Claims for breach of contract are not generally covered under a CGL policy

A town was insured under a commercial general liability insurance policy.  The town was sued for breach of contract.  The statement of claim included claims for negligent misrepresentation and for proprietary estoppel.  The court determined that the additional claims were derivative of the breach of contract claim and that the insurers did not owe a duty to defend the town pursuant to the insurance policy.

Rocky Mountain House (Town) v. Alberta Municipal Insurance Exchange, [2006] O.J. No. 3875, Alberta Court of Queen’s Bench, G.A. Verville J., September 6, 2007

The Town was insured under a commercial general liability policy issued by one Insurer with a second Insurer providing excess commercial liability insurance. Both of these policies were in effect at the material time and the wording with respect to coverage in both policies was the same.

The Third Party brought an Action against the Town alleging damages associated with the loss of possession of a parcel of land owned by the Town. The Insurers denied that they had any duty to defend the Town on the basis that the true nature of the alleged claims were for breach of contract and therefore excluded from coverage. In deciding the issue of whether the Insurers had a duty to defend, the Court was required to consider several sub issues including, whether the Third Party claim had been properly pleaded, whether the insuring agreement and the policies covered contractual liability, whether any of the properly pleaded claims were derivative in nature, and whether any of the properly pleaded non-derivative claims were covered by the policies.

The Court considered the general principles of contractual interpretation and the principles specific to insurance contracts. In particular, the Court reiterated the principle that when interpreting any written contract the object is to give effect to the intention of the parties and the specific purpose of insurance, that it is a mechanism for transfer of fortuitous risks so that usually the only losses which are covered are unforeseen or accidental. The Court then considered the cases, including the Supreme Court of Canada’s decision in Monenco Ltd. vs. Commonwealth Insurance Co., 2001 SCC 49, which provide that an insurer’s duty to defend is triggered by the pleadings. The Court noted that “if there is a mere possibility that the facts alleged in the Statement of Claim would require the Insurer to indemnify the Insured for the claim, the duty to defend is triggered.”

The Court followed the three-step process set out by the Supreme Court of Canada in Non-Marine Underwriters, Lloyd’s of London vs. Scalera, 2000 SCC 24 to determine whether or not the Third Party’s claim could trigger indemnity. In doing so, the Court found that the requisite elements for a claim in breach of contract were made out in the Amended Statement of Claim, as were the requisite elements for the claim in negligent misrepresentation and for proprietary estoppel. On the other hand, the Court found that the Third Party’s allegations fell short of being capable of establishing a claim in trespass and/or wrongful eviction, which the Court noted was not a claim in and of itself as much as it was a fact establishing damage arising from other claims.

The Court then considered whether the viable claims for breach of contract, negligent misrepresentation and propriety estoppel were expressly excluded from coverage under the policies. In doing so, the Court referred to case authority which had established that the common phrase in liability insurance policies “liability imposed by law” was not intended to include contractual liability. Next, the Court engaged in an extensive review of the jurisprudence interpreting the exclusion for liability assumed by an insured under contract or agreement and found that this included the assumption by an insured of tort liability on behalf of another.

In conclusion, the Court held that it was clear from the facts in the Amended Statement of Claim that the claims of the Third Party for breach of contract were not covered by the policy. The Court further concluded that the Third Party’s claims for negligent misrepresentation and proprietary estoppel were derivative of the breach of contract claim, noting that once the facts supporting the claim for breach of contract claim were removed, there were no facts left over sufficient to support the claims for negligent misrepresentation or proprietary estoppel.  These claims, being derivative of the breach of contract claim, were also excluded from coverage and the Town’s Application for an Order requiring the Insurers to defend it in the main action was denied.

This case was originally summarized by Shanti Davies and originally edited by David W. Pilley.

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