Insurance Claim Litigation: 1588444 Ontario Ltd. v. State Farm
*1588444 Ontario Ltd. v. State Farm Fire and Casualty Co. 2017 ONCA 42
Civil procedure — Costs — Substantial indemnity costs — Defendant moving unsuccessfully to amend statement of defence years after commencement of litigation — Defendant’s delay in bringing motion not amounting to egregious misconduct which warranted award of costs on substantial indemnity basis.
Civil procedure — Pleadings — Amendment — Insured premises destroyed as result of arson — Insurer putting insured on notice within days of fire that it might deny coverage on basis that insured had set fire — Insured commencing action in 2007 for indemnification under policy — Insurer defending on basis that insured had not co-operated with fire investigation — Motion judge dismissing motion by insurer in 2015 to amend statement of defence to assert defence that fire was set by or at direction of insured — Motion judge erring in finding that pro- posed amendment would cause actual prejudice to insured — Motion judge not erring in finding that insured had failed to rebut presumption of prejudice which arose from inordinate delay.
The plaintiffs’ restaurant was destroyed by a deliberately set fire in June 2006. Within days of the fire, the defendant insurer put the plaintiffs on notice that it might deny coverage on the basis that the plaintiffs had set the fire. The plaintiffs commenced an action in 2007 for indemnification under the policy. In its statement of defence, the defendant did not plead that the plaintiffs were responsible for the fire. Rather, it defended on the basis that the plaintiffs had not co-operated with the fire investigation. In January 2015, the defendant brought a motion to amend its statement of defence to abandon the defence of non-co-operation and to assert a defence that the fire was set by or at the direction of the plaintiffs. The motion judge dismissed the motion, holding that the plaintiffs would suffer both actual and presumed non-compensable prejudice if leave to amend were granted. He awarded costs against the defendant on a substantial indemnity basis on the ground that the defendant had acted unreasonably in bringing its motion to amend. The defendant appealed.
Held, the appeal should be allowed in part.
The motion judge made a palpable and overriding error of mixed fact and law in concluding that the plaintiffs had met their onus of proving actual prejudice. The plaintiffs were put on notice within days of the fire that there was a possibility that the defendant might deny coverage on the basis that the plaintiffs deliberately set the fire. That potential was alive during the course of the approximately 15 months between the date of the fire and the service of the statement of defence. Had the plaintiffs wished to protect themselves from an allegation that they were responsible for the fire, they could have taken steps to conduct their own forensic investigation. The plaintiffs could not rely on their failure to investigate as an example of actual prejudice, as their decision not to investigate was unrelated to any delay by the defendant.
At a certain point after an exceptional delay, non-compensable prejudice will be presumed absent evidence to the contrary. The motion judge did not err in finding that there was presumed non-compensable prejudice that had not been rebutted. The defendant did not adduce any evidence to establish that the plaintiffs would not suffer prejudice by reason of the amendment. Moreover, the defendant could have pleaded at the outset, or very early on in the litigation, that the plaintiffs were responsible for the fire, and it had not pointed to any specific information discovered during the course of the litigation that it relied upon in support of its new defence.
While the defendant’s conduct in delaying bringing the motion was not ideal, it did not amount to the kind of egregious misconduct that would warrant an award of costs on a substantial indemnity basis. An award of costs on a substantial indemnity basis was also inconsistent with the reasonable expectations of the parties. The costs award should be varied accordingly.
(a) Legal principles
Motions for leave to amend a pleading are governed by rule 26.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, which provides:
26.01 On motion at any stage of an action the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.
The law regarding leave to amend motions is well developed and the general principles may be summarized as follows:
The rule requires the court to grant leave to amend unless the responding party would suffer non-compensable prejudice; the amended pleadings are scandalous, frivolous, vexatious or an abuse of the court’s process; or the pleading discloses no reasonable cause of action: Iroquois Falls Power Corp. v. Jacob Canada Inc.,  O.J. No. 2642, 2009 ONCA 517, 75 C.C.L.I. (4th) 1, at paras. 15-16, leave to appeal to S.C.C. refused  S.C.C.A. No. 367, 2010 Car- swellOnt 425; and Andersen Consulting Ltd. v. Canada (Attorney General),  O.J. No. 3576, 150 O.A.C. 177 (C.A.), at para. 37.
The amendment may be permitted at any stage of the action: Whiten v. Pilot Insurance Co. (1996), 27 O.R. (3d) 479,  O.J. No. 227 (Gen. Div.), vard (1999), 42 O.R. (3d) 641,  O.J. No. 237 (C.A.), revd  1 S.C.R. 595,  S.C.J. No. 19, 2002 SCC 18.
There must be a causal connection between the non- compensable prejudice and the amendment. In other words, the prejudice must flow from the amendments and not from some other source: Iroquois, at paras. 20-21; and Mazzuca v. Silvercreek Pharmacy Ltd. (2001), 56 O.R. (3d) 768,  O.J. No. 4567 (C.A.), at para. 65.
The non-compensable prejudice may be actual prejudice, i.e., evidence that the responding party has lost an opportunity in the litigation that cannot be compensated as a consequence of the amendment. Where such prejudice is alleged, specific details must be provided: King’s Gate Developments Inc. v. Drake (1994), 17 O.R. (3d) 841,  O.J. No. 633 (C.A.), at paras. 5-7; and Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1995), 25 O.R. (3d) 106,  O.J. No. 2220 (Gen. Div.), at para. 9.
Non-compensable prejudice does not include prejudice resulting from the potential success of the plea or the fact that the amended plea may increase the length or complexity of the trial: Hanlan v. Sernesky,  O.J. No. 4049, 95 O.A.C. 297 (C.A.), at para. 2; and Andersen Consulting, at paras. 36-37.
At some point, the delay in seeking an amendment will be so lengthy, and the justification so inadequate, that prejudice to the responding party will be presumed: Family Delicatessen Ltd. v. London (City),  O.J. No. 669, 2006 CanLII 5135 (C.A.), at para. 6.
The onus to prove actual prejudice lies with the responding party: Haikola v. Arasenau (1996), 27 O.R. (3d) 576,  O.J. No. 231 (C.A.), at paras. 3-4; and Plante v. Industrial Alliance Life Insurance Co. (2003), 66 O.R. (3d) 74,  O.J. No. 3034 (Master), at para. 21.
The onus to rebut presumed prejudice lies with the moving party: Family Delicatessen, at para. 6.
*source: Ontario Reports