In April 2019, we wrote a blog about a decision from the Alberta Court of Queen’s Bench about an insurance company’s refusal to provide defence for a client who operated a cold storage warehouse and experienced an incident that led to their customers’ goods being spoiled. The decision was appealed, and the Alberta Court of Appeal has issued a ruling on it.

Dispute Over Coverage Under the Claim

The warehouse owners (“the plaintiff”) were responsible for the care, custody, and control of products for two clients who alleged the plaintiff’s negligence and breach of contract led to their products being damaged. The allegations specified that the plaintiff failed to maintain the appropriate temperature in the warehouse needed to keep their goods frozen. This led to the goods thawing out in 2015 and 2016.

The clients sued the plaintiff, who sought coverage under their insurance policy. However, the insurer denied it had a duty to defend, relying on an Equipment Breakdown Coverage section of the policy, which stated such coverage only applied to sudden and accidental failures, as opposed to negligence.

The Court of Queen’s Bench ruled that a trial would be needed to determine if the failure was really a result of negligence, and as a result, the insurer had a duty to defend.

Insurer Owes a Duty to Defend Until Cause of Incident is Determined

The insurer appealed the decision, alleging the Court of Queen’s Bench was wrong in finding it had a duty to defend.

The Court of Appeal turned to a 2010 Supreme Court of Canada decision which outlines the principles to be applied when deciding whether a duty to defend is owed. In this case, the Supreme Court stated that “the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify. What is required is the mere possibility that a claim falls within the insurance policy.” This is in line with the Court of Queen’s Bench decision, which stated the possibility of the incident not being negligence-related required the insurer to defend the plaintiff.

The insurer attempted to rely on a number of forms that made up the insurance policy, but the court looked at the forms as a whole and agreed with the Court of Queen’s Bench. The Court of Appeal found that it was reasonable for the plaintiff to expect the insurer to provide coverage somewhere in the multiple forms included in the policy for the risk of its freezers malfunctioning, with this being the core of their business. The Court  quoted the earlier decision, writing “'[t]he very nature of the claims brought by both (clients) are for loss of product under refrigeration’ which, if proven to be true, would require (the insurer) to indemnify (the plaintiff) for the claims brought against it by (the clients); further, ‘[w]hether that loss arises from an accident is a matter to be resolved through trial.’”

The trial has not yet occurred, but we will be sure to provide an update when that happens.

HMC Lawyers’ Insurance team has decades of collective experience that has provided us with a comprehensive understanding of the potential risks and legal issues that commonly arise in insurance coverage disputes. We help our clients identify and avoid potential problems when it comes to questions of insurance coverage. Please call us at 1-800-480-3534 or reach us online if you require assistance with an insurance matter.