In Pembridge Insurance Company of Canada v Chu,(1) a judge of Ontario's Superior Court of Justice recently concluded that insurance policies should be interpreted differently when multiple insurers are involved.
In this problematic decision, the court deviated from the longstanding rule that exclusion clauses should be interpreted narrowly. Remarkably, the court began with the assumption that one of the insurance policies must respond to the loss. Based on this assumption, the court decided that different rules of contractual interpretation would apply.
This case is problematic because:
- it conflicts with the well-established rules for policy interpretation;
- it suggests that a policy can be interpreted by looking outside the contract to its effect on a non-party; and
- the assumption that one policy must indemnify the insured was both irrelevant and an improper consideration on a duty to defend application.
Without appellate guidance, this decision may create confusion and unintended consequences on coverage applications involving multiple insurers.
Pembridge involved allegations that, after a motor vehicle accident, Chu left his vehicle to engage in physical violence and threatening behaviour. In a typical 'road rage' incident, he allegedly hit the window of another vehicle, while yelling and making other gestures. Because of Chu's conduct, the underlying plaintiffs alleged that they had feared for their lives.
Chu was insured under a Pembridge homeowner policy which covered "bodily injury or property damages". The policy contained an exclusion for claims "arising from the ownership, use or operation of a motorized vehicle".(2) Dominion, Chu's auto insurer, accepted the duty to defend allegations arising out of the use, ownership or operation of the vehicle. Dominion argued that the allegations regarding Chu's conduct after he left his vehicle had triggered a duty to defend under the Pembridge policy.(3)
False premise and errors in privity
The court began its analysis by correctly articulating the well-settled principles for interpreting insurance policies. It acknowledged that coverage terms must generally be interpreted broadly and exclusion clauses must be interpreted narrowly.
However, when it turned to interpreting the exclusion clause in question, the court decided that the narrow interpretation rule need not apply because the insured would have coverage no matter the outcome of the analysis:
In this case, however, regardless of how the exclusion clause is interpreted, one of the insurers will be providing coverage to the insured in relation to the insured's actions after exiting the vehicle, and the other will not. If I were to interpret the exclusion clause more broadly, this would leave Dominion responsible for following through with the coverage. If I were to interpret the provision more narrowly, this would make Pembridge liable for the conduct.
This was a false premise that gave rise to numerous errors in this decision. Here, the court assumes that only one insurer can respond to a loss when it is entirely possible that both policies could respond. The error in this analysis was further illustrated when the motion judge concluded in the next paragraph that "between Dominion and Pembridge, in light of the jurisprudence, it is more appropriate for Dominion to provide coverage in this case". In effect, the court concluded that only one policy would respond and that it was charged with deciding which policy appeared to be more appropriate. The judge misdirected himself on what the issue was and how it should be determined.
It is well settled that an insurance policy will be interpreted by reference to the insurer's intent and the insured alone – even if the dispute is "as between" insurers. For example, in dealing with an "other insurance" exclusion in Family Insurance Corp v Lombard Canada Ltd, the Supreme Court of Canada ruled that the intentions of one insurer regarding another insurer was irrelevant. Justice Bastarache wrote:
[T]he interpretation exercise is concerned with determining the intentions of the insurers vis-à-vis the insured… In the case of an insurance contract, the entire agreement between the insurer and the insured is contained within the policy itself and evidence of the parties' intentions must be sought in the words they chose… In the absence of privity of contract between the parties, the unilateral and subjective intentions of the insurers, unaware of one another at the time the contracts were made, are simply irrelevant. (Emphasis added.)(4)
In TD General Insurance Company v Intact Insurance Company, the Ontario Court of Appeal recently affirmed and relied on the conclusion in Family Insurance Corp. The court noted that in cases of overlapping insurance:
insurance policies themselves must be construed to determine the liability of each insurer, and the court should not refer to surrounding circumstances or look outside the policies. (Emphasis added.)(5)
But the court in Pembridge did just that when it began with the false assumption that, no matter the outcome, at least one insurer would have to indemnify Chu for the loss. As discussed in the section below, that false assumption distorted the motion judge's interpretation of the exclusion clause. Further, the false assumption also caused an improper finding on the ultimate responsibility for indemnity (see below).
Informed by the improperly assumed result, the court proceeded with its analysis of the Pembridge policy. The exclusion in the Pembridge policy read:
You are not insured for claims made against you arising from: The ownership, use, or operation of any motorized vehicles, trailer or watercraft, except those insured in this policy.
On reading this exclusion, the court concluded that Chu's road rage incident had arisen from the use or operation of a motor vehicle. In reaching that conclusion, the court relied on:
- Section 239 of the Insurance Act, which specifically requires that automobile policies provide coverage for loss or damage caused "directly or indirectly" in operation of a vehicle; and
- Amos v Insurance Corp of British Columbia, which afforded a broad, liberal interpretation of the phrase "arising from".(6)
The court found that cases interpreting the Insurance Act and following Amos have "very broadly construed" the phrase "arising from".(7) In relying on this line of cases, the court specifically observed, but ignored, that the Pembridge policy did not contain the phrase "directly or indirectly". The court further specifically observed, but ignored, that the line of cases cited by Pembridge arose in the context of interpreting coverage grants rather than coverage exclusions. The motion judge reasoned that because the interpretation analysis was being conducted "as between" insurers, the typical rules of interpretation did not apply.
This approach contradicts well-established Supreme Court of Canada precedent, which has repeatedly affirmed that:
- clauses granting coverage must be construed broadly; and
- clauses removing coverage must be construed narrowly.(8)
The court offered no reason to deviate from this rule other than its improper conclusion that Dominion's policy would respond if the Pembridge policy did not.
In fact, the Supreme Court of Canada dealt with this exact issue in Derksen v 539938 Ontario Ltd. In that case, the court held that the Amos interpretation of "arising out of" should not apply to cases interpreting insurance exclusions:
It is clear however that Amos is distinguishable from the case at bar on the basis that the relevant provision in that case was a coverage clause, as opposed to an exclusion clause. It is well-established that, in the construction of insurance contracts, coverage provisions should be construed broadly and exclusion clauses narrowly. Amos is of no assistance in this appeal.(9)
By broadly construing the exclusion, the court in Pembridge applied Amos in direct contravention of the Supreme Court's ruling in Derksen.
In line with Derksen, Dominion specifically relied on cases dealing with similar exclusions which show that road rage incidents "break the chain of causation" and thus are deemed not to arise out of the use or operation of the vehicle.(10) This characterisation of road rage incidents was relied on by the Supreme Court of Canada in Law Union & Rock Insurance Co v Moore's Taxi Ltd(11) and reaffirmed by appellate courts.(12) The court ignored these cases, preferring the broader interpretations afforded by the coverage (and not exclusion) analysis in Amos. As a result, the court maintained that Chu's actions after exiting the vehicle had been "incident" to the ownership, use or operation of the vehicle.(13) Accordingly, the court concluded that Pembridge had no duty to defend and therefore no duty to indemnify.
Notably, toward the end of the decision the court briefly acknowledged that an intentional act exclusion might also apply in this case.(14) Although the court did not conduct the analysis, it is notable that, given the underlying facts as pleaded, it is possible – but unclear, without a full factual record – that such an exclusion might apply. That analysis would be guided by the Supreme Court's ruling in Non-Marine Underwriters, Lloyd's London v Scalera, which dealt with intentional act exclusions and the intent to cause harm.
Errors regarding duty to indemnify
Much of the analysis in Pembridge is centred on the court's assumption that at least one insurer would ultimately be required to indemnify the insured. Because of this assumption, and given its ruling in favour of Pembridge, the court improperly went on to definitively rule on Dominion's duty to indemnify. This ruling was inappropriate on a duty to defend application.
After deciding that the term 'arising from' had been broad enough to capture the road rage incident and further deciding that the incident had not broken "the chain of causation", the court held:
I am finding that as between Pembridge and Dominion, Dominion will be required to provide the requisite coverage. Dennis Chu's actions after exiting the vehicle is now deemed to be incident to the ownership, use or operation of a vehicle. This finding should not be revisited by the trial judge. (Emphasis added.)
This finding contradicts the well-established precedent that the duty to indemnify should not generally be determined on a duty to defend application. To find there is no duty to defend, a court must find that there is not even a 'mere possibility' of coverage under the policy.(15) Therefore, the sole question on the application is whether the court can conclusively rule out the mere possibility that an insurer might have to provide indemnity based solely on the pleadings. Where there is no mere possibility of coverage, it is appropriate to rule on the duty to indemnify. But where the duty to defend exists or is assumed – as was the case with Dominion – it is inappropriate to make a definitive finding on indemnity.
The policy reasons for this are clear and compelling. In most cases, the duty to indemnify will turn on the ultimate findings of fact at trial and the basis on which liability is imposed on the insured. Without the benefit of a trial, the court cannot make a finding that the insurer has a legal obligation to indemnify because the indemnity claim has not yet crystallised.
The decision in Pembridge is clearly problematic. The conclusion that an insurance policy should be interpreted differently because another insurance policy might respond is simply wrong.
The critical error in Pembridge occurred when the court assumed that only one insurer could, and must, provide coverage. That assumption gave rise to all of the other errors in this case. Because the court assumed that there would be coverage for Chu, no matter the outcome, it wrongly concluded that the normal rules of policy interpretation would not apply.
Without the proper rules of interpretation, the court ruled that Pembridge had no duty to defend. Based on the initial error that there must be coverage, no matter the outcome, the court went further and ruled that Dominion must be responsible and imposed a duty to indemnify.
The court's initial assumption creates a false choice between insurers. In deciding that only one insurer can respond to the loss, the court has narrowed the scope of coverage that might otherwise be available. It is always possible to have two insurance policies that provide different coverage but both cover the losses. In that case, the insured may well have the benefit of additional limits of coverage, which would be lost by using the approach adopted in Pembridge.
The decision in Pembridge runs contrary to the basic rules of contractual interpretation and conflicts with well-established precedent. If followed, this case could lead to commercially unreasonable results and erode the benefits of coverage available to an insured.
Endnotes
(1) Pembridge Insurance Company of Canada v Chu, 2019 ONSC 1359.
(2) Pembridge at Paragraph 12.
(3) Pembridge at Paragraph 16.
(4) Family Insurance Corp v Lombard Canada Ltd, 2002 SCC 48.
(5) TD General Insurance Company v Intact Insurance Company, 2019 ONCA 5.
(6) Amos v Insurance Corp of British Columbia, 1995 3 SCR 405 at Paragraph 24.
(7) Pembridge at Paragraph 36.
(8) Reid Crowther & Partners Ltd V Simcoe & Erie General Insurance Co, 1993 1SCR 252 at Paragraph 37; Amos v Insurance Corp of British Columbia, 1995 3 SCR 405 at Paragraph 19; Progressive Homes Ltd v Lombard General Insurance Co of Canada at Paragraph 24.
(9) Derksen v 539938 Ontario Ltd, 2001 SCC 72.
(10) Pembridge at Paragraph 42. See also, Trench v Erskine (2006), 244 NSR (2d) 55.
(11) Law Union & Rock Insurance Co v Moore's Taxi Ltd, 1959 SCR 80 at Paragraph 11.
(12) Aetna Insurance Co v Canadian Surety Co, 1994 114 DLR (4th) 537 at Paragraph 70.
(13) Pembridge at Paragraph 43.
(14) Pembridge at Paragraphs 44-46.
(15) Nichols v American Home Assurance Co, 1990 1 SCR 801 (SCC).
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