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Court holds there is no duty to defend when policy limits are exhausted

Michael Kennedy
Michael Kennedy

March 2011

By Michael Kennedy, Partner
Published first in CLC's Transportation Newsletter

In Dominion of Canada v. Kingsway,1 the Ontario Superior Court of Justice addressed an insurer's duty to defend in cases where an insured's policy limits have been exhausted. The facts were such that a defendant's policy limits of $200,000.00 were offered and accepted at mediation on the condition that a plaintiff with Family Protection coverage through Dominion could pursue her underinsured claim against her own insurer. Dominion would then receive an assignment of the judgment and could pursue the defendant personally for contribution.

Having exhausted the defendant's policy limits, the defendant's lawyer attempted to be removed from the record. Dominion opposed the motion and argued that the policy was clear in its wording that a defence must be provided where it says "we will hire lawyers at our expense and cover all costs of your defence in court" (see: section 3.3.2 Ontario Automobile Policy). However, the policy also states that the insurer has an unfettered right to settle up to the policy limits at its sole discretion. Further, section 3.3.1 of Ontario Automobile Policy states that if the insured is sued for more than the limits of the policy, the insured may wish to hire at their own costs a lawyer to protect themselves against additional risk. As such, Kingsway argued in response that it no longer had a duty to defend its insured since 100% of its policy had been paid.

Justice Arrell reviewed the case law and held that Kingsway did not have a duty to defend. In citing the Supreme Court of Canada decision of Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada,2 Justice Arrell emphasized that "an insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim". Justice Arrell also reviewed the policy wording and found that "there is nothing in the Ontario Automobile Policy obligating an insurer to continue to defend an insured when it has paid its limits and costs in full". As such, the court held that Kingsway did not have a duty to continue defending its insured.

This decision stands for the principle that insurers that pay policy limits and have no possibility of a duty to indemnify have no duty to defend their insureds. To hold otherwise, in the words of Justice Arrell, would be "illogical and fly in the face of encouraging primary insurers to enter into timely resolution of cases".

1 2011 ONSC 1249 (CanLII).
2 [2010] S.C.J. No. 33.


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