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May 16, 2018

Hughes Amys' Bill Chalmers successful before Ont. C.A. in sustaining finding of no defence obligation

Posted in Duty to Defend

Author Michael S. Teitelbaum

Related Lawyer Caroline Mowat

In respect of the previous Blawg post, pasted below, in the now-titled Mori Essex Nurseries Inc. v. Northbridge General Insurance Corporation, further congratulations go to our Bill Chalmers who was successful before the Ontario Court of Appeal in upholding the motion judge's decision which found no duty to defend proceedings relating to the supply of grape vines.

Bill was very ably assisted in drafting the factum by one of Hughes Amys' fine associates, Caroline Mowat.

Well Done, Bill and Caroline!

The Court's Endorsement reads:

[1] The appeal was argued principally on the basis that the care custody or control exclusion did not apply so as to justify the respondent’s refusal to provide a defence to the appellant Mori Essex Nurseries (Essex).

[2] The motion judge found that the insurer had no duty to defend because of the exclusions contained in the Essex’s Commercial General Liability Policy. Essex appeals arguing that the claim includes damage that may have occurred after the vines left the care custody or control of Essex. As a result, Essex maintains that the care custody or control exclusion in the policy does not apply to some of the damage being claimed and the insurer must provide a defence.

[3] We disagree. The motion judge properly focussed on the pleadings and the policy. He carried out a careful review and correctly found that, as they relate to Essex, the pleadings allege that any defect in the vines resulting in the damage claimed was caused by Essex['s] negligent treatment of the vines when they were in its care custody or control. This triggers the care custody or control exclusion of the policy.

[4] In any event, the motion judge also considered Peller’s claim, as set out [in] its pleading. As he explained in his reasons, Peller’s allegation is that the damage was caused by fungus that affected 100% of the vines. This triggers a second exclusion in the policy, the exclusion for damage resulting from fungi or spores.

[5] In conclusion, we see no error in the motion judge’s decision and the appeals are dismissed. The cross-appeal is dismissed as moot. Costs to the respondent fixed at $10,000 inclusive of disbursements and applicable taxes.

Ont. Super. Ct. finds no duty to defend in action in which Hughes Amys' Bill Chalmers represented the insurer

by Michael Teitelbaum | Oct 18, 2017

Hearty Congratulations to our very own Bill Chalmers who successfully resisted a motion before Ontario Superior Court Justice Koehnen seeking an order that the defendant insurer was obliged to defend the underlying main and third party claims in British Columbia in Mori-Vines Inc. v. Northbridge General Insurance Corporation.

His Honour found that no defence duty was owed based on how the B.C. action is pleaded. He also held that if he were wrong, and a duty to defend were owed, then terms would be required to "protect the plaintiffs against any potential conflict that may arise as a result of events to date".

His Honour noted that one of the insureds, Mori, is a grower and wholesaler of grape vines based in Ontario’s Niagara wine region. The other insured, Mori Essex Nurseries, (Essex) is a corporation related to Mori that provides nursery services to grapevine wholesalers. In the spring of 2011, Essex retrieved approximately 47,000 vines from Mori and cared for them over the course of the summer. As part of this care, Essex sprayed the vines with a mixture of chemicals. In the fall of 2011, Essex uprooted the vines and returned them to Mori who placed them into cold storage for the winter. In the spring of 2012, Mori delivered the vines to Andrew Peller Ltd. (Peller) pursuant to contracts entered into earlier. Peller, a well-known wine producer, planted the vines in three of its vineyards in British Columbia. The vines were allegedly defective, as a result of which Peller commenced an action for damages against Mori in the Supreme Court of British Columbia. Mori instituted a third party claim against Essex.

Although Mori and Essex purchased separate insurance policies from the insurer, their wording is essentially identical. Both policies included Commercial General Liability (CGL) coverage. Northbridge denied a duty to defend Mori in the Peller claim and Essex in Mori’s third party notice. Northbridge based its denial on three exclusions in its insurance policies: the “Your Product”, the care custody or control and the fungus exclusions.

His Honour held all three exclusions applied, and declined to consider extrinsic evidence to determine otherwise, holding that the "pleading rule" applies, and the decisions relied on by the insureds did not apply. In obiter, he did find that terms for the defence of the action would be appropriate if there were a defence obligation.

On the provisions, and these additional points, His Honour stated in part:

[34] These paragraphs [in the Claim] demonstrate that Peller’s fundamental complaint is that the vines that Mori sold to Peller were damaged. That complaint would put the vines squarely within the definition of “Your Product” which is defined as: “goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by” the insured.

[35] Mori raises several arguments to suggest that the Peller claim is not caught by the “Your Product” exclusion.

[36] First, Mori argues that the exclusion does not apply because Peller does not allege that the vines are the product of any particular person or entity. While that is correct in the sense that Peller does not state literally that the vines are the product of Mori, the paragraphs quoted above make it clear that Peller bought vines from Mori, the vines were defective and the vines had to be replaced. These allegations bring the claim squarely within the language of the “Your Product” exclusion.

[37] Second, Mori submits that the vines are real property which removes them from the definition of “Your Product”, because the definition specifically excludes real property.

[38] In support of its submission, Mori relies on Hoegy v General Accident Assurance Co. of Canada, 1977 CarswellOnt 776 (Co Ct) where the court decided that it could not determine whether a flax crop was real property or personal property and interpreted the ambiguity in favour of the insured. There is, however, no such ambiguity here. In Hoegy, the court dealt with conflicting case law about the real or personal nature of crops. Cases that characterize crops as real property generally involve situations where the crop is planted in the ground. That could not be the case here. Peller purchased vines from Mori in Ontario for delivery to British Columbia. What Peller purchased was a plant that was moved from Ontario to British Columbia. That is inherently movable, personal property; not real property.

[39] Third, Mori submits that Peller claims damages for harm to Peller’s property and not to the vines that Mori sold.

[40] To support this submission, Mori asserts that Peller seeks damages for soil remediation. There is, however, no claim for soil remediation articulated in Peller’s claim. If Peller did assert such a claim, I would agree that a claim for soil remediation would generally not fall within the “Your Product” exclusion.

[41] To further support its argument that Peller seeks damages for harm to its own property, Mori argues that Peller claims loss of use of its vineyards because Peller could not replace the vines for a full year. Although the loss of use claim is not expressly articulated in Peller’s claim, I am prepared to accept that there is such a claim for purposes of this motion. Even so, I do not agree that a loss of use claim by Peller would take the claim outside of the “Your Product” exclusion.

[42] Mori argued that loss of use could not fall within the “Your Product” exclusion because the loss of use refers to the absence of or shortage of grapes from the vineyards, which grapes are not Mori’s product.

[43] As this court noted in Versa Fittings & Manufacturing Inc. v. Berkeley Insurance Co. 2015 ONSC 1756 at para. 43:

“In all cases the court needs to look beyond the labels and assess what is really being alleged. This will often require the application of common sense to an evaluation of what has been pleaded.”

[44] The pith and substance of Peller’s claim is that the vines did not perform as promised. In this sense the vines are no different than the output from a machine that a customer might purchase from an insured. If the customer claimed that the machine did not produce as many widgets as the insured had promised, no one could argue that that claim fell within a CGL policy. To do so would turn a CGL policy into a performance bond or guarantee of the effectiveness of the insured’s product. As noted earlier this is not their purpose.

[45] The grapes are no different. Their absence or shortage does not arise from damage that a Mori product has caused to Peller property. It arises from a defect inherent in the Mori product. The vines were intended to produce grapes. They did not. They did not do so because they were defective.

[46] Mori’s argument might hold force if Peller’s claim alleged physical damage to the vineyard, such as soil contamination. There is, however, no such claim. The damage as pleaded is for the cost of replacing the vines and for loss of production from the vines that Mori sold to Peller.

[47] Where property damage is excluded under a CGL policy, the exclusion also excludes loss of use claims related to the property: March Elevator Co. v. Canadian General Insurance Co. 1995 CarswellOnt 1237(S.C.J.), at para. 30. In other words, if the “Your Product” exclusion excludes damage to the vines, it must also exclude damages for loss of use of the vines. If it were otherwise, the CGL policy would again be turned into a performance bond or product guarantee.

[48] None of Mori’s submissions has persuaded me that the Peller claim is anything but what it seems on its face: a claim against Mori for the delivery of defective products which is excluded by the “Your Product” exclusion.

[11] In this proceeding, Mori and Essex seek an order requiring Northbridge to defend Peller’s action against Mori and to defend Mori’s third party claim against Essex. Mori and Essex also seek an order entitling them to appoint and instruct counsel of their choice, at Northbridge’s expense, which counsel need not report to, or take instructions from, Northbridge.

[52] In light the allegation that any defect “was caused by Mori Essex’s negligent treatment of the vines”, the care custody or control exclusion applies on the face of the third party notice and relieves Northbridge of any duty to defend Essex.

[53] Essex raises several arguments to avoid the care custody or control exclusion.

[54] First, Essex argues that the exclusion could only apply if the damage to the vines occurred when they were in its care custody or control. Essex points out that Peller does not allege when the damage occurred. 

[55] This misses the point. Peller did not join Essex as a defendant; Mori did. As a result, the pleading relevant to the coverage analysis of Essex is Mori’s third party notice. It clearly alleges that any defect was caused by Essex’s negligent treatment of the vines. That treatment could only arise if the vines were under the care custody or control of Essex. In addition to paragraph 10 quoted above, Mori’s third party notice also alleges that “vines [ ] were being grown and cared for by Essex…” and that “Essex would fully care for the vines during the growing season…” Mori’s own allegation that the vines are under Essex’s care, triggers the exclusion against Essex.

[56] Second, Essex argues that we do not yet know when the damage arose and points to case law that sets out different theories about when damage occurs to trigger coverage under an insurance policy. Some cases follow the exposure theory which holds that damage occurs when the property is first exposed to a deleterious substance. The exposure theory would hold that damage to the vines occurred while they were in the care custody or control of Essex. Other cases follow the manifestation theory which holds that damage occurs when the damage manifests itself. This theory would presumably have the damage occur at some time after the vines came into Peller’s possession and therefore not while they were in the care custody or control of Essex. Other cases follow the injury in fact theory which holds that damage occurs when the injury actually occurs. Still others follow the triple trigger theory which holds that damage occurs when any of the facts for any of the three earlier theories arise. Given these ambiguities Essex argues that they should be resolved in favour of the insureds.

[57] For purposes of this motion, the issue of when the damage occurred should not be resolved by resorting to complex trigger theories from cases with very different factual contexts. The issue must be resolved in light of the pleadings in the Peller action.

[58] Mori’s third party notice against Essex states in paragraph 9 that “Peller alleges that the vines were damaged at the time they were purchased…” In other words, the vines were damaged by the time Peller took delivery. That pleading precludes any argument by Mori (at least as against Essex) that the damage arose after delivery to Peller. As already noted, Mori goes on to allege that any defect in the vines “was caused by Essex’s negligent treatment of the vines.” The pith and substance of Mori’s claim against Essex is that any damage to the vines was caused by Essex. That allegation triggers the care custody or control exclusion as against Essex.

[59] Third, Mori argues that the care custody or control exclusion applies only to personal property, whereas the vines were real property while they were in the possession of Essex because they were planted in the ground.

[60] On the motion before me Northbridge argued that, even if the vines are characterized as real property, the care custody or control exclusion continues to apply because sub-paragraph 2(h)(5) excludes from coverage:

“That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations”

[61] I agree that sub-paragraph 2(h) (5) applies and relieves Northbridge of any duty to defend even if the vines are deemed to be real estate.

[62] The reference to contractors and subcontractors in sub-paragraph 2(h) (5) renders it applicable to both Mori and Essex.

[63] Mori and Essex object to the use of sub-paragraph 2(h) (5) because it was raised for the first time in Northbridge’s factum. Until delivery of its factum, Northbridge had always taken the position that the vines constituted personal property under the concept of fructus industriales even if they were planted in the ground.

[64] Mori and Essex do not allege any particular prejudice to them arising from Northbridge’s late use of the argument, nor did they seek an adjournment to conduct further research to respond to the argument.

[65] I have also considered the issue of fructus industriales and conclude that the vines were in fact personal property when they were in the possession of Essex and are therefore covered by other portions of the care, custody or control exclusion.

[66] The starting point of the analysis is to recognize that any single plant can be either real property or personal property or both depending on the circumstances and the time at which the question is posed. Generally speaking, if a plant is rooted in the ground, it is more likely to be characterized as real property. Once the plant is removed from the ground, it is more likely to be characterized as personal property: Stewart v. TD General Insurance Co. [2014] O.J. No. 983 (Div. Ct.).

[67] The concept of fructus industriales recognizes that even plants that are planted in the ground can constitute personal property. Plants that are fructus industriales and therefore personal property are the fruits of labour or industry. They refer to crops that are produced through human activity such as sewing or cultivation and include things like wheat, corn or other vegetables or grains that are sewn and harvested each year: Cameron v. Gibson (1889) 17 O.R. 233 (Ch. Div.) at p. 238 [1889] O.J. No. 167 at para. 20; Stewart v. TD General Insurance Co. [2014] O.J. No. 983 (Div. Ct.), at fn. 1.

[68] This is contrasted with the concept of fructus naturales such as perennial bushes or trees. In the context of the pleadings of this case, I find the vines to be fructus industriales while they were in the possession of Essex and therefore constitute personal property.

[69] Mori’s third party notice against Essex states that: Mori delivered the vines to Essex, Mori contracted with Essex to care for the vines during the growing season, Essex returned the vines to Mori in a rooted stage, Mori stored the vines in cold storage for the winter and Mori shipped them to Peller in the spring of 2012.

[70] It is clear from Mori’s third party notice that Mori shipped the vines to Essex on a temporary basis. Even though Essex might have planted the vines in the ground, there was no transfer of title from Mori to Essex and it was never intended that the vines would remain with Essex for the long-term. It was a temporary delivery of personal property that was returned to Mori as personal property, stored by Mori as personal property and shipped to Peller as personal property.

[72] The [fungi] exclusion is broadly drafted. It applies to both Mori and Essex. It applies regardless of the time at which the fungus arose. The exclusion of “any other cost, loss or expense…” precludes coverage for any potential claims by Peller for loss of use or loss of yield.

[73] The Peller claim clearly alleges fungus as the cause of the damages. Paragraph seven of the Peller claim alleges that it was an express or implied term of the contract between Peller and Mori that the vines would be free from fungus. The claim goes on to allege:

“10. On or about August 10, 2012 Mori advised Andrew Peller that the vines supplied pursuant to the contracts were defective as a result of the use of certain chemicals during the growing process. Andrew Peller reviewed the progress of the vines and found that approximately 40% of the vines purchased from Mori were dead.

11. As a result, Andrew Peller immediately purchased vines to replace the approximately 40% of the vines that were dead from alternative suppliers due to concerns with the Mori-Vine quality. The replacement vines could not be planted until the 2013 growing season.

12. In or about January 2013, Andrew Peller learned that, contrary to what Mori had advised in August 2012, the vines it had purchased were infected with four separate funguses, which would kill the remaining 60% of the vines before they could reach productivity. As a result, Andrew Peller immediately purchased further vines to replace the remaining 60% of the vines that it had purchased from Mori. The replacement vines could not be planted until the 2014 growing season.

13. In breach of the terms of the Contracts and its duty of care owed to Andrew Peller, Mori failed to ensure the vines provided to Andrew Peller pursuant to the contracts were fit for their intended purpose, of merchantable quality and free from all chemicals, funguses and diseases that could kill of materially impact the productivity of the vines.”

[74] Mori and Essex raise two arguments to avoid the fungus exclusion. First they point out that there has been no determination that fungus caused the damage. Second they argue that Peller alleges that only 60% of the damage arose from fungus. Neither of these submissions assists them.

[75] I accept that there has been no determination that fungus caused the damage. As the Supreme Court of Canada noted in Monenco, it is the pleadings that determine coverage issues at this stage. It matters not that the facts found at trial may differ from those pleaded. Here pleadings clearly raise allegations of fungus which trigger the exclusion.

[76] Whether the pleading alleges that 60% or 100% of the damage was caused by fungus makes no difference to the end result on the motion. If we assume that Peller alleges that only 60% of the damage was caused by fungus, the remaining 40% of the vines would still be caught by the “Your Product” and the care custody or control exclusions, both of which apply to the entire claim.

[77] That said, I read Peller’s claim as quoted above to allege that fungus affected 100% of the vines it purchased from Mori. In paragraphs 10 and 11 of its claim, Peller alleges that Mori told Peller in August 2012 that the vines it had supplied were defective because of the use of certain chemicals. Peller found 40% of the vines to be dead which caused Peller to replace those 40%. In paragraph 12 Peller alleges that that, in January 2013 it learned that what Mori had advised in August 2012 was wrong and that Peller now learned that the vines were infected with fungus which would kill the balance of the vines. As a result, Peller replaced the remaining 60% of the vines. I read that paragraph as alleging that all of the damage to the vines arose because of fungus although that is not what Mori initially advised.

[87] In the present case, the statement of claim clearly triggers exclusions under the policy. Mori and Essex argue that the facts determined at trial might turn out to be different and might not have triggered the exclusions. While that may or may not be the case, it is irrelevant to the current analysis.

[88] The duty to defend must be based on the allegations contained in the statement of claim, not upon possible findings at trial. If it were otherwise, insurer and the insured would do battle in each case about whether facts might develop at trial that either trigger a duty to defend or trigger an exclusion. Imaginative counsel can develop arguments like that at the outset of almost any legal proceeding. If we let such arguments rule the day, it would be impossible to determine if there is a duty to defend until after the proceeding is over. The only way to resolve the debate in a practical way is to have the pleadings govern.

[89] Rather than having courts speculate about what might happen at trial, the better approach is to rely on the pleadings and, if the pleadings change or the facts at trial come out differently than set out in the pleadings, it might be appropriate to re-visit the issue.

[93] In Brockton (Municipality) v. Frank Cowan Co., [2002] O.J. No. 20 (C.A.), the Court of Appeal held that courts should resolve the issue by asking whether there was a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer. Put another way, can counsel’s mandate from the insurer reasonably be said to conflict with his mandate to defend the insured in the civil action: Brockton t para. 43.

[94] If an insurer issues a simple reservation of rights letter based on the monetary limits under the policy, that is unlikely to create a conflict because the reservation is not based on the insurer’s view about any conduct of the insured that would be at issue in the underlying litigation: Brockton at paragraph 39 – 40, 47.

[95] Where, however, the insurer has taken positions that create a conflict between the position of the insured and that of the insurer in the underlying litigation, a conflict may exist: Corporation of the City of Markham v. Intact Insurance Company, 2017 ONSC 3150 at para. 52-53.

[96] In PCL Constructors Canada Inc. v Lumbermens Mutual Casualty Co., 2009 CarswellOnt 3695, [2009] ILR I-4860 (Sup Ct) 2009 CanLII 32915, the court held that it was appropriate to take steps to guard against conflict even where it found that no actual conflict existed.

[97] In the present case, there is more potential for conflict than in Brockton or in PCL but less than in Markham v. Intact.

[98] In the present case, the insurer and its counsel have taken firm positions and have devoted a fair degree of energy and analysis to their positions. It is difficult for anyone in those circumstances to reverse course and advance vigorously, a contrary position. If it were determined that Northbridge did have a duty to defend the Peller claim and the third party notice, Mori and Essex would, in my view, have a reasonable apprehension that personnel who have been involved to date on behalf of Northbridge would find it difficult to approach the matter with a completely open mind and that there would be a real risk that the insurer could steer the defence or witnesses towards a theory that characterized the conduct of the insureds as falling within an exclusion. This is in no way to impugn the character or good faith of the people involved. It simply reflects the human difficulty in advancing a position that is contrary to the position one has advanced before. While lawyers may be used to doing so. They usually do so on behalf of different clients and in the face of different facts.

[99] As in PCL, there are steps that can be taken to guard against those risks while at the same time maintaining the policy’s character as a duty to defend policy.

[100] As a result, if I am found wrong in my earlier conclusions and Northbridge does in fact have a duty to defend, I would order that the following steps be taken to protect the interests of Mori and Essex:

(a) Northbridge shall continue to have the right to appoint and instruct counsel to defend Mori and Essex.

(b) Defence counsel will be appointed who has not acted for Northbridge, Mori or Essex in the last five years.

(c) The adjuster with carriage of the defence should be different from the adjuster who had carriage of the coverage issue.

(d) The new defence counsel should not have any discussions with the coverage counsel, the coverage adjuster or other Northbridge personnel involved in the coverage issues to date.

(e) The internal insurance file should be purged of all documents dealing with coverage prior to being assigned to the new adjuster or new counsel with carriage of the defence.

(f) Claims staff within Northbridge that is assigned to the case should have had nothing to do with the claim up until this point and will have no communication with any person who has had dealings with the claim.

(g) New defence counsel shall report to Mori, Essex and Northbridge about all steps taken in defence of this matter so both insurer and insured are in a position to monitor the defence effectively and address any concerns that may arise. If Mori and Essex are represented by separate counsel they need only report to Northbridge and the litigation client they are defending (i.e. Mori or Essex but not both). 

[101] These steps strike a balance between the rights of Northbridge under a duty to defend policy to assume carriage of the defence and the rights of Mori and Essex to have the defence conducted free of any potential conflict between themselves and Northbridge.



  • care custody and control exclusion
  • fungi exclusion
  • exclusions

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