Errors and omissions policy omits contractual liability

Insurance law – Errors and omissions policies – Duty to defend – Exclusions – Breach of contract – Arbitration

Panasonic Eco Solutions Canada Inc. v. XL Specialty Insurance Co., [2020] O.J. No. 1252, 2020 ONSC 1502, Ontario Superior Court of Justice, March 9, 2020, M. Koehnen J.

The insured sought a declaration that the insurer owed a duty to defend an underlying arbitration pursuant to an errors and omissions policy. In the underlying arbitration, the insured faced two monetary demands by Solar Flow. The first demand was for liquidated damages of $92,309.62 for the insured’s failure to achieve substantial completion of a solar panel project by a guaranteed date under a contract. Solar Flow in turn planned to sell the electricity from the solar panels to a third party, IESO. Solar Flow alleged that IESO terminated seven contracts with Solar Flow as a result of the insured failing to achieve substantial completion in time. The insured, Solar Flow, and IESO then negotiated the reinstatement of five contracts. The second demand by Solar Flow was for damages estimated at $1,300,000, based on a subsequent contract between Solar Flow and the insured, whereby Solar Flow would provide its expertise for the reissued five contracts with IESO, and the insured would pay Solar Flow a portion of proceeds from the insured’s sale of the projects.

The policy excluded coverage for claims arising out of the insured’s assumption of liability in a contract or for breach of contract, unless the liability is one that the insured would have in the absence of the contract. The policy also excluded liability for equitable relief. The insurer argued that the insured’s liability arose out of an alleged breach of contract, which the insured would not have in the absence of the contract, and as such no duty to defend arose. The insured argued that Solar Flow’s multiple causes of action, including negligent misrepresentation and unjust enrichment, fell outside of the exclusion for contractual liability.

The Court confirmed that the duty to defend is distinct from, and broader than, the duty to indemnify. In determining whether a duty to defend exists, the Court assumes that the pleaded facts are true, and applies those facts to the policy wording to determine if any alleged facts might fall within coverage. In finding that a duty to defend arose with respect to the demand for liquidated damages, the Court concluded that it was unable to determine whether the damages sought by Solar Flow were not attributable to negligence by the insured. As a result, it was possible that the claim could fall within coverage, depending on the cause of the insured’s delay in achieving substantial completion. However, unlike the liquidated damages claim, Solar Flow’s claim against the insured for a portion of sale proceeds was in effect a debt claim. It was not a liability that the insured would have incurred in the absence of a contract. Although Solar Flow also claimed against the insured in negligent misrepresentation, the alleged misrepresentation was of an intention to pay under the contract. Solar Flow also claimed, in the alternative, for unjust enrichment, but the Court noted that unjust enrichment was an equitable remedy excluded under the policy.

In the result, the Court found that the insurer had a duty to defend the claim for liquidated damages, but owed no duty to defend the claim for lost sale proceeds. The insurer was entitled to control the defence of the liquidated damages claim pursuant to the policy, subject to specific terms designed to avoid any possible conflict of interest.

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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