Intact Insurance Company v Clauson Cold & Cooler Ltd., 2018 ABQB 997

Court of Queen’s Bench of Alberta Citation: Intact Insurance Company v Clauson Cold & Cooler Ltd., 2018 ABQB 997 Date: 20181212 Docket: 1701 13792 Registry: Calgary Between: Intact Insurance Company Appellant/Defendant - and - Clauson Cold & Cooler Ltd. Respondent/Plaintiff Corrected judgment: A corrigendum was issued on December 12, 2018; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________ Endorsement of the Honourable Madam Justice N. Dilts _______________________________________________________

Appeal from the Decision by J. Farrington, Master in Chambers Filed on the 18 th day of June, 2018 Docket: 1701 13792 Introduction [ 1 ] This is an appeal by Intact Insurance Company (“Intact”) from the decision of Master Farrington given orally on June 18, 2018. [ 2 ] Master Farrington granted the application of Clauson Cold & Cooler Ltd. (“Clauson”) seeking, among other things, a declaration that Intact’s duty to defend Clauson under a Policy of insurance was triggered by actions against Clauson by both BHJ Canada Meat Products Ltd. (“BHJ”) and Bonduelle Canada Inc. (“Bonduelle”).

He concluded that the losses claimed in the pleadings by both BHJ and Bonduelle could be insured losses under the Policy and therefore the duty to defend arose. [ 3 ] In considering the position of the parties, the Master concluded that he was precluded from considering extrinsic evidence in assessing the insurer’s duty to defend and that to do so would be dangerous and inappropriate. Issue [ 4 ] The issue to be determined on this appeal is whether the Master was correct in conclusing that Intact’s duty to defend Clauson in the claims commenced by BHJ and Bonduelle has been triggered.

Evidence and Standard of Review [ 5 ] An appeal from a Master to this Court is an appeal “on the record.” While an appeal from a Master to this Court is an appeal on the record, this Court may also consider new evidence that is relevant and material to the issues: Alberta Rules of Court , Alta Reg 124/2010, s. 6.14(3). No additional evidence was filed before me than what was before the Master. [ 6 ] Our Court of Appeal has made it clear that the standard of review on appeals from a Master in Chambers is correctness; Bahcheli v. Yorkton Securities , 2012 ABCA 166 at paras 8-30 .

Background [ 7 ] Intact agreed to insure Clauson’s cold storage warehouse business and collected premiums to cover risks associated with that business. The Commercial Edge Express Plus Policy 5V0331198 between Intact and Clauson is a single policy of insurance. The Declaration of Coverage makes clear that the Policy Declarations, along with any supplementary declarations, policy conditions, forms, riders and endorsements, comprise the entire Policy.

As such, the Policy is a composition of various forms, all of which combine to constitute the coverage purchased. [ 8 ] The following forms within that Policy are relevant to these proceedings: Warehouse (the “Warehouse Form”) Equipment Breakdown Coverage – Standard Comprehensive (the “Equipment Breakdown Comprehensive Form”) Equipment Breakdown Coverage – Consequential Damage (the “Equipment Breakdown Consequential Form”) Commercial General Liability (the “CGL”) (together the “Forms”) [ 9 ] The allegations by each BHJ and Bonduelle are for loss of certain products while those products were in the care, custody and control of Clauson.

Both maintain claims in negligence and breach of contract when their frozen goods thawed and were damaged. [ 10 ] BHJ alleges that under agreement, Clauson was responsible for the proper storage of BHJ’s frozen products and owed BHJ a duty of care to ensure BHJ’s products remained frozen. It alleges that on or about September 8, 2015, BHJ suffered loss to its products when they thawed while in the care of Clauson.

The specific allegations of Clauson’s negligence include that Clauson failed to maintain the appropriate temperature in the warehouse and failed to inspect and maintain its refrigeration equipment and its warehouse.

[ 11 ] Bonduelle alleges that at various periods in 2015 and 2016, its frozen goods were thawed and rendered unusable while in storage at Clauson’s warehouse. Bonduelle alleges that Clauson owed it a duty of care or a contractual duty to store its frozen goods at an appropriate temperature and that it breached that duty by, among other allegations, failing to store the goods at the appropriate temperature, and failing to inspect the Clauson facilities and to keep those facilities in working condition.

Position of the Parties [ 12 ] Intact argues that the Forms represent examples of two types of insurance coverage purchased by Clauson, each with its own purpose.

It maintains that the Equipment Breakdown Comprehensive and Equipment Breakdown Consequential Forms are first party property insurance under which Clauson can claim its own loss, while the Warehouse Form and CGL are liability insurance under which Clauson can seek coverage for claims brought against it by third parties. [ 13 ] Intact argues that an insurer’s duty to defend can only arise in the context of liability coverage and that it is not possible for a duty to defend to arise in the context of first party insurance. [ 14 ] Intact argues that the only potential liability insurance under which a duty to defend could arise for the BHJ and Bonduelle claims is the Warehouse Form.

Intact urges that Clauson and this Court can only look at the Warehouse Form to determine whether a duty to defend has arisen. While Intact concedes that the BHJ and Bonduelle claims fall within the original grant of coverage under the Warehouse Form, it says the claims are clearly excluded by virtue of the exclusions in

Article 4A(

i) and (

j) of the Warehouse Form. [ 15 ]

Article 4A(

i) and (

j) of the Warehouse Form provides: A. Losses Excluded - This form does not insure any liability assumed by the Insured . . . for, or in respect of: (

i) Mechanical or electrical breakdown; (

j) Loss or damage cause by or resulting from . . . extremes or changes of temperature . . . [ 16 ] Intact says the only logical conclusion that can be drawn from the claims in the BHJ and Bonduelle pleadings is that the frozen products of BHJ and Bonduelle thawed because of a change in temperature within the Clauson warehouse. It says the exclusion in

Article 4A(

j) of the Warehouse Form is clear and unambiguous and therefore that Intact’s duty to defend does not arise. Intact maintains that no extrinsic evidence is required to reach this conclusion and that it is the only logical conclusion based on the allegations contained in the pleadings. [ 17 ] Clauson argues that a general duty to defend arises under the language of the CGL and that the duty to defend applies to the entire Policy, including the first loss Equipment Breakdown Comprehensive and the Equipment Breakdown Consequential Forms.

Moreover, Clauson maintains that Intact owes it a duty to defend because the claims of both BHJ and Bonduelle, if true, would give rise to a claim under the Equipment Breakdown Consequential Form, the Warehouse Form, or the Equipment Breakdown Comprehensive Form. [ 18 ] In asserting this view, Clauson points to the following language in the Equipment Breakdown Consequential Form that expressly extends coverage for spoilage from lack of refrigeration: 1.

INSURING AGREEMENTS In consideration of the Premium charged and subject to the Exclusions and Conditions of this Form, the Insurer hereby agrees: . . . 2) To pay the amount of loss on “Specified Property” of others which the Insured shall become obligated to pay by reason of the liability of the Insured for such loss; . . . provided such loss is due to spoilage from lack of . . . refrigeration, resulting solely from an “Accident”, as defined, to an Object insured under [the Equipment Breakdown Comprehensive Form], which “Object” is in use or connected ready for use. [ 19 ] Under the Equipment Breakdown Consequential Form, accident means “a sudden and accidental failure, during the Policy Period, of all or part of an “Object” and which manifests itself at the time of occurrence by physical damage to such “Object”, necessitating repair or replacement of all or part of it”. “Object” means certain specific property and includes any refrigerating vessels and piping and accessory equipment and any mechanical or electrical equipment. [ 20 ] Clauson argues that the Equipment Breakdown Consequential Form contemplates a scenario where Clauson may be liable to third parties for loss of product from spoilage from lack of refrigeration.

Pointing to this the spoilage clause, Clauson says that rather than being solely a first loss insurance form, the Equipment Breakdown Consequential Form is a sort of hybrid policy that extends coverage to Clauson both for its own loss and for losses experienced by third parties for which Clauson could be liable. [ 21 ] Overarching its position, Clauson argues that it is unreasonable to construe the Policy or any of its components individually or together in such a way that would eliminate coverage to Clauson for the principle risk that a cold storage business has i.e. the risk of damage to frozen stored goods.

Decision

[22] There is no dispute between the parties as to the applicable law for determining whether a duty to defend arises under aninsurance contract. The Supreme Court of Canada in Progressive Homes Ltd. v. Lombard General Insurance Co of Canada, 2010 SCC33, [2010] 2 S.C.R. 245 at para. 21 makes clear that an insurer’s duty to defend is triggered where the allegations in a statement of claim,if assumed to be true, would give rise to a claim under the Policy.

An insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer toindemnify the insured for the claim (Nichols v. American Home Assurance Co., (SCC), [1990] 1 SCR 801, at pp.810-11; Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699 at para. 28; Jesuit Fathers of UpperCanada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at paras 54-55). It is irrelevant whether theallegations in the pleadings can be proven in evidence.

That is to say, the duty to defend is not dependent on the insured actually beingliable and the insurer actually being required to indemnify. What is required is the mere possibility that a claim falls within the insurancepolicy. Where it is clear that the claim falls outside the policy, either because it does not come within the initial grant of coverage or isexcluded by an exclusion clause, there will be no duty to defend (see Nichols, at p. 810; Monenco, at para. 29). [23] The threshold giving rise to a duty to defend is low and the review to be conducted by the Court is to be based on thepleadings.

Words chosen by litigants to characterize the claims are not determinative; the Court is to look at the pleadings to understandthe true nature of the claims and to make a determination whether a defence is owed. The factual allegations in the pleadings are to beconsidered in their entirety. Only in very limited circumstances should extrinsic evidence be considered: Monenco at para 35-36. [24] In determining whether a duty to defend has arisen, the Court is not to rely on the insurer’s view of the validity or nature ofthe claim.

The question to be answered is whether the pleadings allege a state of facts which if proven would fall within the scope ofcoverage of the Policy. [25] The principles of

interpretation that govern the reading of an insurance contract are well settled and are also not in dispute.The Policy must be interpreted to give effect to the reasonable expectations of the parties. Coverage provisions will be interpretedbroadly and ambiguities will be resolved in favour of the insured. The Policy and its components will be read as a whole and are to begiven meaning in the context of the parties’ business realities.

The law requires that the entire Policy be examined to understand thescope of coverage and, when so examined, that it be interpreted in a way that is commercially sensible. [26] Based on a reading of the Policy in its entirety, I find that the “Defence” provision contained in the CGL is applicable to thePolicy as a whole. The CGL Defence provision reads: DEFENCE, SETTLEMENT AND SUPPLEMENTARY PAYMENTS – COVERAGES A, B and D With respect to the insurance afforded by the other terms of this Policy, the Insurer agrees: (

a) to defend in the name of and on behalf of the Insured, claims, suits or other proceedings that may at any time be instituted againstthe Insured for any accident or “occurrence” covered by this Policy. . .. (emphasis added) [27] The word “Policy” is defined by reference to the Declaration page that provides that “[t]he Policy Declarations together withthe Supplementary Declarations, Policy Conditions, forms, riders and endorsements, if any, issued to form a part thereof, completes thePolicy.” The Policy by definition is the collection of all of its components.

As such, when there is reference to the Policy, as distinct fromthe “form” or the “insurance” or the “coverage”, it must be taken to refer to the entire Policy.

Based on the definition of Policy found inthe Declaration and the appearance of the word Policy in the CGL Defence provision, I find that the Defence provision in the CGLapplies to the Policy as a whole. [28] The next question is whether a duty to defend can arise under either the Equipment Breakdown Comprehensive Form or theEquipment Breakdown Consequential Form. [29] Intact argues that it is an absurdity to conclude that a duty to defend arises from first party property insurance.

While I agreethat as a matter of theory, it is illogical that a duty to defend an insured could arise under a first party property Form, the Court is notbound by the titles to the Forms, nor by what might be the usual or expected nature of the Forms. Instead, the Court must be guided bythe words of the Forms themselves. [30] When the Equipment Comprehensive Form and the Equipment Consequential Form are reviewed, it is clear that neither limitsthe scope coverage to Clauson’s own losses.

Under the Equipment Breakdown Consequential Form, the insurer agrees to pay theamount of loss on “Specified Property” of others which the Insured shall become obligated to pay, provided that the loss is due tospoilage from lack of refrigeration resulting solely from an accident. “Specified Property” is defined within the Equipment BreakdownConsequential Form as “property specifically described in the Declaration, or in any Schedules or Endorsements as may be attached tothe Policy.” When one looks to the Declaration, “Specified Property” is expressly defined as “products under refrigeration.” When readas a whole, within what might be expected to be first party coverage the Insurer has agreed to pay for losses experienced by a third party(and for which Clauson shall become obligated to pay) for products under refrigeration at the Clauson warehouse when that loss is due tospoilage from lack of refrigeration resulting solely from an accident. [31] To borrow words from the pleadings rule, the “true nature” of the Equipment Breakdown Consequential Form is not solelythat of first party insurance.

The liability contemplated within the Equipment Breakdown Consequential Form extends beyond theInsured’s own loss to the loss of product by third parties where the product is under refrigeration in the Clauson facility and spoilageoccurs from lack of refrigeration resulting from an accident. [32] The inclusion of “products under refrigeration” as “Specified Property” under the Equipment Consequential form iscommercially logical and reflects the nature of the business being insured.

[ 33 ] The very nature of the claims brought by both BHJ and Bonduelle are for loss of product under refrigeration. Whether that loss arises from an accident is a matter to be resolved through trial and is not to be prematurely determined by reference to unsworn, untested, unchallenged opinion generated by the insurer. [ 34 ] I find that Intact’s duty to defend Clauson in both the BHJ and Bonduelle actions arises given the following:

i) the Equipment Breakdown Consequential Form extends coverage for Clauson’s liability to third parties for loss of products under refrigeration due to spoilage when the loss arises solely from an accident; ii) the Defence provision contained in the CGL applies to the entire Policy; iii) the allegations of both BHJ and Bonduelle on their face, if assumed to be true, could give rise to a claim under the Policy; and iv) it is not appropriate for this Court to consider extrinsic evidence in determining whether a duty to defend arises. [ 35 ] Intact’s appeal of Master Farrington’s decision is dismissed. [ 36 ] If necessary, the parties can provide written submissions on costs within 45 days.

Heard on the 4 th day of December, 2018. Dated at the City of Calgary, Alberta this 7 th day of December, 2018. N. Dilts J.C.Q.B.A. Appearances: Galan T. Lund for the Appellant/Defendant Matthew Kuhl/ Donald J. Chernichen, Q.C. for the Respondent/Plaintiff _______________________________________________________ Corrigendum of the Endorsement of The Honourable Madam Justice N. Dilts _______________________________________________________ Docket number corrected; Order of counsel for Respondent/Plaintiff corrected.