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Extrinsic Evidence and Duty to Defend
Published in the June 2007 issue of Litigation Notes - View Article
The British Columbia Supreme Court recently released a decision relating to an insurer’s duty to defend. Dave’s K&K Sandblasting (1988) Ltd. (“K&K”) operated a sandblasting business on property leased by Del Equipment Ltd. (“Del”). When K&K left the site, environmental testing determined that the soil was contaminated with antimony and chromium and Del sued K&K for the costs of the environmental remediation, which amounted to $160,000.
K&K sought coverage under an insurance policy issued by Aviva Insurance Company of Canada (“Aviva”). Aviva denied coverage pursuant to a pollution exclusion in the policy and K&K applied to Court for an Order that Aviva had an obligation to defend the action brought by Del.
In its Statement of Defence to the underlying action, K&K pleaded that any contamination had been caused by an excavating contractor (“Ralston”) who had removed some sandblasting residue from K&K’s premises, mixed it with other contaminated material and then returned it to the site. As a result, Del amended its Statement of Claim to add Ralston as a defendant.
On the application for coverage, the Court considered the caselaw relating to the duty to defend and set out the basic principle that the insurer’s duty to defend depends on the allegations in the Statement of Claim. The Court referred to the case of Monenco Ltd. vs. Commonwealth Insurance Co., wherein the Supreme Court of Canada provided guidance on the extent to which extrinsic evidence should be considered in determining coverage. In that case the Court held that extrinsic may be considered “…in determining the substance and true nature of the allegations and thus to appreciate the nature and scope of an insurer’s duty to defend” but that the duty to defend application should not become a “trial within a trial” such that a Court may be required to consider “premature” evidence which would require findings to be made before trial that would affect the underlying litigation.
In this case the Court found that certain documents referenced in the Statement of Claim would be admissible as extrinsic evidence, but excluded pre-litigation exchanges between Del and K&K, transcripts of examinations for discovery in the underlying action and reports of the insurance adjuster.
In this case, K&K conceded that the action as originally pleaded against it fell within the pollution exclusion and that there was no duty to defend. However it argued that the Statement of Claim as amended included allegations against Ralston and that as a result the nature of the litigation had changed and the duty to defend arose. However, the Court held that K&K’s analysis was not reflected in the pleadings and that the addition of the claims against Ralston did not change the claim against K&K in the underlying action. That claim was clearly covered by the pollution exclusion and no duty to defend therefore arose.
Dave’s K&K Sandblastting (1988) Ltd. v Aviva Insurance Company of Canada, 2007 BCSC 791 (CanLII)