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Insurance - Duty to Defend

Parkhill Excavating Limited v. Royal & Sunalliance Insurance Company of Canada (Ont CA, 2016)

In this case the Court of Appeal reviewed principles applicable to determining when an insurer has a duty to defend the insured in litigation:
[22] The legal principles governing an analysis of whether an insurer has a duty to defend are well established. The insured has the initial onus of establishing that the allegations made by a plaintiff against it, if proven, would bring the claim within the insurance policy. The duty to defend is not dependent on the insured actually being liable or the insurer actually being required to indemnify. All that is required to trigger the duty is the mere possibility that a claim falls within an insurance policy: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33 (CanLII), [2010] 2 S.C.R. 245, at para. 19. In considering this question, the pleadings shall be given the widest latitude to determine whether the mere possibility of a claim within the policy exists: Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801, at p. 812.

[23] Once the insured has satisfied the initial burden, the onus shifts to the insurer to establish that the claim falls outside of coverage as a consequence of the operation of an exclusion clause. Exclusion clauses preclude coverage when the claim otherwise falls within the initial grant of coverage: Progressive, at para. 27.

[24] If the insurer can bring the claim within an exclusion, the burden then shifts back to the insured to establish that its claim falls within an exception to the operative exclusion clause. Exceptions do not serve to create coverage; they only bring an otherwise excluded claim back within coverage where the claim initially fell within the coverage: Progressive, at para. 28.

[25] With respect to Your Work Exclusions, the case law generally establishes that where the claim is limited to the direct costs of repairing or replacing the defective work, such exclusions apply: March Elevator Co. v. Canadian General Insurance Co., 1995 CanLII 66 (SCC), [1995] I.L.R. 1-3227 (Ont. Gen. Div.), at para. 27, Alie v. Bertrand & Frère Construction Co., (2002) 2002 CanLII 31835 (ON CA), 62 O.R. (3d) 345 (C.A.), at para. 27. However, if consequential damage is alleged, the exclusion applies only with respect to the cost of repairing the insured’s faulty work, and there is coverage for the consequential damage: Progressive, at para. 63.

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