Sky Solar (Canada) Ltd. v. Economical Mutual Insurance Company, 2019 ONSC 4165

CITATION: Sky Solar (Canada) Ltd. v. Economical Mutual Insurance Company, 2019 ONSC 4165

                                                                                       COURT FILE NO.: CV-18-591984-0000

DATE: 20190709

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:	) )
SKY SOLAR (CANADA) LTD. Plaintiff – and – ECONOMICAL MUTUAL INSURANCE COMPANY and FIRSTBROOK, CASSIE & ANDERSON LIMITED Defendants	) ) ) ) ) ) ) ) ))))	Rebecca Huang and Hannah Biesterfeld, for the Plaintiff
		Ben Forrest, for the Defendant, Firstbrook, Cassie & Anderson Limited Marcus B. Snowden and Pearl Rombis, for the Defendant, Economical Mutual Insurance Company
	)
	)
	))	HEARD: November 26-30, 2018 and December 3-7, 2018

 

CAVANAGH J.

 

REASONS FOR JUDGMENT

 

Introduction

[1]               The plaintiff Sky Solar (Canada) Ltd. (“Sky Solar”) is a developer of solar energy projects. Sky Solar entered into two construction contracts with a contractor, Marnoch Electrical Services Inc. (“Marnoch”), to build solar energy projects at two locations.

[2]               Under Sky Solar’s contracts with Marnoch, Marnoch agreed to provide specified insurance coverages including by naming Sky Solar as an insured under Marnoch’s commercial general liability policy. At Marnoch’s request, Marnoch’s insurance broker, the defendant Firstbrook, Cassie & Anderson Limited (“FCA”), issued a certificate of insurance certifying that Marnoch’s liability insurance policy had been issued by the defendant Economical Mutual Insurance Company (“Economical”) and that Sky Solar was named as an additional insured under this policy. Marnoch provided this certificate of insurance to Sky Solar.

[3]               The commercial general liability policy issued by Economical to Marnoch as the named insured included an Additional Insured Endorsement which states that the insurance “applies to those stated as ‘Additional Insureds’, but only with respect to liability arising out of the operations of the Named Insured”.

[4]               There was a fire at one of the solar project locations which involved a transformer selected by Sky Solar and ordered and installed by Marnoch. After this fire, Sky Solar investigated the cause and decided to replace the transformer with one from the same manufacturer and to continue to use the transformer from the same manufacturer at both locations. Marnoch ordered and installed the replacement transformer.

[5]               Sky Solar sold the projects to Firelight Solar Limited Partnership (“Firelight”).

[6]               Several months after this sale, there was a fire at the second location which also involved the transformer. Both solar projects were shut down for investigations and repairs. As a result of the shutdowns of the solar systems following the second fire, Sky Solar became liable to Firelight for remediation costs and loss of income based upon contractual warranties. Sky Solar settled the warranty claims and made a claim against Economical for indemnity coverage under the policy for its losses resulting from its liability to Firelight.

[7]               Initially, Economical denied that Sky Solar was an additional insured under the policy. Approximately two weeks later, Economical accepted that Sky Solar was named as an additional insured under the policy according to the certificates of insurance. However, Economical denied that Sky Solar’s liability to Firelight was covered under the policy by the Additional Insured Endorsement.

[8]               Sky Solar claims against Economical a declaration that it is covered as an additional insured under the policy and indemnification for its loss represented by the amount it paid to Firelight or, alternatively, compensatory damages.

[9]               Sky Solar claims damages against FCA in negligence in relation to its role as the insurance broker which issued certificates of insurance.

[10]           Sky Solar also claims against both Economical and FCA special damages for litigation expenses that it incurred in pursuing a contractual warranty claim against Marnoch in relation to its liability to Firelight through arbitration proceedings, damages for breach of a duty of good faith, and aggravated and punitive damages.

[11]           For the following reasons, Sky Solar’s action against Economical and FCA is dismissed.

Factual Background

Construction contracts for solar projects between Sky Solar and Marnoch

[12]           Sky Solar carried on business in Ontario as a solar energy project developer.

[13]           In August 2010, the Ontario Power Authority issued feed-in-tariff contracts to Sky Solar for solar projects to be built at 90 Whybank, Brampton, Ontario (“Whybank”) and 6 Manchester, Bolton, Ontario (“Manchester”).

[14]           Sky Solar entered into two contracts with Marnoch in February and April 2012 for the construction of the solar systems at the Whybank and Manchester locations, respectively. The tender documents and construction contracts required Marnoch to provide and maintain general liability insurance coverage including an endorsement to name Sky Solar as an insured. The construction contracts provided that the endorsement naming Sky Solar as an insured be “only with respect to liability, other than legal liability arising out of [Sky Solar’s] sole negligence, arising out of the operations of the Contractor [Marnoch] with regard to the Work”.

Insurance policy issued by Economical to Marnoch and Certificates of Insurance issued to Sky Solar as additional insured

[15]           On September 20, 2011, Economical issued an insurance policy to Marnoch as the named insured under an Expert Contractors Policy form identified as policy number 004884806 (the “Policy”) for the policy period of September 20, 2011/2012. The Policy included a commercial general liability (“CGL”) coverage under form number 2294 (03/2010 version).

[16]           The CGL included an Additional Insured Endorsement Form number 2069 (09/2007 version) which reads:

This insurance applies to those stated on the Declarations as “Additional Insureds”, but only with respect to liability arising out of the operations of the Named Insured.

Except as otherwise provided in this form, all terms, provisions and conditions of the policy shall have force and effect.

[17]           In connection with the construction contracts, Marnoch provided to Sky Solar two certificates of insurance that named Sky Solar as an additional insured under a commercial general liability policy of insurance issued by Economical to Marnoch. The first certificate was issued on January 30, 2012 as part of Marnoch’s response to Sky Solar’s invitation to bid, and the second certificate was issued on September 19, 2012 for the renewal period September 2012/2013. Sky Solar did not receive other insurance documents at those times.

[18]           Economical had a broker agreement with FCA dated September 1, 2005. The certificates of insurance which named Sky Solar as the certificate holder and additional insured, and Marnoch as the insured, were issued by FCA. Each certificate of insurance includes the following statement:

This certificate is issued as a matter of information only and confers no rights upon the certificate holder and imposes no liability on the insurer. This certificate does not amend, extend or alter the coverage afforded by the policies below.

The Policy was listed in each certificate as a policy of insurance which had been issued to Marnoch.

[19]           FCA did not provide a copy of the Policy to Sky Solar. Sky Solar did not request a copy of the Policy from FCA.

Supply and installation of Marcus transformers at Whybank and Manchester

[20]           The construction contract for the Whybank project was amended to provide that Marnoch would supply and install a 500 kVA transformer. The change order which Marnoch provided for Sky Solar’s approval included a shop drawing of a transformer manufactured by Marcus Transformers of Canada Ltd. (“Marcus”). Sky Solar approved the Marcus transformer. The construction contract for the Manchester project also provided that Marnoch would supply and install a Marcus transformer. Marnoch supplied and installed Marcus transformers at the Whybank and Manchester locations.

[21]           It was part of Marnoch’s scope of work to order and install a 500kVA transformer for the Manchester project. It was part of Marnoch’s scope of work to order and install a 500 kVA transformer for the Whybank project.

Fire at Whybank in August 2012

[22]           In August 2012, there was a fire at the Whybank location which involved the failure of the Marcus transformer. Sky Solar’s representative, Mark Ruffalo, investigated the fire and he received advice from an engineer at Marcus and other professional advice. Mr. Ruffalo reached the conclusion at that time, relying upon professional advice, that the Marcus transformer was suitable as long as the neutral was disconnected to avoid a circulating circuit. Sky Solar approved a change order and authorized Marnoch to replace the transformer at Whybank with another Marcus transformer. Marnoch also supplied and installed a Marcus transformer at the Manchester location and the project was completed in October 2012. Marnoch tested the systems upon completion and nothing abnormal was observed.

[23]           According to the evidence given by Sean Xiao, Sky Solar’s director of finance, Sky Solar recovered its loss from the August 2012 fire from its own insurer except for the $10,000 deductible.

Sky Solar transfers ownership of projects to Firelight

[24]           In November and December 2012, Sky Solar transferred ownership of the Whybank and Manchester projects to Firelight. The contracts included contractual warranties and provisions whereby Sky Solar agreed to indemnify Firelight for losses, costs and damages in connection with any breach of Sky Solar’s representations and warranties. The benefit of the warranties given by Marnoch to Sky Solar in the construction contracts was assigned to Firelight.

Fire at Manchester on March 14, 2013

[25]           On March 14, 2013, a fire broke out at the Manchester location and destroyed the Marcus transformer. Both systems at Manchester and Whybank were shut down for repair and investigation. Sky Solar decided to use another manufacturer to install replacement transformers and it used Marnoch as the contractor to do so. The systems were shut down from March 14, 2013 through to June or early July 2013.

Firelight claims against Sky Solar

[26]           Firelight made a claim against Sky Solar for breaches of contractual warranties in respect of the projects at both locations. Sky Solar made an agreement with Firelight dated May 14, 2013 whereby it agreed to pay the costs for remediation work. Firelight reassigned the benefit of Marnoch’s contractual warranties to Sky Solar.

[27]           Sky Solar paid $377,418.50 to Firelight for compensation for loss of revenue for the period from March 14, 2013 to June/July 2013. It paid $183,013.99 and $31,163.73 to Firelight for remediation costs at Manchester and Whybank, respectively, in relation to the March 14, 2013 fire at Manchester and the shutdowns at Manchester and Whybank.

[28]           There was no issue raised in this action as to whether the insurance provided by the Policy applies to Sky Solar’s contractual liability to Firelight under the warranties given by Sky Solar to Firelight, and I make no findings in this regard.

Sky Solar claims against Marnoch

[29]           On September 20, 2013, Sky Solar’s lawyer wrote to Marnoch and gave notice of Sky Solar’s warranty claim against Marnoch under the construction contracts.

[30]           Sky Solar commenced arbitration proceedings against Marnoch seeking indemnification from Marnoch for all of its losses resulting from the two transformer fires and based upon written warranties issued on June 6, 2012. Arbitrator Lax issued his arbitral award on December 14, 2014 and dismissed Sky Solar’s claim. Arbitrator Lax issued separate costs awards. Sky Solar appealed the arbitral award and the arbitral costs awards to the Superior Court of Justice and the appeal was dismissed by a decision released on February 24, 2016.

[31]           In his award, Arbitrator Lax made, among others, the following findings:

1.   The design of the solar systems, the wiring design and the choice of equipment to be installed were the responsibility of Sky Solar.
2.   Marnoch played no role in the decision to initially purchase the Marcus transformer for Whybank or in the subsequent decision to use the Marcus transformers at Manchester and as the replacement at Whybank.

[32]           The parties agreed that the findings of fact made by Arbitrator Lax in his arbitral award are binding and will not be relitigated in this action.

Sky Solar correspondence with Economical’s lawyer

[33]           On October 21, 2013, Sky Solar’s lawyer wrote to a lawyer, John Cannings, in his capacity as the lawyer for Economical and for Marnoch as the named insured in the Policy. The letter enclosed the two certificates of insurance and requested production of insurance policies purchased by Marnoch from Economical. In his response sent on October 30, 2013, Mr. Canning enclosed parts of the Policy including wording of the CGL coverage under the Policy and various endorsements, including the Additional Insured Endorsement. Mr. Canning noted that Sky Solar was not shown as an additional insured in Economical’s endorsement. Mr. Canning submitted in his letter that Sky Solar has no right to coverage under the Policy.

[34]           Prior to October 21, 2013, there were no oral or written communications of any kind directly between Sky Solar and FCA. Before this date, FCA had not provided Sky Solar with a copy of the Policy nor did Sky Solar request a copy of the Policy from FCA.

[35]           By letter dated November 11, 2013, Mr. Canning advised Sky Solar’s lawyer that Economical is prepared to accept Sky Solar as an additional insured according to the certificates of insurance. Mr. Canning referred to the language of the additional insured endorsement and advised that Economical will not be defending or indemnifying Sky Solar for its own liability, and that Sky Solar must retain its own defence counsel and pay any damages awarded against Sky Solar.

[36]           Sky Solar submitted claim forms to FCA on November 14, 2013. These were submitted by FCA to Economical. Economical reiterated its denial of coverage in subsequent correspondence from its lawyer to Sky Solar’s lawyer.

Analysis

[37]           I address the claims against Economical and FCA separately.

Sky Solar’s claim against Economical

[38]           The following issues were raised in this action with respect to liability for the claims against Economical:

1.   Has Sky Solar proved that its liability to Firelight is liability arising out of the operations of Marnoch and, therefore, falls within the initial grant of coverage under the Additional Insured Endorsement of the Policy?
2.   Did Sky Solar fail to comply with condition #4 of the Policy and thereby forfeit coverage, if available, under the Additional Insured Endorsement?
3.   Has Economical proved that the Professional Liability exclusion in the Policy applies to exclude coverage?
4.   Did Economical breach a duty of good faith that was owed to Sky Solar?

General principles with respect to interpretation of insurance policies

[39]           The parties agreed that the following general principles taken from the decision of the Supreme Court of Canada in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37 (CanLII) at paras. 49-52 apply to interpretation of contracts of insurance:

49        The parties agree that the governing principles of interpretation applicable to insurance policies are those summarized by Rothstein J in Progressive Homes Ltd. The primary interpretive principle is that where the language of the insurance policy is unambiguous, effect should be given to that clear language, reading the contract as a whole [Citations omitted].

50        Where, however, the policy’s language is ambiguous, general rules of contract construction must be employed to resolve that ambiguity. These rules include that the interpretation should be consistent with the reasonable expectations of the parties, as long as that interpretation is supported by the language of the policy; it should not give rise to results that are unrealistic or that the parties would not have contemplated in the commercial atmosphere in which the insurance policy was contracted, and it should be consistent with the interpretations of similar insurance policies. [Citations omitted]

51        Only if ambiguity still remains after the above principles are applied can the contra preferentem rule be employed to construe the policy against the insurer: [citations omitted]. Progressive Homes Ltd. provides that a corollary of this rule is that coverage provisions in insurance policies are interpreted broadly, and exclusion clauses narrowly.

52        It is important to bear in mind this Court’s guidance in Progressive Homes Ltd. on the “generally advisable” order in which to interpret insurance policies (para. 28). Although that case involved commercial general liability policies and not builders’ risk policies, the two types of policies share a similar alternating structure: they set out the type of coverage followed by specific exclusions, with some exclusions containing exceptions. As such, the insured has the onus of first establishing that the damage or loss claimed falls within the initial grant of coverage. The parties in these appeals have conceded that this particular onus has been met: trial judge’s reasons, at para. 9. The onus then shifts to the insurer to establish that one of the exclusions to coverage applies. If the insurer is successful at this stage, the onus then shifts back to the insured to prove that an exception to the exclusion applies: see Progressive Homes Ltd., at paras. 26-29 and 51. Contrary to the Court of Appeal’s statement at para. 26 of its reasons that the exclusion and exception in this case must be interpreted “symbiotically”, I see no reason to depart from the generally accepted order of interpretation in analysing the Policy and the Exclusion Clause.

a.         Has Sky Solar proved that its liability to Firelight is liability arising out of the operations of Marnoch and, therefore, falls within the initial grant of coverage under the Additional Insured Endorsement of the Policy?

[40]           Economical issued the Policy to Marnoch as named insured which was initially extended for one month from September 20, 2012 to October 20, 2012 and ultimately renewed for another policy year from October 20, 2012 to October 20, 2013. The Policy in each of the 2011/2012 and 2012/2013 policy years included, among other coverages, commercial general liability (“CGL”) coverage according to a specified form with an Additional Insured Endorsement form.

[41]           The CGL Form reads in the relevant parts:

COVERAGE A … PROPERTY DAMAGE LIABILITY

1.       Insuring Agreement.

We will pay those sums that the insured becomes legally obligated to pay as “compensatory damages” because of … “Property damage” to which this insurance applies.

…

(2)  We may investigate and settle any claim or “action” at our discretion;

COMMON EXCLUSIONS – COVERAGES A, B, C AND D

This insurance does not apply to:

…

4. Professional Liability
5. … “property damage” due to the rendering of or failure to render any professional service which shall include but not be limited to …

6)         the preparation or approval of maps, drawings, plans, opinions, reports, surveys, change orders, designs or specifications,

7)         supervisory, inspection, architectural or engineering services,

SECTION IV – CONDITIONS

4.       Duties in the Event of Occurrence, Claim or Action.
5.       You must see to it that we are notified promptly of an “occurrence” which may result in a claim. Notice should include:

1) How, when and where the “occurrence” took place; and

2) The names and addresses of any injured persons and of witnesses.

1.       If a claim is made or “action” is brought against any insured, you must see to it that we receive prompt written notice of the claim or “action”.
2.       You and any other involved insured must:

 

1) Immediately send us copies of any demands, notices, summonses or legal papers received in connection with the claim or “action”;

2) Authorize us to obtain records and other information;

3) Cooperate with us in the investigation, settlement or defence of the claim or “action”; and

4) Assist us, upon our request, in the enforcement of any right against any person or organization which may be liable to the insured because of injury or damage to which this insurance may also apply.

1.       No insureds will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.

[42]           The Additional Insured Endorsement modifies the insurance provided under the Policy. This endorsement reads:

This endorsement modifies insurance provided under the following:

COMMERCIAL GENERAL LIABILITY FORM

This insurance applies to those stated on the Declarations as “Additional Insureds”, but only with respect to liability arising out of the operations of the named Insured.

Except as otherwise provided in this form, all terms, provisions and conditions of the policy shall have full force and effect.

[43]           The first certificate of insurance dated January 30, 2012 was issued by FCA as broker to Sky Solar and showed Marnoch as the named insured. The first certificate states that “[t]his certificate is issued as a matter of information only and confers no rights upon the certificate holder and imposes no liability on the insurer. This certificate does not amend, extend or alter the coverage afforded by the policies below”. The first certificate describes coverages under the Policy including CGL coverages, and it describes the operations of Marnoch as “Operations Usual to those of the Named Insured”.

[44]           On September 19, 2012, FCA issued a second certificate of insurance which named Sky Solar as the certificate holder and Marnoch as the named insured. The second certificate refers to the coverages provided under the Policy, including CGL coverages, which are stated to be effective from September 20, 2012 to September 20, 2013.

[45]           The broker agreement between Economical and FCA in place at the relevant time authorized FCA to issue certificates of insurance on forms authorized or furnished by Economical. Warren Griffiths, the FCA account manager who assumed carriage of Marnoch’s account in March 2011 testified that in 2012-2013, FCA had authority to add additional insureds to the Policy, and that a copy of the certificates issued by Marnoch would not always be sent to the insurer. Mr. Griffiths testified that in 2011-2013, FCA issued approximately 80 to 100 certificates of insurance per year. In this case, FCA did not send copies of the certificates of insurance that were issued to Sky Solar to Economical. Economical was informed that Sky Solar was an additional insured under the Policy when Economical’s lawyer received the letter dated October 21, 2013 from Sky Solar’s lawyers advising that Sky Solar is a certificate holder under two certificates of insurance, and enclosing copies of the certificates.

[46]           After initially stating on October 30, 2013 that Sky Solar was not shown as an additional insured under the Policy, Economical accepted that Sky Solar is an additional insured under the Policy’s Additional Insured Endorsement by letter dated November 11, 2013 from Economical’s lawyer to Sky Solar’s lawyers.

[47]           Both the Sky Solar and Economical rely on the findings made by Arbitrator Lax in his arbitral award in an arbitration by Sky Solar against Marnoch for indemnification under the contracts between Sky Solar and Marnoch for all of its losses resulting from the two transformer fires and for alleged breaches of contractual warranties. Sky Solar accepts the factual findings of Arbitrator Lax as binding on it in this action. An appeal of the arbitral award to a judge of the Superior Court of Justice was dismissed: Sky Solar (Canada) Ltd. v. Marnoch Electrical Services Inc., 2016 ONSC 1295 (CanLII). An appeal of Arbitrator Lax’s costs award was not argued and no order was made on appeal in respect of this decision.

[48]           In his arbitral award, Arbitrator Lax addressed the scope of Marnoch’s work at paragraphs 7-16:

7.       Notably, Marnoch’s scope of work was limited to the installation of solar equipment. The design of the photovoltaic system, the wiring design and more importantly the choice of equipment to be installed, were the responsibility of Sky. Sky, after concluding its design of the installation, had contracted with equipment suppliers (“Sun Edison” and “Schneider”) to deliver the major components needed for its design. Two critical components, the inverter and the transformer, were to be acquired from their manufacturer, Schneider.
8.       The Whybank Project was the first of the two sites to be readied for construction. Prior to commencing the installation, the Marnoch foreman noticed that the transformer which had been delivered to site by Schneider and Sun Edison, did not conform to the design parameters specified in Sky’s drawing. While Sky’s design specified a “Wye/Wye” style transformer, Schneider had inadvertently delivered a “Delta or T/T” style transformer.
9.       The delivery of the wrong type of transformer to Whybank (with another slated for delivery to Manchester) would threaten the construction schedules for both projects. Schneider advised that it would need approximately six weeks to manufacture a Wye/Wye type transformer and this delay was out of the question for the Whybank project, scheduled to be completed in ten weeks but which Sky wanted finished within eight weeks. As will be discussed subsequently in this Award, Sky had previously sold to Firelight the yet to be constructed installations together with the future income stream of these installations and was understandably anxious to get these systems operational, as quickly as possible.
10.    So even though sourcing the appropriate equipment was Sky’s responsibility, faced with a significant delay, Sky turned to Marnoch for help in locating an appropriate replacement transformer for Whybank, and potentially for Manchester as well.
11.    By email dated March 30, 2012, Sky asked Sun Edison (Sky’s supplier) to take back the transformer from the Whybank site and at about the same time Sky requested Marnoch to source an appropriate replacement transformer for both Whybank and Manchester.
12.    Marnoch, while not contractually obligated to source the transformers, agreed to have its supplier (“Hudco”) look into the immediate availability of a suitable replacement. The search for a replacement transformer consisted of Marnoch seeking confirmation from Sky of the proper technical description of a correct transformer (500 KVA 208V Wye/600 V Wye). With this information in hand, Hudco located a transformer manufactured in Montreal by Marcus Transformers of Canada Ltd. (“Marcus”). Marcus could deliver a transformer that met Sky’s specifications, five days after receipt of approved shop drawings.
13.    The decision whether or not to accept the Marcus transformer was left entirely to Sky. Marnoch was not asked for its views on the suitability of the Marcus transformer, nor did it have the expertise or technical knowledge to assess the relative advantages of different transformers. Marnoch was not an electrical engineer nor an electrical consultant, but an electrical contractor with considerable experience as an installer, trying to assist its client Sky out of a jam that Marnoch had no role in creating.
14.    By email dated April 12, 2012, Sky confirmed its approval of the Marcus transformer for the Whybank and the Manchester installations.
15.    The Whybank transformer was the subject of a change order issued by Marnoch. The change order constituted a written amendment to the scope of Marnoch’s work under the contract, as well as a change to the contract price, reflective of the cost of the Marcus transformer, plus a 5% overhead charge and a 5% markup.
16.    Unlike the Whybank Contract, the Manchester contract was drafted to include the new Marcus transformer, as part of Marnoch’s scope of work. There was therefore no change order necessary for Manchester.

[49]           On August 18/19, 2012, there was a fire at Whybank which involved the Marcus transformer.

[50]           In his award, Arbitrator Lax found that Mr. Ruffalo, vice-president of engineering for Sky Solar, decided to continue to use the Marcus transformer after obtaining advice from several engineers:

After the Whybank fire, Ruffalo decided for a second time to use Marcus for the Manchester transformer and for the replacement Whybank transformer, after satisfying himself, that the Marcus Transformers would work. Ruffalo was influenced by the written report of Olivier (dated September 10, 2012) and by the reassuring discussion that he had with Luis Nova of Marcus (September 12, 2012). He also sought the advice of the Schneider engineers. Finally, after the Whybank fire, he had available the advice of Sky’s expert witness Probst. There is no record of Ruffalo seeking Marnoch’s input into his decision to choose the Marcus Transformers.

[51]           In his Award, Arbitrator Lax made findings with respect to the second fire, at Manchester:

Marnoch completed the installation of the Manchester solar system in October 2012. The system was operational and provided power for four months thereafter, then became inoperative between February and March 2013 to ice and snow cover on the solar panels, (then it was briefly operational in early March 2013), until a fire broke out and destroyed the transformer and inverter on March 14, 2013.

[52]           On March 14, 2013, both Whybank and Manchester were shut down for repair and investigation.

[53]           Sky Solar has the burden of proving that the loss arising from its liability to Firelight falls within the initial grant of coverage.

[54]           Sky Solar’s loss as pleaded in its Amended Amended Statement of Claim consists of costs associated with the failure and replacement of the Marcus transformers, together with all consequential losses and damages including (a) liabilities, expenses and costs to restore the solar systems at Whybank and Manchester following the March 14, 2013 fire at Manchester, (b) loss of revenue which Firelight incurred and which Sky Solar paid covering the period from March 14, 2013 through to June or early July 2013. The loss claimed by Sky Solar does not include amounts that it paid for the claims deductible and for project delay costs associated with the first fire at Whybank on August 19, 2012.

[55]           In support of its submission that its loss falls within the initial grant of coverage under the Policy, Sky Solar relies upon several decisions in which an additional insured endorsement in an insurance policy was considered.

[56]           Sky Solar first submits that the words “arising out of the operations on the named Insured” as they appear in the Additional Insured Endorsement must be given a broad meaning. In support of this submission, Sky Solar relies upon the decision of Flynn J. in Waterloo (City) v. Economical Mutual Insurance Co., 2006 CarswellOnt 8451.

[57]           In Waterloo, the City of Waterloo was named as an additional insured under a policy. The named insured was granted a special event permit to conduct or operate a parade in the City. The plaintiffs were injured when a train crossed an intersection when they were watching the parade. The named insured had issued a certificate certifying that the City had been “added as additional insured but only insofar as their legal liability arises vicariously out of the negligent operations of the Named Insured”. The Additional Insured Endorsement used different language and provided that “[t]his insurance applies to those stated on the declarations as ‘additional insureds’, but only with respect to liability arising out of the operations of the named insured.” The plaintiffs sued the railway and the City for negligence. They made no claim against the named insured. The City sought a declaration that the insurer was obliged under the policy to defend the plaintiffs’ action against it.

[58]           In Waterloo, Flynn J. noted that the words “arising out of” have been interpreted in the cases to include such meanings as “originating from”, “growing out of”, “flowing from”, “incident to”, or “having connection with”. Flynn J. held that these words define the pertinent liability for which coverage is provided.

[59]           Sky Solar also relies upon the decision of Koehnen J. in Oliveira v. Aviva Canada Inc. et al., 2017 ONSC 6161 (CanLII) in support of its submission that the language of the Additional Insured Endorsement must be given a broad interpretation. In Oliveira, a hospital was insured and Ms. Oliveira, a hospital employee, was an additional insured under the policy while acting under the direction of the hospital and “only in respect of liability arising from the operations of” the hospital. Ms. Oliveira commenced an application seeking a declaration that the insurer owed her a duty to defend an action commenced against her and the hospital by a former patient. The patient alleged in her pleading that, following an investigation into privacy concerns expressed by the patient, the hospital advised that Ms. Oliveira had accessed the patient’s hospital records even though she was not involved in the patient’s care, and this amounted to a breach of privacy. The patient relied upon causes of action based upon accessing private information for an unauthorized purpose. The hospital denied that it was required to provide a defence based upon the pleaded allegations on the ground that the Ms. Oliveira was not within the patient’s circle of care and her conduct did not arise from the hospital’s operations which were to provide healthcare services.

[60]           Koehnen J. began his analysis by observing that to determine whether liability arises from the hospital’s operations, he was required to determine what degree of proximity is required between the event giving rise to potential liability and the operations of the hospital. Koehnen J. examined the language of the policy and identified the question to be answered as whether the particular allegations fall within the ambit of the contract of insurance or, put another way, “are the allegations in the claim the sort of risks that the insurer agreed to insure (and defend) against”. Koehnen J. held that the insurer agreed to insure against liability arising from accessing information in an unauthorized manner, and that the insurer sought to use the very act it agreed to insure against as an excuse to deny a duty to defend.

[61]           Koehnen J. held that the language of the policy by which insurance coverage was granted for liability arising from the “operations” of the hospital should be read broadly, and that the operations of the hospital include the collection, creation and maintenance of medical records. Koehnen J. held that the term “operations” should be given a broad interpretation which does not imply an active role by the named insured in creation of the liability event. Koehnen J. concluded that given the policy’s coverage for unauthorized access to private information and the judicial treatment of the term “operations”, the allegations against Ms. Oliveira, the additional insured, give rise to possible liability which does arise out of the operations of the hospital and that the insurer owed a duty to defend.

[62]           I accept that the coverage language in the Additional Insured Endorsement must be read broadly.

[63]           Sky Solar also submits that coverage under the Additional Insured Endorsement is not limited to vicarious liability arising out of the operations of the named insured, Marnoch. In support of this submission, Sky Solar relies upon the language of the Additional Insured Endorsement as well as the decision of Hennessy J. in Great Atlantic & Pacific of Canada Ltd. v. Economical, 2013 ONSC 7200 (CanLII). In that case, a grocery store operator entered into an agreement with a contractor for the provision of floor maintenance services. A patron of the grocery store slipped and fell, and sued the grocery store operator, the contractor, and its subcontractor. The contractor was the named insured under an insurance policy and the grocery store operator was named as an additional insured. The insurer refused to provide a defence to the grocery store operator (an additional insured). After a jury trial, the action was dismissed. The grocery store operator’s crossclaim against the contractor for indemnification under the contract was denied because the costs that were incurred were not caused or contributed to by the contractor (given that the action was dismissed), as required by the contract. The Court of Appeal upheld the trial judge’s decision on the crossclaim. The grocery store operator then separately sought reimbursement from the insurer for the costs incurred in defending the personal injury action.

[64]           In Great Atlantic, the additional insured endorsement read “[t]his insurance applies to those stated on the Declaration as ‘Additional Insureds’ but only with respect to liability arising out of the operations of the Named Insured.” The certificate of insurance that was issued to the additional insureds contained different language which stated that coverage was only “insofar as their legal liability arises vicariously out of the negligent operations of the Named Insured”. Hennessy J. concluded that the policy language was determinative, that the policy was not to be read subject to the certificate, and that the policy does not limit the coverage to liability arising vicariously out of the negligence of the insured. Hennessy J. held that the plaintiff alleged facts in the statement of claim that, if true, arose out of the janitorial operations of the insured, and that the insurer’s duty to defend the additional insured was triggered. This decision was upheld on appeal: 2014 ONCA 350 (CanLII).

[65]           I accept that the Additional Insured Endorsement does not limit coverage under the Policy to Sky Solar’s liability arising vicariously out of the negligence of Marnoch, the named insured. The policy language is determinative.

[66]            The language of the Additional Insured Endorsement in Great Atlantic is identical to the language in the Additional Insured Endorsement in the Policy by which Sky Solar was added as an additional insured. Sky Solar submits that Hennessy J. held in Great Atlantic that there was coverage for the additional insured (the grocery store operator) even though the named insured (the maintenance contractor) was not negligent. Sky Solar submits that, in this respect, the decision in Great Atlantic is directly analogous to this case where Sky Solar claims coverage under the Additional Insured Endorsement in circumstances where the named insured, Marnoch, was not negligent.

[67]           I do not accept this submission. In Great Atlantic, the plaintiffs’ action against the maintenance contractor and the grocery store operator was dismissed after a jury trial. Before the trial, the additional insured commenced its application for a declaration that the insurer had a duty to defend and to indemnify the additional insured for all costs incurred in defending the action. The question of whether the insurer had a duty to defend was decided based upon the statement of claim in the underlying action read together with the coverage provided by the insurance policy. The fact that the plaintiffs’ action was dismissed before the application for coverage was decided did not affect the question of coverage for the duty to defend. The statement of claim included allegations of negligence against the named insured (and against the additional insured). Hennessy J. decided that the facts alleged on the face of the pleadings, if true, would require the insurer to indemnify the additional insured and, as a result, the statement of claim in the underlying action triggered the duty to defend. See Great Atlantic at paras. 31-32, 37, 41-42, 44-45, and 52.

[68]           The application in Great Atlantic was for coverage for the duty to defend and was decided based upon the allegations in the statement of claim. There were allegations of negligence against the named insured in the statement of claim that were taken to be true for purposes of the coverage application. This is in contrast to the case before me, where Sky Solar’s claim is for indemnity coverage under the Additional Insured Endorsement and there are no allegations or findings of negligence against Marnoch, the named insured.

[69]           Having regard to the principles that (i) coverage under the Additional Insured Endorsement is to be read broadly, and (ii) coverage is not limited to Sky Solar’s liability arising vicariously out of the negligence of Marnoch, I address whether Sky Solar’s liability for the amounts that it paid to Firelight for remediation costs and in compensation for Firelight’s loss of income following the March 14, 2013 fire at Manchester is liability arising out of the operations of Marnoch.

[70]           As Koehnen J. explained in Oliveira, the degree of proximity between the event giving rise to the liability of the additional insured and the operations of the named insured falls along a spectrum. At the far end of the spectrum would be cases where the named insured was negligent and the additional insured is vicariously liable for the negligence of the named insured. In such a case, there would be a sufficient degree of proximity for indemnity coverage for the additional insured under an additional insured endorsement with the same language as the Additional Insured Endorsement in the Policy.

[71]           Close to this end of the spectrum would be cases where the liability of the additional insured is not vicarious and arises separately from the liability of the named insured, but where the separate liability arises from the negligent acts or omissions of the named insured in the course of its operations that would fall within a risk which was insured against. An example would be the Great Atlantic case where the possible liability (as an occupier and on other grounds which do not involve vicarious liability) of the grocery store operator to the plaintiff who slipped on a wet floor arose because of the alleged negligence of the maintenance contractor, the named insured. I also regard the decision of Koehnen J. in Oliveira as an example of a case near this end of the spectrum. In Oliveira, Koehnen J. held that the additional insured, an employee of the hospital, was acting under the direction of the hospital when she accessed the hospital records. The insurer’s policy provided coverage for accessing hospital records in an inappropriate manner. The operations of the hospital included the collection and maintenance of hospital health care data. The liability of the additional insured (based upon the pleaded allegations against her) arose out of the operations of the hospital and fell within the grant of coverage in the additional insured endorsement.

[72]           At the other end of the spectrum are cases such as Waterloo. In Waterloo, the City’s liability for the plaintiffs’ claim would not have arisen but for the fact that the named insured operated the parade where the train accident occurred. However, the proximity between the plaintiffs’ loss from injuries suffered from being struck by a locomotive at a railway crossing and the operations of the parade organizer was not close enough to possibly bring the claim against the City within the coverage provided to the City as additional insured and trigger the duty to defend. Flynn J. held that the pleadings do not allege facts in support of liability “flowing from” or “incident to” the operations of the named insured because the parade operated by the named insured was merely the site or occasion of the accident. Flynn J. held that all of the allegations of negligence against the City stand alone and are neither expressly or by necessary inference derivative of or arising out of the operations of the named insured: Waterloo at paras. 30-31.

[73]           In Oliveira, Koehnen J. referred to a decision which he cited as Kinnear v. Canadian Recreation Excellence (Vernon) Corp. 2012 BCCA 291 (CanLII) (B.C.C.A.). This decision is also reported as Vernon Vipers Hockey Club v. Canadian Recreation Excellence (Vernon) Corporation, [2012] 11 W.W.R. 423 (B.C.C.A.). Koehnen J. regarded this case as closer to the middle of the spectrum.

[74]           In Vernon Vipers, a local municipality had rented a recreation centre to a hockey club for a hockey tournament. The municipality was an additional insured under the hockey club’s policy “but only in respect of liability arising out of” the hockey club’s operations. While leaving the arena to buy refreshments at a retail outlet across the street, a spectator at the tournament injured himself. The spectator did not cross the street along a pedestrian sidewalk but, instead, walked through an area described as the “boulder zone”, a strip of land along the boundary of the parking lot covered in large boulders. The claim alleged that the recreation centre and the municipality had, among other things, failed to build a pedestrian walkway on the boundary where the boulder zone was located, failed to block pedestrians from using the boulder zone to enter or exit the arena, and failed to illuminate the boulder zone properly. The municipality claimed coverage under the policy, arguing that “but for” the hockey club’s operations, the spectator would not have fallen and injured himself. The trial judge held that there was no duty to defend.

[75]           In upholding the trial decision, the British Columbia Court of Appeal in Vernon Vipers held that the operations of the named insured included the provision of facilities necessary to present hockey games to spectators. The Court held that the phrase “arising out of” requires a stronger nexus than a simple “but for” test and that compliance with the simple “but for” test is necessary, but not sufficient. The Court reviewed jurisprudence which had interpreted the phrase “arising out of” in an insurance context and held that the phrase “arising out of” in the additional insured endorsement should be construed as requiring “an unbroken chain of causation” and a connection that is more than merely incidental or fortuitous: Vernon Vipers at paras. 28-52. The Court concluded that the trial judge did not err in holding that the liability of the additional insured did not arise out of the operations of the named insured.

[76]           In his arbitral award, Arbitrator Lax did not make a finding as to the cause of the March 14, 2013 fire at Manchester which involved the Marcus transformer. At trial, Sky Solar tendered evidence from an expert witness, Steven Probst, who testified that the fires involving the Marcus transformer were a result of electrical fault activity that initiated within the transformer, and that the electrical fault activity occurred because the transformer’s insulation system failed. Mr. Probst concluded that the Marcus transformer contained damaged materials and these material defects caused the Manchester and Whybank fires and necessitated the removal of the second Whybank transformer. Economical called an expert witness, James Wheeler, to give evidence. Mr. Wheeler testified that the Marcus transformer was not a quality product and, if pushed beyond its limits, will become unreliable. Mr. Wheeler testified that the Marcus transformer should not have been used in these solar power generating systems.

[77]           In order to decide the coverage issue raised in this action, it is not necessary for me to decide whether the Marcus transformer was inherently defective, as Sky Solar submits, or whether it was unsuitable for the solar power generating systems in which it was used, as Economical submits. It is enough that both Sky Solar and Economicaltendered evidence to support the same conclusion: the fire at the Manchester location on March 14, 2013 was caused by a failure of the Marcus transformer.

[78]           The scope of the operations of Marnoch included ordering and installing the Marcus transformers. Marnoch’s operations did not include the initial selection of the Marcus transformers to be used at the Whybank and Manchester solar systems. After the first fire at Whybank, Mr. Ruffalo of Sky Solar made the decision to continue to use Marcus transformers. This decision was not part of Marnoch’s operations. The fact that the “but for” test of causation is satisfied because the Manchester fire would not have occurred but for the installation of the Marcus transformer is not, in itself, sufficient to establish that Sky Solar’s liability to Firelight is liability arising out of the operations of Marnoch.

[79]           The failure of the Marcus transformer on March 14, 2013 when the Manchester fire occurred was not caused by any decision taken by Marnoch in the course of its operations or any failure by Marnoch to make a decision or take an action in the discharge of its contractual obligations. The event which gave rise to Sky Solar’s liability to Firelight resulting from the failure of the Marcus transformer at the Manchester location on March 14, 2013 was the decision taken by Mr. Ruffalo to continue to use the Marcus transformer at the Whybank and Manchester locations after the Whybank fire. Marnoch played no role in this decision, as Arbitrator Lax found.

[80]           Marnoch simply ordered and installed the Marcus transformers in compliance with the directions given by Sky Solar and its contractual obligations. Marnoch did not engage in active conduct which caused the March 14, 2013 fire at Manchester, nor did it operate passively in a way which created this liability event. There is insufficient proximity between the decision taken by Sky Solar to continue to use the Marnoch transformer and the failure of the Marcus transformer on March 14, 2013, on one hand, and Marnoch’s operational actions to order and install the Marcus transformer, on the other hand, to allow me to conclude that Sky Solar’s liability to Firelight arose out of Marnoch’s operations.

[81]           This case is closer to the end of the spectrum of proximity as illustrated by the Waterloo case. Marnoch, as additional insured under the Policy, is in an analogous position to that of the parade operator in Waterloo. In Waterloo, there was not sufficient proximity between the operation of the parade operator which organized the parade and train accident which gave rise to the City’s liability to bring this liability within the grant of coverage under the additional insured endorsement of the policy. Marnoch’s connection with the failure of the Marcus transformer and the fire at the Manchester location on March 14, 2013 was, using the words of the British Columbia Court of Appeal in Vernon Vipers, “merely incidental”.

[82]           In reaching this conclusion, I do not decide that it is necessary for the named insured to have been negligent in order for there to be coverage for an additional insured under an additional insured endorsement which has the language of the endorsement in this case. For example, to posit different facts, if Marnoch had contractually agreed with Sky Solar to undertake responsibility for the selection of a suitable transformer for the solar projects at the Whybank and Manchester locations and if, following the first fire, Marnoch had undertaken its own investigations, relied upon its own professional advisors, and decided to continue to use the Marcus transformers, which later failed, this would affect the analysis because, in such circumstances, there would be much closer proximity between the Marnoch’s operations and the event which gave rise to Sky Solar’s liability to Firelight. This proximity would exist even if, in this example, Marnoch had acted reasonably and without negligence in selecting the Marcus transformers in the first place and in deciding to continue to use the Marcus transformers after the first fire.

[83]           I conclude that Sky Solar has failed to prove that its liability to Firelight arose out of the operations of Marnoch and falls within the initial grant of coverage under the Additional Insured Endorsement of the Policy.

b.         Did Sky Solar fail to comply with condition 4 of the Policy and thereby forfeit coverage, if otherwise available, under the Additional Insured Endorsement?

[84]           Economical submits that if Sky Solar is otherwise covered under the Additional Insured Endorsement of the Policy, it forfeited such coverage because it failed to comply with condition 4 of the Policy. Economical also submits that Sky Solar is not entitled to relief from forfeiture.

[85]           Although I have decided that Sky Solar is not covered under the Policy for its loss resulting from its liability to Firelight, I go on to address Economical’s and Sky Solar’s submissions with respect to condition 4.

[86]           The Policy contains the following condition:

4.      Duties in the Event of Occurrence, Claim or Action
5.       You must see to it that we are notified promptly of an “occurrence” which may result in a claim. Notice should include:

1)         How, when and where the “occurrence” took place; and

2) The names and addresses of any injured persons and of witnesses.

1.       If a claim is made or “action” is brought against any insured, you must see to it that we receive prompt written notice of the claim or “action”.
2.       You and any other involved insured must:

1)         Immediately send us copies of any demands, notices, summonses or legal papers received in connection with the claim or “action”;

2)         Authorize us to obtain records and other information;

3)         Cooperate with us in the investigation, settlement or defence of the claim or “action”; and

4)         Assist us, upon our request, in the enforcement of any right against any person or organization which may be liable to the insured because of injury or damage to which this insurance may also apply.

1.       No insured will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first-aid, without our consent.

[87]           Economical submits that Sky Solar failed to comply with this condition because it admitted liability to Firelight, settled Firelight’s claim, and voluntarily paid Firelight amounts for remediation costs and loss of revenue without the consent of Economical. Economical submits that Sky Solar failed to comply with condition 4 and, as a result, it forfeited any coverage under the Policy for its liability to pay these amounts to Firelight.

[88]           In support of this submission, Economical relies upon the decision of the Court of Appeal for Saskatchewan in Lloyd’s Underwriters v. Colliers McClocklin Real Estate Corp, 2004 SKCA 66 (CanLII). In Colliers, a claim was made against the insured and the insured contacted agents of the insurer to report a potential claim. The insured was directed by the agent to notify the insurer in writing of the claim. Before doing so, the insured decided to admit liability and to compensate the claimant. After learning of the insured’s decision to admit liability, the insurer denied coverage on the basis that this was a breach of the insuring agreement and of the general conditions of the contract of insurance. The insuring agreement included a condition which provided that the insured will not make any voluntary payment or admit liability or participate in a process to promote settlement of a claim without the insurer’s prior consent. The insured commenced an action for a declaration that there was coverage or, in the alternative, for relief from forfeiture under The Saskatchewan Insurance Act. At trial, it was successful in obtaining relief from forfeiture. On appeal, the Saskatchewan Court of Appeal relied on the decision of the Supreme Court of Canada in Falk Bros. Industries Ltd. v. Elance Steel Fabricating Co., 1989 CanLII 38 (SCC), [1989] 2 S.C.R. 778 which held that if the breach of a condition amounts to non-compliance as opposed to imperfect compliance, no relief from forfeiture is available. The Saskatchewan Court of Appeal held at paras. 29, 33-34:

It is trite in the law of insurance to state the contract of insurance comes into effect when coverage for the peril is bound. The contract of insurance provides the insurer with rights to defend and to indemnify provided the conditions in the policy are met. If the insured fails to comply with the conditions, the insurer may be relieved from defending or indemnifying in the circumstances, subject to s. 109 at the Act.

…

It is difficult to conceive an insurer would issue a policy which expressly or impliedly gives to the insured the right to investigate a claim against the insured and then to settle a claim against the insured. Each of these conditions or fundamental terms, i.e. the right to investigate, the right to admit liability and the right to participate in any process to promote a settlement and approve any settlement surely must be the sine qua non of any insurance coverage. In the case before us the insured took upon itself the right to investigate and settle the claim. These were breaches of the insurer’s fundamental rights and breaches of the fundamental terms of the contract of insurance.

In my view the actions of the insured constituted a non-compliance with a condition of the policy, not imperfect compliance with the policy is found by the trial judge, and as a consequence relief from forfeiture is not available.

[89]           In response to Economical’s submissions with respect to condition 4, Sky Solar makes four submissions.

[90]           First, Sky Solar submits that Economical is barred by s. 124 of the Insurance Act R.S.O. 1990, c. I.8 from relying upon condition 4 of the Policy. Section 124 provides:

All the terms and conditions of the contract of insurance shall be set out in full in the policy or by writing securely attached to it when issued, and, unless so set out, no term of the contract or condition, stipulation, warranty or proviso modifying or impairing its effect is valid or admissible in evidence to the prejudice of the insured or beneficiary.

[91]           Sky Solar submits that section 124 applies to the certificates of insurance issued by FCA and provided to Sky Solar. The evidence of witnesses at trial established that Sky Solar was not provided with a copy of the Policy at any time before it requested a copy in October 2013. Sky Solar relies upon s. 1 of the Insurance Act which states that “contract” means “a contract of insurance, and includes a policy, certificate, interim receipt, renewal receipt, or writing evidencing the contract, whether sealed or not, and a binding oral agreement”. Sky Solar submits that because condition 4 of the Policy upon which Economical relies was not set out in or attached to the certificates of insurance, it is not valid or admissible in evidence to the prejudice of Sky Solar.

[92]           In support of this submission, Sky Solar relies upon the decision of the Saskatchewan Court of Appeal in Brown’s Mobile Homes Ltd. v. Royal Insurance Co., 1965 CanLII 428 (SK CA), [1965] 54 W.W.R. 490. In Brown’s, a reduction in coverage under a policy and a corresponding premium reduction was discussed by the insured and the insurer’s agent. An endorsement was added to the policy to give effect to the changes, but the insured had not agreed in writing to any alteration or modification of the contract. The insured made a claim that was covered by the policy as originally issued but would not have been covered if the endorsement was effective. The insurer denied coverage in reliance on the endorsement. The Court of Appeal upheld the trial judge’s decision that the endorsement which purported to modify the policy as issued was not valid or admissible in evidence pursuant to s. 103(1) of The Saskatchewan Insurance Act (which contained almost identical language to s. 124 of the Ontario Insurance Act). Subsection 103(2) provided that subsection (1) does not apply to an alteration or modification of the contract agreed upon in writing by the insurer and the insured. This exception did not apply because the insured had not agreed in writing to the changes to coverage. The Saskatchewan Court of Appeal noted that s. 103 is for the protection of the insured.

[93]           In Brown’s, the document which was held to be invalid and inadmissible in evidence was a contractual document, an endorsement, which changed the scope of coverage under the policy as originally issued. In this case, each certificate of insurance states on its faces that the certificate is issued as a matter of information only and confers no rights upon the certificate holder and imposes no liability on the insurer. The certificates of insurance refer expressly to the Policy, and state clearly that the insurance afforded by the Policy is subject to all its terms, exclusions and conditions.

[94]           There may be certificates that change the terms of an insurance policy which have contractual force. Such certificates may be subject to the evidentiary rule in s. 124 of the Insurance Act. The certificates of insurance in this case, however, are informational only, and do not change in any way the terms and conditions of the Policy as originally issued.

[95]           If the interpretation advanced by Sky Solar is correct, this would mean that in every case where a certificate is issued to an additional insured for informational purposes certifying that a policy of insurance has been issued, an insurer would be precluded by s. 124 from putting into evidence in coverage litigation any provision in a policy which modifies or impairs the coverage provided for by the grant of coverage in the policy as originally issued unless all of the policy terms were set out in or attached to the certificate when it was issued.

[96]           In Ontario (Ministry of Transportation) v. Canadian Surety Co. (2008), 98 O.R. (3d) 708, Echlin J. was called on to address the legal effect of a certificate of insurance with respect to an additional insured. In that case, a contractor was required to take out an insurance policy to protect the Ministry of Transportation and the contractor obtained coverage from its insurer as evidenced by a certificate of insurance. The contractor and the Ministry were each held liable to a plaintiff for independent acts of negligence. The Ministry had its own insurance, and its insurer paid the Ministry’s share of the judgment, and then sued the contractor’s insurer for costs of defence and indemnity. The question in the litigation was whether the certificate of insurance issued to the Ministry provided coverage to the Ministry under the policy of the contractor’s insurer for the Ministry’s independent acts of negligence, which responded to the loss first because of the “other insurance” clause in the policy issued by the Ministry’s insurer. Echlin J. rejected the submission of the Ministry’s insurer and in his reasons he addressed the certificate of insurance at paras. 29-30:

The Certificate is nothing more than evidence of coverage but cannot and does not create a separate and different policy or impose new duties on the insurer to indemnify any party not covered by the original contract of insurance. The certificate is not the policy, but only evidence of the fact that a policy has been issued.

The certificate cannot create any duties or responsibilities on its own.

An appeal from the decision of Echlin J. was dismissed: 2009 ONCA 919 (CanLII).

[97]           I do not accept that the definition of the term “contract” as used in the Insurance Act should be interpreted to mean that every certificate which is created in relation to a policy of insurance is a contract of insurance to which s. 124 applies. If a certificate is issued for informational purposes to certify to an additional insured that a policy has been issued to the named insured, and does not change the rights and obligations of the parties under the policy as originally issued, as in this case, the certificate is not a “contract” within the meaning of s. 124 of the Insurance Act. The certificates of insurance which name Sky Solar as an additional insured are not contracts of insurance to which s. 124 of the Insurance Act applies and, therefore, condition 4 of the Policy is not invalid or inadmissible in evidence.

[98]           Second, Sky Solar submits, in the alternative, that there was no failure to comply with condition 4 of the Policy because FCA submitted a notice of loss to Economical on behalf of Marnoch. Condition 4 of the Policy uses the word “You” to identify the person with the obligations thereunder. The Policy states that the words “you” and “your” refer to the “Named Insured” shown in the Declarations and that the words “we”, “us” and “our” refer to the company providing the insurance. The named insured is Marnoch. Sky Solar submits that Economical was able to conduct an investigation into the 2013 failure while the factual circumstances were still fresh because it had been notified of the fire at Manchester by Marnoch’s broker, FCA, on March 14, 2013, and that it did not suffer any prejudice as a result on any non-compliance with condition 4.

[99]           The certificates of insurance state that the insurance afforded by the Policy is subject to all terms, exclusions and conditions of the Policy. Sky Solar’s obligation to comply with condition 4 is in relation to a request for coverage for liability. Sky Solar’s obligation is separate from the obligation of Marnoch to comply with this condition. The investigations which an insurer may undertake following notice of a claim may depend upon the identity of the insured seeking coverage under a policy. I do not accept that the Policy should be interpreted in such a way as to relieve Sky Solar, as an additional insured, from the obligation to independently comply with condition 4 of the policy in respect of a claim against it for which it seeks insurance coverage from Economical.

[100]      In any event, condition 4 is not limited to a requirement for the insured to give notice. The insured has other obligations as set out in paragraphs c and d of condition 4, including the obligation not to voluntarily make a payment, assume an obligation, or incur an expense without the insurer’s consent. Even if the notice given by FCA on behalf of Marnoch qualifies under the Policy as a notice on behalf of Sky Solar, Sky Solar’s settlement with Firelight and its payments to Firelight were not done with Economical’s consent and, by making these payments, Sky Solar failed to comply with condition 4 of the Policy.

[101]      Third, Sky Solar submits that Economical wrongly took the position that the Policy does not respond to Sky Solar’s claim when its lawyer notified Sky Solar in his November 11, 2013 letter that Economical would not be defending or indemnifying Sky Solar for coverage under the additional insured endorsement. Sky Solar submits that having taken this position, Economical lost the right to rely on condition 4.

[102]      Sky Solar relies upon evidence given by Larry Schoch, a claims adjuster at Economical, that even if Sky Solar had notified Economical soon after the 2013 fire that it was claiming coverage for its liability to Firelight arising from the 2013 fire, Economical would not have defended Sky Solar or provided indemnification to Sky Solar for its liability to Firelight.

[103]      In support of this submission, Sky Solar relies upon the following passage from G. Hilliker, Liability Insurance Law in Canada, Sixth Edition at p. 150:

By taking the position that the policy does not respond to a claim, the insurer forgoes both its right to defend the action and its exclusive right to settle the action on behalf of its insured. If the denial is wrongful then the insurer may lose the right to insist upon the insured’s compliance with the terms and conditions of the policy.

[104]      I do not agree that this passage assists Sky Solar. The passage is taken from a chapter of the text entitled “The Duty to Defend”, and the passage quoted by Sky Solar is preceded by the following passage:

Serious consequences flow from an insured’s refusal to defend its insured in circumstances where the policy stipulates that a defence is required. In addition to being in breach of contract, the insurer will have lost certain of its rights under the policy and may be exposed to a bad faith claim.

[105]      The passage quoted by Sky Solar applies where an insurer has refused to defend its insured in circumstances where the policy requires that a defence be provided. In this case, Sky Solar settled the claim made by Firelight and paid the settlement amount to Firelight before it notified Economical that it was making a claim under the Policy. Economical was not asked by Sky Solar to defend a claim against it by Firelight, and Economical did not refuse to defend Sky Solar.

[106]      Economical did not lose the right to rely upon condition 4 of the Policy by refusing to cover Sky Solar’s claim for indemnity coverage under the Additional Insured Endorsement of the Policy.

[107]      Fourth, Sky Solar submits that it is entitled to relief from forfeiture under s. 98 of the Courts of Justice Act and s. 129 of the Insurance Act. Sky Solar submits that the evidence is that Economical would have denied coverage under the Policy regardless of whether Sky Solar gave timely notice of the claim by Firelight before it settled and paid Firelight’s claim. Sky Solar submits that it acted reasonably in entering into the settlement to mitigate its damages by avoiding ongoing claims for loss of income, and that Economical did not suffer any prejudice from non-compliance with condition 4 of the Policy.

[108]      Sky Solar relies upon a decision of the Court of Appeal for Ontario in Canadian Equipment Sales & Service Co. Ltd. v. Continental Insurance Co. (1976), 1975 CanLII 670 (ON CA), 9 O.R. (2d) 7 (C.A.). In Canadian Equipment, the Court of Appeal addressed the question of whether relief from forfeiture was available in that case where the insured had given late notice and the evidence was that the insurer would have denied coverage even if notice had been given in a timely way. The Court of Appeal addressed several authorities and concluded:

However, the common-sense principle that seems to be recognized by these authorities is that if the insurer is going to deny liability on the basis that there is no insurance or that the accident is not covered by the insurance, then imperfect or indeed non-compliance with some conditions of the policy does not prejudice the insurer in any way.

The Court of Appeal held that recourse to relief from forfeiture depends on the facts of the case and whether actual prejudice to the insurer has been proven or potential prejudice which could not be quantified after the event. The Court of Appeal noted that courts have considered the conduct of the insured and whether the insured had been guilty of bad faith or deliberate misrepresentation or concealment The Court of Appeal also addressed the insurer’s submission that held that the insured had voluntarily agreed to make a payment in contravention of a policy condition. The Court of Appeal held that the insured had not breached the policy condition, and relief from forfeiture in this respect was not required. On the facts of that case, relief from forfeiture in respect of the late notice was granted.

[109]      Economical submits that there was non-compliance, not imperfect compliance, with condition 4 by the actions of Sky Solar in settling Firelight’s claim for breaches of contractual warranties and paying to Firelight the compensatory amount that was negotiated without Economical’s consent. Economical submits that upon the act of non-compliance, Economical’s loss crystallized, and the issue of prejudice does not arise. Economical submits that relief from forfeiture is unavailable in these circumstances. In support of this submission, Economical relies on the passage that I quoted from the Colliers decision of the Saskatchewan Court of Appeal, at paras. 29, 33-34.

[110]      In circumstances where Sky Solar settled and paid Firelight’s claim before giving notice to Economical of its claim for coverage under the Policy, I am unable to conclude that Sky Solar has proven that Economical would not have taken any different actions and that it would not have suffered prejudice from non-compliance with condition 4. Sky Solar has not shown that Economical clearly suffered no prejudice as a result of the settlement of Firelight’s claim. It is not necessary for me to decide whether relief from forfeiture is unavailable as a result of non-compliance with condition 4 because, on the facts of this case, I would not have granted relief to Sky Solar from forfeiture of coverage under the Policy.

[111]      I conclude that Sky Solar failed to comply with the requirements of condition 4 of the Policy and, if coverage was available under the Additional Insured Endorsement, Sky Solar would have forfeited such coverage.

c.         If there is coverage under the Additional Insured Endorsement, is coverage excluded by the Professional Liability Services Exclusion in the Policy?

[112]      In its statement of defence, Economical pleads that Sky Solar’s claim for indemnity coverage falls within the “Professional Liability” exclusion in the Policy on the basis that the property damage was due to the rendering of or the failure to render professional services by Sky Solar through the engineering and design services that were provided with respect to the two solar systems at the Whybank and Manchester locations.

[113]      In closing submissions, counsel for Economical advised that Economical was not pursuing its defence based upon this policy exclusion. As a result, it is not necessary for me to address the expert evidence tendered by Sky Solar and by Economical with respect to whether the Marcus transformer was inherently defective or whether it was unsuitable for the applications for which it was used, and whether Sky Solar made a system design choice by selecting the Marcus transformer that would bring the professional liability exclusion into play.

d.            Did Economical breach a duty of good faith that was owed to Sky Solar?

[114]      Sky Solar submits that Economical owed a duty to Sky Solar as an additional insured under the Policy and that it breached this duty. Sky Solar submits that, as an additional insured, it has an independent right to a defence regardless of the defence provided to the named insured. I accept this submission, which is supported by Carneiro v. Durham (Regional Municipality), 2015 ONCA 909 (CanLII) at para. 24.

[115]      The duty of good faith requires an insurer to act with reasonable promptness at each stage of the claims process, and that the duty applies both to the manner in which the insurer investigates and assesses the claim and to the decision whether or not to pay the claim. What constitutes bad faith will depend on the circumstances in each case and a court in considering whether the duty has been breached will look at the conduct of the insurer throughout the claims process to determine whether in light of the circumstances, as they then existed, the insurer acted fairly and promptly in responding to the claim. A breach of the duty to act in good faith gives rise to a separate cause of action from an action for the failure of an insurer to compensate for loss covered by the policy. A breach of the duty of good faith may result in an award of damages which is distinct from the proceeds payable under the policy for the insured loss and which are not restricted by the limits in the policy. See 702535 Ontario Inc. v. Non-Marine Underwriters, Lloyd’s London, England, 2000 CanLII 5684 (ON CA), [2000] O.J. No. 866 (ONCA) at paras. 27-33.

[116]      Sky Solar submits that Economical breached its duty of good faith by denying coverage on October 30, 2013 without conducting an investigation, ignoring the judicial interpretations of the Additional Insured Endorsement in the Great Atlantic and Waterloo cases, taking a narrow coverage position that has been rejected by Ontario courts, failing to comply with its own internal requirements by failing to appoint an adjuster, failing to investigate Sky Solar’s loss and provide documents at Sky Solar’s request, and failing to assist Sky Solar with the claims process.

[117]      Sky Solar relies upon the letter from Economical’s lawyer dated October 30, 2013 which was written in response to a letter from Sky Solar’s lawyer notifying Economicalthat Sky Solar is an additional insured under the Policy and enclosing the two certificates of insurance. In his October 30, 2013 response, Economical’s lawyer enclosed Policy documents and advised that Sky Solar is not shown as an additional insured on the Policy and that he suspects that the certificates of insurance were issued by “the Broker” who never advised Economical of the issuance of the certificates. Economical’s lawyer closed his letter by writing that he submits that Sky Solar has no right to coverage under the policy.

[118]      On November 11, 2013, Economical’s lawyer again wrote to Sky Solar’s lawyer and advised that he had received further coverage clarification from Economical and that Economical is prepared to accept Sky Solar as an additional insured in accordance with the certificates of insurance. Economical’s lawyer referred to the language of the Additional Insured Endorsement and advised that Economical would not be defending or indemnifying Sky Solar for what he described as “Sky’s own liability”.

[119]      I do not regard the failure of Economical, through its lawyer’s letter, to accept that Sky Solar was an additional insured for thirteen days from October 30 to November 11, 2013 to be a breach of Economical’s duty of good faith to Sky Solar. There was evidence given at trial about the arrangements between Economical and FCA in respect of the issuance of certificates of insurance. Mr. Griffiths, an account manager at FCA, testified that during 2012-2013, FCA had authority to add additional insureds to policies issued by Economical and that the certificates would not always be sent to Economical. Within a short period of time after the October 30, 2013 letter, less than two weeks, Economicalaccepted that Sky Solar was an additional insured under the Policy. The conduct of Economical in this respect does not rise to the level of bad faith conduct.

[120]      Sky Solar relies on evidence from Larry Schoch, a claims adjuster for Economical that he was aware of the decision of Hennessy J. in Great Atlantic which involved an interpretation of Economical’s Additional Insured Endorsement and that he ignored this judicial interpretation and continued to take a narrow coverage position on grounds which Ontario courts have rejected.

[121]      I do not accept this submission. As I have explained, the Great Atlantic decision was based upon an alleged breach of the insurer’s duty to defend, and the facts pleaded in the statement of claim in the underlying action in that case alleged that both the named insured and the additional insured were negligent. In this case, Sky Solar does not allege that Marnoch was negligent. The facts in the Great Atlantic case are materially different than the facts in relation to Sky Solar’s claim for indemnity coverage. Economical did not fail to follow the Great Atlantic case when it made its decision with respect to Sky Solar’s claim for indemnity coverage and it did not act in bad faith in how it responded to the Great Atlantic decision.

[122]      Sky Solar submits that Economical’s failure to appoint an adjuster and investigate Sky Solar’s claim is conduct that breached the duty of good faith owed by Economicalto Sky Solar. I disagree. By the time that Sky Solar made a claim for insurance coverage under the Policy, Economical knew that the Marcus transformers had been selected by Sky Solar and that Marnoch did not make this decision. With this knowledge, Economical denied indemnity coverage for Sky Solar’s liability to Firelight (which Sky Solar had discharged) based upon the language of the Additional Insured Endorsement.

[123]      Sky Solar accepts that once an objectively reasonable basis for denial of coverage exists, the insurer may deny coverage without investigating the other aspects of the claim, with the proviso that the insurer must re-open the investigation should the insured person present further evidence which bears upon the basis for the denial. Sky Solar cites Gordon Hilliker, Insurance Bad Faith, Third Edition, paragraph 2.17 in support of this proposition.

[124]      Sky Solar’s lawyer wrote a letter to Economical’s lawyer dated November 13, 2013 in which she advised that it is inappropriate for Economical to deny coverage to Sky Solar and, at the same time, grant coverage to Marnoch, given that both Marnoch and Sky Solar are insureds under the same policy. Sky Solar’s lawyer asked Economical to reconsider its denial of coverage. I do not regard the decision taken by Economical to deny coverage in response to Sky Solar’s claim for indemnification to be an act of bad faith. Although Marnoch and Sky Solar are both insureds under the Policy, the coverage for each insured is not the same. The coverage for Sky Solar under the Additional Insured Endorsement is limited to coverage for liability arising out of the operations of Marnoch. In the circumstances of this case, Economical did not act in bad faith by denying coverage in response to Sky Solar’s claim for indemnity coverage under the Policy without appointing an adjuster and conducting a separate investigation of the fire at the Manchester location.

[125]      Sky Solar submits that Economical is pursuing recovery of costs of the arbitration through a subrogated claim in the name of Marnoch in separate legal proceedings. Sky Solar submits that in so doing, that Economical is improperly asserting a subrogated claim against its own insured. In my view, this is something to be addressed in the separate legal proceedings for recovery of costs of the arbitration from Sky Solar. Economical’s role in these separate legal proceedings is not evidence of bad faith in relation to its denial of Sky Solar’s claim for indemnity coverage for its liability to Firelight.

[126]      I conclude that Sky Solar has failed to show that Economical is liable for breach of the duty of good faith owed to its insured, Sky Solar.

Sky Solar’s claim against FCA

[127]      Sky Solar claims that FCA was negligent in the handling of Sky Solar’s insurance needs with respect to Marnoch’s operations. This claim is in the alternative to Sky Solar’s claim against Economical. If there is coverage under the Policy, Sky Solar does not claim relief against FCA.

a.         Did FCA owe a duty of care to Sky Solar to ensure that the coverage provided by the Policy fully complied with the insurance coverage to which Sky Solar was contractually entitled under the CCDC 2 construction contracts with Marnoch?

[128]      In Lavender v. Miller Bernstein LLP, 2018 ONCA 729 (CanLII) the Court of Appeal for Ontario explained the duty of care analysis to be applied following the decision of the Supreme Court of Canada in Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63 (CanLII), [2017] 2 S.C.R. 855. At the first stage of the analysis, the court asks whether the facts establish a prima facie duty of care. The court then proceeds to the second stage, where it asks whether residual policy considerations justify denying liability in tort.

[129]      In Lavender, the Court of Appeal explained at paras. 30-37 the approach to be taken to the analysis required to determine whether there is a prima facie duty of care:

[30]      Most relevant for this appeal, the majority of the Supreme Court in Livent, at para. 20, reaffirmed that there is a prima facie duty of care where there exists a “sufficiently close relationship between the plaintiff and the defendant”. This stage of the analysis involves establishing both reasonable foreseeability and proximity. The majority stressed that these elements are conceptually distinct and must be considered separately.

[31]      The majority in Livent reiterated the statement from Cooper that “foreseeability alone” is not enough to establish a prima facie duty of care; the first stage of the Anns/Cooper framework requires “something more”. That “something more” is proximity. The majority observed, at para. 24, that it is useful to consider proximity before foreseeability in cases of negligent misrepresentation or negligent performance of a service because “[w]hat the defendant reasonably foresees as flowing from his or negligence depends upon the characteristics of his or her relationship with the plaintiff, and specifically, in such cases, the purpose of the defendant’s undertaking.”.

[32]      The proximity analysis determines whether the parties are sufficiently “close and direct” that it would be “just and fair having regard to their relationship to impose a duty of care”: Livent, at para. 25, citing Cooper, at paragraphs 32 and 34. As most recently affirmed by the Supreme Court in Rankin (Rankin’s Garage & Sales) v. J.J., 2018 SCC 19 (CanLII), at para. 23, that close and direct relationship must be such that “the defendant is under an obligation to be mindful of the plaintiff’s interests.”

[33]      A preliminary question at this stage is whether the relationship at issue falls within a previously established category of relationship in which proximity has already been found to exist. If the relationship falls within a previously established category, or is analogous to one, then proximity is established, without more: Livent, at paras. 26-28. The majority in Livent cautioned, however, that courts must be careful to avoid identifying established categories “in an overly broad manner”: at para. 28. As the majority noted, at para. 52, “the mere fact that proximity has been recognized as existing between an auditor and its client for onepurpose is insufficient to conclude that proximity exists between the same parties for all purposes” (emphasis in original). Rather, the majority explained, at para. 28, that “a finding of proximity based upon a previously established or analogous category must be grounded not merely upon the identity of the parties, but upon examination of the particular relationship at issue in each case.”

[34]      Where an established proximate relationship cannot be found, courts must undertake a full proximity analysis by examining the relationship between the plaintiff and the defendant. Relevant considerations may include, but are not limited to, “expectations, representations, reliance, and the property or other interests involved” as well as any statutory obligations: Livent, at para. 29, citing Cooper, at paras. 34, 38.

[35]      In cases of pure economic loss arising from negligent misrepresentation or performance of a service, two factors are “determinative” of the proximity analysis: (i) the defendant’s undertaking; and (ii) the plaintiff’s reliance: Livent, at para. 30. Where the defendant undertakes to provide a representation or service in circumstances that invite the plaintiff’s reasonable reliance, the defendant becomes obligated to take reasonable care, and the plaintiff has a right to rely on the defendant’s undertaking to do so. These “corollary rights and obligations create a relationship of proximity”: Livent, at para. 30.

[36]      However, the plaintiff’s reliance must be within the scope of the defendant’s undertaking – that is, the purpose for which the representation was made or the service was undertaken. Anything outside that scope will fall outside the scope of the proximate relationship and the defendant’s duty of care; the defendant cannot be liable for risk of injury against which it did not undertake to protect: Livent, at para. 31. Further, as the majority in Livent observed, at para. 31, “the proximity analysis not only determines the existence of a relationship of proximity, but also delineates the scope of the rights and duties which flow from that relationship” (emphasis in original).

[37]      Although the proximity and reasonable foreseeability stages are analytically distinct, they are nonetheless connected. In cases of negligent misrepresentation or performance of the service, Livent explains that the proximate relationship informs the foreseeability inquiry: at para. 34. A plaintiff’s injury will be reasonably foreseeable in such cases where (1) the defendant should reasonably foresee that the plaintiff will rely on its representation; and (2) reliance would, in the particular circumstances of the case, be reasonable: Livent, at para. 35. This is also defined by the nature of the defendant’s undertaking. The plaintiff may rely on the defendant to act with reasonable care for the particular purpose of the undertaking, but not for a purpose outside the scope of that undertaking.

[130]      The evidence is that Sky Solar prepared an invitation to bid for four projects including Whybank and Manchester and sent this invitation to bid to several companies, including Marnoch. Under section 2.4 of the invitation to bid, the response was required to include, among other things, “a valid Certificate of Liability Insurance ($2,000,000 minimum)”. The invitation to bid specified the contract form that the successful bidder would be required to enter into with Sky Solar which included a labour and material warranty which corresponded with the solar project warranties which Sky Solar had given to Firelight. The form of contract, the CCDC 2 construction contract, included a provision for insurance coverage which I have quoted above. Marnoch responded to the invitation to bid on January 30, 2012 and included a certificate of insurance which named Sky Solar as an additional insured under the commercial general liability policy issued by Economical to Marnoch as the named insured.

[131]      As I have noted, the certificate of insurance states on its face:

“This certificate is issued as a matter of information only and confers no rights upon the certificate holder and imposes no liability on the Insurer. This certificate does not amend, extend or alter the coverage afforded by the policies below”.

The certificate identifies the type of insurance as commercial general liability and discloses the limits of liability including the deductibles. FCA’s name appears in the field for the broker and in the field for “Certificate Authorization”, and the name of FCA’s representative, Greg Purvis, is recorded on the certificate.

[132]      Mr. Ruffalo, Sky Solar’s vice-president of engineering, testified that he reviewed the certificate of insurance, noted the name of Sky Solar, the policy period, and the coverage, and he was satisfied that the certificate demonstrated that Marnoch had complied with the bid requirements. He testified that no other documents related to the Policy were provided to Sky Solar at the time. Mr. Ruffalo testified that Sky Solar chose Marnoch as the successful bidder. Mr. Ruffalo agreed that Sky Solar had never retained FCA to act as its insurance broker and that Sky Solar had no agreement or understanding with FCA about reviewing insurance on behalf of Sky Solar. There were no direct communications between Sky Solar and FCA during the material times. Mr. Ruffalo agreed that he did not take steps to have Sky Solar’s own insurance broker look at the certificates of insurance and provide advice to Sky Solar.

[133]      Sky Solar submits that it would not have proceeded with Marnoch as a contractor without the certificate of insurance. I accept this submission, and find that Sky Solar relied upon the certificate of insurance when it selected Marnoch to be the contractor for the two solar projects.

[134]      Sky Solar’s director of finance, Sean Xiao, also gave evidence at trial. He testified that he did not have knowledge or training in insurance matters. Mr. Xiao reviewed the certificate of insurance which was submitted by Marnoch as part of its bid, and he saw that Sky Solar’s name was correct and the dollar amount of the coverage was correct. He testified that everything looked normal. There was nothing on the face of the certificates that indicated to him a need for further inquiries. Part of Mr. Xiao’s job was to notify Sky Solar’s own insurance broker when losses occurred and to submit notices of losses through this broker to Sky Solar’s own insurer. Mr. Xiao arranged to make a claim in respect of the August 2012 fire at the Whybank location and Sky Solar recovered its loss, other than the deductible, from its own insurer. Sky Solar’s own insurer concluded that there was no coverage for the loss from the 2013 failures following the fire at the Manchester location. Mr. Xiao testified that he knew that Marnoch had made a claim to its insurer, Economical, in respect of the 2013 failures, and he believed that coverage for Sky Solar would flow from Marnoch’s insurance claim.

[135]      Greg Purkis is a licensed broker at FCA. Mr. Purkis testified that as an insurance broker, he takes steps to understand his clients’ needs and to find insurance policies to meet those needs. He agreed that if the policy is not adequate for the client’s needs, as a broker he would point that out to the client. Mr. Purkis received an inquiry from a Marnoch representative on January 30, 2012 with a request for a “liability certificate” for Sky Solar and he responded by sending a certificate that day without further inquiry. Mr. Purkis expected Marnoch to give the certificate of insurance to Sky Solar. In January 2013 the renewal of Marnoch’s Policy with Economical was pending and Marnoch asked FCA to issue several certificates of insurance including one to Sky Solar as the certificate holder. Mr. Purkis sent the renewal certificate to Marnoch on September 19, 2012. Marnoch forwarded the renewal certificate to Mr. Ruffalo of Sky Solar on September 28, 2012. Mr. Ruffalo reviewed the certificate and he agreed that there was nothing on its face to show that the Policy did not comply with the requirements of the CCDC 2 construction contract.

[136]       The renewal certificate of insurance showed an effective date of September 20, 2012 and an expiry date of September 20, 2013 for the Economical CGL policy. In fact, the Policy had been extended for one month while renewal negotiations were ongoing and it was renewed for a one year term to October 20, 2013. The certificate of insurance for the renewal term had an incorrect date for the expiry of the Policy. It should have read “October 20, 2013” instead of “September 20, 2013”. This error did not have any consequence.

[137]      Warren Griffiths, the executive account manager at FCA for Marnoch’s insurance program also gave evidence. Mr. Griffiths testified that there was a long-standing arrangement between FCA and Marnoch regarding issuing certificates of insurance and adding additional insureds on CGL policies. Under this arrangement, if Marnoch requested that a certificate be issued, FCA would prepare their certificate based on the information provided and delivered back to Marnoch. If Marnoch was not comfortable with the scope of its obligations, it would seek Mr. Griffiths’ advice in those respects and such advice would be given. Mr. Griffiths acknowledged that there was nothing on the face of the certificates provided to Marnoch and Sky Solar that would suggest to them that there was anything wrong with the certificates. Mr. Griffiths acknowledged that one day after the certificate of insurance for the renewal period was issued on September 19, 2012, he received a copy of Marnoch’s CCDC 2 contract with Sky Solar and he became aware of the insurance requirements in that contract. Mr. Griffiths was negotiating with Economical and other insurance companies with respect to renewal of Marnoch’s CGL insurance requirements. Ultimately, the insurance was renewed with Economical. On March 14, 2013, Mr. Griffiths arranged to put Economical on notice of a claim by Marnoch in respect of the second fire at the Manchester location. FCA sent a Notice of Loss to Economical on behalf of Marnoch as the named insured on the same day. Mr. Griffiths agreed that he did not forward the certificates of insurance that had been given to Sky Solar to Economical’s claims adjuster or inform her of the status of Sky Solar as an additional insured under the Policy.

[138]      FCA accepts that, as the insurance broker which signed the certificates, it had an obligation to correctly communicate the information contained in them. In such circumstances, FCA would reasonably expect that Sky Solar would rely upon the information in the certificates. There was a proximate relationship between FCA and Sky Solar insofar as FCA undertook to provide accurate information in the certificates of insurance. FCA should have reasonably foreseen that Sky Solar would rely upon the correctness of the information in the certificates and reliance would, in the circumstances of this case, be reasonable. Sky Solar was entitled to rely upon FCA to act with reasonable care by providing correct information in the certificates of insurance. There are no residual policy considerations outside of the relationship of FCA and Sky Solar that negate the imposition of this duty of care. FCA owed a duty to Sky Solar to take reasonable care to ensure that the information contained in the certificates of insurance which were to be given to Sky Solar was correct.

[139]      FCA submits that it satisfied this duty of care because all of the information recorded on the certificates (except the incorrect expiry date for the Policy on the second certificate) was correct. The certificates clearly and expressly warn the reader that each is issued as a matter of information only and confers no rights upon the certificate holder and imposes no liability on the insurer. The certificates state that the insurance afforded by the policies described in them are subject to all terms, exclusions and conditions of such policies. The name of the insurer is shown as well as the policy numbers, coverage limits and deductibles.

[140]      I find that the information contained in the certificates of insurance was accurate (except the incorrect expiry date of the Policy). FCA did not breach its duty to take reasonable steps to ensure that the information in the certificates was accurate.

[141]      Sky Solar submits that the scope of the duty of care owed to it by FCA was broader than to provide correct information in the certificates of insurance. Sky Solar submits that FCA’s duty of care extended to (i) investigating Sky Solar’s insurance requirements under the CCDC 2 contracts and ensuring that the coverage afforded to Sky Solar as additional insured under the Policy fully complied with these requirements, and (ii) when there was an occurrence within the meaning of that term in the Policy, to bring to the attention of Sky Solar as an additional insured under the Policy the requirements of condition 4 of the Policy which could affect Sky Solar’s coverage. Sky Solar does not submit that FCA owed duties to Sky Solar which were co-extensive with the duties which it owed to its own client, Marnoch.

[142]      Sky Solar submits that FCA breached its duty of care and Sky Solar suffered damages that were caused by this breach of duty.

[143]      Sky Solar does not assert that it had any contractual relations with FCA. Sky Solar had retained its own insurance broker to assist it with its insurance needs, and it had insurance coverage as a named insured under a policy issued by another insurer. Sky Solar had a contractual entitlement to insurance coverage as an additional insured under the CCDC 2 construction contracts with Marnoch, and it looked to Marnoch to comply with these obligations. Marnoch did so by asking its own broker, FCA, to arrange for the issuance of certificates of insurance to be provided to Sky Solar as evidence that Sky Solar was named as an additional insured under the Policy. Mr. Ruffalo of Sky Solar was satisfied with the information disclosed on the certificate of insurance which was provided with Marnoch’s response to Sky Solar’s invitation to bid. The certificate stated on its face that the insurance afforded by the Policy is subject to all terms, exclusions and conditions of the Policy. Mr. Ruffalo did not ask to see the Policy. There were no direct dealings between Sky Solar and FCA until after the March 2013 fire and after Economical had advised that it would not cover Sky Solar for its loss. There is no evidence that FCA undertook to Sky Solar, which was not its client, that it would take steps to ensure that the Policy complied with the insurance requirements of the CCDC 2 contracts, or that it would contact Sky Solar to inform it of any particular exclusions, conditions, or other provisions of the Policy. Mr. Griffiths of Sky Solar testified that it would have been professionally improper for him to communicate directly with an additional insured on a CGL policy without the consent of its own client, the named insured.

[144]      Given these factual circumstances, it is clear that FCA did not undertake to Sky Solar that it would take steps to investigate Sky Solar’s insurance needs or inform Sky Solar of any particular exclusions or conditions in the Policy. FCA was not in a sufficiently close and direct relationship with Sky Solar that it would be just and fair to impose a duty on FCA to investigate Sky Solar’s insurance requirements and ensure that the coverage afforded to Sky Solar as additional insured under the Policy complied with these requirements, or to bring to Sky Solar’s attention the requirements of condition 4 of the Policy. The certificates clearly communicated to Sky Solar that the insurance afforded by the Policy is subject to all of its terms, conditions and exclusions. Sky Solar could have taken steps to investigate the terms of the Policy, but it did not do so. The scope of FCA’s duty to Sky Solar was limited to taking reasonable steps to ensure that the information in the certificates of insurance which it knew would be provided to and relied upon by Sky Solar was correct.

[145]      If I had concluded that FCA owed a duty of care to Sky Solar the scope of which extended beyond a duty to take reasonable steps to provide correct information in the certificates of insurance, I would need to decide whether FCA breached the extended duty of care by failing to meet the required standard of care and whether any such breaches caused Sky Solar to suffer damages. Sky Solar makes several submissions that FCA failed to meet the required standard of care and that it suffered damages as a result, and I address these submissions notwithstanding my conclusion on the limited scope of the duty owed by FCA to Sky Solar.

[146]      First, Sky Solar submits that the wording of the CCDC 2 contract required Marnoch to maintain commercial general liability coverage for Sky Solar, as the owner of the projects and the additional insured, which is broader than coverage limited to liability arising vicariously from the negligence Marnoch as the named insured. Sky Solar submits that Economical took the position that Sky Solar was not covered by the Policy because Marnoch was not liable, and that these interpretations are incorrect and contrary to the judicial interpretation of Economical’s Additional Insured Endorsement in Great Atlantic. Sky Solar submits that if the Sky Solar is not covered under the Policy because Marnoch was not liable, the result would be a gap in coverage. Sky Solar submits that this gap was caused by FCA’s breach of its duty of care and, as a result, it would be entitled to compensatory damages from FCA.

[147]      I address this submission by comparing the language in the CCDC 2 construction contracts that address Marnoch’s contractual obligation with respect to insurance with the language of the Additional Insured Endorsement in the Policy.

[148]      Section 11.1.1 of each of the CCDC 2 construction contracts between Sky Solar and Marnoch provides in the relevant part:

Without restricting the generality of GC 12.1 – INDEMNIFICATION, the Contractor shall provide, maintain and pay for the following insurance coverages, the minimum requirements of which are specified in CCDC 41 – CCDC Insurance Requirements in effect at the time of bid closing except as hereinafter provided:

.1         General liability insurance in the name of the Contractor and include, or in the case of a single, blanket policy, be endorsed to name, the Owner and theConsultant as insureds but only with respect to liability, other than legal liability arising out of their sole negligence, arising out of the operations of the Contractor [Marnoch] with regard to the Work. (Emphasis by underlining added)

The term “Work” is defined in the CCDC 2 contracts to mean “the total construction and related services required by the Contract Documents.” The “Contractor” is Marnoch and the “Owner” is Sky Solar. There is no “Consultant”.

[149]      By way of comparison, the Additional Insured Endorsement reads:

This insurance applies to those stated on the Declaration as ‘Additional Insureds”, but only with respect to liability arising out of the operations of the Named Insured [Marnoch]. (Emphasis by underlining added)

[150]      I disagree with Sky Solar’s submission that there is any gap in coverage. The language used in the Additional Insured Endorsement closely tracks the language in the CCDC 2 contracts. The words in section 11.1.1 of the CCDC 2 contracts with respect to insurance coverage for Sky Solar as Owner which do not appear in the Additional Insured Endorsement (“other than legal liability arising out of their sole negligence” and “with regard to the Work”) would not have broadened the coverage under the Additional Insured Endorsement if these words have been included. The coverage afforded to Sky Solar under the Additional Insured Endorsement was as broad as or broader than the coverage which Sky Solar contracted to receive in the CCDC 2 contracts with Marnoch. There was no gap in coverage. If FCA had a duty of care to ensure that coverage under the Additional Insured Endorsement complied with the insurance requirements which Sky Solar had contracted to receive under the CCDC 2 construction contracts, FCA did not breach this duty of care.

[151]      In reply submissions at trial, counsel for Sky Solar accepted that the language of the Additional Insured Endorsement complied with the insurance obligations of Marnoch under the CCDC 2 construction contracts.

[152]      Second, Sky Solar submits that FCA breached its duty of care by failing to meet the required standard of care because it did not understand the “professional liability” exclusion in the Policy and it did not ensure that the professional liability exclusion in the Policy was not broader than the exclusion in IBC Form 2100 which was specified in the CCDC 2 construction contracts. Sky Solar submits that the words “by you or on your behalf of” which appear in the definition of “professional services” in IBC Form 2100 and refer to the named insured, Marnoch, do not appear in the professional liability exclusion in the Policy and, as a result, the exclusion in the Policy is broader than the exclusion in IBC Form 2100. Sky Solar submits that if Sky Solar is not covered for its liability to Firelight because of the professional liability exclusion, FCA would have breached its duty of care and should be held liable in damages for the amount of Sky Solar’s loss.

[153]      Economical withdrew its reliance on the professional liability exclusion and, as a result, there is no need for me to address Sky Solar’s submissions in this regard.

[154]      Third, Sky Solar submits that FCA failed to satisfy the required standard of care by failing to disclose to Economical the certificates of insurance or Sky Solar’s status as an additional insured under the Policy after the March 2013 fire, and it failed to provide information to Sky Solar such as how to make a claim under the Policy.

[155]      As I have noted, Mr. Purkis of FCA testified that FCA had an arrangement with Economical by which FCA held certificates of insurance which were routinely issued and kept them on file until an issue arose in respect of a certificate of insurance. For this reason, Mr. Purkis did not provide copies of the certificates of insurance which were provided to Sky Solar in January 2012 and September 2012 when they were issued.

[156]      Where there are competing claims by a named insured and an additional insured under a policy of insurance, the claims need to be treated independently: Carneiro at para. 24.

[157]      Following the August 2012 fire at the Whybank location, there was no claim by Sky Solar under the Policy. Sky Solar made a claim on its own policy in which it was the named insured. After the March 2013 fire, FCA put Economical on notice of a claim by its client, Marnoch. Sky Solar made a claim on its own policy of insurance. Sky Solar did not put FCA or Economical on notice of a claim under the Policy in the period of time soon after the March 2013 fire.

[158]      Sky Solar’s lawyers put Marnoch on notice of a contractual warranty claim against it on September 20, 2013, and Marnoch reported this claim to FCA and, through FCA, to Economical. Economical retained counsel to represent Marnoch in defence of Sky Solar’s claim (this counsel also represented Economical in this period of time before separate coverage counsel was retained).

[159]      As I have noted, Sky Solar, through its lawyers, notified Economical on October 21, 2013 (through a letter sent to Economical’s lawyer) that Sky Solar is an additional insured under the Policy and requested production of the Policy in order to determine Sky Solar’s rights and coverage under the Policy. Economical’s lawyer responded and submitted that Sky Solar has no right to coverage under the Policy on the ground that it is not shown as an additional insured on Economical’s policy. As I explained when I addressed Sky Solar’s claim against Economical for breach of a duty of good faith, Economical reversed this position and advised in a letter dated November 11, 2013 from its lawyer that it accepts Sky Solar as an additional insured. In the same letter, Economical’s lawyer advised that “Sky was responsible for all of the selection and utilization of the major components on both projects and that appears to be the crux of most issues in these matters, Economical will not be defending or indemnifying Sky for Sky’s own liability”. Sky Solar made a formal claim against Economical under the Policy on November 14, 2013 by transmission of proof of loss forms.

[160]      Economical’s claims adjuster, Larry Schoch, testified that he instructed Economical’s lawyer to write the November 11, 2013 letter. He testified that even if Sky Solar had notified Economical in April 2013 that Firelight had made a contractual warranty claim against Sky Solar, Economical would not have defended Sky Solar because it would not have accepted that there was coverage for Sky Solar under the Policy.

[161]      Having regard to this sequence of events and the evidence of Mr. Schoch, I am unable to find that a failure by FCA to promptly provide the certificates of insurance to Economical would have affected in any way the coverage decision that was taken by Economical. I do not find that a failure by FCA to disclose the certificates of insurance to Economical and confirm Sky Solar’s status as an additional insured in a more timely way, or to provide advice to Sky Solar as to how to make a claim under the Policy, had any effect on Economical’s decision to deny coverage to Sky Solar under the Policy.

[162]      Fourth, Sky Solar submits that FCA failed to meet the required standard of care by failing to bring condition 4 of the Policy to the attention of Sky Solar before it settled Firelight’s claim. I have concluded that FCA did not owe such a duty of care to Sky Solar. If FCA did owe such a duty, I am unable to conclude on the evidence that if FCA had informed Sky Solar of condition 4 of the Policy, FCA would have acted differently in relation to its dealings with Firelight and that a breach by FCA of this duty caused Sky Solar to suffer damages.

[163]      Sky Solar has failed to prove that FCA breached a duty of care owed to Sky Solar and that Sky Solar suffered damages as a result.

b.            Did FCA breach a duty of good faith owed to Sky Solar?

[164]      Sky Solar submits that FCA owed a duty of good faith to Sky Solar which required it to deal with Sky Solar’s claim objectively and promptly, and not to treat Sky Solar, as an additional insured under the Policy, in a way that would cause it to suffer hardship, undue inconvenience or expense.

[165]      I have concluded that FCA owed a limited duty to Sky Solar to take reasonable care to issue certificates of insurance (which it knew would be relied upon by Sky Solar) that contained accurate information. FCA complied with this duty. Further, when FCA learned that Sky Solar intended to make a claim under the Policy, it took steps to locate these certificates of insurance and provide them to Economical.

[166]      I do not accept Sky Solar’s submissions that the brokers employed by FCA acted towards Sky Solar in ways which amounted to misconduct and a blatant disregard of the interests of Sky Solar as an additional insured.

[167]      Sky Solar has failed to prove that FCA breached a duty of good faith towards it.

[168]      I have concluded that Economical is not liable to Sky Solar and that FCA is not liable to Sky Solar, including for breach of a duty of good faith. There is no basis for an award of punitive or aggravated damages against Economical or FCA.

[169]      It is not necessary for me to make findings or reach conclusions concerning the compensatory damages claimed by Sky Solar, including the special damages for Sky Solar’s liability for costs in the arbitration proceeding.

Disposition

[170]      For these reasons, Sky Solar’s action against Economical and against FCA is dismissed.

[171]      If the parties are unable to settle the costs of this action, Economical and FCA may make written submissions within 30 days. Sky Solar may make responding submissions within 30 days thereafter. Economical and FCA may make brief written reply submissions, if so advised, within 10 days thereafter.

 

Cavanagh J.

 

Released: July 9, 2019

 

CITATION: Sky Solar (Canada) Ltd. v. Economical Mutual Insurance Company, 2019 ONSC 4165

COURT FILE NO.: CV-18-591984-0000

DATE: 20190709

 

ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: SKY SOLAR (CANADA) LTD. Plaintiff – and – ECONOMICAL MUTUAL INSURANCE COMPANY and FIRSTBROOK, CASSIE & ANDERSON LIMITED Defendants REASONS FOR JUDGMENT Cavanagh J.

 

Released: July 9, 2019