approved deficient plans — Parties executing minutes of settlement
after homeowners accepted opinion of defendant’s expert that problem could be remedied without having to lift house off foundation —
Homeowners accepting $200,000 from town’s insurer — Releases held
in escrow — Minutes of settlement effectively requiring town to enter
into contract with homeowners for repair of basement — Homeowners
bringing second action against town after discovering that remedial
plan had not worked — Town’s insurer having duty to defend second
In 2008, homeowners discovered that the basement of a house which they had
purchased in 2007 was flooding because the basement walls and floor had not
been constructed in accordance with the Ontario Building Code. The town’s
building inspection department had approved deficient plans and on inspection
had failed to identify deficiencies in the construction of the basement. The owners
sued the town and W, the person they had hired to perform a pre-purchase home
inspection. An engineer retained by W believed that the basement could be
repaired and brought up to code without having to raise the house off its foundations. The owners accepted the engineer’s proposal, and they executed minutes of
settlement. The town’s insurer paid the owners $200,000, but releases were held
in escrow. The minutes of settlement effectively required the town to enter into a
contract with the owners for the repair of the basement. After discovering that
the remedial plan had not worked, the owners brought a second action against
the town. The applicant applied for a declaration that the town’s insurer was
obliged to defend the second action.
Held, the application should be allowed.
The first action was not settled and remained an open file. The second action
had the same parties and arose out of the same circumstances — the continuation of water infiltration into the basement. It was in reality a continuation of the
first action on the additional ground of breach of contract. Although the policy did
not oblige the insurer to defend an action for breach of contract, the first action,
a pure negligence case, remained unfinished business and should continue to be
defended. The town was exposed to the contractual claims solely because it relied
on the advice of counsel retained by and answerable to the insurer when the
minutes of settlement were negotiated. Having placed the town in this predicament, the insurer could not now rely on the terms of its own policy to claim that
it had no responsibility because the claim was framed primarily in contract.
In any event, the second action alleged negligence as well as breach of contract,
albeit unconvincingly. That factor alone entitled the town to coverage.
Cases referred to
Alie v. Bertrand & Frère Construction Co. (2002), 62 O.R. (3d) 345,  O.J.
No. 4697, 222 D.L.R. (4th) 687, 167 O.A.C. 20, 26 C.L.R. (3d) 5, 119 A.C. W.S. (3d)
129, 2002 CanLII 31835 (C.A.); Home Insurance v. Landmark, 293 Cal. Rptr. 277
(Cal. App. 4 Dist., 1988)
Rules and regulations referred to
Building Code, O. Reg. 332/12 [as am.]
APPLICATION for a declaration that the insurer had an obliga-
tion to defend an action.
R.J. Kennaley, for applicant.