Chapter 13 Additional Insured Coverage in Canada

• Library: The Handbook on Additional Insureds (ABA) (2018 Ed.)

CHAPTER 13 Additional Insured Coverage in Canada

Richard Berrow and Joelle Michaud¹

I. Introduction

The scope of coverage available to the additional insured (AI), and the obligations owed to an AI, have generated much litigation in Canada, and the law in this area continues to evolve. Before delving into the legal principles, it is important to briefly review how AI coverage arises.

AI coverage is typically added to an insurance policy through an endorsement that modifies the policy, although in some instances the policy itself will contain wording to extend AI coverage situationally, for example, to persons for whom the named insured has agreed to procure coverage. Difficulties can arise where an endorsement is required, but the broker and/or insurer has not seen to the issuance of the endorsement. In such cases the AI has often relied on a broker-issued form of certificate of insurance. In Canada, certificates of insurance are not statutorily mandated or regulated. There is no standard form of certificate. More sophisticated AI seekers will sometimes have their own customized form of certificate that they require contracting parties to secure for their benefit. Brokers often issue an industry-r ecommended form of certificate that incorporates disclaimer language similar to the ACORD form in the United States. For instance, the certificate may state that the form is a matter of information only and confers no rights upon the person named on it as an AI. The value of such certificates is, to say the least, questionable, where no endorsement has been created (unless the policy confers AI coverage without the need for an endorsement).

In some cases, despite the absence of an endorsement or language in the policy to extend AI coverage situationally, the court has ignored this discrepancy and has accepted certificates of insurance as evidence of coverage, although certificates do not confer coverage but rather are simply a representation of coverage.² In Canada, there is some scope for an overriding argument that a certificate issued by a broker acting with the ostensible authority of an insurer is binding on the insurer.³

Normally, a certificate merely certifies or confirms to the AI that the policy provides certain coverage for the AI at the time of issuance. If there is an endorsement, the language of the certificate should mirror the language of the endorsement, and both the certificate and endorsement should reflect the intent of the covenant to insure agreed to by the parties. If there is a discrepancy between the certificate and endorsement, it has been held that the terms of the endorsement always trump those of the certificate.⁴ Therefore, in the case of a certificate that purports to certify that more coverage is in place than is actually granted by the endorsement, this could lead a court to conclude that the broker or insurer made a misrepresentation to the AI. If the discrepancy is between the contractual terms and the insurance documents, then the named insured could be in breach of its contractual obligation to insure.

Policies containing AI coverage usually limit the coverage with the intent to avoid providing coverage for the AI in the absence of a sufficient nexus between the alleged fault of the AI and the operations of the named insured. The scope of such limitations must be assessed carefully against the circumstances of the case. The AI wording of the policy can be at odds with the terms of an underlying contract between the AI and the named insured, which may impose broad obligations on the named insured to provide insurance for and to indemnify the AI. If the AI wording falls short of the named insured's contractual obligations to the AI, the named insured may have contractual exposure to the AI. These matters have generated much litigation in Canada.

The limitations in AI coverage wording that have received consideration in the Canadian courts tend to fall into the following categories:

• Liability of the AI that is imposed vicariously for the negligent operations of the named insured;
• Liability that "arises out of" the operations of the insured;
• Liability arising from the project or activity for which coverage was obtained;
• Interest in the operations of the insured;
• Interest in a specific contract.

It will be noted that the first instance cited (pure vicarious liability) is extremely narrow, since in Canadian common law there are relatively few situations where an AI will be vicariously liable for the tort of a named insured.

The variations in wording can lead to ambiguities and issues in determining coverage. The standard wording of an additional insured endorsement as recommended by the Insurance Bureau of Canada is as follows:

In consideration of an additional premium of $ __________ each of the [persons or entities described on this AI endorsement form] is to be included as an Additional Insured but only with respect to liability arising out of or attributable to the work of the Named Insured shown above, as described below.⁵

This chapter provides an overview of the approach taken by Canadian courts in determining the scope of coverage or the duties owed to an AI. The analysis can be varied depending on whether the court is attempting to determine the extent of the insurer's duty to defend or the duty to indemnify. The general factors that have been found relevant to the analysis are the wording of the policy and/or of the endorsement or insurance certificate, the object of the insurance (i.e., the purpose for obtaining it, especially where the coverage was obtained for a specific activity), the contractual background (i.e., the content of the covenant or agreement to insure), and the nature of the claim or claims before the court. This chapter will also briefly address how the language of the policy can also affect the rights of the AI in Sections VI and VII.

II. The Duty to Defend the Additional Insured

A. Principles of Interpretation of Insurance Contracts Relevant to the Duty to Defend the Additional Insured

Under Canadian law, the duty to defend an insured arises where allegations are made against the insured that raise a claim potentially payable under an insurance contract. Specifically, the duty to defend is triggered by the mere possibility that a claim under an insurance policy may succeed.⁶ The Supreme Court of Canada has also phrased the test for the duty to defend as "the mere possibility that a claim falls within the insurance policy."⁷ Such a claim is raised in the pleadings, which is why this test is commonly referred to as the "pleadings rule."⁸ The rule, stated otherwise, is that claims, which may arguably fall under the scope of the policy, generate the duty to defend. In Nichols, the Supreme Court of Canada set out that the "widest latitude" should be given to allegations in the pleadings to determine whether they may be argued to give rise to a claim under the policy.⁹ The principle was refined a decade later in Non-Marine Underwriters, Lloyd's of London v. Scalera,¹⁰ where the court took the view that it can look beyond the "legal labels" chosen by the plaintiff to frame his or her claim and must examine the "true nature" of the allegations. The court should also be wary of derivative claims. In the words of J. Iacobucci:

Determining whether or not a given claim could trigger indemnity is a three-step process. First, a court should determine which of the plaintiff's legal allegations are properly pleaded. In doing so, courts are not bound by the legal labels chosen by the plaintiff. A plaintiff cannot change an intentional tort into a negligent one simply by choice of words, or vice versa. Therefore, when ascertaining the scope of the duty to defend, a court must look beyond the choice of labels, and examine the substance of the allegations contained in the pleadings. This does not involve deciding whether the claims have any merit; all a court must do is decide, based on the pleadings, the true nature of the claims.
At the second stage, having determined what claims are properly pleaded, the court should determine if any claims are entirely derivative in nature. The duty to defend will not be triggered simply because a claim can be cast in terms of both negligence and intentional tort. If the alleged negligence is based on the same harm as the intentional tort, it will not allow the insured to avoid the exclusion clause for intentionally caused injuries.
Finally, at the third stage the court must decide whether any of the properly pleaded, non-derivative claims could potentially trigger the insurer's duty to defend.¹¹

In determining whether the duty to defend is triggered on the pleadings, aside from considering the originating pleading filed by the plaintiff, the court may also look to pleadings filed by defendants asserting cross-claims or third-party claims.¹² However, this would seem to be limited to pleadings filed by a party other than the party who asserts a duty to defend.¹³

Insurance policies are interpreted contra proferentem, meaning that where a promise or term is ambiguous, it will be interpreted against the interests of the insurer.¹⁴ Coverage clauses are given a broad interpretation, and exclusion clauses are construed narrowly. The Supreme Court of Canada has emphasized that it is desirable to give effect to the reasonable expectations of the parties.

In Monenco Ltd. v. Commonwealth Insurance Co.,¹⁵ the Supreme Court of Canada added that in determining the substance of the pleadings, the factual allegations must be considered in their entirety to determine whether they are able to support the plaintiff's claim as pleaded. Extrinsic evidence that has been explicitly referred to within the pleadings can also be considered by the court.¹⁶ As such, where an insurance contract, a collateral contract, or the relationship between the parties is pleaded, a contract can be considered by the court. However, it remains an open question whether...