On June 29, 2012, the BC Court of Appeal issued judgment in Vernon Vipers Hockey Club v. Canadian Recreation Excellence (Vernon) Corporation, 2012 BCCA 291 and in doing so narrowed the scope of coverage for persons added to a CGL policy by way of an “Additional Insured” endorsement.
The Named Insured’s business will frequently involve contracts which require other parties to be added to and protected by the Named Insured’s liability policy. This sort of requirement is common in commercial leases, rental agreements, construction contracts, and the like.
In Canada, the most common form of Additional Insured endorsement will usually add the third parties as Additional Insureds under the policy “…but only in respect of liability arising out of the Named Insured’s operations”. This qualification raises questions about the “reach” of the coverage under the Additional Insured endorsement: what sort of link to the Named Insured’s business does the phrase “arising out of” import? Does the coverage extend to the Additional Insured’s own negligent conduct or only to liability imposed on that party because of the Named Insured’s negligent conduct?
In the Vernon Vipers case, the plaintiff slipped and fell as he was leaving the hockey rink facility to buy some refreshment at a retail outlet across the street. The complex was the home of the Vernon Vipers Hockey Club and it was owned and managed by the municipality and CREVC. The latter two entities were added to the hockey club’s CGL policy “but only in respect of liability arising out of the [hockey club’s] operations”.
The plaintiff sued only the owner and manager of the complex and did not name the hockey club as a defendant. He claimed he lost his footing as a result of defective lighting and made a variety of negligence and Occupiers Liability allegations against the owner/operator of the complex relating to lightings, warnings, safe walking routes, etc. The owner/operator turned to the hockey club’s liability insurer seeking coverage for the claim under the hockey club’s policy by virtue of the Additional Insured endorsement.
The question squarely before the court, then, was whether the alleged liability for unsafe premises “arose out of the hockey club operations”. In particular, the focus was on the nature and extent of connection required between the injury and the operations in order that the former might be said to “arise out of” the latter.
Both the Supreme Court and the BC Court of Appeal held there was insufficient connection between the injury and the hockey club operations to trigger coverage under the policy. The Court of Appeal held:
“At the heart of this appeal is a question of pure law: what degree of connectedness is required by the phrase “arising out of”? Does it mean simple “but for” causation, …or does it require a stronger nexus?…I conclude that the latter interpretation is the correct one”;
“…the correct interpretation of “arising out of” and “arising from” in the context of an insurance contract requires a closer causal connection than a simple “but for” test…Though [some case law] contain excerpts which, taken in isolation, seem to equate “arising out of” with simple causation, this interpretation is not supported by a reading of the cases in their entirety. Compliance with a simple “but for” test is necessary, but not sufficient”;
“Merely incidental or fortuitous connections are not enough to satisfy the causation standard”;
“I conclude that the contractual term “arising out of the Named Insured’s operations” as written in the hockey club’s policy endorsement, imposes a causal requirement greater than a simple “but for” test. Borrowing from the cases discussed above, the phrase “arising out of” should be construed as requiring “an unbroken chain of causation” and a connection that is more than “merely incidental or fortuitous”.
The court reviewed a number of cases where the connection between the Named Insured’s operations and the alleged source of the Additional Insureds liability was “direct and apparent”. For example, the claimant struck by a stray lacrosse ball launched out of bounds during a lacrosse game was an obvious and sufficient “causal link” between the sports club activities and the injury such that the Additional Insured municipality in that case was covered under the lacrosse team’s policy.
In the Vernon Vipers case however, the court held,
“By contrast, the link here is far more tenuous, even allowing for a broad and liberal interpretation to the term “operations”. No aspect of the hockey club’s operations are alleged to have caused [the plaintiff] to fall and injure himself. The most that the pleadings allege is that these operations caused him to be in a place where, for unrelated reasons, he became injured. This might have been enough to meet a simple “but for” test but in my view, it cannot satisfy the more rigorous causal requirement established in [the case law]”.
Most of these coverage contests occur in the context of “duty to defend” coverage under a CGL policy to which the Additional Insured has been added. The Vernon Vipers case represents a narrowing of coverage for such Additional Insureds and makes it conditional upon a closer causation requirement than a simple “but for” test such as an unbroken chain of causation and a stronger connection that is more than merely incidental or fortuitous.
The implications of this decision may be significant. Questions to be considered in all of these Additional Insured cases include:
- Does the language of the Additional Insured endorsement match the requirement of the contract between the Named Insured and the third parties who are supposed to be added to coverage?
- If the connection between the Named Insured’s operations and the injury triggering the source of the Additional Insureds liability is vague, must insurers assume the defence of the Additional Insured on a “reservation of rights” basis (raising the prospects of a denial of indemnity at a later date)?
- Must different defence counsel be appointed for the Named Insured and the Additional Insured?
- Are there additional conflicts as between the Named Insured and Additional Insured arising out of issues such as allocation of fault, indemnity provisions in contracts between the parties, and so on?
- Does the Additional Insured have its own liability coverage in any event and, if so, how is the priority of overlapping coverage determined?
While most endorsements in Canada extend fairly broad coverage for Additional Insureds, each case is fraught with its own unique complications and it would be wise for insurers to obtain advice from coverage counsel before stepping into the fray.