Commercial general liability (CGL) insurance policies are primarily used to provide financial protection to an insured party in the event that it is sued by a third party. CGL policies result in the insurer assuming two obligations towards the insured:
- The insurer's "duty to defend" the insured which requires the insurer to pay and instruct legal counsel in defending a claim against the insured.
- The insurer's "duty to indemnify" the insured which requires the insurer to pay for any judgment or settlement costs that have been awarded against the insured.1
When are the duties triggered?
Traditionally, insurers are only required to indemnify the insured for claims and damages which fall under the coverage provided in the insured's insurance policy. As a result, the insurer's duty to indemnify is not typically triggered until a legal action has been concluded.2
In contrast, the insurer's duty to defend is activated at the outset of a legal action.3 This was established in the 1990 Supreme Court of Canada case, Nichols v American Home Assurance.4 As determined in Nichols, the duty to defend would be activated if any of the facts within the pleadings (assumed to be true) would result in the insurer having to indemnify the insured. The Court in Nichols also explained that it was not necessary to prove that an insurer's duty to indemnify would be enforced for certain. Instead, the "mere possibility that a claim within the policy may succeed"5 is sufficient to activate the insurer's duty to defend the insured. As a result, it is possible for an insurer to have a duty to defend the insured without having a duty to indemnify. However, it is not possible for the insurer to have a duty to indemnify the insured without having the duty to defend.
...the final step is to evaluate whether the allegations are covered by the insurance policy. |
The rule in Nichols was further clarified in the 2000 Supreme Court of Canada case, Non-Marine Underwriters, Lloyd's of London v Scalera.6 In Scalera, the Court decided that it was not only the language in the pleading that would give rise to the insurer's duty to defend. Rather, the activation of the insurer's duty to defend should be dependent on the "true nature of the claim",7 based on the pleadings. Once the Court has ascertained the true nature of the claims being pleaded, the final step is to evaluate whether the allegations are covered by the insurance policy.
Issues
Have recent developments increased the scope of the insurer's duty to defend and indemnify?
- An insurer's duties to additional insureds;
- An insurer's duties in a situation involving a conflict of interest;
- An insurer's duties in a situation involving breach of contract.
Analysis
Yes. Recent case law developments have increased the scope of an insurer's responsibility regarding their duty to defend and indemnify an insured. This increased responsibility can be observed in three situations:
A. An insurer's duties to an additional insured
Two recent cases clearly outline the obligations of an insurer that provides coverage to an additional insured.
In Carneiro v Durham,8 the Ontario Court of Appeal decided that the insurer had a duty to provide a full defence to the additional insured. This was a reversal of the motion judge's initial decision dismissing the additional insured's request for a full defence.
Carneiro involved a motor vehicle accident. The driver lost control of his car on a patch of ice and died. The driver's family commenced an action against Miller Maintenance Limited ("Miller") and the Regional Municipality of Durham ("Durham"). Durham and Miller cross-claimed against each other.
Durham had contracted Miller to maintain the area of the road where the accident occurred. Miller's responsibilities included plowing, sanding, and salting this area of the road. The contract between the two parties required Miller to obtain an insurance policy with coverage for third party bodily injury and property liability and to list Durham as an additional insured. This insurance policy was provided by Zurich Insurance Company Ltd. ("Zurich"). Durham advanced a third party claim seeking a declaration that Zurich would pay for Durham's independent counsel of choice, provide Durham with a full defence and indemnity for any costs for which it may be liable. Some of the allegations against Durham were not covered by the insurance policy. As a result, Zurich's position was that it did not have a duty to defend Durham. Zurich also asserted that by defending Miller it was also protecting Durham from liability arising from Miller's negligence.
Two recent cases outline insurer obligations... |
Two recent cases outline insurer obligations providing coverage to additional insured:
- The Court decided that Zurich's duty to defend Durham was clearly triggered in the pleadings. The Court reiterated that the duty to defend only required the mere possibility that a claim would be covered by the insurance policy to be triggered.
- The Court explained that the duty to defend is an unqualified obligation to an insured. As a result, an insurer is obligated to defend the insured for the entirety of the action and not only for the claims that are covered within the policy.
- The Court rejected Zurich's argument that it was protecting Durham by defending Miller, as this would make Durham's rights as an additional insured trivial.
- The Court found that the motion judge gave preference to Zurich's best interests over Durham's when it decided that Zurich did not have the duty to defend Durham. The Court found that this initial decision overlooked Zurich's contractual obligation to provide Durham with a defence.
- The Court explained that the duty to defend was a contractual obligation on its own that would not be fulfilled by the recovery of costs after the proceeding had concluded.9
In order to ensure that it was not covering the cost of claims not covered by the policy, Zurich had the right to seek apportionment of the defence costs to the extent that they dealt only with claims not covered by the insurance policy.
Seidel v Markham10 is a slip and fall case. The plaintiff had slipped on Markham's property. Markham had contracted with V.T.A. Construction Ltd. ("V.T.A.") for winter maintenance services. The contract between the two parties required V.T.A to obtain an insurance policy and name Markham as an additional insured. V.T.A.'s insurance policy was provided by Intact. Markham commenced a third party claim seeking contribution and indemnity from V.T.A. and full defence and indemnity from Intact. Mr. Persaud was Markham's independent counsel at the start of the legal proceedings. V.T.A. was later added as a defendant to the action.
It was eventually decided that the legal counsel representing V.T.A., the firm Benson Percival Brown LLP ("BPB"), would take over representation for Markham as well. Mr. Persaud attempted to have an Assumption of Defence agreement signed by BPB. BPB stated that this agreement would not be executed by Intact. Instead, BPB would provide Mr. Persaud with a notice of change of lawyers. Mr. Persaud asserted that the agreement did not have to be signed as long as there was consensus that Markham would be indemnified for any costs resulting from the allegations against it. The notice of change of lawyers was received the following day. BPB represented Markham for 16.5 months. This included representation at examinations for discovery. BPB eventually removed itself from the record. Markham brought a motion seeking to enforce Intact's duty to defend and indemnify Markham in the proceeding. The motions judge dismissed Markham's motion. The motions judge decided that there was no "meeting of the minds"11 in regards to the agreement for Intact to indemnify Markham.
The Ontario Court of Appeal reversed the motions judge's decision. |
The Ontario Court of Appeal reversed the motions judge's decision. Intact was ordered to indemnify Markham for damages and costs awarded against Markham in the slip and fall proceeding. Intact was also required to provide and pay for defence counsel for Markham.
In its reasoning, the Court explained:
In its third party claim, Markham claimed both a defence and indemnification from Intact. Intact had three choices. It could have denied both obligations, in which case Markham would have been on its own in the action. It could have resisted the claim for indemnification but accepted the obligation to defend, assuming the cost of Markham's defence by different counsel. Or it could have accepted the obligation to defend and indemnify. The first two options would recognize that Markham and V.T.A continued to be adverse in interest in the main and third party action. The third would mean that their interests were aligned or the same.12
The Court explained that by appointing the same legal counsel to represent both parties, Intact's agreement to defend and indemnify Markham was clear. The Court stated that if this was not the case, BPB would have been in a very apparent conflict of interest.
B. An insurer's duties in a situation of conflict of interest
In the recent application, The Corporation of the City of Markham v Intact Insurance Company,13 the Ontario Superior Court affirmed the municipality's right to appoint and instruct the legal counsel of their choice. This was in the context of a conflict of interest between a contractor and a municipality.
Markham v Intact was a slip and fall case. Markham had contracted winter maintenance services to V.T.A. Construction Ltd ("V.T.A."). V.T.A.'s responsibilities included plowing, sanding, and salting sidewalks. V.T.A possessed an insurance policy with Markham named as an additional insured. This policy was provided by Intact. The policy included an unqualified obligation to defend Markham against any claims falling under the coverage of the policy.
The plaintiff in the action filed a claim against both Markham and V.T.A. for her injury incurred on February 24, 2014. Intact provided V.T.A. with a full defence, however, it denied its duty to provide Markham with a defence. Intact's position was that the allegations against Markham were not covered under the insurance policy. This was because V.T.A. was not asked to service the sidewalks in Markham on the date of the plaintiff's loss. V.T.A.'s services had been requested every day from February 18-22, 2014. V.T.A. filed a cross-claim against Markham.
Markham brought forward an application requesting a declaration that Intact was obligated to defend Markham for all allegations made against it; an Order that Markham was able to appoint and instruct the counsel of its choice, paid for by Intact; and an Order requiring Intact to compensate Markham for all past costs related to defending the action.
The Court referred to the reasoning in Carneiro and decided that Intact had a duty to defend Markham. The Court determined that the plaintiff's allegations of negligence against Markham and V.T.A. were identical and pertained not only to the date of loss but also the days preceding it. The Court explained it was irrelevant that some of the allegations were not covered by the insurance policy since the insurer's duty to defend was unqualified. The Court also found a clear conflict of interest existed between V.T.A. and Markham. As a result, the Court stated Markham was entitled to choose and instruct the legal counsel of its choice. The Court ordered Intact to pay for this separate legal counsel. The Court acknowledged certain claims against Markham within the pleadings were not covered by the insurance policy. However, it stated "there are no practical means of distinguishing the covered and uncovered claims and Intact ought to assume the costs of the City's defence in their entirety."14 As a result, the Court ordered Intact to fully indemnify Markham for all costs related to the defence of the action, as well as the costs for the application.
C. An insurer's duties in a situation of breach of contract
In the recent motion brought forward in Bentley v Hastings (County),15 the Ontario Superior Court ordered an insurer to fully indemnify a municipality after the contractor failed to name the municipality as an additional insured under its CGL policy.
Bentley v Hastings (County) involved two slip and fall cases. In both of these cases, the plaintiffs commenced an action against the Corporation of the Town of Hastings, the Hastings Local Housing Corporation (together the "County"), and Steve Walt Property Maintenance (the "contractor"). Economical Mutual Insurance, the contractor's insurer, was a third party in both of the proceedings. The contract between the County and the contractor required the contractor to obtain third party liability insurance and name the County as an additional insured. The contractor obtained an insurance policy for itself but failed to name the County as an additional insured. As a result, the motions judge found that the contractor breached the contract between itself and the County. The motions judge determined that the appropriate remedy for this breach would be for the County to be fully defended and indemnified, as this is what would have been provided to the municipality if it had been named an additional insured under the contractor's insurance policy. As a result, the contractor was required to pay for the County's past and future defence costs incurring from the main proceeding. The motion judge also allowed the County to appoint and instruct the counsel of its choice, paid for by the contractor.
Conclusion
The scope of an insurer's responsibility regarding the duty to defend and indemnify has increased. This increased responsibility can be observed with respect to an insurer's duties to an additional insured, an insurer's duties in a situation involving a conflict of interest, and an insurer's duties in a situation involving a breach of contract.
The recent case law developments described above have affirmed:
- The duty to defend is triggered at the mere possibility of an allegation within a pleading giving rise to an insurer's duty to indemnify.
- The duty to defend is a distinct contractual obligation to an insured that is to be abided by from the outset of a legal proceeding. If triggered, the insurer has a duty to defend an insured in the entirety of an action and not just against claims that are covered within the insurance policy.
- The duty to defend does not discriminate against additional insureds. To accept the argument that an additional insured is protected through the defence of only the insured would be to trivialize the rights of an additional insured under the insurance policy.
- In a situation involving a conflict of interest, an insured may be permitted to appoint and instruct independent legal counsel of their choice at the expense of the insurer, without having to report to the insurer.
- In a situation where an insured has breached a contract and failed to name a party as an additional insured, full indemnity and defence has been ordered.
1 Barbara Billingsley, General Principles of Canadian Insurance Law, 1st ed, Student ed, Lexis Nexis, at 233. See also: MB's paper "The Mechanics of the Duty to Defend" (2016)
2 Ibid at 234.
3 Ibid.
4 [1990] 1 SCR 801 [Nichols].
5 Ibid at para 17.
6 2000 SCC 24 [Scalera].
7 Ibid at para 79.
8 2015 ONCA 909.
9 Ibid at paras 14-26.
10 2016 ONCA 306.
11 Ibid at para 6.
12 Ibid at para 11.
13 2017 ONSC 3150 [Markham v Intact].
14 Ibid at para 60.
15 2017 ONSC 2980.
