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Insurance - Duty to Defend

Carneiro v. Durham (Regional Municipality) (Ont CA, 2015)

In this case the Court of Appeal made several salutory statements about an insurer's duty to defend, as follows:
[15] First, when pleadings allege facts that, if true, require the insurer to indemnify the insured, the insurer is obliged to defend the claim: Monenco v. Commonwealth, 2001 SCC 49 (CanLII), [2001] 2 S.C.R. 699, at para. 28. The mere possibility that a claim may fall within the policy is sufficient to trigger the duty to defend: Monenco, at para. 29. In assessing whether the facts pleaded fall within the policy, the court must consider the substance and true nature of the claim: Monenco, at paras. 34-36. Extrinsic evidence expressly referred to in the pleadings may be considered: Monenco, at para. 36.


[18] Second, Zurich’s policy required it to defend the action, not just the covered claims.

[19] In Hanis, this court addressed the situation where, as here, some but not all of the claims made in the lawsuit are covered by the policy, and there is an unqualified obligation in the policy to provide the defence. In that event, this court held that the insurer is required to pay all reasonable costs associated with the defence of those claims, even if those costs further the defence of uncovered claims. It added that the insurer is not obliged to pay costs related solely to the defence of uncovered claims.


[23] Third, there is no authority for Zurich’s argument that it satisfied its duty to Durham by defending Miller [SS: Miller was a snow clearance service contracted to the insured Durham]. Arguments to that effect were rejected by this court in Papapetrou v. 1054422 Ontario Limited, 2012 ONCA 506 (CanLII), 111 O.R. (3d) 532, at paras. 53-54. See also Atlific Hotels and Resorts Ltd. v. Aviva Insurance Co. of Canada (2009), 2009 CanLII 24634 (ON SC), 97 O.R. (3d) 233 (S.C.J.), at para. 21.

[24] Indeed, counsel for the respondent acknowledged that there is no authority for this position. It would render meaningless Durham’s status as an additional insured. As an additional insured, Durham has independent rights, including a right to a defence, regardless of the defence provided to the named insured. If Zurich’s position were correct, it would seldom be required to provide a defence to an additional insured because it would usually be defending the named insured against the same liabilities.

[25] Fourth, in deciding that it was not in Zurich’s best interests to defend Miller when there were both insured and uninsured claims, the motion judge gave preference to Zurich’s interests over those of the insured. That ignored Zurich’s contractual duty to defend.

[26] Fifth, and finally, we disagree with the motion judge’s conclusion that Durham was protected because it would be entitled to recover costs at the end of the litigation if it were not found liable. That misses the point. The duty to defend is a separate contractual obligation. The outcome of the trial is irrelevant to the duty to defend. The duty would be a hollow one if the insurer’s only obligation were to indemnify its insured at the end of the day. That was not the obligation Zurich undertook when it issued a policy naming Durham as an additional insured. It promised to defend Durham and it should have been held to that promise.


[27] In our view, the motion judge should have ordered Zurich to provide Durham with independent counsel, at Zurich’s expense, to defend the action in its entirety, having regard to (i) Zurich’s unqualified contractual undertaking to defend Durham; and (ii) the conflict between the interests of Durham and Miller, and between those of Durham and Zurich: see Zhou v. Markham (Town), 2014 ONSC 435 (CanLII); Day v. Wood (2008), 2008 CanLII 42425 (ON SC), 92 O.R. (3d) 438 (S.C.), at paras. 12-13, 15; Appin Realty Corp v. Economical Mutual Insurance Co., 2008 ONCA 95 (CanLII), 89 O.R. (3d) 654.

[28] At the end of the proceedings, Zurich is entitled to seek an apportionment of the defence costs, to the extent they deal solely with uncovered claims, or exceed the reasonable costs associated with the defence of the covered claims: Tedford v. TD Insurance Meloche Monnex, 2012 ONCA 429 (CanLII), 112 O.R.(3d) 144, at para. 24.

[29] In closing, we repeat this court’s observation in Halifax Insurance Co. of Canada v. Innopex, (2004), 2004 CanLII 33465 (ON CA), 72 O.R. (3d) 522, at para. 55, that the duty to defend issue must be determined expeditiously, on the basis of the allegations in the underlying litigation, read with the insurance coverage. The failure to do so in this case has undoubtedly increased the costs of the litigation and has caused delay to all parties.

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