Advancing a claim for Contribution and Indemnity as Equitable Set-off

Goma v. Raghunanan [2011] O.J. No. 4916

Motion to amend Statement of Defence

This was a very clever motion by defendant’s counsel to add a claim for contribution and indemnity where the limitation period to start a counterclaim had passed.

This case involves a motor vehicle accident where there were two injured plaintiffs, the driver and a passenger. The defendants pleaded contributory negligence against the driver but neglected to counterclaim for contribution and indemnity against the passenger for her injuries.

When they realized the oversight, the plaintiff’s refused to consent to adding a counterclaim; the limitation period to counterclaim had passed.

The defendants decided to bring a motion to amend the statement of defence to add a claim for equitable set-off against the plaintiff. They assert that the s.18(1) Limitations Act limitation period does not apply.

Master Dash was bound by the decisive statements of a superior court, which held that claims for equitable set-off are not subject to limitation periods. See Canada Trustco Mortgage Co. v. Pierce Estate, [2005] O.J. No. 1886, 197 O.A.C. (C.A.) and Spiral Aviation Training Co. v. Attorney General of Canada, 2010 ONSC 2581.

However, after examining the test for equitable set-off and the case law presented by counsel, Master Dash held that the defendant’s could not meet the test. Specifically, the claim for contribution does not go to the root of the plaintiff’s claim for damages.

He concluded that a defendant cannot claim contribution and indemnity against one plaintiff for damages awarded to another plaintiff by pleading equitable set-off in the statement of defence; this must be done by counterclaim, and the defendants were out of time to advance a counterclaim.

Rule 26.01 allows for amendments that are “legally tenable”. Amendments must be granted “unless the claim is clearly impossible of success”. Master Dash determined that because the claim for equitable set-off cannot succeed, the motion must be denied.

- Alison McBurney

Missouri Court Addresses Owned Property Exclusion

In its recent decision in Clarinet v. Essex Ins. Co., 2012 U.S. Dist. LEXIS 7300 (E.D. Mo. Jan. 23, 2012), the United States District Court for the Eastern District of Missouri had occasion to consider whether a general liability policy afforded coverage for an insured’s obligation to stabilize and later demolish its own building so as to prevent damage to third-party property. 

The insured, Clarinet, was the owner of a historic building located in St. Louis, Missouri.  The building partially collapsed as a result of a severe windstorm.  The insured undertook efforts to stabilize the building, but it ultimately was determined that the entire building needed to be razed in order to prevent harm to persons and to an adjacent bridge.  It was not until after the demolition was complete that the insured gave notice to Essex that it had incurred costs to stabilize and demolish the building and that it was seeking coverage under its liability policy for such costs.

Essex denied coverage for Clarinet’s stabilization and demolition costs on the basis that there was no property damage resulting from an occurrence.  Specifically, Essex took the position that to constitute an “occurrence,” there must be injury resulting from the insured’s own negligent conduct.  As such, Essex contended, a windstorm cannot qualify as an occurrence.  Essex also denied coverage based on an “owned property exclusion” and an exclusion applicable to vacant buildings.  Finally, it denied coverage based on Clarinet’s failure to have provided notice of occurrence prior to undertaking the stabilization and demolition efforts. 

The court only briefly addressed whether a windstorm can constitute an “occurrence,” noting that there was no guidance under Missouri law as to whether an occurrence must result from the insured’s negligent conduct.  Ultimately, the court resolved coverage on the basis of the policy’s owned property exclusion, applicable to property damage to:

(1)           Property you own, rent, or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another’s property;  (Emphasis supplied.)

Acknowledging a lack of Missouri case law on the issue, the court surveyed case law from throughout the country as to whether the exclusion applies to bar coverage for costs necessary to prevent damage to third-party property.  In Castle Village Owners Corp. v. Greater New York Mutual Ins. Co., 878 N.Y.S.2d 311 (N.Y. 1^st Dep’t 2009), a New York appellate court held that the exclusion may not be enforceable when the insured has a legal obligation to prevent damage to another’s property.  The test in New York, as explained by the court, is whether there is a “nexus between the condition of the insured’s property and the existence of ongoing and immediate harm to the property of others.”  Courts in Michigan and Maryland, on the other hand, apply a more lenient standard, holding that the exclusion does not apply when the insured acts to prevent “imminent harm” to third-party property.  See, Aetna Cas. & Sur. Co. v. Dow Chem. Co., 28 F. Supp. 2d 448 (E.D. Mich. 1998); Aetna Ins. Co. v. Aaron, 685 A.2d 858 (Md. Ct. App. 1996).  Wisconsin courts, however, do not recognize an exception to the exclusion, holding it applicable even when there is imminent risk of damage to third-party property.  See, Watertown Tire Recycles, LLC v. Nortman, 788 N.W.2d 384 (Wis. Ct. App. 2010).  The Clarinet court ultimately decide concluded that Missouri courts, similar to those in Wisconsin, “would likely enforce the ‘owned property’ exclusion according to its plain terms, thereby excluding from coverage costs incurred to mitigate damage to third parties.”  In other words, there is no exception to the exclusion, even if the insured is acting so as to prevent third-party property damage that might otherwise be covered under a general liability policy.

The court found additional support for its conclusion on the basis of the policy’s exclusion applicable to any claims involving vacant buildings.  The policy specifically identified the building at issue as a vacant building.  The court further noted that the insured’s failure to have given notice to Essex of its stabilization and demolition efforts before incurring such costs necessarily prejudiced Essex and constituted an additional basis for noncoverage. 

Mississippi Court Addresses Coverage for Conversion Claim

In its recent decision in Markel American Insurance Company v. Tri-Miss Services, Inc., 2012 U.S. Dist. LEXIS 5850 (S.D. Miss. Jan. 19, 2012), the United States District Court for the Southern District of Mississippi had occasion to consider whether an insured was entitled to a defense under a general liability policy for a lawsuit alleging conversion.

The insured, Tri-Miss, was sued for allegedly purchasing over 13,000 pounds of copper and aluminum that it knew, or should have known, was stolen from plaintiff. The complaint specifically alleged that Tri-Miss demonstrated an intent to exercise dominion over the stolen metals, even after learning that the goods were stolen, thus giving rise to the intentional tort of conversion. Markel denied coverage to Tri-Miss, and subsequently brought suit, seeking a declaration that the underlying matter did not allege and “occurrence” and that coverage was otherwise precluded on the basis of the policy’s “care, custody or control” exclusion.

Tri-State argued that the underlying suit could allege an occurrence if it was determined that its purchase of the stolen property was accidental. The court disagreed, noting that under Mississippi law, conversion is an intentional tort that occurs when “the title of the lawful owner is made known and resisted, or the purchaser exercises dominion and control over the property by use, sale, or possession,” which is what plaintiff alleged in the underlying suit. These elements, explained the court, required intentional conduct from the standpoint of the insured. As such, and because the underlying plaintiff did otherwise not plead any conduct that could be construed as accidental, the court concluded that the suit did not allege an occurrence triggering a duty to defend.

The court also considered the policy exclusion applicable to property damage to “personal property in the care, custody or control of the insured.” The insured argued that the exclusion was ambiguous because the phrase “personal property” was not defined in the policy. Citing to various Mississippi case law and a dictionary definition, however, the court concluded that the phrase should be afforded a broad interpretation as any property other than real property. As such, the court held that the phrase “unambiguously includes the property at the heart” of the underlying suit, and that the exclusion therefore served as a secondary basis for noncoverage.

Illinois Court Addresses Liquor Liability Exclusion

In its recent decision in Netherlands Insurance Co. v. Phusion Projects, Inc., 2012 U.S. Dist. LEXIS 5222 (N.D. Ill. Jan. 17, 2012), the United States District Court for the Northern District of Illinois had occasion to consider the application of liquor liability exclusion.

The insured, Phusion Projects, produced and sold an alcoholic beverage that also contained significant quantities of “stimulants” such as caffeine, wormwood and taurine.  Phusion was named as a defendant in several product liability suits brought by individuals claiming injuries as a result of having consumed the beverage.  While the nature of plaintiffs’ injuries differed, all suits alleged, in pertinent part, that the combination of alcohol and stimulants in the Phusion beverage enabled plaintiffs to consume more alcohol without passing out, thus causing them to behave more erratically while intoxicated and/or causing them to suffer negative health effects.

Phusion’s primary and umbrella liability insurers denied coverage for the underlying suits on the basis of a liquor liability exclusion applicable to:

c. Liquor Liability

"Bodily injury" or "property damage" for which any insured may be held liable by reason of:

   (1) Causing or contributing to the intoxication of any person;

   (2) The furnishing of alcoholic beverages to a person under the legal drinking age or under the influence of alcohol; or

    (3) Any statute, ordinance or regulation relating to the sale, gift, distribution or use of alcoholic beverages.

This exclusion applies only if you are in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages.

Phusion argued that the exclusion should not apply since the policies were purchased specifically to insure Phusion’s products, which the insurers knew were alcoholic, thus rendering coverage virtually nonexistent.  The court rejected this argument, explaining that the policies provided coverage for other risks arising from Phusion’s products, such as “if Phusion sold tainted products and injured its customers in a manner unrelated to intoxication.”  Phusion also argued that the exclusion applied only to “Dram shop” claims, i.e., liability against bars for their sale of alcohol to individuals who then cause injuries to others.  The court rejected this argument as well, citing to the express language of the exclusion that broadly applied to any insured in the business of manufacturing, distributing and selling alcoholic beverages, not just those in the business of serving or furnishing such beverages.

Thus, finding the exclusion clear and unambiguous, the court concluded that the exclusion applied to four of the underlying suits alleging injuries as a result of plaintiffs being intoxicated, including a DUI-related suit and a suit alleging that an individual accidentally killed himself after his consumption of the Phusion beverage caused him to be awake, in an intoxicated state, for over thirty hours.  The court did, however, conclude that the exclusion did not apply to an underlying suit alleging that plaintiff developed a heart condition as a result of consuming the Phusion product since the his claim was based on the dangerous nature of the product rather than its intoxicating nature.

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