The scope of an insurer’s duty to defend is a crucial issue in relating to any liability insurance policy, particularly those applying to building projects.   One of the questions which may arise is:  what is the nature of a “claim” for the purpose of the duty to defend?  That question will almost always be determined by the particular wording in the policy.  In General Electric Canada Company v. Aviva Canada, Inc., the Ontario Court of Appeal has just held that the wording of the policy did not apply when the insured complied with a request by the Ontario Ministry of Environment for an environmental investigation.

The Background

GE owned the subject property from 1903 to 1980, during which time it manufactured a variety of products on the site. During some period of that time, it used trichloroethylene (“TCE”) as a degreasing agent. In February 2004, the Ontario Ministry of the Environment (MOE) wrote to GE and other former owners of the property advising that it was reviewing potential TCE contamination and requested the assistance and co-operation of GE and the other recipients of the letter, asking them to provide any environmental assessments that they had in their possession.

In April, 2004, the MOE sent a second letter to GE, requesting further information concerning about potential TCE contamination.  The letter said that:

“the data appears to support a TCE plume migrating from/ through the former GE property…As discussed you will be required to take action in delineating the source area on your former property. The delineation investigations are to determine the current levels and the full vertical and horizontal extent of all contamination within the soil and groundwater which are on site location. The delineation report shall include at minimum the following….At this time the ministry is willing to enter into an agreement with GE to pursue the required action items voluntarily. If at any time the ministry determines there is unsatisfactory progress a Director’s Order will be issued to resolve the matter.”

GE agreed to cooperate with the MOE request. It asserted that, in responding to that MOE request, it had incurred out-of-pocket expenses of $2.1 million for investigation costs, $1.86 million for remedial costs and $750,000 for legal costs. GE made a clam against its CGL insurers for payment of those costs.

The Policies

The two CGL policies contained language which required the insurer:

“to pay on behalf of the Insured all sums which the Insured shall become obligated to pay [by] reason of the liability imposed upon the Insured by law… for damages because of damage to or destruction of property caused by an occurrence within the Policy Period…

To serve the Insured by the investigation of claims on account of such damage to or destruction of property and occurrence alleged as the cause thereof,

To defend in the name and on behalf of the Insured any suit against the Insured alleging such damage to or destruction of property and seeking damages on account thereof, even if such suit is groundless, false or fraudulent.”

The Decision

The trial judge held that GE’s claim did not fall within the policy because GE had complied with the MOE’s request, and had not defended against it.  He said:

“What GE calls “defence costs” were not costs of defending against the MOE’s claim but, in fact, the costs of complying with the MOE’s claim. GE complied with the MOE’s request and performed the work on the basis that it was thought to be in GE’s best interests to do so.

In coming to this conclusion, I make no finding on whether the matters alleged and requested in the MOE’s letter fall within the coverage language of the Aviva and Dominion policies from an indemnity perspective. I base my conclusion rejecting GE’s request for a declaration that Aviva and Dominion have a duty to investigate and to defend the MOE’s request solely on the fact that there was no investigation or defence of the MOE’s claim at all. What GE is seeking, in my view, is indemnification for its costs of complying with the MOE’s claim. This is not the time to make findings on the merits of GE’s indemnity claim in this regard. As the Ontario Court of Appeal said in Halifax Insurance, supra, the time to determine the insurer’s duty to indemnify is at the conclusion of the underlying litigation, not during the abbreviated application for defence costs. My conclusion, therefore, is without prejudice to the parties’ positions on whether the MOE letter is a “claim” or to GE’s right to seek these costs by way of an indemnity claim against Aviva, Dominion, or both, as well as the right of those insurers to argue against the existence of that obligation.” (emphasis added)

The Court of Appeal agreed with this conclusion.  It said:

[T]the only evidence of a “claim” by the MOE in the April letter is the request, or requirement if you will, that GE take action in delineating the source of the TCE contamination. GE did not oppose, defend or investigate that request. GE, as it was invited to do in the letter, voluntarily complied with the request of the MOE. It cannot be said that it has suffered any defence or investigation costs recoverable under its insurance policies. As the application judge concluded, the costs incurred were compliance costs – not defence costs. The fact that GE provided a list of costs, which it has characterized as potential defence costs does not, in my view, change the analysis of whether the April letter triggers a duty to defend.

In the result, these decisions undertook no analysis of the indemnity coverage under the policy.  The courts did not consider whether there was indemnity coverage for the damage to the land, or whether there was an environmental exclusion.  Nor did they consider whether the MOE’s request was a “suit” against GE.  All that the courts decided was that GE’s cost of cooperation did not amount to defence costs.  The Court of Appeal declined to consider American case law on the issue.

This is an interesting decision from a number of aspects:  

First, while the court’s reading of the word “defend” as excluding cooperation may be based on sound grammar and literal meaning, there could be a debate about whether it is based upon sound policy. If cooperation is the best defence, should the costs of that cooperation be excluded from coverage for defence costs?  Is fighting better or different than cooperating so far as a defence is concerned? 

Second, if the cost of “cooperating” doesn’t amount to defence, does the cost of settling an action or regulatory proceeding amount to defence? Normally, the costs of settling an action, and obtaining the best evidence and expert reports to do so advantageously, would be included within defence costs under a liability policy.

Third, if the cost of cooperating is not defence costs, then that cost may fall within the indemnity coverage arising from damage to the property.  The trial judge’s decision appears to allow GE to argue that it does.  If so, then this proceeding was much to do about nothing.  Except that, by cooperating, GE may have materially reduced the insurer’s potential exposure.