Newsletter > July 2009
In this issue: 1. Bill C-7 Receives Royal Assent June 23rd, 2009 2. Turn Life’s Lemons Into Virtual Lemonade 3. Frugoli v. Services Aeriens – Time Bar Cannot Be Extended by A Court in an Accident Involving a Single Boat 4. Insurer’s Duty to Defend
1. Bill C-7 Receives Royal Assent June 23rd, 2009
On 29 January 2009, Bill C-7, An Act to amend the Marine Liability Act and the Federal Courts Act and to make consequential amendments to other Acts, was introduced in the House of Commons.
The current Marine Liability Act, which has been in force since August 2001, is the principal legislation dealing with the liability of shipowners and ship operators in relation to passengers, cargo, pollution and property damage. The intent of the legislation, according to Transport Canada officials, is to set limits of liability and establish uniformity by balancing the interests of shipowners and other parties.
The proposed amendments to the Marine Liability Act contained in Bill C-7 result largely from the Maritime Law Reform Discussion Paper released by Transport Canada in May 2005 and the subsequent consultations that took place with many stakeholders in all sectors of the marine community.
Bill C-7 received Royal Assent on June 23rd, 2009 and most of its amendments will come into force 90 days thereafter (late September, 2009.) The amendments to Part 6 (concerning liability and compensation for marine pollution) will come into force on a day to be fixed by order of the Governor in Council and these amendments will be dealt with in a subsequent newsletter.
The amendments coming into force in September include the following highlights:
- C-7 amends current parts 3 and 4 of the Marine Liability Act to clarify certain rules concerning the limitation of shipowners’ liability for maritime claims and liability for the carriage of passengers, particularly in the marine adventure tourism sector.
- It creates a maritime lien against foreign vessels for Canadian ship suppliers as security for unpaid invoices.
- It establishes a limitation period of three years for all proceedings under Canadian maritime law that are not already covered by a limitation period in a federal statute.
Passenger Definition Amended
Under the current legislation “passenger”, for the purposes of Athens Convention relating to the Carriage of Passengers and their Luggage by Sea, 1974, as amended by the Protocol of 1990 to amend the Athens Convention relating to the Carriage of Passengers and their Luggage by Sea, 1974, is defined as a person carried on a sea-going vessel, excluding an air cushion vehicle.
The definition of “passenger” has been extended to include a participant in a marine adventure tourism activity, a person carried on board a vessel propelled manually by paddles or oars and operated for a commercial or public purpose, and a sail trainee.
Before and during the consultations on the proposed amendments to the Marine Liability Act that took place in 2005-2006, industry stakeholders raised many concerns about the liability regime introduced in 2001, which applied equally to commercial passenger vessels and marine tourism enterprises and operators. The regime also provided that waivers of liability, often used in adventure tourism, would no longer be valid. The loss of this standard risk management practice, combined with new limits of liability introduced in 2001, made insurance unaffordable or commercially unavailable to tourism operators. The amendment places the marine adventure tourism industry in the position it occupied prior to 2001. This would enable operators to purchase adequate insurance against the limits of liability that had always applied to them in Part 3 of the Marine Liability Act and allows them to use liability waivers with the same flexibility employed in the past.
Section 37.1 has been added to exclude the Athens Convention from applying to an adventure tourism activity that meets the following conditions:
(a) it exposes participants to an aquatic environment; (b) it normally requires safety equipment and procedures beyond those normally used in the carriage of passengers; (c) participants are exposed to greater risks than passengers are normally exposed to in the carriage of passengers; (d) its risks have been presented to the participants and they have accepted in writing to be exposed to them; and (e) any condition prescribed under paragraph 39(c).
The new section 139 creates a maritime lien* against foreign vessels as security for unpaid invoices to ship suppliers operating in Canada. Departmental sources point out that maritime liens currently exist in Canada with respect to crew wages, collisions, salvage and port charges but not for ship suppliers. They note that this is contrary to the situation in the United States, where legislation specifically grants a US-based ship supplier a maritime lien on a vessel for unpaid bills, thereby giving an advantage to US ship suppliers over their Canadian competitors who may be supplying the same vessel when it calls at a Canadian port. Under the current arrangement, a US lien would be recognized in Canadian courts ahead of any mortgages or similar claims by Canadian ship suppliers, who are treated as unsecured creditors.
[*Note: A maritime lien is a secured claim against a ship in respect of services provided to the vessel or damages done by it. It arises without notice, registration or other formalities, at the time the services are rendered or damages are done. It travels with the ship, encumbering the title of subsequent owners or possessors and surviving the sale of the ship.]
Limitation Period of Three Years
Under a new section 140 a general limitation period of three years for all proceedings under Canadian maritime law that are not already covered by a limitation period in a federal statute has been created. (See for example s. 14 of the Marine Liability Act, S.C. 2001, c. 6 which provides a two year limitation period for actions involving a fatality, or Article III of Schedule 3 of the Marine Liability Act, S.C. 2001, c. 6 which provides a one year limitation period for actions involving carriage of goods by ship.)
2. Turn Life’s Lemons Into Virtual Lemonade
When life throws you lemons, what can you do? A few options exist. Firstly, you can do as they say and make lemonade, but that is just way too cliché. Secondly, you can take arms against a sea of troubles and by opposing, end them; of course this Shakespearean suicidal approach (from Hamlet’s famous “To Be or Not To Be” soliloquy) is never the best option. Finally, you can start your life afresh in a 3-dimensional virtual world called “Second Life”, an online platform that mimics life in the real world. As you will find out, this final option is probably the best choice as our society cruises further into the 21st century.
As its name suggests, Second Life provides an opportunity to live a second life in a virtual form, separate and apart from any aspect of the “physical” world. Online users who sign up for this experience become “residents” in the Second Life virtual world. These residents are then able to create their own onscreen graphic characters known as avatars. It is through these avatars that residents are able to navigate this virtual world and interact with millions of other residents while creating, designing, buying and selling any virtual objects they want along the way.
What sets Second Life apart from other virtual worlds on the Internet is that its objective is not that of a typical game. There is no winning or losing. There are no scores or levels to conquer. The objective is simply to live a second life in a world that simulates our very own physical realm, and it is the residents of Second Life who create all of the virtual objects and infrastructure found within the experience including virtual buildings, beaches, nightclubs and roads-just to name a few.
Second Life also has its own internal currency called the Linden dollar, which is named after Linden Lab, the company behind the development of the service. The Linden dollar can actually be exchanged for U.S. currency at online currency exchanges at a floating exchange rate of about 270 Lindens to 1 U.S. dollar. Additionally, currency can also be traded within Second Life at a virtual exchange location called the LindeX where currency can be bought and sold using credit cards or Paypal.
In addition, business opportunities are abundant in Second Life. Residents can start up and run their own businesses or seek employment elsewhere in order to generate Linden dollars. There are no limitations on the types of virtual employment opportunities available, and they can even be facilitated through virtual staffing agencies. The types of jobs available include nightclub promoters, landscapers, theme park developers, car manufacturers, tattooists, fashion designers and thousands of others. Residents can buy and sell everything from virtual houses, property, body parts, labour, and other services including sex. This real world commoditization of the virtual world has fostered a culture of limitless innovation and profit making. This has allowed Second Life to support an economy of its own where millions of real U.S. dollars exchange hands every month through this commerce, making many virtual residents real world millionaires.
Second Life’s first reported millionaire operates out of China through an avatar named “Anshe Chung”. Anshe Chung began her fortune by making small-scale purchases of virtual real estate, which she then subdivided for rent and sale to other residents for Linden dollars. Today, Anshe Chung focuses on developing and selling virtual properties to many real world mega corporations who are actually interested in establishing a genuine presence in this virtual world. As unreal as this may sound, it is not something to laugh about. After all, consider what it would mean for corporate planners to be able to experiment with models of their suppliers, customers and employees in a virtual world.
Many well-known corporations have already made their mark in Second Life. MTV has purchased virtual land and developed a nightclub in Second Life. Toyota Motor Corp. also has an established presence, which sells digital cars for residents to customize. IBM has purchased 12 islands, one of which is used privately to host business events for its global employees with Second Life accounts to engage in sensitive proprietary discussions and conferences without requiring any physical travel.
Some countries are even beginning to establish a diplomatic presence within Second Life. For example, in May 2007, the Swedish Government opened up the world’s first virtual embassy in Second Life. Although Sweden’s virtual embassy will not issue passports or visas, it will serve to instruct Second Life visitors on how to obtain such documents in the real world, and provide a portal to web-based information about Sweden. Similarly, the Government of Estonia is investing over $8,700 in developing a virtual Second Life embassy as well. These countries pride themselves on being at the forefront of technology, and this is an opportunity to perpetuate this reputation in a virtual world that is likely to become even more complex over time. This begs the question of what legal implications will this have for the future?
IP issues in Second Life are worth mentioning. The developers of Second Life have provided through the terms of service that all the IP rights are to extend to all users of the service for all creations made by the users. This means that once a Second Life user creates something, that resident’s IP right is protected both on and offline and will extend to commercial or non-commercial use of whatever is created. However, despite this, there still exist problems with guaranteeing actual enforcement of such IP protection within Second Life. Moreover, there exists potential trademark infringement as corporate brand owners are being falsely represented in the form of virtual goods, which are sold for profit by users in Second Life. These include virtual iPods, Ferraris, and Rolex watches amongst others. Whether these brand owners will be forced to crack down on counterfeits in Second Life like they do in the real world remains to be seen for now.
Other foreseeable legal considerations for the future are endless. Take family and property law for example. Residents in Second Life can “marry” through ceremonies. Virtual assets owned by the marrying parties may need to be dealt with specifically in agreements in the event of separation or “divorce”. Moreover, property encroachments in Second Life may become more frequent as users continue to build more virtual real estate assets on others user’s virtual property. Last but not least, matters of national security may also be of relevance as several real world intelligence services have suggested that Second Life can serve as a terrorist hub to recruit others and mimic real life terrorism. Terrorism experts have confirmed the possibility of “Jihad terrorists” assuming identities within Second Life to build a community of extremists and plan real world atrocities. Clearly there exist many other future legal considerations, but it is impossible to mention all of them.
Technology is now evolving to the point where the real world is being blurred with the virtual world. Although risks exist with the introduction of any revolution, we should be able to minimize these risks and savour the benefits by keeping our laws attuned with technological advancement, and turning virtual lemons into lemonade for everyone.
3. Frugoli v. Services Aeriens – Time Bar Cannot Be Extended by A Court in an Accident Involving a Single Boat
On August 29, 2002, on the occasion of participating in a hunting expedition in the northern region of Quebec, Joseph M. Frugoli and Wayne Herbert Raschke (the “Deceased”) both residents of Chicago, Illinois in the United States died, presumably by drowning, when the boat in which they were passengers capsized while crossing Lake Louis. Their bodies were never recovered. Lake Louis is 20.6 kilometers long and 1.6 kilometers wide. Access to it is by way of hydroplane.
The widows and children of the Deceased as well as the estates of the Deceased brought suit against Services Aériens des Cantons de L’Est Inc. (“Services Aériens”), the commercial outfitter of the expedition and Raymond Smith (“Smith”) its employee who was operating the boat at the time of the accident.
The claimants filed legal proceedings against respondents in the Circuit Court of Cook County Illinois on August 26, 2004, less than two years after the accident. The jurisdiction of the Illinois Court was challenged, but the question of its competence had not yet been decided by the time the Quebec Court of Appeal issued this ruling.
The claimants also instituted proceedings against the same defendants in the Superior Court of Quebec on April 26, 2005. This was more than two years, but less than three years, after the death of the Deceased on August 29, 2002.
The Superior Court ruled that the subject matter of the actions was that of Canadian maritime law and accordingly, within exclusive federal legislative jurisdiction. Hence the statutory provision of the Marine Liability Act which at s. 14(2) establishes a limitation period of two years for commencing an action, was applied, to the exclusion of the three-year prescription in article 2925 of the Civil Code of Quebec. The motions judge also ruled that he had no authority, pursuant to the Marine Liability Act, to prolong the limitation period and also that he had no inherent jurisdiction to do so. Furthermore, in an obiter dictum, he stated that he would not have granted an extension of time, even if he had the authority to do so. Thus, the motions to dismiss the actions were maintained and the motions to extend the limitation period were dismissed, the whole with costs.
The parties had agreed to file certain material before the motions judge setting forth the relevant facts with respect to the navigability of Lake Louis. The motions judge, in this regard, stated:
 The additional facts disclosed in these documents indicate that:
a) Lake Louis is a large body of water, 20,6 kilometers in length by 1.6 kilometers in width, Its perimeter is 46.08 kilometers. Its depth is approximately 30 meters (100 feet).
b) the Defendant Services Aériens des Cantons de l’Est Inc. runs open motor-boats of more than 16 feet in length and has built a wharf to moor its boats and sea-planes, used to carry passengers and equipment on and out of its hunting and fishing installations situated on or around Lake Louis.
c) Lake Louis is consequently used as a waterway in that sea-planes will land thereon and take off thereof and the lake will serve as a way and means of communication, the whole within the context of a recreational or commercial exploitation.
The Quebec Court of Appeal affirmed the decision of the motions judge. It held that:
“A subject matter comes within Canadian maritime law when it is so integrally connected to maritime matters as to be legitimate Canadian maritime law within federal competence.
The motion to institute proceedings meets the above criterion. It is perfectly clear from the description of the cause of action that the subject matter is one which is squarely in the category of a death resulting from navigation in a boat on a lake. This is in the domain of federal maritime negligence law. It is not relevant that Lake Louis is in an isolated area, nor that there may be no commercial shipping on it. Accidents involving boats on inland lakes are matters of Canadian maritime law and are within exclusive federal legislative jurisdiction.
The Court found that the limitation period for taking the action is, by virtue of s. 14(2) of the Marine Liability Act, two years stating “the fact that art. 2925 C.C.Q. provides a prescription period of three years is of no relevance to the proper application of Canadian maritime law in these appeals.”
The Court of Appeal then had to decide if it had discretion to extend the limitation period under the Marine Liability Act, or under its inherent jurisdiction and if so had the motions judge erred.
The motions judge concluded that the provisions at s. 23(2)(a) of the Marine Liability Act with respect to extending the limitation period apply only to cases where the claim arises from a collision between two boats. Consequently, he ruled that the Court had no discretion or authority to authorize an extension of the limitation period because the deaths did not occur as a result of the collision of two boats.
Section 23 of the MLA provides:
23. (1) No action may be commenced later than two years after the loss or injury arose to enforce a claim or lien against a ship in collision or its owners in respect of any loss to another ship, its cargo or other property on board, or any loss of earnings of that other ship, or for damages for loss of life or personal injury suffered by any person on board that other ship, caused by the fault or neglect of the former ship, whether that ship is wholly or partly at fault or negligent.
(2) A court having jurisdiction to deal with an action referred to in subsection (1
(a) may, in accordance with the rules of court, extend the period referred to in that subsection to the extent and on the conditions that it thinks fit; and
(b) shall, if satisfied that there has not during that period been a reasonable opportunity of arresting the ship within the jurisdiction of the court, or within the territorial waters of the country to which the claimant’s ship belongs or in which the claimant resides or has their principal place of business, extend that period to an extent sufficient to provide that reasonable opportunity.
The Court of Appeal of Quebec summarized the issue before it had to be decided according to the rules and principles of Canadian maritime law, which is a uniform body of law applied throughout Canada, consisting of statutory Canadian maritime law and non-statutory Canadian maritime law.
The Court concluded that the statutory Canadian maritime law applicable in this case is set out in the Marine Liability Act. It states the one specific instance, – a claim resulting from a boating collision, when a Court has discretionary authority to extend the limitation period. It provides no authority or jurisdiction for a Court to grant an extension in other instances.
The Appeal Court also concluded that because the Marine Liability Act expressly gives authority, in the same statute, for an extension of the limitation period to commence an action only in the case of a collision between boats, Parliament has thereby expressed its refusal to give such authority in cases involving claims which result from the capsizing of a boat.
The Appeal Court added:
“In view of our conclusion that statutory Canadian maritime law does not permit the extension of the limitation period in non-collision claims, it is not necessary to review the question pertaining to non-statutory Canadian maritime law because the latter may not, in any event, provide a measure which is contrary to statutory Canadian maritime law.”
The Appeal Court referred to the Ontario Court of Appeal decision in Ordon v. Grail 1996 CanLII 3060 (ON C.A.), (1996), 30 O.R. (3d) 643 where it appears that the Ontario Court of Appeal extended a statutory limitation period. Ordon v. Grail ended up in the Supreme Court of Canada where the latter court felt it did not have to decide the limitation issue by extending the relevant statutory limitation period.
The Appeal Court (in Quebec) noted that Ontario Court of Appeal, after the Supreme Court of Canada heard Ordon v. Grail, has in Desautels v. Katimavik appeared not to have followed its previous judgment in Ordon Estate.
In Desautels v. Katimavik Justice Goudge, with the approval of Chief Justice of Ontario McMurtry wrote:
“24. Nor should we be taken to agree with the finding of the trial judge that the Court can use its discretion to extend a statutory limitation period. That is the very question that was left open by the Supreme Court of Canada in Ordon Estate v. Grail, 1998 CanLII 771 (S.C.C.),  3 S.C.R. 437.”
Justice Laskin, concurring in the result, in separate reasons, states:
“49. The trial judge wanted to avoid the injustice for the appellants brought about by the changes in the law. I sympathize with her desire to do so. I am not satisfied, however, that the case law from the Supreme Court and this court permitted her to do so.
50. In holding that the court had an inherent jurisdiction to extend a limitation period to preserve an action the trial judge relied on this court’s decision in Ordon Estate v. Grail 1996 CanLII 3060 (ON C.A.), (1996), 30 O.R. (3d) 643, and Dreifelds v. Burton 1998 CanLII 5013 (ON C.A.), (1998), 38 O.R. (3d) 393, leave to appeal refused  S.C.C.A. No. 261, and on the Supreme Court’s decision in Basarsky v. Quinlan, 1971 CanLII 5 (S.C.C.),  S.C.R. 380. In Ordon Estate and Dreifelds, both complex maritime law cases, this court affirmed an inherent jurisdiction to extend a statutory limitation period to prevent an injustice. But the Supreme Court has not adopted this principle. Instead, in Ordon Estate v. Grail, 1998 CanLII 771 (S.C.C.),  3 S.C.R. 437 it concluded that it did not have to decide the point. Moreover, Dreifelds and Basarsky are both distinguishable from this case. In Dreifelds, Goudge J.A. writing for the court relied principally on the statutory discretion to extend a limitation period in s. 2(8) of the Family Law Act, R.S.O. 1990, c. F.3. Apart from the disability provision, which is not applicable here, the Alberta statute contains no similar statutory discretion. And in the Basarsky case, the Supreme Court held that after the expiry of a limitation period it had a discretion to add a party or a new claim to an action properly commenced within the limitation period. Again, this was not the situation here.”
The Court of Appeal for Quebec concluded by essentially stating that it did not agree with the Ontario decision in Ordon v. Grail:
“With great respect for the judgment of the Court of Appeal for Ontario in Ordon Estate, we conclude that Canadian maritime law does not authorize the extension of the limitation period for commencing an action, except in the case of collisions between boats, and that the Court does not have any inherent jurisdiction to extend the two-year limitation period set out in s. 14(2) of the MLA for commencing an action, such as the ones with which we are concerned.”
The two claims were affirmed as time barred.
4. Insurer’s Duty to Defend
Under established principles of law, an insurer’s obligation to defend an insured in a lawsuit is ‘broader’ than the obligation to ‘indemnify’. The starting point on the analysis as to whether there is a ‘duty to defend’ concerns whether the claim by the plaintiff pleads facts that come within the coverage grant, and are not excluded. The facts are deemed to be established for this analysis. If the facts amount to ‘conduct’ for which the insured is covered under the policy, as a general rule the duty to defend is triggered. The facts may however not ultimately be proven at the trial down the road, resulting in a vindication of the defendant insured. The insurer’s policy duty to indemnify will then not be triggered. Hence, the general legal proposition that the “insurer’s duty to defend is broader than it’s duty to indemnify”.
Our courts have however in recent years considered whether the claim in question should be given a strict literal or ‘form’ interpretation on a duty to defend analysis. Should the analysis come to be determined strictly by the words employed by the lawyer for the plaintiff? Should that lawyer be able to ‘trigger’ coverage by a selection of words, or by skillful pleading, in elevating claims otherwise excluded by the language of the insurance policy (for which no duty to defend arises, from the ‘get go’) into covered conduct not excluded? The usual example is the categorization of intentional wrongful conduct [excluded from coverage] into negligent conduct with unintended results [generally coverage].
The recent decision in O’Leary et al v. AXA Pacific Insurance Company (2009) 95 O.R. (3d) 315 (ON. S. C.) employs a ‘substance over form’ review of a plaintiff’s pleading in the context of a ‘duty to defend’ analysis.
Discount Mortgage Canada Inc. (“Discount”) is in the mortgage brokerage business. Discount was insured by AXA Pacific Insurance Company (“AXA”) pursuant to the terms of a Mortgage Brokers Professional Liability Policy [the “Policy”).
As explained below, certain employees of Discount came to be named as ‘defendants by counterclaim’ along with other parties by one Tracey Lee Jones (“Jones”) who was in default under the terms of a residential mortgage. The Discount employees in question (the “Applicants”) applied to the Court for an order that AXA owed them a defence obligation under the Policy.
The Royal Bank of Canada (“Royal Bank”) commenced a lawsuit in June of 2008 against Jones for the amount due under a mortgage and for possession of the mortgaged residential property.
Jones defended the Royal Bank’s action, also filing a “counterclaim” against the Royal Bank, one Dwayne Deneka (who was the vendor of the property to her and an employee of Discount), the Applicants, Discount and one Theresa Zehr who was a Royal Bank employee.
In her defence to the action by the Royal Bank, Jones sought an order that it could not enforce its rights under the mortgage on the basis that the mortgage was placed through misrepresentation, fraud or a breach of duty owed to her. In particular, Jones alleged that her mortgage application had been falsified by one or more of the defendants that she named by the ‘counterclaim’ filed in the action by the Royal Bank. She alleged that this was done without her knowledge and with the intent of qualifying her for a mortgage for which she would not otherwise have qualified in accordance with the usual and ordinary lending practices of the Royal Bank.
Jones also alleged that the defendants to the counterclaim (the Royal Bank, Deneka, the applicants, Discount and Theresa Zehr) had ‘superior knowledge’ in relation to herself and that they owed her a fiduciary duty in view of their knowledge that she had relied upon them in the mortgage application process. Jones complained that she was not provided ‘appropriate cautionary advice’ against ‘taking the financing that was ultimately secured’ by the mortgage. It is important to note then, that Jones’s counterclaim pleads both fraudulent conduct and negligent conduct against those with whom she had a grievance.
Jones alleged that the applicants were employed by Discount, with the latter accordingly being vicariously liable for the conduct of the former.
The Coverage Question and the Duty to Defend
AXA undertook the defence for Discount in the counterclaim by Jones for the non-intentional conduct alleged under certain “Innocent Insured” coverage, cited below. AXA however denied that it had any obligation to represent the Applicants separate from its provision of a defence for Discount, or to defend conduct excluded from coverage.
The general Policy coverage grant was as follows:
To pay on behalf of the insured, Damages and Claims Expenses which the insured shall become legally obligated to pay because of any Claim or Claims first made against any Insured and reported to the Insurer during the Period of Insurance or Extended Reporting Period, arising out of any act, error or omission of the Insured rendering or failing to render Professional Services while acting in the capacity of a Mortgage Broker, for others on behalf of the Named Insured designated in the declarations and caused by the Insured except as excluded or limited by the terms, conditions and exclusions of this Policy.
The Policy contained the following exclusion:
The coverage under this insurance does not apply to Damages or Claims Expenses incurred with respect:
(a) to any claim arising out of any criminal, dishonest, fraudulent or malicious act, willful error or omission of any insured, acting alone or in collusion with others.
AXA defended Discount pursuant to a portion of the Policy titled “Innocent Insured”. By this particular wording, where coverage would be excluded “because of any exclusion relating to criminal, dishonest, willful, fraudulent or malicious acts, errors or omissions by any insured, and with respect to which any other insured did not personally participate or personally acquiesce or remain passive after having personal knowledge thereof” the Insurer would agree to provide coverage.
The applicants asserted that Jones raised claims both coming within the terms of the Policy as well as falling outside of such coverage. However, in seeking the relief sought against AXA, they cited the following standard principles endorsed by the Supreme Court of Canada:
a) the pleadings govern the duty to defend;
b) the duty to defend is broader than the duty to indemnify. The mere possibility that a claim will succeed will suffice.
c) the duty to defend arises only with respect to claims which, if proven, will fall within the scope of coverage provided by the policy.
In essence, as the claim by Jones pleaded aspects of negligence, which would be covered [the applicants being ‘unnamed insureds’ in the Policy] by applying the above principles the Court should order AXA to provide them a defence.
AXA in turn took the position that the true nature of Jones’s claim is one alleging criminal conduct, in the form of fraud and that any unintentional conduct, such as negligence, is merely “derivative” conduct excluded from coverage. AXA asserted as an alternative argument that if the court should find that the claim includes independent allegations of unintentional conduct, that it nevertheless should not be obliged to defend the applicants on the basis that its defence being provided for Discount (for the non-intentional conduct alleged) necessarily provides a defence to the applicants (as unnamed insureds) against those allegations. AXA argued that it should not have to defend the applicants from the allegations of fraud which is clearly excluded from coverage.
The court determined that the resolution lies in the determination of the ‘true nature’ of the claim pleaded, relying on the Supreme Court of Canada decision of Non-Marine Underwriters, Lloyd’s of London v. Scalera  1 S.C.R. 551. The cite that follows, while lengthy, from the Scalera decision [at paras 84-86] provides important guidelines in the determination of what a claim is really about for the purposes of considering a duty to defend:
A court must therefore look beyond the labels used by the plaintiff, and determine the true nature of the claim pleaded. It is important to emphasize that at this stage a court must not attempt to determine the merit of any of the plaintiff’s claims. Instead, it should simply determine whether, assuming the verity of all of the plaintiff’s factual allegations, the pleadings could possibly support the plaintiff’s legal allegations.
Having construed the pleadings, there may be properly pleaded allegations of both intentional and non-intentional tort. When faced with this situation, a court construing an insurer’s duty to defend must decide whether the harm allegedly inflicted by the negligent conduct is derivative of that caused by the intentional conduct. In this context, a claim for negligence will not be derivative if the underlying elements of the negligence and of the intentional tort are sufficiently disparate to render the claims unrelated. If both the negligence and the intentional tort claims arise from the same actions and cause the same harm, the negligence claim is derivative, and it will be subsumed into the intentional tort for the purposes of the exclusion clause analysis. If, on the other hand, neither claim is derivative, the claim of negligence will survive and the duty to defend will apply …. A claim should only be treated as ‘derivative’, for the purposes of this analysis, if it an ostensibly separate claim which nonetheless is clearly inseparable from a claim of intentional tort.
This reasons for this conclusion are twofold. First… one must always remember that insurance is presumed to cover only negligence, not intentional injuries. Second, this approach will discourage manipulative pleadings by making it fruitless for plaintiffs to try to convert intentional torts into negligence, or vice versa. While courts should not concern themselves with whether or not pleadings are designed to generate insurance coverage, following the guidelines set out above will provide insurers with sufficient protections against manipulative pleadings.
Following the above guidelines the Court concluded that “both the negligence and the intentional tort claims arise from the same actions and cause the same harm”. The essence of the claim by Jones was the fraud alleged on the part of the defendants by counterclaim in procuring a mortgage loan that she was otherwise unqualified to receive, by keeping her in the dark about their failure to perform various duties owed to her. The claims of negligence against the applicants were accordingly found to be ‘derivative’ and were ‘subsumed’ into the intentional tort of fraud, falling within the above noted policy exclusion.
Accordingly, AXA was held to have no duty to defend the applicants in the counterclaim by Jones. By the application of the Scalera principles cited above, AXA did not have to defend the applicants in respect of the allegations of fraud (clearly excluded from coverage) or in respect of the allegations of negligence, on the basis that the true nature of the allegations of negligence (which, on a literal or an ‘on the face of things’ approach would seem to come within coverage) derived from the allegations of fraud.
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