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Insurance - Duty to Defend (2). Hemlow Estate v. Co-operators General Insurance Company
In Hemlow Estate v. Co-operators General Insurance Company (Ont CA, 2021) the Court of Appeal made a point about an insurer's duty to defend:[19] At the outset, it is important to remember that an insurer’s duty to defend arises from the claims as pleaded. McLachlin J. made this point in Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801, where she said, at p. 810:However, general principles relating to the construction of insurance contracts support the conclusion that the duty to defend arises only where the pleadings raise claims which would be payable under the agreement to indemnify in the insurance contract. ....
[24] We repeat what we said at the outset of our analysis. The existence of the duty to defend depends on the nature of the claim made: Prudential Life Insurance Co. v. Manitoba Public Insurance Corp. (1976), 1976 CanLII 1099 (MB CA), 67 D.L.R. (3d) 521 (Man. C.A.), at p. 524, cited with approval in Nichols. Here the claim made falls within the terms of the CGL policy because it is a claim for breach of contract and negligence. The duty to defend therefore arises.
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[38] In the end, it is important to recognize, as the application judge did at para. 50, that on a motion to determine if the insurer has a duty to defend the applicant will succeed if there is a “mere possibility” that a claim falls within the coverage under the policy: see Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, at para. 19. . Panasonic Eco Solutions Canada Inc. v. XL Specialty Insurance Company
In Panasonic Eco Solutions Canada Inc. v. XL Specialty Insurance Company (Ont CA, 2021) the Court of Appeal considered an insurer's duty to defend:[22] The first substantive issue is the principles governing the duty of an insurer to defend claims brought against the insured. In Monenco, the Supreme Court reviewed and restated the principles that govern the duty to defend. The first is the rule that the pleading by the claimant against the insured is what triggers the duty to defend. If the facts alleged in the pleading would, if true, require the insurer to indemnify, then the insurer has the duty to defend. The duty to defend is therefore broader than the duty to indemnify because it is triggered by the mere possibility of coverage: Monenco, at paras. 28-29. In addition, the pleadings themselves are to be interpreted broadly, with any doubt to be resolved in favour of the insured: Monenco, at para. 31. In that regard, where the claim alleges facts that might fall within coverage, the duty arises: Monenco, at para. 33. The required analysis is to determine the substance of the claim rather than merely the legal label chosen by the claimant. . Family and Children’s Services of Lanark, Leeds and Grenville v. Co-operators General Insurance Company
In Family and Children’s Services of Lanark, Leeds and Grenville v. Co-operators General Insurance Company (Ont CA, 2021) the Court of Appeal considered an insurer's duty to defend:The insurer’s duty to defend against claims
[58] Whether there is a duty to defend is determined by the allegations pleaded in the underlying lawsuit read together with the terms of coverage provided in the insurance policy. The duty to defend is broader than the duty to indemnify. An insurer has a duty to defend where, on the facts as pleaded, there is a possibility that a claim within the policy may succeed: Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801, at p. 810. The court must try to ascertain the substance and true nature of claims pleaded: Tedford v. TD Insurance Meloche Monnex, 2012 ONCA 429, 112 OR (3d) 144, at para. 14; Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, at paras. 34-35.
[59] If the pleadings allege facts which, if true, would require the insurer to indemnify the insured for a claim, the insurer is generally obliged to provide a defence, even though the actual facts may differ from the allegations in the statement of claim: Monenco, at para. 28; Alie v. Bertrand & Frère Construction Co. (2002), 2002 CanLII 31835 (ON CA), 222 D.L.R. (4th) 687 (Ont. C.A.), at para. 182.
[60] The insurer’s defence obligation is not governed by facts outside of the pleaded allegations. Courts have been cautioned against referring to extrinsic evidence that is not explicitly cited by the parties in their pleadings, for fear of making findings binding on the parties that might be contrary to the evidence tendered on the full record at trial: Monenco, at paras. 36-37.
[61] Where a loss arises from several causes, some of which fall within coverage and some of which are not covered, there is a duty to defend absent clear exclusory language denying coverage for multiple independent concurrent causes or ‘mixed claims’: Derksen v. 539938 Ontario Ltd., 2001 SCC 72, [2001] 3 SCR 398, at para. 48. This is because, as noted by Doherty J.A. in Hanis, at para. 23:I see no unfairness to the insurer in holding it responsible for all reasonable costs related to the defence of covered claims if that is what is provided for by the language of the policy. If the insurer has contracted to cover all defence costs relating to a claim, those costs do not increase because they also assist the insured in the defence of an uncovered claim. The insurer's exposure for liability for defence costs is not increased. Similarly, the insured receives nothing more than what it bargained for – payment of all defence costs related to a covered claim. [62] In the event of mixed claims, the insurer has a duty to defend against the entire claim, subject to an entitlement to recover all or an appropriate portion of their costs of the defence from the insured following the ultimate disposition of the underlying actions: St. Paul Fire & Marine Insurance Co. v. Durabla Canada Ltd. (1996), 1996 CanLII 494 (ON CA), 137 D.L.R. (4th) 126 (Ont. C.A.).
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[106] They also agreed that, should Co-operators have a duty to defend, it would be appropriate to establish a joint protocol for the management of documents and the litigation, similar to that ordered by this court in Markham (City) v. AIG Insurance Company of Canada, 2020 ONCA 239, 445 D.L.R. (4th) 405, leave to appeal refused, [2020] S.C.C.A. No. 170.
[107] The establishment of such a protocol reflects the balance between the insured’s right to a full and fair defence of the civil action and the insurer’s right to control that defence because of its potential ultimate obligation to indemnify: see Brockton (Municipality) v. Frank Cowan Co., 2002 CanLII 7392 (ON CA), 57 O.R. (3d) 447 (Ont. C.A.). It also reflects the fact that an insurer that has reserved its rights on coverage does not lose its right to control the defence and appoint counsel unless, in the circumstances, a reasonable apprehension of conflict of interest would arise if counsel were to act for both the insurer and the insured: Brockton, at paras. 39-40, 43; citing Zurich of Canada v. Renaud & Jacob, 1996 CanLII 5801 (QC CA), [1996] R.J.Q. 2160 (C.A.), per Lebel J.A.
[108] The onus is on the insured to establish such a reasonable apprehension of conflict of interest on the part of the insurer: Brockton, at para. 49; Wal-Mart Canada Corp. v. Intact Insurance Co., 2016 ONSC 4971, 133 O.R. (3d) 716; and Brookfield Johnson Controls Canada LP v. Continental Casualty Company, 2017 ONSC 5978. . Markham (City) v. AIG Insurance Company of Canada
In Markham (City) v. AIG Insurance Company of Canada (Ont CA, 2020) the Court of Appeal addressed an interesting case where two insurers were both involved in a municipality's liability for a hockey accident. The case involved respective issues of duty to defend and rights to instruct counsel:THE FIRST ISSUE: Does Lloyd’s have a Concurrent Duty to Defend?
(a) The Governing Principles
(i) The Relationship between an Insured and an Insurer
[44] The relationship between an insured and an insurer is a contractual one governed primarily by the terms of the insurance policy. The proper instrument to determine the liability of each insurer is the contract itself: Family Insurance Corp. v. Lombard Canada Ltd., 2002 SCC 48, [2002] 2 S.C.R. 695, at paras. 16-18 and Van Huizen v. Trisura Guarantee Insurance Company, 2020 ONCA 222.
[45] The language of the policy is construed in accordance with the usual rules of construction rather than inferred "expectations" not apparent on a fair reading of the document. This is particularly so in the case of commercial insurance policies involving sophisticated parties. In so doing, the insurer must explicitly state the basis on which coverage may be limited: Hanis v. Teevan, 2008 ONCA 678, 92 O.R. (3d) 594, at para. 22, leave to appeal refused, [2008] S.C.C.A. No. 504.
(ii) The Duty to Defend Claims
[46] An insurer has a duty to defend where there is a “mere possibility” that the true nature of the pleaded claim, if proven at trial, falls within coverage and would trigger the insurer’s duty to indemnify: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at para. 19.
[47] If the pleadings allege facts which, if true, would require the insurer to indemnify the insured for the claim, then the insurer is obliged to provide a defence, even though the actual facts may differ from the allegations in the statement of claim: Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, at para. 28; Alie v. Bertrand & Frère Construction Company Limited (2002), 2002 CanLII 31835 (ON CA), 62 O.R. (3d) 345 (C.A.), at para. 182, leave to appeal refused, [2003] S.C.C.A. No. 48.
[48] In Hanis, at para. 23, Doherty J.A. held that.I see no unfairness to the insurer in holding it responsible for all reasonable costs related to the defence of covered claims if that is what is provided for by the language of the policy. If the insurer has contracted to cover all defence costs relating to a claim, those costs do not increase because they also assist the insured in the defence of an uncovered claim. The insurer's exposure for liability for defence costs is not increased. Similarly, the insured receives nothing more than what it bargained for -- payment of all defence costs related to a covered claim. [Emphasis added.] [49] However, an insurer is not obligated to pay costs incurred solely to defend uncovered claims: Hanis, at para. 25.
(iii) Primary and Excess Coverage
[50] In Trenton Cold Storage v. St. Paul Fire & Marine (2001), 2001 CanLII 20561 (ON CA), 199 D.L.R. (4th) 654 (Ont. C.A.), at para. 24, this court explained the difference between primary and excess insurance. Where there is primary insurance coverage, liability attaches immediately upon the happening of the occurrence that gives rise to the liability. An excess policy, on the other hand, is one that provides that the insurer is liable for the excess above and beyond that collected on primary insurance.
[51] Determining priority for overlapping coverage requires both policies to cover the same risk. An excess policy is excess to the claims covered in the primary policy: Family Insurance, at para. 15.[52] Where there is both primary and excess insurance coverage, the limits of the primary insurance must be exhausted before the primary carrier has a right to require the excess carrier to contribute to a settlement. The remote position of an excess carrier greatly reduces its chance of exposure to a loss: Trenton Cold Storage, at para. 24, citing with approval the explanation in St. Paul Mercury Insurance Co. v. Lexington Insurance Company, 78 F. 3d. 202 (5th Cir. 1996) at footnote 23, quoting from Emscor Mfg., Inc. v. Alliance Ins. Group, 879 S.W.2d 894 at 903 (Tex. App. 1994), writ denied, at 903.
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[76] The fact that AIG has a duty to defend the City does not, by itself, excuse another insurer from its duty to defend: Unger (Litigation guardian of) v. Unger (2004), 2003 CanLII 57446 (ON CA), 68 O.R. (3d) 257 (C.A.), at para. 10. Lloyd’s also has a duty to defend.
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THE SECOND ISSUE: MUST LLOYD’S PAY THE ONGOING COSTS OF DEFENDING THE CLAIM?
(a) The Governing Principles
[78] Where two insurers have an obligation to defend the same claim, the insured is entitled to select the policy under which to claim indemnity, subject to any conditions in the policy to the contrary: Family Insurance, at paras. 14-15.
[79] However, where both insurers are responsible to defend and one is selected by the insured to assume the defence, it may be inequitable for one insurer to pay all costs and the other to pay nothing unless for example, there is no realistic chance the policy would be reached by the claim: Alie. As a result, the insurer selected by the insured to defend the claim may be entitled to contribution from all other insurers who have a concurrent duty to defend the insured.
[80] As noted by the Supreme Court in Family Insurance, at paras. 14-15:It is a well-established principle of insurance law that where an insured holds more than one policy of insurance that covers the same risk, the insured may never recover more than the amount of the full loss but is entitled to select the policy under which to claim indemnity, subject to any conditions to the contrary. The selected insurer, in turn, is entitled to contribution from all other insurers who have covered the same risk. This doctrine of equitable contribution among insurers is founded on the general principle that parties under a coordinate liability to make good a loss must share that burden pro rata. It finds its historic articulation in the words of Lord Mansfield C.J. in Godin v. London Assurance Co. (1758), 1 Burr. 489, 97 E.R. 419 (K.B.), at p. 420:If the insured is to receive but one satisfaction, natural justice says that the several insurers shall all of them contribute pro rata, to satisfy that loss against which they have all insured. [Emphasis added.] [81] Similarly, in Broadhurst & Ball v. American Home Assurance Co. (1991), 1990 CanLII 6981 (ON CA), 1 O.R. (3d) 225 (C.A.), at p. 241, leave to appeal refused, [1991] S.C.C.A. No. 55, the court held that where two insurers have a concurrent obligation to defend:[T]heir respective obligations cannot be a matter of contract. Nonetheless, their obligations should be subject to and governed by the principles of equity and good conscience, which, in my opinion, dictate that the costs of litigation should be equitably distributed between them. [82] The full and early participation of all insurers who are potentially liable promotes settlement and expedites the trial process: Alie, at para. 201. The insurers have the same interest in minimizing their exposure by conducting the best defence possible.
[83] The allocation of defence costs as among insurers who have a concurrent obligation to defend is essentially a matter of fairness as among those insurers. As such, the allocation of costs is not an exact science and an application or trial judge’s determination is owed considerable deference: Alie, at para. 235; Broadhurst, at p. 241.
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THE THIRD ISSUE: DOES AIG HAVE THE RIGHT TO PARTICIPATE IN THE DEFENCE INCLUDING THE RIGHT TO RETAIN AND INSTRUCT COUNSEL?
(a) The Governing Principles
[88] In Brockton (Municipality) v. Frank Cowan Co. (2002), 2002 CanLII 7392 (ON CA), 57 O.R. (3d) 447 (C.A.), at para. 31, this court explained that an insurer who has a duty to defend an action also has a prima facie right to control the conduct of that defence.
[89] In order to remove the insurer’s contractual right to “defend and control the defence of the litigation,” there must be a “reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer”: Brockton, at para. 43.
[90] In Brockton, at para. 43, this court held that: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.
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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. [91] Counsel defending the action should have the confidence of the insurer who is obliged to pay the legal fees and may have to pay a substantial judgment on behalf of the insured. Counsel must also meet their legal and ethical obligation to represent and protect the interests of the insured: Hoang v. Vincentini, 2015 ONCA 780, 57 C.C.L.I. (5th) 119, at para. 14; Mallory v. Werkmann Estate, 2015 ONCA 71, 330 O.A.C. 337, at para. 29.
[92] The mere fact that an insurer has reserved its rights on coverage does not cause the insurer to lose its right to control the defence and appoint counsel. The question is whether the circumstances of the case create a reasonable apprehension of conflict of interest if that counsel were to act for both the insurer and the insured in defending the action: Brockton, at paras. 39-40, 43, citing Zurich of Canada v. Renaud & Jacob, 1996 CanLII 5801 (QC CA), [1996] R.J.Q. 2160 (C.A.) at pp. 2168-69, per Lebel J.A. (as he then was).[93] The onus is on the insured to establish a reasonable apprehension of conflict of interest on the part of the insurer: Brockton, at para. 43; Wal-Mart v. Intact, 2016 ONSC 4971, 133 O.R. (3d) 716; and Brookfield Johnson Controls Canada LP v. Continental Casualty Company, 2017 ONSC 5978.
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