Can the description of the insured’s business be relied upon to limit coverage?

A recent decision from the Ontario Superior Court has shed light on the role that the description of an insured’s business operations has on liability coverage.  Harjit Virdi was the principal of Multilamps Shades Co. (“Multilamps”) and American Industrial Machines Inc. (“AIM”).  The two companies were unrelated companies but for the fact that they shared some common warehouse space and were both owned by Virdi.  Multilamps was an importer and manufacturer of lampshades, while AIM sold heavy machinery.

Multilamps was insured by Intact.  No other business was listed on the policy and AIM was not listed as an additional insured.  It would appear that AIM had no liability insurance.

On February 4, 2011, an individual was injured at the shared warehouse while using a forklift to transport lathes.  The lathes were sold in the course of AIM’s business and were entirely unrelated to the business of Multilamps.  When AIM was sued, it turned to the Intact policy for coverage.  Of note, AIM subsequently applied for and obtained insurance through Intact in November, 2011.  Intact was put on notice of the legal action on December 8, 2011.     Intact successfully applied to the court for a declaration that there was no coverage for AIM under the Multilamps policy, it having been conceded that the AIM’s “new” policy provided no coverage.  Intact argued that there was no duty to defend because the injury arose out of AIM’s business operations, which Intact did not insure.  Multilamps argued that, notwithstanding which business was insured on the policy, the duty to defend was triggered because Multilamps was an occupier  of the warehouse, and the Multilamps policy provided occupiers’ liability coverage for Multilamps.

The judge rejected Multilamps argument, finding that the allegations against AIM did not arise out of its business operations, but rather, out of the business operations of an unrelated company.  As Justice Riccheti said in his decision, “It is clear from the Declaration that what Intact was insuring was Multilamps business operations. The Policy did not cover all liability claims which might arise on the Property”.

The court’s decision supports an insurer taking the position that the description of the business in the declaration can be relied upon to circumscribe the insurance coverage available to the insured in certain circumstances.  This should not of course, be taken as a general rule.  The fact that AIM was an entirely separate company clearly factored into the judge’s analysis.  The answer may not be as clear if the named insured performed the operations.

While this decision answers some important questions, it raises others.  The obvious question is who ultimately is responsible for the description of an insured’s business operations?  While the circumstances of this case are relatively clear, one can certainly imagine cases that involve more interrelated businesses where the distinction between business operations becomes murky.  Insurers should also be wary of relying solely on an insured’s description of their business operations when issuing policies, because it is not clear with whom the consequences of an inaccurate description of business operations will lay if coverage is sought.