Duty to defend for property damage claim less than deductible

Insurance law – Liability insurance – Wrap up policies – Duty to defend – Interpretation of policy – Deductible

Distillery S.E. Development Corp. v. Temple Insurance Company, [2021] O.J. No. 1535, 2021 ONSC 1908, Ontario Superior Court of Justice, March 23, 2021, P.M. Perell J.

The insureds were the developer and a subcontractor involved in the construction of a condominium tower. The owner of the tower later sued both for damages of $9,913,169.25. The wrap-up policy insurer refused to defend the insureds because, in their view, the total value of potentially covered property damage on the face of the pleadings was less than the $10,000 deductible. On a summary trial, the issues were whether the insurer had a duty to defend and, if so, whether an ex ante (“before the event”) allocation of defence costs was appropriate.

The court determined there was a duty to defend based on first principles. Considering the plain language and plain meaning of the words used in the policy, the insurer had agreed to defend the insureds in any civil action for property damage regardless of whether the amount of property damage may be below the deductible. The court rejected the insurer’s position that the policy is not engaged and there is no duty to defend triggered where the amount of the claim is below the deductible. The court found this would require reading limiting language into the policy which would offend the principle that coverage provisions should be construed broadly and would produce a result that was absurd, unjust, commercially unreasonable or destructive of the commercial objective of the insurance agreement.

With respect to defence costs, although the court agreed that the policy did not oblige the insurer to pay defence costs incurred exclusively or solely for uncovered claims, the court determined it was premature to make an allocation since it was a fact-specific allocation for trial that could not be made based solely on the pleadings.

This case was digested by Michael J. Robinson, and first published in the LexisNexis® Harper Grey Insurance Law Netletter and the Harper Grey Insurance Law Newsletter. If you would like to discuss this case further, please contact Michael J. Robinson at [email protected].

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