowner. The province did not have a duty to dispose of the asphalt on private lands and only a limited number of people - those affected by the disposal - not the entire public had any claim arising out of the disposal. The SCC held the disposal activity was of a predominantly private aspect, being an operation decision made incidentally to the exercise of a public duty. DC

Supreme Court of Canada: Implied Duty of Confidentiality

In Lac d'Amiante du Québec Ltée v 2858-0702 Québec Inc, [2001] S.C.C. 51, the Supreme Court of Canada confirmed that the implied duty of confidentiality with respect to information obtained from another litigant in the discovery process exists in examinations for discovery under the Quebec Civil Code of Procedure. The Court, however, limited the scope of the duty by restricting it to information obtained solely from the examination, stating that the duty does not apply to information that is otherwise accessible to the public. The analysis used by the Court, including its references to the law of other provinces, indicates the limitation on the scope of the duty of confidentiality should be applicable in other provinces where the duty is recognized.

THREE CASES ON DEALING WITH COVERAGE ISSUES

Trafalgar Ins. Co. v. Imperial Oil Ltd., [2001] O.J. No. 4936 (December, 2001) is an example of the problem that arises, under liability policies, where the insurer denies an obligation to defend on the basis that the policy does not provide a duty to indemnify because of an exclusion which the insurer says will apply to any liability the insured might have for the claims asserted in the action. In Trafalgar, the Ontario Court of Appeal dealt, in part, with the shifting burdens of proof in duty to defend motions in respect of liability coverage. The Court affirmed the rule that that the duty to defend arises where there is a "mere possibility" that the claim made against the insured is covered by the policy. The Court stated that the onus is on the insured to establish, on a possibility basis - the court did not suggest that this has to be shown on the balance of probabilities - that the allegations made by the plaintiff, if proven, fell within policy coverage. Once that threshold is met, the onus shifts to the insurer, relying on an exclusion clause, to show the claim will necessarily fall outside of coverage because of the clause. With respect to what the insurer has to establish, the Court of Appeal stated, in paragraph 76: "In determining whether an insurer has a duty to defend, the test is whether there is a mere possibility that the claim made against the insured is covered by the policy: Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801. In my view, based on the wording of the coverage and exclusion clauses and the allegations made against Hope in the pleadings, the insured Hope is covered. However, we need only decide for the purposes of this appeal whether coverage is necessarily excluded. I am satisfied that it is not, and therefore the insurer has a duty to defend Hope in the action." [emphasis added]. The Court did not explain what the standard of proof is for "necessarily" however principle suggests it would have to be the balance of probabilities.

It is essential that insurers and insureds under liability policies appreciate the distinction between what the insured has to establish to have the benefit of the duty to defend and the insurer must establish to defeat the duty, where the insurer is relying on an exclusion to defeat the duty to which will exist if if the exclusion does not apply. The insured must merely show a possibility of coverage. The insurer must show that at liability will necessarily not be covered. That must mean that the insurer must show, on the balance of probabilities, that the exclusion will apply.

Trafalgar also limits the scope of the standard pollution exclusion. The insured, a contractor was involved in a site cleanup. The site was polluted. The insured had not caused the pollution, nor was it alleged that the insured caused the pollution. The allegation against the insured was that it was negligent in the manner in which it cleaned up the pollutants and this negligence resulted in damage. The pollution exclusion contained the standard provision that "This insurance does not apply to property damage arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants … if the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize the pollutants." Notwithstanding this wording, a 2-1 majority of the Court of Appeal (the dissent was on this point) held that the exclusion did not apply because the alleged negligent remediation of the contractor did not fall clearly fall within the exclusion.

[72] In this case, the acts alleged to have been done by Hope occurred during the course of its clean-up of the already discharged oil. Hope was neither an active nor a passive polluter in respect of the original spill, for which it had no responsibility. Hope's alleged failure to remediate the situation in a timely manner constitutes an independent act, which occurred after the original discharge and therefore constituted an independent cause of the plaintiffs' loss. There is no claim made against Hope for damage caused by the original escape, nor could there be. The claim against Hope does not arise out of the original escape of the oil but out of its later action in failing to clean up the oil and prevent future damage beyond the time when the situation should have been remediated. Therefore the damage allegedly caused by Hope's negligence does not arise out of the escape, discharge, dispersal or release of a pollutant as prescribed in the clause.
[73] The analysis can be tested by considering first the wording of the coverage clause, then whether the acts that come within coverage are excluded. Coverage is given where there is an occurrence. An occurrence is defined as an accident, including continuous or repeated exposure to the harmful conditions. Although Hope is not alleged to have caused the original escape, it is entitled to coverage because it is allegedly responsible from the time of its negligence, for continuous exposure of the property to the oil contamination.
[74] The pollution exclusion makes the insurance inapplicable where the property damage that would otherwise be covered - in this case, the damage from continuous exposure - arises from an escape, discharge, dispersal or release of pollutants from the site where the insured is performing clean-up of those pollutants. Because the insured must be on site dealing with the already-released pollutants for the clause to apply, it seems clear that the pollution exclusion speaks temporally to a new escape that occurs while the clean-up operation is ongoing. Such a new escape is excluded. Damage arising only from continuous exposure to pollutants released earlier, is not excluded.
[75] The exclusion requirement that the escape must be from the site where the insured is working also supports the interpretation that the clause is speaking to a new escape that occurs while the insured is working on site. Although in this case the original oil spill occurred on the same site where Hope was called to perform the remediation, depending on the circumstances in each case, the original escape may or may not occur on or from that site.

It does not seem that the majority gave sufficient consideration to the portion of the exclusion which reads "if the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize the pollutants." That provisio seems to invalidate the Court's argument that the exclusion is to be limited to those cases where it is alleged the insured was responsible for an escape of the pollutant.

In Federated Ins. Co. v Reliance Insurance Co., [2001] O.J. No. 4676 (Sup. Ct.), the judge affirmed the reluctance of the courts to determine, in advance of trial, the ultimate apportionment of defence costs as between primary and excess carriers in those cases where, for whatever reason, both primary and excess policies are responsible for the costs and there is not a pre-existing apportionment agreement. The primary insurer wanted a definitive, permanent, 50-50 division. The excess insurer was content with the 50-50 division on the basis that the insurers would be entitled to seek a reallocation of the costs at the end of the trial. The Court accepted the excess insurer's position with the qualification that even the issue of whether any reallocation was available was a matter for the trial judge.

In Brockton (Municipality) v Frank Cowan Co., [2002] O.J. No. 20 (C.A.) (January 2002) considers the question of who, as between the insured and the insurer, has the right to appoint counsel and control the defence in cases where the duty to indemnify and duty to defend provided by the policy does not apply to all of the claims asserted in the action.

The case arises out of the Walkerton tragedy in which a number of people were poisoned, many fell sick, and some died, because of polluted water. The tragedy resulted in a class action against a number of defendants, including the Municipality of Brockton. Brockton and its insurer disagreed over whether Brockton should be defended by counsel it chose or counsel the insurer chose. The Ontario Court of Appeal affirmed the prima facie right of Brockton's insurer to appoint counsel, and control the defence of the action, in those cases where there is no conflict between the insurer and the insured. The Court affirmed the proposition that the mere fact that some portion of the claim against the insured is not covered does not, of itself, create a conflict sufficient that the right to control the defence and appoint counsel, still at the insurer's expense with respect to covered claims, passes to the insured. The case law has established that the insurer's right is not absolute. The insured argued that, in this case, the "usual right of the insurer to control the defence and appoint counsel should be overridden if there is an appearance of impropriety, which can be based on conflicts, divergences of interest and other proper objections or factors." The Municipality argued that:

"The appellant argues that the facts of this case demonstrate an appearance of impropriety requiring the insurer to surrender control of the defence of the civil actions arising from the Walkerton water disaster. The appellant's fundamental complaint is the nature of the advice given by Borden Ladner, counsel appointed by the respondents. Right from the beginning the municipality was advised by Borden Ladner that it should separate itself from the Walkerton Public Utility Commission and that the latter should take the lead role in reacting to the emerging legal and administrative proceedings. The appellant felt strongly that the disaster required it to give it a much more active and comprehensive response to these events. The appellant's other major concern was the insurer's reservation of rights concerning the policy limits and the exclusion from coverage of punitive and exemplary damages."

The Municipality argued that these facts, of themselves, created a sufficient appearance of impropriety that that the right to control the defence and appoint counsel passed to it. The judge at first instance did not agree with Brockton, nor did the Court of Appeal. The Court of Appeal stated:

"[38] … the law does not permit the appellant to build the concept of appearance of impropriety on to the concept of conflict of interest as a basis to require the insurer to surrender control of the defence. The older jurisprudence … which applies the notion of appearance of impropriety, does so in a conflict context rather than as an entirely "stand alone" concept. Moreover, even if it were advanced merely as an addition to conflict of interest, "appearance of impropriety" carries a vagueness which would make it difficult to apply with consistency and therefore unwise to adopt. More importantly however, the relevant jurisprudence both in Canada and in the United States has developed so as to clearly articulate the governing principle in this kind of case to be limited to conflict of interest."

DC

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