Under a commercial general liability policy, a contractor (as the Named Insured) hired by a developer (added as an Additional Insured) had liability coverage, but only with respect to “liability arising out of the operations of the Named Insured”. The Ontario Superior Court held that the contractor was not covered for a loss caused by the developer because the loss did not arise from the contractor’s operations.
Sky Solar (Canada) Ltd v Economical Mutual Insurance Company, 2019 ONSC 4165, per Cavanagh J.
Facts + Issues
The plaintiff, Sky Solar (Canada) Ltd. (Sky Solar) was a developer of solar energy projects. Sky Solar entered into two construction contracts with Marnoch Electrical Services Inc. as the contractor for Marnoch to build solar energy projects at two locations.
Pursuant to the construction contracts, Marnoch purchased a commercial general liability policy from the defendant Economical Mutual Insurance Company through Marnoch’s insurance broker, the defendant Firstbrook, Cassie & Anderson Limited (FCA). Sky Solar was named as an additional insured under the CGL policy specifying that the named insured was the contractor. The policy included an Additional Insured Endorsement stating that the insurance “applies to those stated as ‘Additional Insureds’, but only with respect to liability arising out of the operations of the Named Insured.”
Sky Solar specified the specific solar transformers that Marnoch was to install in the solar energy projects. Marnoch supplied and installed those transformers.
Once the solar energy projects were complete, Sky Solar sold the projects to Firelight Solar Limited Partnership (“Firelight”). Several months after the sale, a fire ignited at one of the project locations was caused by the solar transformer and both projects were shut down for investigations and repairs.
Sky Solar was liable to Firelight for remediation costs and loss of income based on contractual warranties, so Sky Solar settled the warranty claims and voluntarily paid the settlement amount to Firelight. After Sky Solar settled the claims, it then notified Economical that it was making a claim for indemnity under the CGL policy.
Economical initially denied that Sky Solar was an Additional Insured under the CGL policy, and later, after accepting that Sky Solar was an Additional Insured, denied coverage for Sky Solar’s liability to Firelight under the Additional Insured Endorsement. Economical also denied coverage on the basis that Sky Solar had failed to comply with Condition no. 4 of the CGL policy, which prohibited the insured from assuming liability and settling a claim without Economical’s consent.
Sky Solar commenced an action against both Economical and FCA. As against Economical, Sky Solar sought a declaration that Sky Solar was covered as an Additional Insured under the CGL policy and indemnification for the amounts paid to Firelight. With respect to its action against FCA, Sky Solar claimed damages in negligence for FCA’s role as the insurance broker which issued certificates of insurance.
HELD: For the defendants, Economical and FCA; action dismissed.
Cavanagh J. held that Sky Solar failed to prove that its liability to Firelight arose out of Marnoch’s operations so as to fall within the initial grant of coverage under the Additional Insured Endorsement of the CGL policy.
- The scope of Marnoch’s operations included ordering and installing the solar transformers, but it did not include the initial selection of the transformers to be used in the solar projects.
- Sky Solar’s decision to use the specific transformers in the solar projects was not part of Marnoch’s operations, and Marnoch did not cause the fire by any negligent acts in carrying out its contractual duties of ordering and installing the transformers. The fact that “but for” the installation of transformers the fires would not have occurred satisfied the “but for” test but was insufficient to establish that Sky Solar’s liability to Firelight arose from Marnoch’s operations.
 The scope of the operations of Marnoch included ordering and installing the Marcus transformers. Marnoch’s operations did not include the initial selection of the Marcus transformers to be used at the Whybank and Manchester solar systems. After the first fire at Whybank, Mr. Ruffalo of Sky Solar made the decision to continue to use Marcus transformers. This decision was not part of Marnoch’s operations. The fact that the “but for” test of causation is satisfied because the Manchester fire would not have occurred but for the installation of the Marcus transformer is not, in itself, sufficient to establish that Sky Solar’s liability to Firelight is liability arising out of the operations of Marnoch.
 The failure of the Marcus transformer on March 14, 2013 when the Manchester fire occurred was not caused by any decision taken by Marnoch in the course of its operations or any failure by Marnoch to make a decision or take an action in the discharge of its contractual obligations. The event which gave rise to Sky Solar’s liability to Firelight resulting from the failure of the Marcus transformer at the Manchester location on March 14, 2013 was the decision taken by Mr. Ruffalo to continue to use the Marcus transformer at the Whybank and Manchester locations after the Whybank fire. Marnoch played no role in this decision, as Arbitrator Lax found.
 Marnoch simply ordered and installed the Marcus transformers in compliance with the directions given by Sky Solar and its contractual obligations. Marnoch did not engage in active conduct which caused the March 14, 2013 fire at Manchester, nor did it operate passively in a way which created this liability event. There is insufficient proximity between the decision taken by Sky Solar to continue to use the Marnoch transformer and the failure of the Marcus transformer on March 14, 2013, on one hand, and Marnoch’s operational actions to order and install the Marcus transformer, on the other hand, to allow me to conclude that Sky Solar’s liability to Firelight arose out of Marnoch’s operations.
 This case is closer to the end of the spectrum of proximity as illustrated by the Waterloo case. Marnoch, as additional insured under the Policy, is in an analogous position to that of the parade operator in Waterloo. In Waterloo, there was not sufficient proximity between the operation of the parade operator which organized the parade and train accident which gave rise to the City’s liability to bring this liability within the grant of coverage under the additional insured endorsement of the policy. Marnoch’s connection with the failure of the Marcus transformer and the fire at the Manchester location on March 14, 2013 was, using the words of the British Columbia Court of Appeal in Vernon Vipers, “merely incidental”.
 In reaching this conclusion, I do not decide that it is necessary for the named insured to have been negligent in order for there to be coverage for an additional insured under an additional insured endorsement which has the language of the endorsement in this case. For example, to posit different facts, if Marnoch had contractually agreed with Sky Solar to undertake responsibility for the selection of a suitable transformer for the solar projects at the Whybank and Manchester locations and if, following the first fire, Marnoch had undertaken its own investigations, relied upon its own professional advisors, and decided to continue to use the Marcus transformers, which later failed, this would affect the analysis because, in such circumstances, there would be much closer proximity between the Marnoch’s operations and the event which gave rise to Sky Solar’s liability to Firelight. This proximity would exist even if, in this example, Marnoch had acted reasonably and without negligence in selecting the Marcus transformers in the first place and in deciding to continue to use the Marcus transformers after the first fire.
Cavanagh J. held that Sky Solar failed to comply with condition 4 of the CGL policy by admitting liability and settling with Firelight without Economical’s consent and before notifying Economical that it was making a claim under the policy. Sky Solar thereby forfeited its coverage, even if it had coverage under the Additional Insured Endorsement.
- While FCA had submitted a notice of loss to Economical on behalf of Marnoch, Sky Solar did not itself promptly notify Economical of the loss and inform Economical that it was making a claim under the policy.
- By settling with Firelight and paying Firelight without Economical’s consent, Sky Solar failed to comply with the clear wording of condition 4 of the policy which stated that the insured shall not “voluntarily make a payment, assume any obligation, or incur any expense, other than for first-aid, without our consent.”
- Economical did not lose its right to rely upon condition 4 of the policy by refusing to cover Sky Solar’s claim for indemnity coverage under the Additional Insured Endorsement.
- Sky Solar was not entitled to relief against forfeiture even if it had coverage under the policy:
 In circumstances where Sky Solar settled and paid Firelight’s claim before giving notice to Economical of its claim for coverage under the Policy, I am unable to conclude that Sky Solar has proven that Economical would not have taken any different actions and that it would not have suffered prejudice from non-compliance with condition 4. Sky Solar has not shown that Economical clearly suffered no prejudice as a result of the settlement of Firelight’s claim. It is not necessary for me to decide whether relief from forfeiture is unavailable as a result of non-compliance with condition 4 because, on the facts of this case, I would not have granted relief to Sky Solar from forfeiture of coverage under the Policy.
Cavanaugh J. held that Economical did not breach the duty of good faith it owed Sky Solar as its insured.
- The fact that Economical initially refused to accept that Sky Solar was an Additional Insured for thirteen days did not rise to the level of bad faith conduct.
- Economical did not breach the duty of good faith by denying coverage to Sky Solar even though the Court in a recent decision (Great Atlantic & Pacific of Canada Ltd v Economical, 2013 ONSC 7200), involving a similar Additional Insured Endorsement, held the insurer liable for breaching its duty to defend.
- Economical did not breach its duty of good faith by failing to appoint an adjuster and investigate Sky Solar’s claim because by that time, Economical had knowledge of the loss and knew that it was Sky Solar that had selected which solar transformers to install.
Cavanagh J. held that FCA did not breach a duty of care owed to Sky Solar and was therefore not liable for damages in negligence.
- FCA had a duty to take reasonable steps to issue policy certificates (which it knew would be relied upon by Sky Solar) that contained accurate information, and FCA fulfilled that duty.
- Additionally, FCA did not breach a duty of good faith owed to Sky Solar.
On the first issue of determining coverage for the unnamed insured under the Additional Insured Endorsement of the CGL policy, the central question was whether the loss arose from the named insured’s operations. There must be proximity between the loss and the operations of the named insured to bring the additional insured within coverage.
Cavanagh J. specifically noted that the Additional Insured Endorsement would have provided coverage if the named insured contractor had been negligent and the additional insured was vicariously liable for the negligence of the named insured. Alternatively, there also would have been coverage if the liability of the additional insured, rather than being vicarious, arose separately from the liability of the named insured, but where the separate liability arose from the negligent acts or omissions of the named insured in the course of its operations that would fall within a risk which was insured against (see discussion at paras 70-72, 80).