Insurer’s Obligation to Respond to Claims in Good Faith

Summary of the Nichols/Scalera/Monenco Trilogy

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  The Pleadings Rule applies to determine whether an insurer’s duty to defend is triggered
  
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  The Pleadings Rule provides that an insurer is obligated to defend a third party claim on behalf of its insured where the allegations pleaded, if proven to be true, would fall within policy coverage
  
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    The merits of the allegations are not to be considered
    
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    The duty to defend is broader than the duty to indemnify because an insurer may be responsible for defending a third party action for which, if successfully defended, the insurer will not be obliged to provide indemnity
    
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  For the purposes of the Pleadings Rule, the allegations in the pleadings are to be read generously, but with regard to the substance, or true nature, of the allegations rather than with regard to the literal wording of the pleadings
  
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  In order to determine the “true nature” of the allegations, courts should look at which of the allegations can be supported by the factual allegations in the pleadings and which allegations are merely derivative of others
  
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    Courts may also review extrinsic evidence explicitly referred to in the pleadings
    
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  Outstanding issues:
  
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    Scope of pleadings rule: appears limited to plaintiff’s statement of claim and not statement of defence
    
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      Duty to defend not dependent on statement of defence
      
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      Merits of case may be considered with statement of defence
      
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      Strategic defence contrary to duty of good faith- could find a way to manipulate the pleadings to bring them within the scope of coverage
      
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    Severability of claims
    
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      No duty to defend uncovered claims
      
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      Insurer’s liability limited to defence cost for covered claims (Sommerfield)
      
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      Potential problems re apportionment- control of litigation? Insurer may not be the one calling the shots
      
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    Inter-related claims
    
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      Severability impossible- defence of covered claims benefits uncovered claims
      
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      Apportionment of defence cost in inter-related claims- should the insurer pay defence cost for covered claims, ignoring the collateral benefit for uncovered claims?
      
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        Allocation depends on contractual obligation as per policy terms, not fair & equitable allocation (Hanis v. Teevan)
        
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        No apportionment between covered and uncovered claims- insurer liable for entire defence cost in accordance with contract- irrelevant defence of covered claims benefits uncovered claims (Hanis v. Teevan)
        
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        Where distinguishable, insurer’s liability limited to defence cost for covered claims
        
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    Multiple liability coverage
    
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      Allegations against insured covered by multiple policies- concurrent duty to defend for all insurers whose policy is engaged in the circumstances
      
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      Each insurer contributes to defence costs- irrelevant policy primary or excess
      
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      Irreleveant duty to indemnify under excess may not be triggered
      
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      If there is no contract re apportionment of defence costs between insurers then apportionment must be fair and just in the circumstances and not necessarily correlate with policy limits (Broadhurst & Ball)
      
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      Which insurer defends if they both want to? Usually primary insurer, but should be the insurer with the greatest risk of loss (Economical Mutual Insurance v. ICBC)
      
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        If the excess insurer is at a greater risk of loss, still must consult primary insurer
        
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      Auto insurance: court must determine insurer to defend as it considers proper in the circumstances (BCI(V)A s. 79)
      
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      Insurance Bureau of Canada Agreement of Guiding Principles:
      
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        Primary insurer conducts claim- advises named insured to notify excess insurer if the claim is likely to exceed the limit of the primary policy
        
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          But should be in full consultation with excess insurer
          
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        Excess insurer may request to be part of investigation and defence- if they so request, excess insurer shares equally with primary insurer all costs associated with claim regardless of the final outcome
        
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  Auto Insurance
  
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    Proportionate share based on liability for damages awarded against insured or settlement on their behalf (BCI(V)A s. 79(5)
    
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      So if claim was for 2 million and primary pays 500k, primary would be liable for 25% of defence costs and excess insurer for 75%
      
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      79(5): If insurance is provided to the insured under more than one optional insurance contract or under the plan and one or more optional insurance contracts and one or more of them are excess insurance, the insurers must, as between themselves, contribute to the payment of costs, expenses, interest and reimbursement in accordance with their respective liabilities for (a) damages awarded against the insured, or (b) the amount payable under a settlement made on behalf of the insured
      

Sommerfield v. Lombard Insurance Group (SCC 2005)

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  Former student brought an action against applicants (teachers) alleging that each applicant independently sexually abused the student, and that the applicants were professionally negligent
  
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  Applicants were insured under a policy which excluded coverage for bodily injury caused intentionally by or at the direction of the insured
  
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  Held:
  
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    The claim of professional negligence is not exempted from coverage under the insurance policy- it would be open to the triers of fact to find any of the applicants not liable for the intentional tort of sexual battery and yet to find that applicant liable for failing to report the sexual abuse of the other teachers
    
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    Respondent had no duty to defend the sexual assault claim, but the negligence claim was properly pleaded and was not derivative of the sexual abuse claim
    
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      Negligence claim triggered the respondent’s duty to defend because it was a separate and distinct cause of action
      
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    To require the respondent to pay for the entire defence would be unfair because almost the entire claim dealt with the allegations of sexual abuse- the respondent was ordered to pay 20% of the legal fees of each applicant
    

Hanis v. Teevan (ONCA 2008)

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  Plaintiff was awarded wrongful dismissal charges against Western, but his claim for malicious prosecution was not successful- Western had comprehensive general liability policies with Guardian
  
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  Held:
  
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    Cannot read Sommerfield etc. to mean that there must be an allocation of defence costs as between the insurer and insured in all cases where covered and uncovered claims based on different factual allegations are advanced in the same lawsuit
    
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      The nature and extent of the insuerer’s obligation to pay defence costs is not a question of fairness or unfairness- it is a question of what the insurer has agreed to do in the policy
      
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    The malicious prosecution claim was covered and that coverage triggered Guardian’s duty to defend and its obligation to pay defence costs associated with the malicious prosecution claim- on a plain reading of the relevant part of the policy, Guardian was responsible for all costs associated with the defence of the malicious prosecution claim
    
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      Nothing in the policy exempts Guardian from paying those costs simply because they also assisted Western in the defence of uncovered claims
      
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      The policy made it clear that Guardian had a duty to defend all claims associated with coverd risks, regardless of whether the defence would also assist in the defence of uncovered claims
      

Broadhurst & Ball v. American Home Assurance Co (ONCA 1990)

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  Plaintiffs obtained professional liability insurance from two separate insurers
  
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    American Home provided standard primary professional liability coverage to a limit of $500,000 per occurrence to all lawyers practicing in Ontario, including the plaintiffs
    
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    In addition, the plaintiffs purchased excess professional liability coverage to a limit of $9,500,000 per loss from Guardian Insurance
    
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    An action claiming $20 million in damages was commenced against the plaintiffs and others alleging conspiracy, breach of fiduciary duty and negligence
    
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    American Home acknowledged its obligation to defend the action on the plaintiff’s behalf, but Guardian denied duty to defend, saying that the plaintiffs were aware of the claim when they applied for the Guardian policy
    
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  Held: American Home and Guardian have concurrent obligations to defend, and therefore Guardian should pay a proper share of the costs of defence- American Home should be able to compel such payment
  
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    To require a primary insurer whose financial exposure is significantly less than that of the excess insurer to bear the entire burden of defending an action is patently inconsistent with the principles of equity and good conscience, as is allowing an excess insurer to deny responsibility for costs which it ought in good conscience to pay
    
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    Not appropriate to allocate costs simply by reference to respective policy limits- in this case, most fitting to apportion the costs equally between the parties
    

Economical Mutual Insurance Co v. ICBC (ABQB 1986)

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  Question was which insurer was entitled to defend two actions for damages for personal injuries suffered by the plaintiffs as a result of a motor vehicle accident
  
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  Third party liability limit under Economical policy was $300,000 and under ICBC policy was $1 million- Economical was the primary insurer
  
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  Clearly the insurer who carries first loss insurance bears the first risk of loss and should be required to assume the first or primary obligation to defend to the extent of the limits of its coverage
  
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  But who should have control and carriage of the proceedings?
  
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    If the insurers are unable to agree who is to defend, the court must choose between first loss and excess insurer- seems reasonable that the insurer who has the greater risk of loss is entitled to defend
    
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      This would usually be the first loss insurer, but in this case it is ICBC
      

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