Ontario – ONCA holds that insurer has no duty to defend claims based on breach of contract that were excluded from coverage in a professional errors and omissions policy.
The Court of Appeal (“ONCA”) allowed an appeal from the application judge, and determined that the insurer XL had no duty to defend Panasonic for breach of contract claims made by Solar in an arbitration proceeding.
Panasonic failed to meet substantial completion deadlines owed to Solar under an Engineering Agreement (“the EA”), resulting in contracts being cancelled by a third party with Solar. Panasonic had a professional errors and omissions policy with XL that excluded contractual liability claims unless the insured would have had the liability in absence of the contract.
In the arbitration, Solar sought liquidated damages against Panasonic under the EA for missing the substantial completion deadlines and damages for breach of contract, misrepresentation, or unjust enrichment under an unsigned Proceeds Agreement which was negotiated with Panasonic after the substantial completion deadline was missed.
The case addresses issues that are of interest to arbitration lawyers.
- The standard of review;
- Principles of interpretation of XL’s insurance contract and, especially, as to the exclusion clause; and
- Whether Solar’s claims gave rise to a duty by XL to defend the claims
- Standard of Review
Feldman J.A. confirmed that the standard of review was correctness, as the interpretation of a standard form contact is characterized as a question of law, relying on Ledcor Construction Ltd. v Northbridge Indemnity Insurance Co.,2016 SCC 37, (CanLII), para.21.
- Contract interpretation.
The insurance policy had an exclusion clause which stated,
“This Policy does not apply to any Claim…arising from the Insured’s;”
- Assumption of any liability in contract or agreement; or
- Breach of contract or agreement
The exclusion does not apply to: (i) liability that the Insured would have in the absence of the contract or agreement…”
Feldman J. analyzed the exclusion to determine if it was so broad it would make coverage under the insurance policy illusory and held that because the XL policy had an exception to the exclusion, the exclusion clause was within the reasonable expectations of the parties.
The ONCA further considered the meaning and effect of the exception and held that, when read literally, it was ambiguous because the insured would have no relationship with Solar but for the contracts between them.
To resolve the ambiguity, Feldman J.A. applied contract the interpretation principles in Progressive Homes Ltd. v Lombard General Insurance Co of Canada 2010 SCC 33 at para. 23 (CanLII) which are summarised as follows:
- When the language of the policy is ambiguous the court should give effect to the clear language, reading the contract as a whole;
- When the language of the insurance policy is ambiguous, the court should rely upon general rules of contract construction and that the courts should prefer interpretations that are consistent with the reasonable expectations of the parties and avoid interpretations that give rise to an unrealistic result or not in the contemplation of the parties when the policy was concluded; and
- When the rules of construction fail, resolve the ambiguity against the contract drafter (contra proferentem).
The XL policy covered professional losses relating to claims resulting from an act, error, or omissions. Feldman J.A. held that “the policy continues to cover professional losses caused by the insured in performing its professional functions in its relationships with the claimant as they arise in law, regardless of the terms of their contract.” para.33
The insurer was responsible for losses caused by the insured’s negligent performance of its professional obligations, but the ONCA held that the insurer need not indemnify the insured for any extra obligations it undertakes in a contract, or for the breach any extra obligations it undertakes in a contract. para. 34
- Duty to Defend
The ONCA held that the insurer had no duty to defend the claim.
Under the EA, , Panasonic and Solar agreed that Solar’s sole remedy if substantial completion was not met, would be liquidated damages. The ONCA held that the application judge erred in his application of the test for determining the duty to defend focussing on the fact that Panasonic could be liable for negligence in its delay, which would be within coverage, but he failed to apply the exclusion and the exception to the exclusion to his analysis of the liquidated damages clause. In particular, the application judge failed to note that the claim for liquidated damages was Solar’s sole remedy under its agreement. In other words, Solar had contracted out of any claim it may have had against Panasonic for damages for negligence. Therefore, it could not make a negligence claim against Panasonic in the arbitration. para.40-41
Panasonic contracted out of its insurance coverage by agreeing to the liquidated damages clause because of the exclusion clause which excluded coverage for breach of contract. The insurer was only obligated to cover liability that insured would have without the contract.
The ONCA noted that its decision demonstrated the fairness of the exclusion clause as it was interpreted in accordance with the expectations of the parties who had included the liquidated damages clause in the EA . As the liquidated damages clause was Solar’s sole remedy, Solar could not make claims against Panasonic for negligence in the arbitration. para. 39
With respect to the unsigned Proceeds Agreement, Panasonic did not pay Solar the amount agreed. Solar alleged negligent misrepresentation or unjust enrichment in the arbitration. The claims for negligent misrepresentation and /or unjust enrichment did not give rise to a duty to defend. The ONCA agreed with the application judge that Solar’s claim under the Proceeds Agreement was a debt claim arising under contact, which was excluded under the exclusion clause.
Appeal allowed in part. No duty to defend.