Case Summary: Insurers – Be sure of the policy terms before denying coverage
When a loss occurs and where there is both a general liability policy and either builder’s risk property insurance or self-insurance, the terms of the general liability policy are critical to determining which party pays for a loss. Secondly, self-insurance is not necessarily considered insurance and a principled analysis of the contract between parties needs to be done.
Insurance law – Commercial general liability insurance – Property damage – Interpretation of policy – Exclusions – Excess liability – Practice – Appeal – Summary judgments
Community Electric Ltd. v. Royal & Sun Alliance Insurance Company of Canada,  S.J. No. 53, 2020 SKCA 17, Saskatchewan Court of Appeal, February 21, 2020, R.K. Ottenbreit, L.M. Schwann and J.D. Kalmakoff JJ.A
The insured contracted with a third party to perform electrical work at a construction site. The contract required the insured to obtain a commercial general liability policy (“CGL policy”) which they did. The contract required the third party choose between self-insuring or obtain builder’s risk property insurance for the work at the site, and it chose to self-insure. The insured performed electrical work which led to a fire that caused damage to the construction works and subsequent losses. The third party withheld a sum of money from the insured as compensation under the contract. The insured accepted this and settled the third party’s claim, and then made a claim with its insurer for payment of the loss under the CGL policy. The insurer denied the claim on two grounds: First, that the damage caused by the insured was to the construction work and therefore covered by the third party’s self-insurance, and that the insured had not been required to pay the third party the money withheld. Second, that the third party’s obligation to provide builder’s risk insurance or to self-insure was “other insurance” under the CGL policy, and therefore made the CGL policy excess insurance.
The insured was successful in its summary judgment application for coverage from the insurer. The chambers judge found that the CGL policy covered the type of damage the insured caused, the third party’s self-insurance was not primary by virtue of the contract, the damage caused by the insured was “property damage” under the CGL policy, the insured was legally obligated to pay the third party for the loss, the settlement was not unreasonable, there were no exclusionary clauses that the insurer could rely on other than a relatively minor repair cost, and that the self-insurance was not “other insurance” under the CGL policy.
The insurer appealed.
The Court of Appeal noted two main issues, first, whether the chambers judge was correct in determining the CGL policy was engaged and secondly, whether the chambers judge was correct in determining the other insurance clause did not apply.
The Court of Appeal held that the chambers judge correctly focused on the terms of the CGL policy and made no error in determining that the terms provided for coverage of the losses incurred by the insured. The court rejected the insurer’s argument that general insurance principles made either self-insurance or builder’s risk policies primary coverage in this case. The CGL policy was engaged when the insured became legally obligated to pay compensatory damages because of property damage caused by their own error, based on the wording of the policy.
The Court of Appeal rejected the insurer’s argument that the third party’s obligation to self-insure created a tort immunity for the benefit of the insurer, on the grounds that the argument was an implicit attack on the reasonableness of the settlement. The chambers judge properly determined there was no basis to conclude the settlement between the insured and the third party was unreasonable.
On the second issue, the Court of Appeal used a principled approach in the consideration of self-insurance as “other insurance”. The court considered the terms of the contract between the insured and the third party to determine whether self-insurance as described either closely resembled insurance or met the ordinary definition of insurance, and whether it operated for the benefit of the insured. Additionally, whether financial responsibility laws affect the determination of the issue, and whether public policy considerations merit seeing the third party’s choice to self-insure as other insurance. The Court of Appeal concluded in the negative at each step of the analysis, and held that the chambers judge was correct to conclude that the insurer’s obligation to pay was not affected by the third party’s decision to self-insure as it was not other valid and collectible insurance.
This case was digested by Mark A. McPhee, and first published in the LexisNexis® Harper Grey Insurance Law Netletter and the Harper Grey Insurance Law Newsletter. If you would like to discuss this case further, please contact Mark A. McPhee at email@example.com.