In 1588444 Ontario Ltd. v State Farm Fire and Casualty Company, 2017 ONCA 42, the Ontario Court of Appeal, specifically Justices Laskin, Feldman and Hourigan, were asked to overturn the Order of Justice H.K. O’Connell, dated October 16, 2015, dismissing State Farm’s motion for leave to amend its Statement of Defence.
The claim arose out of a fire that destroyed a restaurant and banquet facility operated by the numbered company on June 4, 2006. The investigation of the fire confirmed the cause to be arson. The property was insured under a policy with State Farm. In a letter dated June 9, 2006, State Farm’s representative advised the numbered company that despite State Farm’s investigation and adjustment of the claim, State Farm may deny the claim based on a provision in the policy that negates coverage if the loss is caused by a dishonest or criminal act by the insured. Also on June 9, 2006, Mr. Vincenzo Spartaco, the directing mind of the numbered company, signed a document acknowledging that State Farm may not have to indemnify the numbered company as a result of the loss, and authorizing State Farm to investigate the fire.
State Farm retained an engineer to investigate the cause of the fire. The investigator came to the same conclusion as the Barrie Police Force and the Office of the Fire Marshall; that the fire had been deliberately set.
The numbered company issued a Statement of Claim on June 4, 2007, naming the numbered company and Mr. Spartaco as plaintiffs. In its Statement of Defence dated September 14, 2007, State Farm did not plead or allege, in any manner, that the plaintiffs, or anyone on their behalf, had set the fire.
Discoveries were conducted in May, 2011. State Farm conceded during its discovery that its only basis for non-payment of the claim was non-cooperation by the plaintiffs, and that it was not taking the position that the plaintiffs were responsible for setting the fire. However, during the discovery of Mr. Spartaco, State Farm attempted to ask questions in support of the allegations that he had intentionally set the fire. Those questions were refused. State Farm brought an undertakings motion, part of which was to compel answers to the questions refused regarding arson. Justice Mullins denied the portion of the motion requesting answers to the questions alleging Mr. Spartaco was involved with the fire because State Farm had not pleaded that Mr. Spartaco was responsible for the fire.
On confirmation by State Farm’s counsel that State Farm was not aware of any failure on the part of the plaintiffs to comply with the terms of the policy, counsel for the plaintiffs commenced the scheduling of a summary judgment motion. At a hearing on Dec. 19, 2014, to schedule the summary judgment motion, counsel for State Farm advised for the first time that his client would be bringing a motion seeking leave to amend its Statement of Defence. In the materials served by State Farm for its motion to amend, was an amended Statement of Defence in which State Farm withdrew the non-cooperation allegation and added the pleading that coverage was denied based on the plaintiffs committing arson.
Motion to amend Statement of Defence
The motion was heard on May 21, 2015. Justice O’Connell released an endorsement on Oct. 16, 2015, advising that the motion was denied. Reasons were released on Feb. 12, 2016. Justice O’Connell found that the plaintiffs would suffer actual and presumed non-compensable prejudice if leave to amend were granted.
Justice O’Connell concluded that actual prejudice occurred because the amendments effectively restarted the litigation and the plaintiffs had lost the ability to marshal evidence to counter the claim of arson. He concluded that there was presumed prejudice because State Farm failed to demonstrate that no prejudice was caused by the delay in bringing the motion. He also found that State Farm failed to provide a reasonable excuse for the delay in bringing the motion. Justice O’Connell awarded $40,000.00 in costs on a higher-than-partial indemnity basis because State Farm litigated in an unreasonable manner and the motion was more complicated than the average motion to amend.
Court of Appeal
The unanimous decision of the Court of Appeal was written by Justice Hourigan. In a review of the applicable legal principles, Justice Hourigan confirmed that motions for leave to amend a pleading are governed by r. 26.01 of the Rules of Civil Procedure which states that on motion at any stage of an action the court shall grant leave unless prejudice would result that could not be compensated for by costs or an adjournment. Key legal principles that were summarized by Justice Hourigan included the requirement for a causal connection between the non-compensable prejudice and the amendment, the fact that non-compensable prejudice may be actual prejudice, and that at some point the delay in seeking the amendment will be so lengthy, and the justification so inadequate, that prejudice will be presumed. Justice Hourigan also confirmed that the onus to prove actual prejudice lies with the respondent and the onus to rebut presumed prejudice lies with the moving party.
Actual prejudice
Justice Hourigan reviewed the plaintiffs’ (respondents’) claims of actual prejudice that were based on their alleged lost opportunity to fully investigate the fire and attempt to ascertain the identity of the potential suspects. They specifically claimed that they lost the opportunity to interview potential suspects, review records, review neighbourhood surveillance, and conduct forensic analysis of a broken window of the damaged property and of Mr. Spartaco’s clothing. Counsel for the plaintiffs confirmed that witnesses were still available, however, he claimed that their memories would be affected by the passage of time.
Justice Hourigan found that the plaintiffs had not suffered actual prejudice, and that the motion judge had made a palpable and overriding error of mixed fact and law in finding they had. He noted that actual prejudice requires the adduction of specific evidence of actual prejudice. He found that the potential for failing memories of witnesses was a generalized description of presumed prejudice, and lacked the requisite specificity to qualify as actual prejudice. To clarify any confusion, Justice Hourigan confirmed that evidence indicating that witnesses are no longer available would constitute actual prejudice.
With respect to the plaintiffs’ claim to have lost the opportunity to conduct forensic analysis, Justice Hourigan found that the motion judge had made a palpable and overriding error of mixed fact and law in failing to find that the prejudice does not flow from the proposed amendments and therefore lacked a causal connection. Justice Hourigan noted that the plaintiffs had been notified that there was a possibility State Farm would deny the claim based on Mr. Spartaco setting the fire, and that this warning lasted for approximately 15 months between the date of the fire and service of the Statement of Defence. As a result, Justice Hourigan found that the plaintiffs could have conducted forensic investigations to address the live arson allegation and chose not to. He concluded that the decision not to conduct the investigations was not connected to State Farm’s delay in bringing the motion to amend. Justice Hourigan confirmed that where an insured is put on notice that a claim may be denied because of arson on the part of the insured, and the insured chooses not to investigate, the insured cannot rely on its failure to investigate as an example of actual prejudice.
Presumed prejudice
After reviewing the relevant case law, Justice Hourigan noted that after inordinate and exceptional delay the presumption towards granting leave changes to a presumption that non-compensable prejudice will result if leave is granted. He noted that the presumption of prejudice is rebuttable by an adequate explanation for the delay by the moving party or evidence tendered by the moving party that there is no non-compensable prejudice. Justice Hourigan noted that the case law does not indicate when the presumption will actually shift, nor does it indicate what evidence would need to be led to rebut the onus.
Justice Hourigan upheld the motion judge’s finding of presumed non-compensable prejudice. Justice Hourigan found that the eight-year delay from the time litigation commenced to the bringing of the motion was a sufficient delay to trigger presumptive prejudice. He also noted that State Farm did not adduce any evidence indicating there was no non-compensable prejudice or provide an adequate explanation for the delay. To clarify the issue for insurance companies, Justice Hourigan advised that it is appropriate for insurers to plead and allege arson at the outset where there is positive evidence of arson and the insured is not cooperating with the investigation of the fire.
Costs
Justice Hourigan overturned the costs award. He found that there were insufficient grounds to award costs on a substantial indemnity basis, noting that a party must have engaged in egregious misconduct in a proceeding to justify a substantial indemnity cost award. He also noted that a substantial indemnity costs award must also be consistent with the reasonable expectations of the parties. Noting that the matter was only a motion to amend a Statement of Defence and was not complex, Justice Hourigan set aside the costs award and substituted an award of costs in the total amount of $20,000.00.
Application
This case serves as a reminder to all litigants that any allegations that have the potential to be proven must be pleaded at the outset to ensure that proper discovery is conducted and to avoid the need to explain away delays during motions to amend pleadings.
The case can also be used as a leading case in Ontario regarding the evidentiary requirements for actual and presumed prejudice during motions to amend pleadings as a result of Justice Hourigan’s thorough reasons.
As well, there are also specific findings within the case that are pertinent to property loss insurance claims. Specifically, that insureds cannot claim actual prejudice from a lost opportunity to investigate, if they actually had an opportunity to investigate and chose not to do it, and Justice Hourigan’s confirmation that arson can be pleaded and alleged from the outset by an insurer with positive evidence of arson and an insured that is not cooperating with an investigation.
Shane H. Katz is a lawyer with Singer Kwinter and a member of the Ontario Insurance Law Executive