Limitation Period Expired – Discoverability Principle Not Applicable

In Muirhead v. Coulas [2011] OJ No. 4908 (S.C.J.), the defendants moved for summary judgment dismissing the action as statute barred. The action arose from a slip and fall in July 2005 and a claim was not commenced until July 2010.

The plaintiffs took the position that the limitation period did not begin to run until June or November 2009 when two medical opinions were received following another slip and fall in February 2006 when the plaintiff injured her same knee. They claimed that it was not until they received these reports that they discovered the 2005 injuries were ongoing and permanent.

The defendants took the position that there was no issue with respect to discoverability as the plaintiff knew she hurt her knee and she underwent surgery on her knee three days later and was unable to work for several months following.

Justice Mackinnon held that the defendants met their initial burden as they had led evidence that the plaintiff knew of her injury, it was serious enough to require surgery, she could not walk for two months after, she still had pain and restriction in movement six months later and had not been able to return to work by then. Justice Mackinnon also relied on section 5(2) of the Limitations Act , 2002 which sets out a presumption that a plaintiff has the requisite knowledge as of the day the act took place, “unless the contrary is proved”.

Addressing the plaintiffs’ submission that a proceeding would not have been an appropriate means to remedy the injury sustained as the plaintiff believed her injuries were resolving and would not be permanent, Justice Mackinnon stated that section 5(1)(a)(iv) “does not amount to a bar to an action for recovery in tort” and held that the cause of action was complete, even if the complete extent of damages was not fully known.

Justice Mackinnon agreed with the plaintiffs’ submission that an individual should not be required to commence an action where there is no reasonable prospect of recovery, but found there to be no such facts in the case at hand.
In response to the plaintiffs’ submission that the true nature of the loss from the 2005 slip and fall was not knowable until after the second incident, Justice Mackinnon held that the plaintiff clearly had a claim arising from the first incident and “the facts learned subsequently that the injury was permanent and contributed to her current severe condition may have been a basis to increase the quantum of damages sought but is not a new or different claim”.

Lastly, the plaintiffs attempted to rely on cases that extended the running of the limitation period because a medical opinion was required in order to know whether a cause of action existed. Justice Mackinnon pointed out that in all of these cases, the court had referred to the requirement that the plaintiff acted with due diligence in acquiring facts in order to be fully apprised of all material facts upon which a negligence claim can be based, including being diligent in requesting and receiving a medical opinion, if required. The plaintiffs in this case did not provide evidence as to why they did not seek out the medical reports sooner that were ultimately obtained in 2009. Also, there was evidence to suggest that there was an operative report available in March of 2007 that the plaintiffs did not request until later.

It was held that there was no genuine issue requiring a trial.

- Kristen Dearlove, Student-at-Law

California Court Holds Professional Services Exclusion Ambiguous

In its recent decision in Corky McMillin Construction Services, Inc. v. U.S. Specialty Ins. Co., 2012 U.S. Dist. LEXIS 3438 (S.D. Cal. Jan. 11, 2012), the United States District Court for the Southern District of California considered the application of an errors and omissions exclusion contained in a directors and officers insurance policy.

At issue in Corky McMillin was the insured’s right to coverage for an underlying class action.  Plaintiffs in the suit alleged that the insured, Corky McMillin, made various misrepresentations and omissions regarding the nature, value and desirability of certain residential neighborhoods. The policy provided coverage for “Insured Organization Loss arising from Claims first made against [the insured] during the Policy Period or Discovery Period (if applicable) for Wrongful Acts.” By endorsement, however, the policy contained an errors and omissions exclusion, stating in relevant part that:

… the Insurer will not be liable to make any payment of Loss in connection with any Claim against the Insured Organization arising out of, based upon or attributable to the rendering or failure to render services for others, including without limitation services performed for or on behalf of customers or clients of the Insured Organization … .

U.S. Specialty denied coverage on the basis of this E&O exclusion. Corky McMillin argued that the exclusion was ambiguous since the term “services” was not defined in the policy. U.S. Specialty countered, and the court agreed, that the term “services” should be interpreted based on its common dictionary definition, meaning “the work performed by one that serves.” The court further agreed with U.S. Specialty that while this definition of “services” was broad, the mere breadth of the term did not otherwise render it ambiguous.

The court nevertheless found the exclusion as a whole to be ambiguous when considered in the context of the policy’s insuring agreement, which provided coverage for “wrongful acts,” defined in pertinent part as “any other actual or alleged act, error, misstatement, misleading statement, omission or breach of duty (a) by the Insured Organization … .” The court noted that while the intent of the E&O exclusion was to bar coverage for liability arising out of the insured’s services, it was not clear whether “services,” with its broad meaning, encompassed, and therefore excluded, the same “wrongful acts” covered under the policy’s insuring agreement.  For instance, explained the court, while the definition of “wrongful act” included misstatements, misleading statements and omissions, the exclusion, on its face, would operate to bar coverage for misstatements, misleading statements and omissions contained in the insured’s marketing materials – the very basis on which the insured was sued in the underlying suit. Given the “canons of construction” that insuring agreements are to be interpreted broadly in favor of the insured and that exclusions are to be interpreted narrowly against the insurer, the court concluded that “there is, at a minimum, ambiguity about the meaning of the term ‘services’ as used in the E&O Endorsement.”

Summary Judgment - Costs

We continue our discussion of the Court of Appeal's decision in Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764.

The former r. 20 provided that a party that was unsuccessful on a summary judgment motion was liable to pay substantial indemnity costs. The 2010 amendments eliminated the presumption of substantial indemnity costs.

The Court of Appeal commented on the costs rule as follows:

[67] As a result of the amendments to rule 20.06, the onus is now on the party seeking substantial indemnity costs to convince the court that the other side acted unreasonably or in bad faith for the purpose of delay in bringing or responding to a motion for summary judgment. This amendment removes a disincentive to litigants from using Rule 20 by eliminating the presumption that they will face substantial indemnity costs for bringing an unsuccessful motion for summary judgment. However, as the jurisprudence becomes more settled on when it is appropriate to move for summary judgment, the reasonableness of the decision to move for summary judgment or to resist such a motion will be more closely scrutinized by the court in imposing cost orders under rule 20.06.

It seems that this paragraph suggests that courts will revert back to substantial indemnity costs as a body of case law develops. This will be an important consideration when deciding whether to bring a summary judgment motion or not.

- Tara Pollitt

Supreme Court of Utah Addresses Allocation of Defense Costs Among Insurers

In a question certified by the United States Court of Appeals for the Tenth Circuit, the Supreme Court of Utah in The Ohio Casualty Ins. Co. v. Unigard Ins. Co., 2102 Utah LEXIS 1 (Utah Jan. 6, 2012) recently addressed the issue of whether allocation among successive insurers is determined by the insurers’ respective “other insurance” clauses or by a time-on-the-risk methodology.

The insured, Cloud Nine, had general liability coverage from Ohio Casualty for a one-year period, and then from Unigard for the next three years.  Cloud Nine was sued for an alleged advertising injury which allegedly took place during the last three months of the Ohio Casualty policy, continued throughout the entire period of the Unigard policy, and extended into a period of time in which Cloud Nine was not insured.  Ohio Casualty denied coverage and commenced a declaratory action in which Unigard eventually was a party.  The Utah federal district court held that Ohio Casualty indeed had a duty to defend Cloud Nine and that defense costs must be shared equally with Unigard as a result of their policies’ respective “other insurance” clauses.  Ohio Casualty appealed the question of allocation to the Tenth Circuit, which in turn certified the question to the Supreme Court of Utah.

Ohio Casualty argued on appeal that pursuant to the decision by the Supreme Court of Utah in Sharon Steel Corp v. Aetna Casualty & Surety Co., 931 P.2d 127 (Utah 1997), defense costs should be allocated based on a time-on-the risk methodology, and that Cloud Nine should be allocated a percentage of defense costs for its uninsured period.  Unigard, on the other hand, argued that allocation should be determined by the policies’ other insurance clauses, both of which stated that in the event of other insurance, the policies provide primary coverage on an equal shares basis. 

The court rejected Unigard’s argument, concluding that “other insurance” clauses do not apply to successive insurers, but only to concurrent insurers.  As such, the court explained, the matter was governed by its prior holding in Sharon Steel, which applied a time-on-the-risk methodology in the context of an environmental claim, rather than an equal shares methodology.  In explaining the basis for its prior holding, the court noted that such an allocation scheme “was the most equitable because it fairly related both to the time each insurer spent on the risk and the degree of risk each insurer contracted to assume.”  Thus, while the court agreed with Unigard that Ohio Casualty had an absolute duty to defend Cloud Nine, it noted that the “duty to defend and the apportionment of defense costs between two insurers that have an equal duty to defend are distinct issues.”  As such, the court concluded that defense costs should be apportioned based on time-on-the risk, subject to policy limits.

The court did, however, reject Ohio Casualty’s argument that Cloud Nine should be made to participate in its own defense.  The basis for the court’s reasoning was that both Ohio Casualty and Unigard, pursuant to their respective policies, assumed complete control over Cloud Nine’s defense.  As a result, the court concluded, “it would be inequitable to apportion any defense costs to an insured who has no power to select counsel or negotiate rates and no voice in deciding whether to settle the suit.”  Thus, the court held that defense costs would be divided between Ohio Casualty and Unigard based on their respective times on the risk and that “the portion of defense costs attributable to periods during which the insured lacked coverage” would be divided among the two insurers “in the same proportions.”

California Court Addresses Payment of Self-Insured Retention

In its recent decision in National Fire Ins. Co. of Hartford v. Federal Ins. Co., 2012 U.S. Dist. LEXIS 641 (N.D. Cal. Jan. 4, 2012), the United States District Court for the Northern District of California had occasion to consider the issue of whether an insured was required to satisfy a self-insured retention with its own funds, or whether the retention could be paid by other insurance.

The insured in National was a restaurant located within a hotel.  The restaurant hosted a graduation party at which a three-year old girl fell to her death from a balcony.  The girl’s family brought a wrongful death suit, initially against the hotel only, which was insured by Federal Insurance Company.  The hotel tendered its defense to National, the primary insurer for the restaurant, on the basis that the hotel qualified as an additional insured under the restaurant’s policy.  While National initially denied coverage to the hotel, it later paid its policy limit to plaintiffs in order to secure a settlement on behalf of the restaurant and the hotel.  National then brought a contribution claim against Federal. 

After finding that the hotel was, in fact, entitled to additional insured coverage under the policy National issued to the restaurant, the court addressed the issue of priority of coverage as between the National and Federal policies, and the related issue of whether payments made by National on behalf of the hotel satisfied the Federal policy’s self-insured retention.  The Federal policy had a $250,000 self-insured retention and the policy provision concerning payment of the retention stated that “[w]e have no obligation or liability under such Coverages unless and until the applicable Self-Insured Retentions … are exhausted by payments you make … You must pay all self-insured retention expenses.”  Thus, from the face of this provision, only the insured could pay the retention.

Citing to the 2010 California state court decision in Forecast Homes, Inc. v. Steadfast Ins. Co., 181 Cal. App. 4^th 1466 (Cal. App. 2010), Federal argued that this policy language required the hotel to pay the retention with its own funds, and that the retention could not be insured.  The court rejected this argument, however, noting that in Forecast Homes, the provision concerning payment of the self-insured retention expressly stated that “Payment by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention.”   By contrast, the Federal policy contained a “Bankruptcy Within the Self-Insured Retention” provision stating that the bankruptcy of any insurer, or any other person, would not relieve the hotel of its obligation to satisfy the retention.  This language, explained the court, implied that the retention could be paid by other insurers, or other persons, and at the very least, did not “clearly require the hotel to satisfy the SIR out of its own pocket.”  In other words, the bankruptcy provision negated the otherwise clear policy provision stating that the retention must be paid by “you.”

This aspect of the National Fire decision adds to the body of California case law dating back to General Star Nat. Ins. Corp. v. World Oil Co., 973 F. Supp. 943 (C.D. Cal. 1997) and Vons Cos. v. United States Fire Ins. Co., 78 Cal. App. 4th 52 (Cal. App. 2000), and more recently in cases such as Forecast Homes, Mt. McKinley Ins. Co. v. Swiss Reinsurance Am. Corp., 757 F. Supp. 2d 952 (N.D. Cal. 2010); Travelers Indem. Co. v. Arena Group 2000, L.P., 2007 U.S. Dist. LEXIS 17931 (S.D. Cal. 2007).  These cases establish the general rule that absent express and unambiguous language restricting payment of a retention to the insured, California courts will allow retentions to be satisfied by secondary sources, including other insurance.  

New York Court Addresses Impact of Allowing Insured to Default

The recent decision by New York’s Appellate Division, First Department, in K2 Investment Group, LLC v. American Guarantee & Liability Ins. Co., 2012 N.Y. App. Div. LEXIS 16 (Jan. 3, 2012) illustrates the dangers under New York law in denying a duty to defend, and allowing an insured to default, when coverage is questionable.

The underlying matter in K2 involved a convoluted factual scenario, complicated by the insured’s default.  Plaintiffs, K2, were a group of limited liability companies that made a series of loans to non-party Goldan, LLC.  Goldan’s principal was Jeffrey Daniels.  Mr. Daniels also happened to be an attorney, and in this capacity, he represented K2 in connection with the loan to Goldan.  How or why K2 agreed to be represented by Mr. Daniels despite the apparently obvious conflict of interest was not explained by the court.  After the loans were made, Goldan became insolvent and defaulted on the loans, whereupon K2 learned that Mr. Daniels had failed to properly secure the loans with mortgages and had failed to obtain title insurance. 

K2 subsequently brought a malpractice action against Mr. Daniels and demanded $450,000 to settle their claims, which was within the $2 million limit of liability on Mr. Daniels’ legal malpractice policy issued by American Guarantee.  American Guarantee nevertheless denied coverage to Mr. Daniels based on two policy exclusions: one applicable to claims based upon or arising out of the insured’s capacity as an officer or director of a business enterprise and the other applicable to acts or omissions of the insured for any business enterprise in which the insured had a controlling interest.  American Guarantee’s argument, therefore, was that the exclusions applied because Mr. Daniels represented K2 in connection with loans made to a company in which he was a principal.  Mr. Daniels failed to appear in K2’s lawsuit, resulting in a default judgment in the amount of $688,716.  Following entry of the judgment, Mr. Daniels assigned his rights under the policy to K2, including bad faith claims.  K2 thereafter brought a direct action against American Guarantee.

The court explained that having allowed its insured to default, American Guarantee could litigate the application of the exclusions, but could not otherwise challenge the underlying or damages determination, citing to Lang v. Hanover Ins. Co., 787 N.Y.S.2d 211 (N.Y. 2004) and Rucaj v. Progressive Ins. Co., 797 N.Y.S.2d 79 (N.Y. 1^st Dep’t 2005).  The court nevertheless concluded that the exclusions relied on by American Guarantee did not apply since K2’s suit related to Mr. Daniels’ capacity as their own lawyer rather than his capacity as a director or officer of Goldan.  The court noted that by having failed to defend its insured, American Guarantee “cannot at this juncture assert defenses that would have defeated the legal malpractice claims (for example, that Daniels was not performing legal services for plaintiffs but instead was representing Goldan) or would have established the applicability of the exclusions … .”  In other words, the court suggested that there were facts that would have either refuted K2’s malpractice claim, or that could have supported application of the policy exclusions, but by having allowed its insured to default, American Gurantee could not rely on or seek to discover such facts, and instead was limited to the allegations in the complaint in support of its policy exclusions.

In passing, the court rejected K2’s claim for bad faith, holding that under Pavia v. State Farm Mut. Auto Ins. Co., 82 N.Y.2d 445 (N.Y. 1993), K2 failed to demonstrate American Guarantee’s “gross disregard” of its insured’s interests under the policy.

Summary Judgment - Simplified Rules

This is our third post on the Court of Appeal's decision in Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764.

The Court seems to suggest that summary judgment may not be appropriate generally in Simplified Rules actions. The Court stated that although in appropriate cases, a motion for summary judgment in a r. 76 action may be a useful tool to promote the efficient disposition of cases, "it will often be the case that bringing a motion for summary judgment will conflict with the efficiency that can be achieved by simply following the abridged procedures in Rule 76." The Court held that summary judgment in r. 76 cases should be discouraged where there is competing evidence from multiple witnesses, the evaluation of which would benefit from cross-examination, or where oral evidence is clearly needed to decide certain issues. In many cases, the better course is to proceed to a speedy trial.

The Court did qualify its comments by indicating that it was not stating that summary judgment could never be used in Simplified Rules actions; in a document driven case, or in a case where there is limited contested evidence, both the full appreciation test and the efficiency rationale may be served by granting summary judgment in a simplified procedure action.

Given the Court's comments, it would seem that few summary judgment motions will be brought in Simplified Procedure actions.

- Tara Pollitt