There are two new Court of Appeal decisions that could have significant consequences. Unfortunately, it appears that the Court either was not directed to the potential interpretations or decided to ignore them. In any event, there is, in my mind, a significant problem.
Unifund Assurance Company v. D.E., 2015 ONCA 423 (CanLII) – http://canlii.ca/t/gjhcl
C.S. v. TD Home and Auto Insurance Company
These two short decisions, in my opinion, may have a significant impact in insurance defence coverage issues. In quick summary, the cases deal with the obligation of the homeowners’ insurance company to defend the parents of children accused of negligently allowing their children to harass and bully the Plaintiffs.
The pleadings against the parents were properly framed in negligence. Both the lower court and the Court of Appeal agreed that the causes of action were properly plead as negligence actions against the Parents.
The relevant clauses are pretty standard in home insurance policies:
SECTION II – Liability Coverage
Coverage E – Personal Liability
This is the part of the policy you look to for protection if you are sued.
We will pay all sums which you become legally liable to pay as compensatory damages because of unintentional bodily injury or property damage arising out of:
- your personal actions anywhere in the world….
Exclusions – SECTION II
We do not insure claims arising from:
- bodily injury or property damage caused by an intentional or criminal act or failure to act by:
(a) any person insured by this policy; or
(b) any other person at the direction of any person insured by this policy;
7.(a) sexual, physical, psychological or emotional abuse, molestation or harassment, including corporal punishment by, at the direction of, or with the knowledge of any person insured by this policy; or
(b) failure of any person insured by this policy to take steps to prevent sexual, physical, psychological or emotional abuse, molestation or harassment or corporal punishment.
The parents were successful at the application stage.
The two cases were considered companion appeals.
In Unifund, the Court of Appeal focused in on Exclusion clause 7(b).
The Court of Appeal found that since the negligence of the parents was a “failure to act” which resulted in physical harm etc., the exclusion clause applied. Therefore no duty to defend or to indemnify arises.
 It is obvious from this language that the plaintiffs’ claim against D.E. and L.E. is a negligence claim. The New Oxford Dictionary of English (Clarendon Press: Oxford, 1998) defines ‘negligence’ as “failure to take proper care over something” (p.1240). The claims in the Amended Statement of Claim come four-square within this definition of negligence.
 Against this backdrop of the language of the Amended Statement of Claim and the dictionary definition of ‘negligence’, I turn to exclusion clause 7(b) which precludes coverage for:
7.(b) failure of any person insured by this policy to take steps to prevent sexual, physical, psychological or emotional abuse, molestation or harassment or corporal punishment.
 I do not see any ambiguity in the wording of this clause. The first word of the clause is ‘failure’ which is the core of the definition of ‘negligence’. ‘Failure’ is also the centrepiece in the Amended Statement of Claim of each allegation against the parents D.E. and L.E.
 Indeed, the overlap between the wording of the s. 7(b) exclusion clause and the wording employed in the Amended Statement of Claim is significantly broader than just the word ‘failure’. The wording of exclusion clause 7(b) includes “failure… to take steps to prevent… physical, psychological or emotional… harassment”. The wording of the Amended Statement of Claim includes “failed to take steps… to prevent… physical and psychological harassment”.
 The application judge found ambiguity in exclusion clause 7(b) because of its silence about whether it applied to “negligent failure to prevent physical abuse or molestation” and suggested that, if this were intended, the clause “could have included express language to this effect”. In light of my analysis above of the dictionary definition of ‘negligence’ and the wording of exclusion clause 7(b), I do not accept the analysis leading to a conclusion of ambiguity.
Exclusion clause 7(b) is clear on its face and it applies to the lawsuit as pleaded against D.E. and L.E. in the Amended Statement of Claim.
In my view, the Court has just interpreted the language to state that where an exclusion clause clearly indicates: we do not cover “the failure of an insured to take steps to prevent XYZ” , there is no duty to defend or indemnify.
Unfortunately, the Court of Appeal, perhaps inadvertently, did not address the phrasing of exclusion clause s.6, right above. That clause states that “we do not insure claims arising from bodily injury or property damage caused by an intentional or criminal act or failure to act by… an insured. (emphasis added)
I am hopeful that courts will not interpret “the failure of an insured to take steps” to mean the same as “failure to act” by an insured, however the language seems similar.
This interpretation, would make the coverage essentially useless. However, this is essentially what the Court of Appeal just said.