Slippery slope not expected or intended

Insurance law – Liability insurance – Public entity – Duty to defend – Property damage – Occurrence – Exclusions

AIG Insurance Co. of Canada v. Lloyd’s Underwriters, [2021] O.J. No. 4339, 2021 ONSC 5372, Ontario Superior Court of Justice, August 4, 2021, W. Black J.

The insured city was sued by homeowners for slope degradation on their property occurring between April 2016 and December 2019. AIG insured the city for 2016 and 2017 and Lloyds insured the city for 2018 and 2019. AIG sought equitable contribution from Lloyds for defending the city. The issue before the court was whether Lloyds owed a duty to defend. AIG and Lloyds agreed that if there was a duty to defend, then costs incurred to date and going forwards would be shared on a 50/50 basis.

In April 2016, the slope on the plaintiff homeowners’ neighbours’ property began to erode. In September 2016, the plaintiff homeowners’ own property began to suffer from slope failure. In September 2019, the city issued an order prohibiting the occupancy of the plaintiff homeowners’ home, and in December 2019, the city ordered the homeowners to demolish their dwelling. The homeowners sued the city, alleging negligence in failing to appreciate and address the risk of ongoing erosion.

Both the AIG and Lloyds policies provided coverage for property damage caused by an occurrence that occurs during the policy period and both policies excluded coverage for expected or intended injury. AIG defended the city under a reservation of rights. Lloyds’ position was that any property damage during its time on risk was not caused by an “occurrence” and that any damage was expected or intended, and therefore excluded. The most controversial evidence was a geotechnical engineering report prepared in May 2017 at the request of the city, which resulted in recommendations for upgrading and redirecting the drainage near the homeowners’ property. Lloyds argued that there was no “occurrence” under its time on risk because any property damages had completely manifested by the time of the engineering report and that the city’s failure to proceed with the recommended remediation meant that any ongoing damage was not accidental, but was a result of the city’s failure to act.

The court found that Lloyds owed a duty to defend. Putting aside whether the geotechnical report crossed the line of importing evidence into a coverage issue to be decided on the pleadings, the report’s analysis was not robust enough to bear the weight that Lloyds attributed to it. The damage to the property continued and progressed throughout the currency of the Lloyd’s policy. Moreover, the report did not rise to the level required to recharacterize what appeared to be accidental damage or negligence to an outcome that was “expected”, let alone “intended”. As such, the test was met of a “mere possibility” that the underlying claim triggered a duty to defend.

This case was digested by Joe Antifaev, 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 Joe Antifaev at jantifaev@harpergrey.com.

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