Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., [1993] 1 S.C.R. 252
Simcoe and Erie General Insurance Company Appellant
v.
Reid Crowther & Partners Limited Respondent
Indexed as: Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co.
File No.: 22372.
1992: October 13; 1993: January 21.
Present: La Forest, Sopinka, Gonthier, Cory and McLachlin JJ.
on appeal from the court of appeal for manitoba
Insurance -- Liability -- Policy a hybrid of "claims-made" and "occurrence" policies -- Subsequent claim arising out of same negligent act -- Whether successive claims for damages arising out of the same negligent act constituting separate claims -- If so, whether the second claim in this case was made during the currency of the policy.
Appellant insured respondent engineering firm for third party liability with a policy that was "claims-made" in that the insurer's obligation to indemnify arose only where a claim was first made against the insured during the policy period. The policy had attributes of an "occurrence" policy, however, in that it disclaimed liability from acts predating the policy.
Respondent designed and supervised the construction of a municipal sewage and water system in 1974 and 1975. The installation, however, was defective and respondent admitted to improperly supervising the project. Appellant indemnified respondent in January 1981 and was given a narrow release confined to the remedial work performed. Expansion work on the system in September 1981 revealed further problems and the complaints made were treated by respondent as a demand for compensation. Respondent proceeded to perform further remedial work at its own expense. Appellant refused to indemnify respondent because the claim did not relate to a claim made prior to the expiry of the policy. The judgment at trial dismissing respondent's action was reversed on appeal. The issues here are: (1) whether successive claims for damages arising out of the same negligent act constitute separate claims; and (2) if so, whether the second claim in this case was made during the currency of the policy.
Held: The appeal should be dismissed.
"Claims‑made" and "occurrence" are not legal labels which dictate a certain legal result once a policy is characterized as one or the other. Regardless of what a policy is called, the issue is always what the particular policy dictates. The policy at issue here was a hybrid policy in that it was a "claims‑made" policy on its face, and yet disclaimed liability for any claim arising from acts predating the policy where the insured knew of the prior error or negligent act at the date the policy came into effect.
The courts must interpret the provisions of the policy at issue in light of the general principles of interpretation of insurance policies, including, but not limited to: (1) the contra proferentum rule; (2) the broad construction of coverage provisions and the narrow construction of exclusion clauses; and, (3) the desirability, at least where the policy is ambiguous, of giving effect to the reasonable expectations of the parties.
The ambiguities in the policy at issue, interpreted in accordance with the contra proferentum rule, militate in favour of adopting an interpretation that favours the insured rather than the insurer which drafted the policy. The same result is suggested by the rule that coverage provisions should be construed broadly.
The insured's reasonable expectation must be presumed to be, at a minimum, that the insurance plan would cover legitimate claims on an ongoing basis whether through renewal with the same insurer or through securing new insurance with a different insurer. This presumption is consistent with the discovery principle in that the insurer is able to secure a means of certainty in calculating its risk without unfairly creating gaps in coverage. To hold, however, that damages claimed after expiry of the policy are not part of the claim would be to endorse a situation where an insured could in some circumstances find it impossible to obtain indemnity for a loss.
The damages discovered in 1981 formed part of the original claim made during the policy period. Even if the damages were a separate claim, the claim would have been made within the policy period.
Generally, for a "claim" to be made there must be some form of communication of a demand for compensation or other form of reparation by a third party upon the insured, or at least communication by the third party to the insured of a clear intention to hold the insured responsible for the damages in question. This policy was far from clear on the meaning of "claim". It suggested that the allegation of negligence may constitute a claim, and it did not distinguish between a formal demand and a less formal expression of intention to sue which the reasonable person would interpret as a claim. It was therefore open on the authorities to find that a claim has been made in the absence of a formal demand.
The policy contained no express requirement of a formal demand, or indeed any demand at all, and what constituted a claim "made" was therefore a question to be resolved on the facts. Some authorities require the reasonable expectations of the parties be considered in determining whether a claim is being made. A reasonable person would have inferred that a further claim was being made when shown the further damage that had been discovered and when the comment was made that the work was typical of the job done by the general contractor on the project and approved by respondent. The substance of the claim was made before the policy expired. Appellant might have drafted the policy so as to require a formal written demand for coverage to be triggered. Having chosen not to do so, it must accept that the facts and circumstances may establish a demand and/or assertion of liability sufficient to constitute a "claim" within the wording of the policy.
Cases Cited
Considered: Hoyt v. St. Paul Fire and Marine Insurance Co., 607 F.2d 864 (1979); St. Paul Fire and Marine Insurance Co. v. Guardian Insurance Co. of Canada (1983), 2 C.C.L.I. 275; Stevenson v. Simcoe & Erie General Insurance Co., [1981] I.L.R. ¶1‑1434; Defrancesco v. Stivala, [1989] I.L.R. ¶1‑2524, rev'd [1992] I.L.R. ¶1‑2896; referred to: Brissette Estate v. Westbury Life Insurance Co., [1992] 3 S.C.R. 87; Wigle v. Allstate Insurance Co. of Canada (1984), 49 O.R. (2d) 101, leave to appeal refused [1985] 1 S.C.R. v; Continental Casualty Co. v. Enco Associates, Inc., 238 N.W. 2d 198 (1976); Williamson & Vollmer Engineering, Inc. v. Sequoia Insurance Co., 134 Cal.Rptr. 427 (1976); San Pedro Properties, Inc. v. Sayre & Toso, Inc., 21 Cal.Rptr. 844 (1962); Phoenix Insurance Co. v. Sukut Construction Co., 186 Cal.Rptr. 513 (1982); Mt. Hawley Insurance Co. v. Federal Savings & Loan Insurance Corp., 695 F.Supp. 469 (1982); Jensen v. Snellings, 841 F.2d 600 (1988); Safeco Title Insurance Co. v. Gannon, 774 P.2d 30 (1989), petition for review denied 782 P.2d 1069 (1989); Peacock v. Roberts (1985), 15 C.C.L.I. 36, aff'd (1990), 42 C.C.L.I. 196; McNish & McNish v. American Home Assurance Co. (1989), 39 C.C.L.I. 200, aff'd (1991), 5 C.C.L.I. (2d) 222; J. G. Link & Co. v. Continental Casualty Co., 470 F.2d 1133 (1972), cert. denied 414 U.S. 829 (1973); Continental Casualty Co. v. Robert McLellan & Co., [1973] 5 W.W.R. 475.
Authors Cited
Brown, Craig, and Julio Menezes. Insurance Law in Canada, 2nd ed. Scarborough, Ont.: Carswell, 1991.
Davis, Thomas R. M. "The New IBC Standard Form Commercial General (Claims‑Made) Liability Policy" (1987), 5 Can. J. Ins. L. 77.
Dumont, Jeanine. "What Every Professional Should Know Before Buying Claims‑Made Liability Insurance" (1985), 35 Fed. Ins. Couns. Q. 363.
Hilliker, Gordon. Liability Insurance Law in Canada. Toronto: Butterworths, 1991.
Long, Rowland H. The Law of Liability Insurance, Vol. 2. New York: Matthew Bender, 1992.
Parker, John K. "The Untimely Demise of the `Claims Made' Insurance Form? A Critique of Stine V. Continental Casualty Company", [1983] Det. C.L. Rev. 25.
Pierce, Lee Roy, Jr. "Professional Liability Insurance: The Claims Made and Reported Trap" (1991), 19 W. St. U. L. Rev. 165.
APPEAL from a judgment of the Manitoba Court of Appeal (1991), 70 Man. R. (2d) 36, 77 D.L.R. (4th) 243, 47 C.C.L.I. 309, [1992] I.L.R. ¶1‑2703, with supplementary reasons (1991), 73 Man. R. (2d) 128, allowing an appeal from a judgment of De Graves J. (1990), 66 Man. R. (2d) 142, 45 C.C.L.I. 172, [1990] I.L.R. ¶1‑2642. Appeal dismissed.
David I. Marr, for the appellant.
Leonard M. French and Dennis Ringstrom, for the respondent.
//McLachlin J.//
The judgment of the Court was delivered by
McLachlin J. ‑‑ This appeal involves the construction of a "claims‑made" policy of liability insurance. It raises two issues:
(1) do successive claims for damages arising out of the same negligent act constitute separate claims; and, if so,
(2) was the second claim in this case made during the currency of the policy?
1. The Facts
The appellant ("Simcoe and Erie") insured the respondent engineering firm ("Reid Crowther") under Simcoe & Erie's Master Policy L55470 for Engineers' Professional Liability Insurance, through ten consecutive policy periods, from October 1, 1971 to September 30, 1981. Under the terms of the policy, Simcoe & Erie agreed to indemnify Reid Crowther against liability to third parties. The policy was a "claims-made" policy, in that Simcoe & Erie's obligation to indemnify Reid Crowther arose only where a claim was "first made" against the insured during the policy period. In other words, Simcoe & Erie's obligations under the policy depended on when the claim was made, instead of when the negligent act giving rise to the claim occurred. The policy provided, in part:
Part I
Insuring Agreements
I.Coverage
The Company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages if legal liability arises out of the performance of professional services for others in the insured's capacity as an architect or an engineer and if such legal liability is caused by an error, omission or negligent act.
IV.Policy Period, Territory
This Policy applies only to errors, omissions or negligent acts which occur . . . (a) during the policy period and then only if claim if (sic) first made against the insured during the Policy period, or (b) which occurred prior to the effective date of the Policy and then only if claim is made during the Policy period provided: (1) no insured had any knowledge of such prior error, omission or negligent act at the effective date of the policy . . . .
Part IV
Conditions
1.Notice of Claim or Suit
The insured shall, as soon as practicable after receiving information as to his alleged errors, omissions or negligent acts, give written notice thereof to the Company with full particulars of any claim arising therefrom. . . . If suit is brought, the insured must immediately forward to the Company every summons or other process received by him.
In June 1974, Reid Crowther entered into a contract with the Manitoba Water Services Board to provide engineering services for the construction of a sewage collection and water distribution system in the Town of Stonewall, Manitoba ("the town"). Reid Crowther's task was to design and supervise the construction of the system, and to certify the workmanship and materials provided by the general contractor. Construction of the system took place in 1974 and 1975. The sewer system and water distribution system were approved and accepted on November 14, 1975 and June 16, 1976, respectively.
The town experienced many problems with the new system, as a result of which the town complained to the Manitoba Water Services Board and to Reid Crowther. There was also direct communication between the Manitoba Water Services Board and Reid Crowther about the problems with the town's new system. In 1978, Reid Crowther agreed with the town that the installation was improper and acknowledged its inadequate supervision of the general contractor. Remedial work was carried out, at Reid Crowther's expense. A claim for indemnity against Simcoe & Erie was settled and a release executed in January 1981. The release as originally drafted by Simcoe & Erie's solicitors referred generally to "remedial works to sewer and water services and related works in the Town of Stonewall". Reid Crowther insisted on a narrow release, confined to "remedial works related to freezing of sewer and water house services as a result of installation at inadequate depth in the Town of Stonewall".
The town continued to experience problems with the system. On September 25, 1981, in the course of work to expand the system, further antecedent damage to the project was discovered. The town foreman showed Reid Crowther's on‑site engineer the defects of the original installation and the newly discovered damage, and commented to Reid Crowther's on-site engineer that the installation of that part of the system was typical of the job done by the general contractor and approved by Reid Crowther as adequate. Then on September 29, in the presence of on-site engineers from Reid Crowther, town workers videotaped large sections of the sewer pipe, in order to ascertain the extent of the damage caused by the improper installation. The town foreman was also present during this videotaping, and again indicated to Reid Crowther's representatives his dissatisfaction with the condition of the sewer line and the job that had been done.
Reid Crowther treated these communications as a demand for compensation. On October 1, 1981, the same day the policy expired, Reid Crowther's Winnipeg office sent a memo to its head office in Calgary reporting the new damage that had just been discovered in the system. The memo arrived in Calgary October 5, 1981. The same day, Reid Crowther's Calgary office notified Simcoe & Erie's representative of the further damage.
On January 7, 1982, the town asked to meet with Reid Crowther to discuss compensation it was seeking for the further damage, thereby formally advising Reid Crowther of its new demands. Ultimately, further remedial work was performed at Reid Crowther's expense, totalling $250,564.44 (inclusive of interest as of March 31, 1989). In addition, Reid Crowther paid $62,023.76 in settlement of a suit filed by the Province of Manitoba against Reid Crowther in relation to the defective sewer system. Reid Crowther thus incurred a total cost of $312,588.20 (inclusive of interest up to March 31, 1989) as a result of its liability for the further damage. Simcoe & Erie has refused to indemnify Reid Crowther for this amount, on the ground that it does not relate to a claim made prior to the expiry of the policy. It may be noted that for purposes of this appeal nothing turns on the distinction between the town and the province.
II. The Issues
1. Where a claim is made under the policy, and compensation for additional damage arising from the same act of negligence is subsequently demanded after the expiry of the policy, does the additional damage constitute part of the first claim?
2. If the subsequent demand for compensation does not constitute part of the first claim, but instead forms a separate claim, on the facts of this case was that separate claim made within the policy period in any event?
I have concluded, as will be seen, that both questions should be answered in the affirmative.
III. Discussion
1.Was the Second Demand for Compensation Part of the Same Claim as the Prior Demand for Compensation?
Background: "Claims-Made" versus "Occurrence" Policies
Before focusing on the central issues of the case, it is not amiss to consider the difference between "occurrence" and "claims-made" liability insurance policies.
Every insurance policy must provide a mechanism for determining the claims for which the insurer is liable in a temporal sense. The traditional way has been to focus on the occurrence giving rise to the claim. For example, most automobile insurance liability policies provide coverage for accidents caused by the insured's negligence during the policy period. Provided that the negligent act occurred in the policy period, the insurer is required to indemnify the insured for all loss arising from it, regardless of when a claim is made against the insured for that loss. This type of insurance policy is called an "occurrence" policy.
Alternatively, the policy may focus on the time the claim is made by the third party on the insured. Under a "claims-made" policy, the insurer is liable to indemnify the insured for claims made during the currency of the policy, regardless of when the negligence giving rise to those claims may have occurred. Liability for negligent acts predating the policy is covered provided a claim arising from any such negligent act is made during the policy period. On the other hand, liability for negligent acts which occur within the policy period is covered only if a claim is made against the insured on their account within the policy period. As John K. Parker puts it, in "The Untimely Demise of the `Claims Made' Insurance Form? A Critique of Stine V. Continental Casualty Company", [1983] Det. C.L. Rev. 25, at p. 27:
Generally speaking, "occurrence" policies cover liability inducing events occurring during the policy term, irrespective of when an actual claim is presented. Conversely, "claims made" (or "discovery") policies cover liability inducing events if and when a claim is made during the policy term, irrespective of when the events occurred.
At the same time, it is important to note that "claims‑made" and "occurrence" are not legal labels which dictate a certain legal result once a policy is characterized as one or the other. The issue is always what the particular policy dictates, regardless of what it is called. This is particularly so due to there being disagreement between academics as to just what are "pure" "claims-made" policies, and "pure" "occurrence" policies. For instance, there is disagreement as to whether "claims-made" means claims made against the insured by third parties, or claims made by the insured against the insurer for coverage under the insurer's policy. Regarding the characterization of "pure" "occurrence" policies, one point of disagreement is whether the "occurrence" consists of a negligent act, or the resultant damage, or both.
These disagreements can perhaps be resolved by recognizing that there may be different types of "claims-made" and "occurrence" policies, as well as hybrid policies that have some features of "claims‑made" policies and some features of "occurrence" policies. The essential is not the label one places on the policy, but what the policy says. The courts must in each case look to the particular wording of the particular policy, rather than simply attempt to pigeonhole the policy at issue into one category or the other. Construction of policies at issue in these kinds of cases depends much more on the specific wording of the policy at issue than on a general categorizing of the policy.
That said, it is important to understand what the parties are seeking to accomplish by adopting a "claims‑made" or hybrid policy, as this may aid in interpreting the provisions of such a policy. An examination of the historical development of the widespread use of "claims-made" and hybrid policies is an appropriate starting point to this area of discussion.
Although there is evidence of "claims‑made" and hybrid policies having been utilized to at least some extent for decades in Canada, and as far back as the first half of this century in the United States, "claims‑made" and hybrid policies have come into widespread use in the liability insurance industry only within the past 25 years or so in the United States, and apparently somewhat more recently in Canada. The expanded utilization of "claims‑made" and hybrid policies was resorted to by insurance companies in response to serious problems that had developed in the use of "occurrence" policies. These problems were rooted in the "long‑tail" nature of liability claims against some types of insureds.
"Occurrence" liability insurance policies work reasonably well in covering insureds such as automobile owners and drivers. Where an automobile operator is negligent and thereby causes damage, the nature of the negligent act and the resultant damages are in almost all cases known upon the happening of the negligent act or shortly thereafter. But for insureds who are professionals such as doctors, lawyers, engineers, etc., damages can result (or be discovered) many years after a negligent act is committed. This is even more the case for manufacturers and other types of insureds who can cause damages by producing hazardous products or toxic waste. Therefore, for each of these types of insureds, insurers are at risk for an unknown number of claims that may be made many years after the expiry of a particular policy of "occurrence" liability insurance.
Compounding the uncertainty that these "long-tail" risks caused to insurers was the evolving nature of law and science. The potential for future developments such as the increased availability and quality of scientific proof of causation of harm, expanded legal liability (e.g., "superfund" environmental legislation), and changes in the law as to quantum of damages, added to the uncertainty on the part of insurers as to the likely number of claims that would be made against their insureds in the future, as well as the likely amount of damages per claim for which individual insurers would have to provide indemnity.
Another type of problem associated with the "long-tail" nature of "occurrence" policies resulted where defendants to claims had been insured successively under liability insurance policies from different insurers over the years. In those types of situations, there arose disputes between the insurers as to when the "occurrence" in question happened -- and, therefore, which insurer had to provide an indemnity for the loss. These kinds of disputes further added to the uncertainty in calculating insurers' actuarial risk, and also caused added expenses to the insurance industry in engaging in this type of litigation.
As a result of these problems, insurers sought to protect themselves either by drastically increasing premiums as a hedge against actuarial uncertainty or by withdrawing altogether from providing liability insurance coverage to some types of insureds.
The "claims‑made" type of policy was seen (as were hybrid policies) as a means of providing liability insurance at reasonable rates while avoiding the problems associated with the "long-tail" nature of "occurrence" policies. The date at which a claim was made would be easier to ascertain than the date at which an "occurrence" happened, and more importantly, insurers would be better able to project the likely level of claims that would be payable under liability insurance policies.
But "claims‑made" and hybrid policies (the latter in particular), while increasing predictability for insurers and reducing premiums to insureds, exact their price ‑‑ the price of diminished coverage. As noted earlier in these reasons, "claims-made" policies are sometimes called "discovery" policies. To provide that the "discovery" of a claim is the event that triggers coverage solves the problems associated with the use of "occurrence" policies while avoiding some of the gaps in coverage that are created by providing in a policy that it is the "making" of a claim that triggers coverage.
A more far-reaching diminishment of coverage results from the manner in which insurers deal with known contingent liabilities of insureds (or potential insureds). For instance, the discovery by a manufacturer, by reason of the claim of even a single consumer, that it has produced thousands of units of a product that is hazardous, raises enormous implications for future insurability of that manufacturer. In light of the known potential for future claims of a similar nature faced by the manufacturer, the manufacturer will face either skyrocketing premiums for coverage, or a complete refusal to grant or renew coverage at all. Alternatively, insurers may agree to grant or renew a liability insurance policy, but exclude coverage for liability arising out of the type of defect that has been discovered. In short, "claims-made" or "discovery" policies, by placing insurers in the position of obtaining extensive information about potential claims before commencing (or renewing) the coverage of an insured, enable insurers to avoid having to indemnify insureds for a significant proportion of the potential claims that exist as of the date of commencement (or renewal) of coverage.
A more sweeping method used by insurers to refuse coverage for some contingent liabilities of their insureds is that of using a standard policy term that excludes coverage for claims arising out of any negligent act of which the insured was aware as of the date of commencement (or renewal) of coverage. This is inconsistent with the theoretical basis of true "claims-made" policies. Since it is the claim which is the focus of a true "claims-made" policy -- not the underlying negligent act -- knowledge prior to the commencement (or renewal) of coverage of an antecedent negligent act should not be a bar to coverage. Policies with this kind of provision may be viewed more as hybrid policies than as true "claims-made" policies. The insurer has in effect incorporated an element of an "occurrence" policy into its policy framework.
Another type of restriction of coverage in "claims-made" and hybrid policies is found in what are referred to as "claims made and reported" policies. Coverage under such policies applies only to claims which are both made of the insured and reported to the insurer during the policy period. This type of policy creates obvious problems for insureds regarding claims discovered and/or made by third parties just before the expiry of their coverage. In his article "Professional Liability Insurance: The Claims Made and Reported Trap" (1991), 19 W. St. U. L. Rev. 165, Lee Roy Pierce, Jr. writes at p. 171:
Claims made and reported policies are less expensive because it is statistically probable that a certain number of insureds will find it impossible or impracticable to timely report their claims. Thus, premium costs to the group are reduced because it is statistically probable that many insureds (who actually encounter the insured loss) will forfeit coverage.
In Pierce's view, this situation is antithetical to the purpose of purchasing liability insurance, which is for the insured to trade a contingent loss (uncertainty) for a certain loss (the premium paid to the insurer).
Similarly, a standard form policy released in 1986 by the Insurance Bureau of Canada was the subject of a critical analysis by Thomas R. M. Davis in "The New IBC Standard Form Commercial General (Claims-Made) Liability Policy" (1987), 5 Can. J. Ins. L. 77. In Davis' view, at p. 78:
The purpose of the claims-made form is to enable insurers to predict current liabilities rather than underwrite unpredictable long-term liabilities (occurrence basis). There is no doubt that the claims-made form will accomplish this, primarily by shilfting (sic) a significant part of the risk of unpredictable long-term liabilities back to the insured.
In sum, while it is reasonable to argue that some part of the reduced premiums (and greater availability of coverage) associated with "claims-made" and hybrid policies is the result of greater certainty of risk, a major reason why "claims-made" and hybrid policies are cheaper and more available to insureds than are "occurrence" policies is that there are significant gaps in coverage inherent to "claims-made" and hybrid liability insurance policies.
This is not to say "claims‑made" or hybrid policies with these sorts of gaps in coverage are necessarily unfair to insureds. It is open to insureds to agree to a more risky sort of indemnity agreement (if the phrase is not an oxymoron) in exchange for a lower premium. The issue of fairness arises only if the insured is not aware that it is buying a "more risky" policy. But, it should be noted that most insureds will purchase liability insurance assuming they are covered for all liability, and not realizing there may be gaps in the coverage they have purchased. These considerations suggest that so‑called "claims‑made" policies should be examined with care to determine whether, read as a whole, they clearly transfer the risk of the long‑term liability in question to the insured. In particular -- considering again the discovery principle as it relates to the purpose of avoiding the problems associated with "occurrence" policies -- courts should be careful not to construe "claims-made" or hybrid policies in such a way as to exclude claims discovered by the insured during the policy period on the ground of some technical defect in the nature of the claim. If they do, they may be unfairly depriving people of the benefit of the coverage for which they reasonably understood themselves to have contracted.
The Simcoe & Erie Policy: Characterization
The policy at issue in this case, while on its face a "claims-made" policy, possesses attributes of an "occurrence" policy. To this extent, it may be regarded as a hybrid policy rather than a true "claims-made" policy.
Clause IV of Part I of the policy is a "claims‑made" type of clause. The insurer is seeking the benefit of having to pay only those claims which were made to the insured during the policy period. However, by the same clause, the insurer carves out a category of claims made within the policy period for which the insurer is not liable ‑‑ those arising from acts which predate the policy where the insured had "knowledge of such prior error, omission or negligent act at the effective date of the policy...." Thus the insurer seeks to secure to itself an advantage it would have under an "occurrence" policy, in excluding coverage for claims arising from some negligent acts which occurred prior to the effective date of the policy.
It can also be argued, interpretatively, that the negligent act or omission may have been seen by the parties as possessing a greater importance in this policy than it would have under a true "claims‑made" policy. This emerges not only from the exclusion regarding claims arising from prior negligent acts of which the insured has knowledge, but also from other portions of the policy. The heading of Part IV, Clause I, "Notice of Claim or Suit", indicates that it deals with notice of such claims. The body of the clause, however, provides that the insured is to give prompt written notice of "his alleged errors, omissions or negligent acts" "as soon as practicable after receiving information as to [them]". This suggests that "claim" is equated with the negligent act or omission giving rise to it. At the very least, the wording of this clause creates ambiguity in the policy as to whether it is intended to be a true "claims-made" policy, or something else.
The Simcoe & Erie Policy: Construction
This brings me to the question raised by the first issue: does the word "claim" in Part I, Clause IV of the policy include a demand for compensation made after expiry of the policy for an error, omission or negligent act for which a prior demand was made within the policy period?
As suggested above, the distinction between "claims-made" and "occurrence" policies does not resolve this question. In each case the courts must examine the provisions of the particular policy at issue (and the surrounding circumstances) to determine if the events in question fall within the terms of coverage of that particular policy. This is not to say that there are no principles governing this type of analysis. Far from it. In each case, the courts must interpret the provisions of the policy at issue in light of general principles of interpretation of insurance policies, including, but not limited to:
(1) the contra proferentum rule;
(2) the principle that coverage provisions should be construed broadly and exclusion clauses narrowly; and
(3) the desirability, at least where the policy is ambiguous, of giving effect to the reasonable expectations of the parties.
See C. Brown and J. Menezes, Insurance Law in Canada (2nd. ed. 1991), at pp. 123-31, and Brissette Estate v. Westbury Life Insurance Co., [1992] 3 S.C.R. 87.
If this were a true "claims‑made" policy, the case against coverage for the additional damages here at issue might be stronger. The only thing that would matter is when the demand for compensation for the damages discovered in 1981 was made against the insured. The origin of that claim (the negligent act or omission), and whether there was any prior demand for compensation for other damages resulting from the same act of negligence, would arguably be irrelevant to the question of whether the new demand for compensation was made within the policy period. And the result would not be unfair; the insured would be able to advance the claim under its next "claims‑made" policy. By straddling the fence between "claims‑made" and "occurrence" policies, Simcoe & Erie's policy precludes these arguments and raises the contrary suggestion that the act or omission from which the claim arises is a matter of considerable importance.
A number of provisions of the policy indicate that the act or omission from which the claim arose is of considerable importance. First, as noted above, where the act or omission preceded the policy, there must be an inquiry as to whether the insured knew ‑‑ not about the claim ‑‑ but about the act or omission which gave rise to it.
Second, in cases such as this one, where the negligent act occurred during the policy period, the notice provisions suggest that what is meant by "claim" in Part I, Clause IV may be the negligent act or omission. A provision requiring the insured to give notice of matters falling short of claims is not inconsistent with a true "claims‑made" policy; the insurer can ask for what it wishes in gauging its risk. But by referring to "errors, omissions or negligent acts" under the heading of "Notice of Claim or Suit", the suggestion is made that "claims" in the policy consists, at least in part, of an allegation of a negligent act or omission.
A third source of ambiguity in the policy lies in the phrases "if claim is made" and "if claim is first made" in Part I, Clause IV. The word "claim" is preceded by neither the word "a" nor the word "the". In the context of Part I, Clause IV, there is a world of difference between the words "a claim" and the words "the claim". If the passages referred to are read as if they said "if a claim is (first) made", then the policy wording would seem to provide coverage for each one of any number of claims arising from the same error, omission or negligent act as long as at least one ("a") such claim is made during the policy period. By contrast, if the word "the" had been used, Simcoe & Erie would have had a stronger argument that the fact of damages being claimed in 1978 does not affect whether the damages discovered in 1981 fall within the particular terms of coverage under its policy.
These ambiguities, interpreted in accordance with the contra proferentum rule, militate in favour of adopting an interpretation of the policy that favours the insured rather than the insurer which drafted the policy. The same result is suggested by the rule that coverage provisions should be construed broadly.
I turn to the third relevant principle of construction, the reasonable expectations of the parties. Without pronouncing on the reach of this doctrine, it is settled that where the policy is ambiguous, the courts should consider the reasonable expectations of the parties: Wigle v. Allstate Insurance Co. of Canada (1984), 49 O.R. (2d) 101 (C.A.), leave to appeal to S.C.C. refused, [1985] 1 S.C.R. v. The insured's reasonable expectation is, at a minimum, that the insurance plan will provide coverage for legitimate claims on an ongoing basis. The presumption must be that the intention of the parties is to provide and obtain coverage for all legitimate claims on an ongoing basis, whether through renewal with the same insurer or through securing new insurance with a different insurer. This presumption is consistent with the discovery principle discussed earlier in these reasons, in that the insurer is able to secure a means of certainty in calculating its risk without unfairly creating gaps in coverage. Yet the construction of the policy which the insurer urges upon us may well not achieve that goal.
To hold that damages claimed after expiry of the policy are not part of the claim would be to endorse a situation where an insured such as Reid Crowther could in some circumstances find it impossible to obtain indemnity for a loss. Assuming for the moment that Reid Crowther renewed its coverage with Simcoe & Erie on October 1, 1981, as it had the ten preceding years, it might have been unable to obtain indemnification for the further damages discovered during the renewal period. This leads to the absurdity that Reid Crowther might have had no coverage at all for the damages discovered in 1981 despite being continuously insured by Simcoe & Erie. Reid Crowther could not have claimed under the policy in place when the negligence was discovered and the first damages "claimed" if one accepts Simcoe & Erie's contention that the claim falls outside that policy. At the same time, Reid Crowther would arguably have been unable to claim for the damage under the renewal policy because it had knowledge of the negligent act giving rise to it prior to the effective date of that renewal policy. So Reid Crowther would have found itself without any coverage at all. Reid Crowther would become one of the actuarially predictable number of insureds to which Pierce refers who are unable to obtain insurance indemnification because they fall between two stools. It follows that a view of Simcoe & Erie's policy as part of a system of successive insurance designed to provide liability coverage from year to year militates against the interpretation which the insurer urges upon us.
I conclude that the Court of Appeal was correct in ruling that the damages discovered in 1981 formed part of the original claim made during the policy period.
2.If the 1981 Damages Were a Separate Claim, was the Claim Made within the Policy Period?
The conclusion I have reached on the first issue makes it technically unnecessary to deal with the second issue. Nevertheless, because of the importance that the second issue has in relation to the interpretation of "claims-made" and hybrid policies, in my view this Court should not in this case refrain from ruling on the second issue. Assuming, then, for the purpose of conducting this analysis, that I had concluded the subsequently discovered damages constitute a separate claim against the insured, the issue is whether that claim was made on September 25, 1981, when the town foreman showed Reid Crowther's representative the further damage, and/or on September 29, 1981, when the damage to the sewer line was videotaped in the presence of representatives of Reid Crowther.
The authorities establish that as a general rule, for a "claim" to be made there must be some form of communication of a demand for compensation or other form of reparation by a third party upon the insured, or at least communication by the third party to the insured of a clear intention to hold the insured responsible for the damages in question: Jeanine Dumont, "What Every Professional Should Know Before Buying Claims-Made Liability Insurance" (1985), 35 Fed. Ins. Couns. Q. 363, at p. 374; Continental Casualty Co. v. Enco Associates, Inc., 238 N.W. 2d 198 (Mich. App. 1975); Williamson & Vollmer Engineering, Inc. v. Sequoia Insurance Co., 134 Cal.Rptr. 427 (App. 1976). See also: Gordon Hilliker, Liability Insurance Law in Canada (1991), at pp.136-37; Rowland H. Long, The Law of Liability Insurance (1992), vol. 2, at p. 12C-54; San Pedro Properties, Inc. v. Sayre & Toso, Inc., 21 Cal.Rptr. 844 (App. 1962); Hoyt v. St. Paul Fire and Marine Insurance Co., 607 F.2d 864 (9th Cir. 1979); Phoenix Insurance Co. v. Sukut Construction Co., 186 Cal.Rptr. 513 (App. 1982); Mt. Hawley Insurance Co. v. Federal Savings & Loan Insurance Corp., 695 F.Supp. 469 (C.D.Cal. 1987); Jensen v. Snellings, 841 F.2d 600 (5th Cir. 1988); Safeco Title Insurance Co. v. Gannon, 774 P.2d 30 (Wash. App. 1989), petition for review denied 782 P.2d 1069 (Wash. 1989); Stevenson v. Simcoe & Erie General Insurance Co., [1981] I.L.R. ¶1-1434 (Alta. Q.B.); St. Paul Fire and Marine Insurance Co. v. Guardian Insurance Co. of Canada (1983), 2 C.C.L.I. 275 (Ont. C.A.); Peacock v. Roberts (1985), 15 C.C.L.I. 36 (B.C.S.C.), aff'd (1990), 42 C.C.L.I. 196 (B.C.C.A.); McNish & McNish v. American Home Assurance Co. (1989), 39 C.C.L.I. 200 (Ont. H.C.), aff'd (1991), 5 C.C.L.I. (2d) 222 (Ont. C.A.); Defrancesco v. Stivala, [1989] I.L.R. ¶1-2524 (Ont. H.C.), rev'd [1992] I.L.R. ¶1‑2896.
The authorities distinguish between a communication of a demand or assertion of liability sufficient to trigger coverage under a claims-made policy and: (1) mere requests for information; (2) filing of a lawsuit without serving it upon the insured or otherwise advising the insured of the claim embodied in the suit; and (3) expressions of dissatisfaction that are clearly not meant to convey a demand for compensation for the damages. These are sound distinctions.
The rule that a demand or assertion of liability must be communicated for a claim to be "made" leaves open the further questions, however, of what constitutes a demand or assertion of liability, and whether that demand or assertion is established on the facts. The cases in the United States and Canada referred to above which have found a claim had not been made can be distinguished on the basis of either or both of two factors: (1) the wording of the policies in question, which made it clear that "claim" meant an express demand; or (2) the fact situations, which fell short of establishing that a claim had indeed been made within the meaning of the general rule. I will address the authorities and this case in the context of these two points.
I turn first to the wording of the policies. In Safeco Title Insurance Co. v. Gannon, supra, a rather clear indication by a third party that a suit would be filed was held not to constitute a claim, where the policy expressly distinguished between "claims" and "facts and circumstances which may give rise subsequently to a claim hereunder." Similarly, in Jensen v. Snellings, supra, Hoyt v. St. Paul Fire and Marine Insurance Co., supra, as well as in a number of other cases aside from those cited herein, the American courts have not merely stated that a claim is ordinarily understood to mean a demand of some sort, but have also gone on to say that the wording of the policy in the particular case reinforces the conclusion that the ordinary meaning was intended.
In the appeal at bar, the policy is far from clear on the meaning of "claim". The policy suggests, as discussed above, that the allegation of negligence may constitute a claim, and it does not distinguish between a formal demand and a less formal expression of intention to sue which the reasonable person would interpret as a claim. It is therefore open on the authorities to find that a claim has been made in the absence of a formal demand. Indeed, in one American case in which the policy wording being considered was fairly similar to the wording in Simcoe & Erie's policy (J. G. Link & Co. v. Continental Casualty Co., 470 F.2d 1133 (9th Cir. 1972), certiorari denied 414 U.S. 829 (1973)), it was held that the policy was ambiguous as to what was meant by "claim" ‑‑ and that therefore the court would treat the claim as having been made within the policy period when the insured architect received a complaint during the policy period about a floor squeaking.
The other matter which must be looked at in applying the authorities are the facts of the particular case. What is required, unless the policy expressly so stipulates, is a form of demand or assertion of liability, not a formal demand or assertion of liability. Under a policy such as the one in this appeal, which contains no express requirement of a formal demand or indeed any demand at all, what constitutes a claim "made" is a question to be resolved on the facts of the case. There is no magic formula. One must look to the reality of what the third party was communicating to the insured by words and conduct. If the message was clear, the fact that the third party through politeness refrained from stating its demand or intention to hold the insured liable in categorical legal terms should not preclude a finding that a claim has been made. Where the reasonable insured in all the circumstances would conclude that a third party was making a claim against him or her in the sense that if satisfactory payment or other form of reparation were not made the third party would sue, then it may be said that a claim has been made, even though a formal statement of liability and/or demand has not been tendered.
The need to consider the reasonable expectations of the parties in determining whether a claim is being made finds some support in the authorities. For example, in Continental Casualty Co. v. Robert McLellan & Co., [1973] 5 W.W.R. 475 (B.C.S.C.), Monroe J. refused to give the word "claim" a narrow meaning in a case where the interpretation would have affected the insured's deductible, on the ground that the word "claim" should not be read in a way that would defeat the intention of the parties (the insured and insurer) as deduced from the circumstances (at p. 479):
It cannot have been the intention of the parties that delay on the part of the claimants in making formal claim against the defendant should redound to benefit the plaintiff to the detriment of the defendant in the circumstances above related.
In American case law, Hoyt v. St. Paul Fire and Marine Insurance Co., supra, is of interest to the matter at hand. The insured was a solicitor sued for negligent drafting of a will. The issue in that case was whether a letter from the estate's attorney asking for an explanation of the error in the will could be considered a claim within the policy. The majority found that the wording of the policy required a more formal demand, distinguishing J. G. Link & Co. v. Continental Casualty Co., supra. (It may be noted that the wording in the policy on this appeal is more like that in Link than that in Hoyt.) The dissenting judge would have found Link to be indistinguishable, but also argued at pp. 867-68 for finding a claim had been made on the basis of the reasonable understanding of the insured in the circumstances of the intentions of the estate's solicitor:
Hoyt maintains the April 5th letter was within a broad definition of the meaning of a "claim"; i.e., a mere notice that there may have been some negligence on his part in rendering a legal service.
While I do not fully subscribe to Hoyt's expansive definition of a "claim," I do agree with Hoyt's contention that a claim of professional malfeasance was made against him through the content of the April 5th letter well within the policy period. The April 5th letter clearly asserts a claimed financial loss to the Cope estate resulting from a questioned professional practice by Hoyt. It would be foolhardy for any reasonable attorney to interpret Henry's polite request for Hoyt's thinking or information on the matter as other than a claim to justify the challenged professional practice or pay up.
A non-technical view of what constitutes a claim was similarly taken in St. Paul Fire and Marine Insurance Co. v. Guardian Insurance Co. of Canada, supra. The issue under consideration was whether a claim had been made when a suit was filed but not served upon the insured (or otherwise brought to the insured's attention). Goodman J.A., in the course of his reasons, stated at p. 286:
A claim, other than one made by way of the institution of legal proceedings, can only be made by notifying the person against whom the claim is being asserted of such claim.
Of note, Goodman J.A. did not suggest that such notification must be formal or express. Meanwhile, Thorson J.A. (Houlden J.A. concurring) expressed the view at p. 294 that:
... a claim ... is "made" by being notified to or otherwise brought to the attention of the person against whom it is asserted. However that is done, the essence of the making of the claim is that the substance of the claim is in fact "brought home to" that person. [Emphasis added.]
For a similar analysis, see Peacock v. Roberts, supra.
In the case on appeal, it can be convincingly argued that a reasonable person in the position of Reid Crowther surely would have inferred that the town was making a claim against it when, on September 25, the town foreman showed Reid Crowther's on-site engineer the further damage that had been discovered, and commented that the work was typical of the job done by the general contractor on the project and approved by Reid Crowther. This argument is even more convincing in relation to the events which occurred on September 29 -- the damage was videotaped and further comments critical of the general contractor's work and Reid Crowther's supervision were made to Reid Crowther's representatives by the town foreman. A claim had already been made against Reid Crowther for negligent inspection of the same project. Reid Crowther had acknowledged its negligence in supervision of the general contractor and had paid for the previous repairs upon the demand of the town. There could be no doubt about the town's intentions in late September as to the newly discovered damage; the town expected Reid Crowther to pay for the cost of the remedial work, as it had for other related remedial work. Reid Crowther took this meaning; its Winnipeg office immediately communicated with its head office, which in turn immediately contacted its insurance representative. Everyone knew what had happened at the meetings at the site ‑‑ an assertion of Reid Crowther's liability, and a demand for compensation, had in effect been made. To borrow the words of St. Paul Fire and Marine Insurance Co. v. Guardian Insurance Co. of Canada, supra, the substance of the claim had been brought home to Reid Crowther before the policy expired.
Simcoe & Erie might have drafted the policy so as to require a formal written demand for coverage to be triggered. Having chosen not to do so, it must accept that the facts and circumstances may establish a demand and/or assertion of liability sufficient to constitute a "claim" within the wording of the policy. Here, in my opinion, they do. In concluding that the claim was not made within the policy period, the trial judge did not consider whether a claim could be made by way of something less than an express demand by the town. It is therefore open to this Court to substitute its own finding on this issue.
The conclusions of law and fact that I have reached on this issue are not inconsistent with Stevenson v. Simcoe & Erie General Insurance Co., supra, and Defrancesco v. Stivala, supra. In Stevenson v. Simcoe & Erie General Insurance Co. a letter expressing dissatisfaction of site supervision conducted by the insured was held to not constitute a claim. The letter had not demanded any compensation, and made no threat to launch legal proceedings. Moreover, the letter indicated that if there were further evidence of inadequate supervision, the insured would lose future government work. This last aspect of the letter would seem to indicate that the government (who was the party making the complaint) did not at the time of writing the letter intend to seek compensation as a remedy for the subject-matter of its complaint.
In Defrancesco v. Stivala, supra, an insurance broker had liability insurance coverage for the period September 1981 to October 5, 1982, which coverage applied "as respects claims first made against the Insured during the Policy Period". The broker was negligent in dealing with the obtaining of automobile insurance coverage in April 1982 for a customer, as a result of which negligence the customer's insurance was invalid. The customer was involved in a motor vehicle accident on September 23, 1982. On October 4, 1982, the broker was informed of the accident. He was by then aware that there was a problem with the customer's insurance, due to an inquiry from the customer's wife in late September. However, no demand for compensation had been made of him. In fact, he had not even as yet been advised that the customer considered him to be at fault for the insurance being invalid. The broker did not advise his liability insurers of the potential claim until after the expiry of the policy. In dealing with the issue of whether claim had first been made against the broker during the policy period, Rutherford J. held at trial that because the broker knew as of October 4 that he had erred, that the claim was "made" ("brought home" to the broker) on October 4. The Ontario Court of Appeal, following St. Paul Fire and Marine Insurance Co. v. Guardian Insurance Co. of Canada, supra, disagreed, stating at p. 2107:
The policy in issue was clearly a claims made policy. It provided indemnity only if a claim was made within the policy period. In practical terms that meant that a claim had to be made after September 23, 1982 when Stivala was involved in an accident and before October 5, 1982 when the policy expired. No claim was made in that period. The fact that the respondent realized that he had made an error within the policy period does not mean that a claim as contemplated by the plain wording of the contract of insurance was made at that time.
The facts of that case are clearly distinguishable from the matter at hand. Reid Crowther not only knew of its negligence: it knew the town viewed Reid Crowther as having been negligent; it had previously admitted its negligence on the project; it had paid compensation for the previous claim arising from the same negligence; and, it knew the town considered the further damages that were discovered in September 1981 to have resulted from the same negligence. The facts of the matter at hand go far beyond a mere inquiry, or a mere suspicion on the part of the insured that there may be a demand at some point in the future.
V. Conclusion
I would dismiss the appeal with costs.
Appeal dismissed with costs.
Solicitors for the appellant: Campbell, Marr, Winnipeg.
Solicitors for the respondent: Fillmore & Riley, Winnipeg.