Duty to Defend. Carneiro v. Durham (Regional Municipality)
In Carneiro v. Durham (Regional Municipality) (Ont CA, 2015) the Court of Appeal made several salutory statements about an insurer's duty to defend, as follows:
 First, when pleadings allege facts that, if true, require the insurer to indemnify the insured, the insurer is obliged to defend the claim: Monenco v. Commonwealth, 2001 SCC 49 (CanLII),  2 S.C.R. 699, at para. 28. The mere possibility that a claim may fall within the policy is sufficient to trigger the duty to defend: Monenco, at para. 29. In assessing whether the facts pleaded fall within the policy, the court must consider the substance and true nature of the claim: Monenco, at paras. 34-36. Extrinsic evidence expressly referred to in the pleadings may be considered: Monenco, at para. 36. . OSPCA v. Sovereign General Insurance Company (Ont CA, 2015)
 Second, Zurich’s policy required it to defend the action, not just the covered claims.
 In Hanis, this court addressed the situation where, as here, some but not all of the claims made in the lawsuit are covered by the policy, and there is an unqualified obligation in the policy to provide the defence. In that event, this court held that the insurer is required to pay all reasonable costs associated with the defence of those claims, even if those costs further the defence of uncovered claims. It added that the insurer is not obliged to pay costs related solely to the defence of uncovered claims.
 Third, there is no authority for Zurich’s argument that it satisfied its duty to Durham by defending Miller [SS: Miller was a snow clearance service contracted to the insured Durham]. Arguments to that effect were rejected by this court in Papapetrou v. 1054422 Ontario Limited, 2012 ONCA 506 (CanLII), 111 O.R. (3d) 532, at paras. 53-54. See also Atlific Hotels and Resorts Ltd. v. Aviva Insurance Co. of Canada (2009), 2009 CanLII 24634 (ON SC), 97 O.R. (3d) 233 (S.C.J.), at para. 21.
 Indeed, counsel for the respondent acknowledged that there is no authority for this position. It would render meaningless Durham’s status as an additional insured. As an additional insured, Durham has independent rights, including a right to a defence, regardless of the defence provided to the named insured. If Zurich’s position were correct, it would seldom be required to provide a defence to an additional insured because it would usually be defending the named insured against the same liabilities.
 Fourth, in deciding that it was not in Zurich’s best interests to defend Miller when there were both insured and uninsured claims, the motion judge gave preference to Zurich’s interests over those of the insured. That ignored Zurich’s contractual duty to defend.
 Fifth, and finally, we disagree with the motion judge’s conclusion that Durham was protected because it would be entitled to recover costs at the end of the litigation if it were not found liable. That misses the point. The duty to defend is a separate contractual obligation. The outcome of the trial is irrelevant to the duty to defend. The duty would be a hollow one if the insurer’s only obligation were to indemnify its insured at the end of the day. That was not the obligation Zurich undertook when it issued a policy naming Durham as an additional insured. It promised to defend Durham and it should have been held to that promise.
 In our view, the motion judge should have ordered Zurich to provide Durham with independent counsel, at Zurich’s expense, to defend the action in its entirety, having regard to (i) Zurich’s unqualified contractual undertaking to defend Durham; and (ii) the conflict between the interests of Durham and Miller, and between those of Durham and Zurich: see Zhou v. Markham (Town), 2014 ONSC 435 (CanLII); Day v. Wood (2008), 2008 CanLII 42425 (ON SC), 92 O.R. (3d) 438 (S.C.), at paras. 12-13, 15; Appin Realty Corp v. Economical Mutual Insurance Co., 2008 ONCA 95 (CanLII), 89 O.R. (3d) 654.
 At the end of the proceedings, Zurich is entitled to seek an apportionment of the defence costs, to the extent they deal solely with uncovered claims, or exceed the reasonable costs associated with the defence of the covered claims: Tedford v. TD Insurance Meloche Monnex, 2012 ONCA 429 (CanLII), 112 O.R.(3d) 144, at para. 24.
 In closing, we repeat this court’s observation in Halifax Insurance Co. of Canada v. Innopex, (2004), 2004 CanLII 33465 (ON CA), 72 O.R. (3d) 522, at para. 55, that the duty to defend issue must be determined expeditiously, on the basis of the allegations in the underlying litigation, read with the insurance coverage. The failure to do so in this case has undoubtedly increased the costs of the litigation and has caused delay to all parties.
In OSPCA v. Sovereign General Insurance Company (Ont CA, 2015) the Court of Appeal considered the basic principles applicable to an insurer's duty to defend and the indemnification 'fortuity principle' (that intentionally-caused harm is not implicitly covered by liability insurance):
 The application judge commenced her analysis by noting that the pleadings govern the duty to defend and that if there is doubt as to whether there is coverage for the claims pleaded, this doubt must be resolved in favour of the insured. The mere possibility that a claim falls within the policy will suffice and, in this sense, an insurer’s duty to defend is broader than the duty to indemnify.. Mallory v. Werkmann Estate
(i) General Principles Applicable to Duty to Defend
 As noted in Geoff R. Hall, Canadian Contractual Interpretation Law, 2nd ed. (Toronto: LexisNexis Canada, 2012), at p. 203: “The interpretation of insurance policies involves a somewhat unique blend of the general principles of interpretation applicable to all contracts and special principles applicable in the insurance context.” When interpreting insurance policies, the language of the policy is the most important factor in determining whether coverage is granted or excluded; however, in addition to the language of the policy, courts should also take into account general principles of insurance law: Somersall v. Friedman, 2002 SCC 59 (CanLII),  3 S.C.R. 109, at paras. 46 and 49. The fortuity principle is one such principle and will be discussed in more detail subsequently in these reasons. Another applicable principle is that coverage provisions should be construed broadly and exclusion clauses should be construed narrowly: Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., 1993 CanLII 150 (SCC),  1 S.C.R. 252, at p. 269.
 Similarly, a body of jurisprudence has developed on the principles governing an insurer’s duty to defend. To determine whether an insurer has a duty to defend, a court must construe and examine both the wording of the contract of insurance and the substance of the pleadings in issue.
 It is important to emphasize that the duty to defend rests on the possibility that a covered claim may succeed; there is no need for certainty: Liberty Mutual Insurance Co. v. Hollinger Inc. (2004), 2004 CanLII 10995 (ON CA), 236 D.L.R. (4th) 635 (Ont. C.A.), at para. 11. Moreover, facts in a statement of claim are assumed to be true for the purpose of the coverage analysis. The true nature or substance of the claim is determinative: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33 (CanLII),  2 S.C.R. 245, at paras. 19-20.
 Where there is genuine ambiguity or doubt, the duty to defend ought to be resolved in favour of the insured: Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49 (CanLII),  2 S.C.R. 699, at para. 31.
In Mallory v. Werkmann Estate (Ont CA, 2015) the Court of Appeal briefly noted that even in a subrogated defence (ie. where the insurer appoints defence counsel for their insured defendant) then the ultimate duty of counsel is to the insured:
 Mr. Kostyniuk acknowledges that it was inappropriate to include para. 8 [SS: the trial judge's mention of insurance coverage in the judgment] in the appellant’s notice of appeal. I agree. He was appointed and paid by the insurer, but he owed a duty of loyalty and good faith to the appellant: Ernst & Young Inc. v. Chartis Insurance Co. of Canada, 2014 ONCA 78 (CanLII), 118 O.R. (3d) 740, at para. 70; Parlee v. Pembridge Insurance Co., 2005 NBCA 49 (CanLII), 253 D.L.R. (4th) 182, at para. 17.. Unifund Assurance Company v. D.E.
In Unifund Assurance Company v. D.E. (Ont CA, 2015) the Court of Appeal cited with approval the following test for determining when an insurer has a duty to defend an insured, particularly as it bears on claims sounding in negligence as opposed to intentional torts:
 In Non-Marine Underwriter, Lloyd’s of London v. Scalera, 2000 SCC 24 (CanLII), Iacobucci J. set out a three-part test for interpreting insurance policies in the context of the duty to defend and duty to indemnify. He said, at paras. 50-52:. Parkhill Excavating Limited v. Royal & Sunalliance Insurance Company of Canada
Determining whether or not a given claim could trigger indemnity is a three-step process. First, a court should determine which of the plaintiff’s legal allegations are properly pleaded. In doing so, courts are not bound by the legal labels chosen by the plaintiff. A plaintiff cannot change an intentional tort into a negligent one simply by choice of words, or vice versa. Therefore, when ascertaining the scope of the duty to defend, a court must look beyond the choice of labels, and examine the substance of the allegations contained in the pleadings. This does not involve deciding whether the claims have any merit; all a court must do is decide, based on the pleadings, the true nature of the claims.
At the second stage, having determined what claims are properly pleaded, the court should determine if any claims are entirely derivative in nature. The duty to defend will not be triggered simply because a claim can be cast in terms of both negligence and intentional tort. If the alleged negligence is based on the same intentional tort, it will not allow the insured to avoid the exclusion clause for intentionally caused injuries.
Finally, at the third stage the court must decide whether any of the properly pleaded, non-derivative claims could potentially trigger the insurer’s duty to defend.
In Parkhill Excavating Limited v. Royal & Sunalliance Insurance Company of Canada (Ont CA, 2016) the Court of Appeal reviewed principles applicable to determining when an insurer has a duty to defend the insured in litigation:
 The legal principles governing an analysis of whether an insurer has a duty to defend are well established. The insured has the initial onus of establishing that the allegations made by a plaintiff against it, if proven, would bring the claim within the insurance policy. The duty to defend is not dependent on the insured actually being liable or the insurer actually being required to indemnify. All that is required to trigger the duty is the mere possibility that a claim falls within an insurance policy: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33 (CanLII),  2 S.C.R. 245, at para. 19. In considering this question, the pleadings shall be given the widest latitude to determine whether the mere possibility of a claim within the policy exists: Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC),  1 S.C.R. 801, at p. 812. . Hoang v. Vicentini
 Once the insured has satisfied the initial burden, the onus shifts to the insurer to establish that the claim falls outside of coverage as a consequence of the operation of an exclusion clause. Exclusion clauses preclude coverage when the claim otherwise falls within the initial grant of coverage: Progressive, at para. 27.
 If the insurer can bring the claim within an exclusion, the burden then shifts back to the insured to establish that its claim falls within an exception to the operative exclusion clause. Exceptions do not serve to create coverage; they only bring an otherwise excluded claim back within coverage where the claim initially fell within the coverage: Progressive, at para. 28.
 With respect to Your Work Exclusions, the case law generally establishes that where the claim is limited to the direct costs of repairing or replacing the defective work, such exclusions apply: March Elevator Co. v. Canadian General Insurance Co., 1995 CanLII 66 (SCC),  I.L.R. 1-3227 (Ont. Gen. Div.), at para. 27, Alie v. Bertrand & Frère Construction Co., (2002) 2002 CanLII 31835 (ON CA), 62 O.R. (3d) 345 (C.A.), at para. 27. However, if consequential damage is alleged, the exclusion applies only with respect to the cost of repairing the insured’s faulty work, and there is coverage for the consequential damage: Progressive, at para. 63.
In this motor vehicle accident case, Hoang v. Vicentini (Ont CA, 2016), 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:
 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.. National Gallery of Canada v. Lafleur de la Capitale Inc.
 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. 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),  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. 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.
In National Gallery of Canada v. Lafleur de la Capitale Inc. (Ont CA, 2017) the Court of Appeal set out principles applicable to determining when an insurer has a duty to defend the insured:
13] In the present case, the application judge was required to decide whether or not Intact owed the respondent a duty to defend the Arsenault and Lafrenière actions. To determine this issue, the application judge had to undertake a detailed analysis of the pleadings, the insurance policy, including the Endorsement, and the maintenance contract, in the context of the following questions:
i. whether the plaintiffs showed that the loss at issue is covered under the terms of the policy;
ii. if the loss is covered, whether Intact demonstrated that an exclusion applies; and,
iii. if an exclusion applies, whether the plaintiffs established that there is an exception to the exclusion.
See: G & P Procleaners and General Contractors Inc. v. Gore Mutual Insurance Co., 2017 ONCA 298 (CanLII),  O.J. No. 1871, at paras. 13-14