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Insurance - Duty to Defend (3). BelairDirect Insurance Company v. Continental Casualty Company
In BelairDirect Insurance Company v. Continental Casualty Company (Ont CA, 2023) the Court of Appeal considered a priority/coverage ['duty to defend'] contrast between the SABS auto and the tort auto insurance regimes:[2] The Continental Casualty Company issued a policy of insurance that included third party liability coverage for the lessee/driver. BelairDirect Insurance Company (“Belair”) did not. Nonetheless, Continental contends that the application judge erred in holding that it, rather than Belair, is the priority insurer under s. 277(1.1) of the Insurance Act, R.S.O. 1990, c. I.8 (the “Act”)[1] and has a duty to defend the lessee/driver in the underlying personal injury action.
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[6] In November 2016, Mr. Sarantakos and WTH were sued for $2,100,000 (the "personal injury action") by the driver of the other vehicle involved in the accident and her husband (the “plaintiffs”).
[7] Continental appointed counsel (“Continental’s counsel”[2]) to defend the personal injury action. As a matter of course, Continental’s counsel conducted a priorities investigation to determine whether there was other insurance responsible for responding to the personal injury action.
[8] Section 277(1.1) of the Act addresses the order in which the third party liability provisions of any available motor vehicle liability policies shall respond “in respect of liability arising from or occurring in connection with the ownership or, directly or indirectly, with the use or operation of [a leased] automobile”. Section 277(1.1) requires that insurance available to a lessee or driver respond in priority to insurance available to an owner which is excess to the lessee’s or driver’s available insurance.
[9] Further, subject to certain exceptions, s. 267.12 of the Act caps the vicarious third party liability of rental car companies in respect of one incident at $1,000,000.
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[21] Like the application judge, I see no basis for drawing an analogy between priority cases decided under the SABS priority regime and the priority/coverage issues in this case. There is no similar regulation to that governing the SABS priority regime applicable to priority/coverage disputes among tort insurers and the policy implications differ. The rule applicable in the SABS context exists to ensure prompt payment of SABS benefits by preventing priority disputes from delaying payment. The urgency is less pressing in the tort context. For priority disputes relating to tort liability, the principles on which Continental sought to rely (contract, estoppel, waiver) are properly applicable. . Ontario v. St. Paul Fire and Marine Insurance Company
In Ontario v. St. Paul Fire and Marine Insurance Company (Ont CA, 2023) the Court of Appeal considered the 'pleadings rule', which sets out limits on what is to be considered when resolving an insurance 'duty to defend' application (and an exception to that rule):B. Did the Application Judge Err in considering Extrinsic Evidence?
[27] I would not find that the application judge erred, contrary to the “pleadings rule”, by considering extrinsic evidence when determining the true nature of the underlying claim. The “pleadings rule” holds that a “court may look only to the provisions of the policy and to the pleadings in the underlying action to determine whether the insurer has a duty to defend the insured”: IT Haven Inc. v. Certain Underwriters at Lloyd’s, London, 2022 ONCA 71, 18 C.C.L.I. (6th) 219, at para. 35. This rule, which ordinarily prevents courts from considering other “extrinsic evidence”, is intended to encourage expedition and to discourage factual findings that could prejudice the underlying action: IT Haven Inc., at paras. 38-39. However, there is an exception to the pleadings rule that permits courts to consider extrinsic evidence that is explicitly referred to in the pleadings in the underlying action: Monenco, at para. 36; IT Haven Inc., at para. 37. The reports critical of Ontario’s bail release system that the application judge considered fall within this exception since they were referred to in the pleadings in the underlying action. Moreover, the application judge cited these documents without making factual findings, while listing multiple passages from the pleadings that supported her characterization of the true nature of the underlying claim. Simply put, she used this extrinsic evidence without violating the pleadings rule, and without creating any of the mischief the pleadings rule is intended to prevent. I would dismiss this ground of appeal. . Ontario v. St. Paul Fire and Marine Insurance Company
In Ontario v. St. Paul Fire and Marine Insurance Company (Ont CA, 2023) the Court of Appeal sets out insurance 'duty to defend' principles, here in an ambitious class action:[12] The parties do not contest the principles that apply in a duty to defend application. They can be stated as follows:. If the pleadings allege facts which, if true, would require the insurer to indemnify the insured for the claim, the insurer is obliged to provide a defence: Monenco Ltd. v Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, at para. 28.
. If there is any possibility, based on a reasonable reading of the policy, that a claim falls within the liability coverage such that there could be coverage the insurer has a duty to defend the insured against that claim: Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551 at para. 52; Tedford v. TD Insurance Meloche Monnex, 2012 ONCA 429, 122 O.R. (3d) 144, at para. 14, citing Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801, at p. 810. “In this sense, the insurer’s duty to defend is broader than the duty to indemnify”: Monenco, at para. 29, citing Nichols at p. 810; Panasonic Eco Solutions Canada Inc. v. XL Speciality Insurance Company, 2021 ONCA 612, 466 D.L.R. (4th) 276, at para. 22. (For convenience, I will call this the “possibility of coverage test”.)
. In determining whether coverage is possible, a court must look beyond the labels used to describe the claims and ascertain the substance and true nature of the claim: Scalera, at para. 50.
. Any doubt as to whether the pleadings bring the incident [or event] within coverage ought to be resolved in favour of the insured. Coverage clauses should be construed broadly in favour of coverage, and exclusion clauses should be construed narrowly: Monenco, at para. 31; Tedford, at para. 14. Where the policy is ambiguous, effect should be given to the reasonable expectations of the parties: Tedford, at para. 14, citing Scalera, at para. 71.
. If coverage for intentional torts is excluded, there will be no duty to defend a negligence claim if the alleged negligence claim is based, in substance, on the same harm as the excluded intentional tort: Scalera, at para. 51. There will be no duty to defend the negligence claim in such a case because the negligence claim is not distinct from the intentional torts but “derivative”. . Forest Hill Fine Homes Inc. v. Heartland Farm Mutual Insurance Co.
In Forest Hill Fine Homes Inc. v. Heartland Farm Mutual Insurance Co. (Ont CA, 2023) the Court of Appeal stated with respect to the duty to defend:[11] As Rothstein J. stated in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R.245, at para. 19, “the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify. What is required is the mere possibility that a claim falls within the insurance policy.” . AIG Insurance Company of Canada v. Lloyd’s Underwriters
In AIG Insurance Company of Canada v. Lloyd’s Underwriters (Ont CA, 2022) the Court of Appeal states the insurance law of 'duty to defend', here considering whether exceptions to the standard duty-to-defend 'pleadings rule' existed for extrinsic and premature evidence:The Governing Legal Principles
[44] In Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, the Supreme Court sets out the legal principles for assessing whether an insurer’s duty to defend has been triggered. The starting premise rests on the traditional “pleadings rule” (para. 28). If the pleadings filed against the insured 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 (para. 28).
[45] Determining whether a duty to defend exists in any given situation requires an assessment of the pleadings to ascertain their substance and true nature (para. 35). The court may go beyond the pleadings and consider “extrinsic evidence that has been explicitly referred to within the pleadings … to determine the substance and true nature of the allegations, and thus, to appreciate the nature and scope of an insurer’s duty to defend” (para. 36). However, this approach cannot cause the duty to defend application to become “a trial within a trial”. The court considering the application may not look to “premature” evidence, which the Supreme Court defines as “evidence which, if considered, would require findings to be made before trial that would affect the underlying litigation” (para. 37).
[46] As this court stated in Reeb v. The Guarantee Company of North America, 2019 ONCA 862, 97 C.C.L.I. (5th) 175, at para. 6, excluding premature evidence from the application judge’s duty to defend analysis avoids turning the hearing into a “trial within a trial” on contested facts or issues best reserved to the trial judge.
Analysis
[48] Contrary to Lloyd’s submission, the application judge did apply the traditional pleadings rule in his duty to defend analysis.
[49] The application judge determined that the true nature and substance of the Forgets’ pleaded claim against the City was negligence. As required by the pleadings rule, his determination was based on the assumption that the factual allegations in the amended statement of claim are true. His reasons can be read as identifying that in the Underlying Action, the Forgets assert facts against the City which, if true, would require Lloyd’s to indemnify it for damages due to property damage caused by an occurrence during the period in which Lloyd’s provided coverage.
[50] I do not understand Lloyd’s to quarrel with the foregoing. Its quarrel is with the application judge’s treatment of the AMEC Report. It submits that, because the AMEC Report is referred to in the amended statement of claim, the traditional pleadings rule required the application judge to accept as true its contents and that he erred in failing to do so.
[51] I do not accept this submission. While the AMEC Report is referred to in the pleadings, that does not make it part of the pleadings. On a plain reading of Monenco, the AMEC Report is extrinsic evidence.
[52] Monenco defines extrinsic evidence as including “evidence explicitly referred to in the pleadings” (at para. 36). The AMEC Report is precisely that – extrinsic evidence explicitly referred to in the amended statement of claim. As extrinsic evidence, the application judge was entitled to consider the AMEC Report for the purpose of determining the substance and true nature of the allegations (at para. 36). However, because the AMEC Report was not part of the pleadings, it was not subject to the traditional pleadings rule. On a fair reading of the application judge’s reasons, his consideration of the AMEC Report comported with the permissible use of extrinsic evidence according to Monenco – it assisted in his determination of the substance and true nature of the pleadings when assessing whether Lloyd’s has a duty to defend.
[53] The application judge gave a number of reasons for not treating the AMEC Report as Lloyd’s had urged. I acknowledge that he did not use the Monenco language or lens of “premature” evidence. However, he was alive to its dictates and cited to it at para. 22 of his reasons. There, the application judge explains there is a prohibition against reliance on contested evidence since to import it “would risk the application judge having to conduct a ‘trial within a trial’ and lead to premature findings on such contested facts best left to the judge hearing the underlying trial.” In the result, the application judge did not accept that the AMEC Report was evidence of a crystallizing event such that the Exclusion Clause applied.
[54] At para. 37 of Monenco, the Supreme Court says that the court considering a duty to defend application “may not look to ‘premature’ evidence” (emphasis added). It defines “premature” evidence as evidence that would require findings to be made before trial that would affect the underlying litigation. The AMEC Report was precisely that type of “premature” evidence. Thus, rather than misapplying the law on the admissibility of extrinsic evidence, as Lloyd’s contends, the application judge’s treatment of the AMEC Report comports with the Monenco dictates.
[55] It is true that the application judge referred to the AMEC Report as “controversial” but he was not importing an additional requirement for its consideration. To the contrary, the application judge was simply acknowledging that the AMEC Report could not be used in the way that Lloyd’s urged because it would require findings to be made before trial that would affect the underlying litigation. . Demme v. Healthcare Insurance Reciprocal of Canada
In Demme v. Healthcare Insurance Reciprocal of Canada (Ont CA, 2022) the Court of Appeal considers a duty to defend issue:[40] The “pleadings rule” governs the duty to defend analysis. According to the rule, an insurer must defend if the allegations in the pleadings in the third-party action raise the “mere possibility” that a claim within the policy may succeed. As mentioned in para. 30 above, the case law has developed a three-step process to apply the pleadings rule: Barbara Billingsley, General Principles of Canadian Insurance Law, 3rd ed. (LexisNexis Canada, 2020), at Ch. 4, C.2.a. There is no dispute the motion judge followed that three-step process.
[41] While the usual duty to defend analysis considers the allegations pleaded in the statement of claim against the insured, this court has recognized that all pleadings may be considered, albeit with the most weight given to the pleadings against the insured: Keys v. Intact Insurance Company, 2015 ONCA 400, 50 C.C.L.I. (5th) 189, at para. 4. Billingsley observes that the weight of lower-court authority recognizes considering defence pleadings that include admissions of fact, such as in the present case: General Principles of Canadian Insurance Law, at Ch. 4, C.2.b. . GFL Infrastructure Group Inc. v. Temple Insurance Company
In GFL Infrastructure Group Inc. v. Temple Insurance Company (Ont CA, 2022) the Court of Appeal considered an insurer's duty to defend, which turns largely on both the insurance contract and pleadings:[23] On the first point, while a court may consider documents incorporated by reference into the pleadings to assist in determining the true nature of the claims, the court should not prematurely assess evidence and make factual findings on matters in issue in the underlying litigation, including causation. As expressed by Iacobucci J. for a unanimous court in Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, at para. 37:It should be recalled that the question whether an insurer is bound to provide defence coverage in an action taken against the insured arises as a preliminary matter. Of course, after trial, it may turn out that there is no liability on the insurer, and thus, no indemnity triggered. But that is not the issue when deciding the duty to defend. Consequently, we cannot advocate an approach that will cause the duty to defend application to become “a trial within a trial”. In that connection, a court considering such an application may not look to “premature” evidence, that is, evidence which, if considered, would require findings to be made before trial that would affect the underlying litigation. [24] The application judge cited the test from Monenco and found that the pleadings established the mere possibility that the claims fell within liability coverage. He was entitled to do so.
[25] On the second point, there is nothing in the case law to support the argument that the “mere possibility” test must be abandoned when the issue in play is an exclusion clause. On the contrary, the “mere possibility” test is the anchor for consideration in all duty to defend cases: see Monenco, at para. 29; Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, at para. 19. Indeed, the Supreme Court of Canada has stated that a corollary to the “mere possibility” test is that any exclusion must “clearly and unambiguously” exclude coverage to negate the duty to defend: Progressive Homes, at para. 51. . 1152729 BC Ltd v. Chicago Title Insurance Company Canada
In 1152729 BC Ltd v. Chicago Title Insurance Company Canada (Ont CA, 2022) the Court of Appeal considered the insurance law of 'duty to defend':[25] This court recently reviewed the principles that a court is to use in determining whether an insurer has a duty to defend a claim in Panasonic Eco Solutions Canada Inc. v. XL Specialty Insurance Company, 2021 ONCA 612, 466 D.L.R. (4th) 276, at para. 22:The first substantive issue is the principles governing the duty of an insurer to defend claims brought against the insured. In [Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699], 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. ....
[30] In Monenco, Iacobucci J. discussed the principle that the duty to defend arises from the pleadings. A number of phrases are approved in Monenco from previous Supreme Court cases and academic commentary that discuss the standard to be applied when assessing the pleadings. Iacobucci J. uses the term “a reasonable reading”: Monenco, at para. 31. McLachlin J., as she then was in Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801, stated, “the widest latitude should be given to the allegations in the pleadings in determining whether they raise a claim within the policy”: Monenco, at para. 31, citing Nichols, at p. 812. However, Iacobucci J. also cites the proposition that the court must not give a claim a “fanciful reading”: Monenco, at para. 32. . IT Haven Inc. v. Certain Underwriters at Lloyd’s
In IT Haven Inc. v. Certain Underwriters at Lloyd’s (Ont CA, 2022) the Court of Appeal cited the lower court judge's summary of 'duty to defend' law while dismissing an appeal from their ruling:[22] Referring to Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245 and Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, the application judge summarized the principles applicable to duty to defend cases:
• Insurers owe a duty to defend where there is a mere possibility that a claim falls within the insurance policy.
• In determining a duty to defend, the court should consider the allegations made against the insured and the policy language.
• The onus is on the insured to first establish the possibility that the pleadings fall within the insurance policy, at which point the onus shifts to the insurer to show that an exclusion clearly and unambiguously excludes coverage for a claim against an insured.
• Extrinsic evidence explicitly referred to within the pleadings may be considered for the purposes of ascertaining the substance and true nature of the claims.
• However, courts cannot look at “premature” evidence, or evidence which, if considered, would require findings to be made before trial that would affect the underlying litigation.
• Extrinsic evidence not mentioned in the underlying action, or not needed for the purpose of ascertaining the nature of the claim, should not be considered by the court in the duty to defend application. . IT Haven Inc. v. Certain Underwriters at Lloyd’s
In IT Haven Inc. v. Certain Underwriters at Lloyd’s (Ont CA, 2022) the Court of Appeal considers the 'pleadings rule' in a 'duty to defend' case (that the court shouldn't look beyong the pleadings). The case was complicated by an allegation by the insurer that the insured had misrepresented conditions of the policy on application:[32] The pleadings rule has been summarized as: “[w]hen the pleadings allege facts which, if true, would require the insurer to indemnify the insured in respect of the claim, the insurer must provide a defence”: Gordon G. Hilliker, Liability Insurance Law in Canada, 7th ed. (Toronto: LexisNexis Canada, 2020), at p. 111; see also Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801, at p. 810; Panasonic Eco Solutions Canada Inc. v. XL Specialty Insurance Company, 2021 ONCA 612, at para. 22. The duty to defend is therefore broader than the duty to indemnify, because it is triggered by the mere possibility of coverage: Panasonic, at para. 22, citing Monenco, at paras. 28-29.
[33] In considering whether the facts pleaded fall within the policy, the court must consider the substance and true nature of the claim: Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24 (CanLII), [2000] 1 S.C.R. 551, at paras. 50, 79; Monenco, at paras. 34-36.
[34] The pleadings must be interpreted broadly, with any doubt being resolved in favour of the insured. Where the claim alleges facts that might fall within coverage, the duty to defend arises: Panasonic, at para. 22; Monenco, at paras. 31-33.
[35] According to the rule, the court may look only to the provisions of the insurance policy and to the pleadings in the underlying action to determine whether the insurer has a duty to defend the insured: Mark G. Lichty & Marcus B. Snowden, Annotated Commercial General Liability Policy, loose-leaf (2021-Rel. 2) (Toronto: Thomson Reuters Canada Ltd., 2021), at §12:22; Monenco, at para. 28. In a typical duty to defend case, the issue can be addressed by determining whether the claim, on the face of the pleadings, “falls within” the policy coverage or is plainly excluded by the policy language.
[36] The onus is on the insured to establish that the allegations made by the plaintiff, if proven, would bring the claim within the four corners of the policy. Once that threshold is met, the onus shifts to the insurer to show that the claim falls outside the coverage provided by the policy, because of an applicable exclusion clause: Trafalgar Insurance Co. of Canada v. Imperial Oil Ltd. (2001), 2001 CanLII 21205 (ON CA), 57 O.R. (3d) 425 (C.A.), at para. 18.
[37] As with many rules, there are exceptions to the pleadings rule. One such exception permits the court to consider documents, such as contracts, expressly referred to in the pleadings in the underlying action: see Hilliker, at p. 114. Another permits the court to give effect to an exclusion clause in the policy where it clearly and unambiguously excludes coverage: Progressive Homes, at paras. 19, 51; Monenco, at para. 29. It has also been suggested that the court may consider extrinsic evidence of “underlying facts” where those facts are unrelated to, and not disputed in, the underlying action: see Hilliker, at p. 121; Lichty & Snowden, at §12:22; Craig Brown et al., Insurance Law in Canada, loose-leaf (2021-Rel. 8) (Toronto: Thomson Reuters Canada Ltd., 2021), at §18:15; 1540039 Ontario Limited v. Farmers’ Mutual Insurance Company (Lindsay), 2012 ONCA 210, 110 O.R. (3d) 116, at paras. 26, 30. This appears to be based on the proposition that there can be no prejudice to the insured in so doing.
[38] Two reasons have been identified for judicial reluctance to consider extrinsic evidence to resolve duty to defend applications at an early stage. First, as observed by the application judge, the use of extrinsic evidence to determine whether the insurer owes the insured a duty to defend could require findings of fact or the resolution of live issues in the underlying litigation. This could operate to prejudice the insured in the underlying litigation and could potentially result in inconsistent findings in the underlying litigation on the one hand, and the insurance dispute on the other. As well, the findings of fact made on the application could ultimately be “contrary to the evidence tendered on the full record at trial”: Family and Children’s Services of Lanark, Leeds and Grenville v. Co-operators General Insurance Company, 2021 ONCA 159, 457 D.L.R. (4th) 714, at para. 60, citing Monenco, at paras. 36-37.
[39] The second reason to exclude extrinsic evidence when determining whether the insurer has a duty to defend arises out of the practical need for an expeditious determination of the issue: McLean (Litigation Guardian of) v. Jorgenson (2005), 2005 CanLII 45188 (ON CA), 78 O.R. (3d) 308 (C.A.), at para. 5. It reflects a concern for fairness to the insured, who may be left stranded, without a defence to the third party’s action, while the insurer contests its liability under the policy. It has been observed that for this reason a duty to defend application should not become a “trial within a trial”: Monenco, at para. 37; Halifax Insurance Co. of Canada v. Innopex Ltd. (2004), 2004 CanLII 33465 (ON CA), 72 O.R. (3d) 522, at paras. 1, 39, 55. The reasoning continues at paras 40-58.
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