O what a tangled web…

Insurance law – Liability law – Product liability – Property damage – Umbrella policies – Series of related occurrences – Definition – Commercial general liability insurance – Exclusions

Dana Canada Corp. v. XL Specialty Insurance Co., [2022] O.J. No. 3281, 2022 ONSC 4214, Ontario Superior Court of Justice, July 18, 2022, J.T. Akbarali J.

Dana Canada Corporation (“Dana”) manufactures automobile parts including transmission oil coolers (“TOCs”), which are installed in automobile transmissions to keep coolant and transmission fluid separate. The TOCs are manufactured for installation in transmissions built by another auto parts manufacturer, and then installed in car engines. From February 2014 to March 2016, a factory machining error caused some TOCs to separate during use so that transmission fluid and coolant mixed, resulting in damage requiring replacement of a vehicle’s transmission or, in some cases, the entire engine. In June 2016, the transmission manufacturer notified Dana of a claim for damages based on reports from the car manufacturer that the TOCs were damaging auto parts that had not been built by Dana.

Dana initially denied the claim and notified its insurers, but in May 2019 it settled the claim for damage to non-Dana parts for USD $24 million. Dana then brought an application to determine the extent of the liability insurance due to it with respect to the non-Dana parts claim. (Damage to the TOCs themselves wasn’t covered and the cost of replacement TOCs wasn’t part of the claim.)

Several insurers were relevant or potentially so. XL Specialty Insurance Company (“XL Canada”) argued that it had paid out the limits on its policy, but Dana suggested that XL Insurance America Inc (“XL US”) might have additional exposure. Westport Insurance Corporation and Swiss Re Corporate Solutions Elite Insurance Corporation (collectively “Swiss Re”) provided umbrella coverage to Dana and its American parent, Dana Incorporated (“Dana US”) and, having paid out USD $8.6 million, now raised a number of coverage defences. Also potentially relevant was a fronted insurance policy issued by Hartford Fire Insurance Company (“Hartford”) to Dana US.

The key issues for determination were:

• at what point the umbrella coverage provided by Swiss Re responded, having regard to the other policies held by Dana, and in that regard

o          whether there had been one, two or more “occurrences” for the purposes of the XL policy;

o          whether coverage was available under the Hartford policy for the property damage;

o          how many Swiss Re policy periods were implicated in the claim;

• the quantum of Dana’s claim and in particular

o          whether $1.3 M of the settlement was unrecoverable under the Swiss Re policies; and

o          whether forecast repair costs were recoverable under the Swiss Re policies.

The court concluded that Dana had coverage under the Swiss Re policies for the balance of its loss, in the full amount claimed, only after the two XL policies had each paid out their full limits. It was unnecessary to determine whether there had been one occurrence or several, because a batch clause in the XL policies deemed all incidents to result from a single occurrence and to have occurred at the time the first incident took place.

The Hartford policy was a CGL policy with an exclusion for “specified other insurance policies” including “any other General Liability policy”. The XL policies were commercial liability policies. In the court’s view, this clearly ousted coverage under the Hartford policy.

Swiss Re’s insuring obligation was spread out over several policy periods, with insurance applying to “property damage” that occurs during the policy period. The damage was that to the non-Dana parts, i.e. the transmissions and engines. These were damaged at different times, influenced by various factors including when a car was sold and the owner’s driving habits. Accordingly, the Swiss Re policies began with the 2014-2015 policy year and continued until the claim was settled during the 2018-2019 policy year. As such, Swiss Re was responsible for all of Dana’s loss after the exhaustion of the XL policy limits.

The court saw nothing in the record to challenge Dana’s explanation that a quibbled-over USD $1.3 million of the settlement in fact represented damages that Dana would be legally required to pay and therefore was covered under the Swiss Re policies.

Similarly, the court did not accept Swiss Re’s argument that forecast repairs were not covered, because it conflated the date on which the repair cost was incurred with the date of the property damage. It was the latter that had to occur during the policy period, not the former. The evidence suggested that the last defective TOC was manufactured in March 2016 and that the largest repair costs were incurred between June 2015 and May 2017, and it was reasonable to infer that at least some of the forecast repair costs would have been in respect of TOCs in which the property damage was ongoing and unrepaired at the time of settlement, and therefore that portion of the settlement was recoverable under the Swiss Re policies.

In the final analysis, taking account of payments previously made, the quantum of Dana’s claim was USD $13,400,000, payable by Swiss Re.

This case was first published in the LexisNexis® Harper Grey Insurance Law Netletter and the Harper Grey Insurance Law Newsletter.

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