Canadian Market Update and Canadian Workers’ Compensation

Canadian Market Update andCanadian Workers’ Compensation SRMC ConferenceNiagara-on-the-Lake Presented by: Maurice Audet October 2011

Objectives • Review recent important court rulings covering: • Construction defects • Additional insureds and certificates of insurance • Exclusions removing coverage for fire damage • Large awards • Punitive damages • An overview of Canadian Workers’ Compensation

Construction Defects • Progressive Homes v Lombard • Bulldog Bag • Insurance industry reaction

Progressive Homes • This case involves damage caused by water ingress through defective windows and curtain wall of a university residence. • This case arose in British Columbia where the courts did not consider damage resulting from construction defects to be covered by a CGL policy. • Ontario and Saskatchewan had previously ruled in favour of coverage based on the facts of the cases before the courts.

Progressive Homes continued • The BC courts had held that damage caused by construction defect was: • Not damage caused by an Occurrence • Not property damage • Uninsurable “economic loss” • Breach of contract and not liability imposed at law • The “particular part of your work” exclusion excluded the entire structure that incorporated the defective part.

Progressive Homes continued • The Supreme Court of Canada’s prior rejection of the complex structure theory precluded any possibility of coverage for damage by one part of a structure to another. • A CGL policy is not a performance bond. • Public policy considerations precluded the possibility of coverage. To allow coverage would give contractors carte blanche to be careless and then get paid a second time by their insurance company for redoing the same work over again.

Progressive Homes continued • The Supreme Court of Canada, in a unanimous decision, overturned each of the holdings of the lower courts and ruled: • Damage caused by a construction defect is damage caused by an Occurrence • Such damage can be property damage under each of the two definitions of property damage contained in a CGL policy, i.e.: • Physical injury to tangible property • Loss of use of tangible property not physically injured or destroyed caused by an Occurrence

Progressive Homes continued • Progressive Homes was soon followed by the Court of Appeal of British Columbia in its decision in Bulldog Bag. This was a strong message to insurers that the British Columbia courts would not try to circumvent the impact of Progressive Homes by trying to distinguish fact situations. • Progressive Homes has also been followed by a Quebec court and misapplied by an Ontario court.

Progressive Homes – New Development • October 3, 2011 • Commercial General Liability – IBC 2100 • Revision of the “Your Work” exclusion and the subcontractors’ exception. • The IBC Board of Directors has approved a revision to the Commercial General Liability wording – IBC 2100. At the direction of the Underwriting Committee, and with IBC Legal Services input, the IBC CGL committee reviewed the Supreme Court of Canada’s decision on the Progressive Homes case. • Despite the fact that this decision brought the courts of British Columbia in line with decisions of the courts in other provinces, the notion of defective work of a subcontractor triggering the Commercial General Liability policy was never the intent of the coverage.

Progressive Homes Bulletin • Although the decision was with respect to the duty to defend, where there threshold is lower than the duty to indemnify, the intent has never been to cover defective work of either the insured, or any subcontractor working on its behalf. • Therefore, the Board of Directors has approved a revision to the “Your work” exclusion to clarify that the subcontractors’ exception does not include “defective, deficient, inadequate or dangerous” work performed on behalf of the Insured. • 2. Exclusions • This insurance does not apply to: • i. Damage to Your Work • "Property damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard”. This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor, but this exception does not apply to work that is defective, deficient, inadequate or dangerous.

Progressive Homes • The IBC Commercial General Liability wording committee will follow up this change with a review of the definitions of “Property Damage” and “Occurrence” in IBC 2100. These terms were also referenced in the Supreme Courts’ decision, and the committee will assure that their definitions reinforce the intent. • The revised IBC 2100 and all other IBC advisory wordings are posted on IBC’s secure website at https://infosource.ibc.ca under Products and Services > Legal > Policy Wordings > Commercial General Liability. • The adoption of IBC advisory wordings is entirely at the discretion of each individual insurer and may require editorial changes to reflect an insurer’s own policy language. • R.J. Bundus • Vice-President, Operations & General Counsel

Insurance Industry Reaction • Initially disbelief and anger • Possible wording changes to redefine “occurrence”. • There is concern that comments made in the supreme Court ruling could result in coverage to repair the defective work itself.

Additional Insureds • Unlike the U.S. where there are numerous ISO approved “additional insured” endorsements, in Canada there are no IBC approved additional insured endorsements. • Based on court rulings, an additional insured is given protection to the extent that the party provided additional insured status was intended by contract to be provided such status, but only to the extent of that intention.

Additional Insureds continued • In British Columbia the test as to the scope of coverage is basically a “but for” test. In short, if the named insured had not been performing its activities could the incident have occurred? If the incident required the named insured’s activities, even if only as a context, the incident arose out of the named insured’s activities and the additional insured was covered. • In Ontario, the test is more rigorous. If the named insured’s activities contributed to the incident, coverage is provided to the additional insured.

Certificates of Insurance • Canadian courts generally enforced certificates of insurance, notwithstanding the usual disclaimer that: • This certificate is issued as a matter of information only and confers no rights on the holder • Having said this, there does not appear to be a case where a court has actually stated that the disclaimers are to be ignored. • A British Columbia court has ruled that adding additional insureds on a certificate is the same as adding them by endorsement. The Ontario Court of Appeal does not appear to agree, but this decision is somewhat suspect.

Restricting Fire Coverage • In most Canadian jurisdictions the Insurance Act states that coverage can be restricted to negate fire coverage if the exclusion is not “unjust or unreasonable”. The Ontario Court of Appeal recently upheld a ruling that an exclusion for damage caused by marijuana operations could be invoked to exclude the fire damage that resulted was both just and reasonable. The damaged building was a rented dwelling. The landlord played no role in the marijuana activity that led to the fire. • The ruling has been appealed to the Supreme Court of Canada.

Restricting Fire Coverage continued • The Ontario ruling gives support to the argument that a terrorism exclusion applies to fire following a terrorist act. • Arguably, the same argument could be used to deny coverage for windstorm, lightning, sprinkler leakage, plumbing system leaks, etc. based on the faulty workmanship, material and design exclusions. • We do recommend language to the effect that: • The coverage provided will not be less than that provided in a standard fire and EC policy

Terrorism • Canada has nothing comparable to TRIA. Terrorism coverage in Canada is quite expensive when compared to the coverage provided by TRIA.

Punitive Damages • The largest punitive damages award in Canada is the $1,000,000 awarded in Whiten v Pilot: • The Ontario Court of Appeal had reduced a $1 million award against Pilot Insurance for its outrageous treatment of one of its insured’s to $100,000. The Supreme Court of Canada reinstated the jury award but clearly stated that it did so only due to the circumstances of the case, and had it been the court of first instance it would not have made such an award. • In Sagle v Chubb (2011), a recent outrageous behaviour case, the Ontario Superior Court of Justice refused to award punitive damages. Instead it awarded substantial indemnity on costs.

Subrogation Waivers • Subrogation waivers are readily available on property and builders’ risks policies. • Liability insurers generally will provide waivers but not as freely, and some insurers flatly refuse. • On automobile insurance, the policy wordings are statutory. There is no approved statutory wording providing for a waiver of subrogation. When such waivers are provided they are provided on unapproved forms. • Generally, this lack of a waiver should not be an issue because as an additional insured on the CGL, coverage is provided for liability arising out of non-owned automobiles and such automobiles would include automobiles owned by the named insured.

Design Professionals E&O • The standard limit purchased by most small design professionals is between $250,000 to $500,000. • Limits well in excess of $20 million are readily available. • Most claims are settled out of court. We are told that settlements can be significant, but of those that go to judgment, most are settled for under $1 million, with a few reaching $5 million. • There are exceptions. In a recent case involving cost overruns on a co-gen, between costs and damages the judgment was over $19 million. • In most cases, the design professional limits its liability.

Size of Judgements for Non-professional Risks • $24,000,000 Crippling injuries to two people. • $18,000,000 Crippling injuries to one person, 16 years old – because of lifestyle had no reasonable prospect of entering work force. • $ 5,000,000 Loss of future earnings resulting from head injury due to fall on dance floor. • $22,000,000 Fire damage to adjoining buildings.

Size of Judgments continued • Outstanding writs: • $33,000,000 For crippling injuries. Independent counsel values at $20–$25 million • $24,000,000 For water damage to high-rise condominium. Represents actual cost of repairs. • $30,000,000 For damage to condominium, living expenses and alleged health issues resulting from electrical explosion at condominium. Cost of physical repairs: $1.5 million. Estimated worst case for total claim: $10 million.

Canadian Workers’ Compensation • Unlike most U.S. states, the Canadian workers’ compensation system is monopolistic and publicly managed by each Canadian province. • The systems vary from province to province in that all employees must participate in some provinces, whereas, office employees do not have to participate in provinces such as Ontario and Alberta. • Even where all employees must participate there are at least two schedules to the Acts, one for private sector employees and one for public sector, telecommunications, railroads and airlines.

Immunity for Employers • An employee cannot take action against his or her employer, not even for gross negligence, for work-related injuries. This immunity also applies to other employers covered by the same section of the Act. • An employee cannot take action against a co-employee for work-related injuries, nor against employees of other employers covered by the same section of the Act. • The families of employees suffering work related injuries cannot take action against the employer or fellow employees for work related injuries.

Immunity for Employers continued • There are a few exceptions as to what constitutes work related injuries: • Assault does not constitute a work-related activity but if the incident arises out of horse-play it may. • There is very little jurisprudence on this issue. • Ultimately, the decision rests with an administrative tribunal. The courts are loath to interfere with a tribunal’s ruling. • Before a court will overturn the ruling of an administrative tribunal the ruling must be found to be patently unreasonable, and great deference will be given to the tribunal.

Immunity for Employers continued • In an Alberta ruling involving an assault, the court ruled that the employer retained its immunity because at the time of the assault the employees were otherwise performing their duties as employees. The action against the employees was permitted to proceed. • In an east coast case, an employee was assaulted at a company sponsored barbeque. • The court referred the matter to the Workers’ Compensation Tribunal to determine if the act arose out of the employer/employee relationship. The last reported action on this case is a ruling on a procedural issue in 2011.

Immunity for Employers continued • The immunity granted the employer under the Act has been upheld by the Supreme Court of Canada. • The court agreed that the Act violated the Charter of Rights but that it was a justifiable violation.

Parties not Covered • Executive officers unless they choose to be covered. • Sole proprietors. • In the case of sole proprietors, an application can be made to the board to have them declared “deemed employees”. They then lose the right to sue but the injury is assessed against the “deemed employer’s” experience.

Executive Officers • Though executive officers are not required to be covered by Workers’ Compensation they retain their immunity from suits by others covered by the same section of the Act. In Ontario, this immunity was granted to executive officers following a successful action by an employee against an executive officer in 1983.

Ontario Act • Workplace Safety and Insurance Act, 1997 • Important issues: • Developers with subsidiary companies • Corporations undertaking work in Ontario • Employees working outside of Ontario • Foreign workers in Ontario • Subrogation • Complying with contractual requirement • Obligation to pay premiums

Developers With Subsidiaries • In Canada it is not uncommon for developers to incorporate separate subsidiaries for each project they undertake. • If each subsidiary is separately registered with the Workers’ Compensation Board there is no problem but if the subsidiaries are shell companies with no employees registered with the Workers’ Compensation Board, there may be no immunity with respect to the subsidiary. • There have been actions, but to date I know of no judgments. There have been settlements.

Corporations Working in Canada • If a foreign company is registered under the Workers’ Compensation Act there should be no problems. If instead of registering in Canada, the foreign company subcontracts the work to Canadian companies, again, there should be no problems. • But if the foreign company provides technical assistance or supervision there may be issues.

Issues With Foreign Workers • Under the Ontario Act a foreign worker who has worked in Ontario for ten or more days in any twelve month period is deemed to have a sufficiently close relationship with Ontario that he or she is covered by Ontario workers’ compensation even if his or her ultimate employer is not registered under the Ontario Workplace Safety and Insurance Act. • Who pays the premiums? Any consequences?

Foreign Workers in Ontario • If an employee is deemed covered by the Act he or she has no right to sue his or her employer or any other company covered under the same section of the Act. • If coverage is sought under U.S. workers’ compensation and the U.S. insurer tries to subrogate in Canada there may be a breach of contract issue between the contracting parties. • If coverage is paid under the Ontario Act the party assessed will seek recovery from the actual employer for breach of contract.

Ontario Workers in the U.S. • Ontario workers, working temporarily out of province for their employer, are covered for six months under the Ontario Act. • If working in the U.S. they may run afoul of their contractual obligations, i.e. waivers of subrogation.

Subrogation • Canadian workers’ compensation boards have the right to subrogate and they will not waive this right. • Recent illustration: • An employee of a sign company noticed some plywood in a field adjoining his job site. • The plywood was several sheets thick and was spiked to the ground. There had been a warning sign but it had disappeared. • For whatever reason, this individual became fixated with the plywood. When he could not move the plywood by hand he fetched a bar from his van and pried up one end. As he raised one end, he walked forward to free the plywood from the spikes holding it to the ground. • He fell over twenty feet to the bottom of a concrete shaft and subsequently died of his injuries. • Workers’ compensation paid death benefits and subrogated against the developer.

Subrogation continued • Developer contracted with trade contractor and condition of the contract was that all employees and subcontractors be covered by workers’ compensation. A Clear Certificate was produced. • Trade contractor employed several sole practitioners and ignored requirement that everyone be covered by workers’ compensation. • Sole practitioner died as a result of negligence of other trade. • Developer’s subsidiary not covered by workers’ compensation. There is a $2 million reserve.

Complying With Contract Conditions • In Canada, contracts routinely require that workers be covered by workers’ compensation. • The intent is workers’ compensation in the jurisdiction of the work. • Have we seen litigation involving this issue? To date, no.

Action Over Suits • In Canada, this is basically not an issue. By law, no one can contract out of the terms and conditions of the various workers’ compensation Acts. • The only time litigation is allowed is if one of the parties is not covered by the Act. • Even then, the Act may come into play.

Action Over Suits • Storey v Canada Post, British Columbia Court of Appeal, 2006 • Storey was injured by a mail bin owned by Canada Post while working for a company contracted to Canada Post. BC Workers’ Compensation paid benefits to Storey and subrogated against Canada Post (the two were covered by different sections of the Act). • Action was dismissed as no negligence was assessed to Canada Post. • Canada Post sued under an indemnity agreement for its litigation expenses. • Court of Appeal ruled that Act was a complete bar to any indemnification.

Action Over Suits continued • Piper Estates v Mitsubishi Heavy Industries Ltd., Supreme Court of British Columbia, 2009 • Piper was killed when the plane he piloted crashed. BC Workers’ Compensation Board confirmed that piper was an employee of Nav Air at the time of the accident. • His estate sued the manufacturer of the plane and its engines. • Honeywell, the manufacturer of the plane’s engines, third partied Nav Air alleging failure to properly train Piper. • The court ruled that the workers’ compensation act was an absolute bar to any action against the employer.

Action Over Suits continued • Warren v Canadian Pacific Ltd., 1992 • Warren was employed by a Schedule 1 employer. He was struck and killed by a CP train at the terminal where he worked. Warren’s estate sued and CP filed a third party action against the employer. The court ruled that C P’s action was barred by the express terms of the Act.

Who is Responsible for Premiums? • In construction, the principal is responsible for payment of workers’ compensation premiums if his subcontractors default.

Workers’ Compensation Summary • Workers’ compensation is a complete bar to an action against an employer and against any other employer covered by the same schedule of the Act. • Workers’ compensation will subrogate against any party who is not covered by the same schedule of the Act. • There are issues respecting foreign workers. In Ontario, after working ten days in a twelve month period they are subject to the Act. • In at least some occupations, the principal is responsible for workers’ compensation premiums.

Questions?

Canadian Market Update and Canadian Workers’ Compensation