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Insurance - Insurer's Right to Defend - Conflict of Interest

Hoang v. Vicentini (Ont CA, 2016)

In this motor vehicle accident case the court considered if and when an insurer's right to defend an indemnified insured was compromised by conflicts of interest it had with the insured:
[73] The Insurance Act states that every motor vehicle liability policy issued in Ontario shall provide that the insured appoints the insurer as its attorney to defend any action against the insured arising out of the ownership, use or operation of the automobile: Insurance Act, R.S.O. 1990, c. I.8, s. 252(1)(c). Section 3.3.1 of the standard Ontario Automobile Policy in force at the time of the accident incorporated this statutory right of the insurer. However, the right of an insurer to control the defence of any claim is not absolute: Brockton (Municipality) v. Frank Cowan Co. (2002), 2002 CanLII 7392 (ON CA), 57 O.R. (3d) 447 (C.A.), at para. 32. If a sufficient degree of divergence exists between the interests of the insurer and the insured, the insurer can be required to surrender control of the defence and pay for counsel retained by the insured.

[74] In Brockton, this court described the degree of divergence that must exist before a court can require an insurer to surrender control of the defence. Rejecting the concept of “appearance of impropriety” as a basis for depriving an insurer of its contractual right to control the defence, this court instead adopted, at para. 43, the concept of conflict of interest:
The balance is between the insured's right to a full and fair defence of the civil action against it and the insurer's right to control that defence because of its potential ultimate obligation to indemnify. In my view, that balance is appropriately struck by requiring that there be, in the circumstances of the particular case, a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer before the insured is entitled to independent counsel at the insurer's expense. The question is whether counsel's mandate from the insurer can reasonably be said to conflict with his mandate to defend the insured in the civil action. Until that point is reached, the insured's right to a defence and the insurer's right to control that defence can satisfactorily co-exist.
[75] The potential tension between insurer and insured which is manifested by a reservation of rights by the insurer is not, in itself, sufficient to require the insurer to surrender control of the defence: Brockton, citing Zurich of Canada v. Renaud & Jacob, 1996 CanLII 5801 (QC CA), [1996] R.J.Q. 2160 (C.A.). Whether a conflict exists turns, in part, on the reason why an insurer reserves its rights. In Brockton this court, at para. 42, adopted the following analysis from the Zurich case:
If the reservation of rights arises because of coverage questions which depend upon an aspect of the insured's own conduct that is in issue in the underlying litigation, a conflict exists. On the other hand, where the reservation of rights is based on coverage disputes which have nothing to do with the issues being litigated in the underlying action, there is no conflict of interest requiring independent counsel paid for by the insurer.
[76] Generally, an insured should take prompt action when it thinks appointed counsel has a conflict of interest. Where an insured is of the view that a sufficient divergence of interests with its insurer exists to justify the insurer paying for counsel retained by the insured, the insured generally moves before the court for declaratory relief to that effect at the early stages of the defence of the action. See, for example: Brockton, at para. 20; Appin Realty Corp. v. Economical Mutual Insurance Co., 2008 ONCA 95 (CanLII), 89 O.R. (3d) 654, at paras. 9 and 10.


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