The Ontario Court of Appeal recently advanced the discussion as to how insurers and the insureds allocate defence costs between covered and uncovered claims.
In Tedford v. TD Insurance Meloche Monnex, 2012 ONCA 249, the Ontario Court of Appeal was faced with a claim by the insured, Tedford, for a defence to be paid for by the insurer.
Significantly, the Court's decision in Tedford on this topic differed from, or at least clarified to a degree, the Court's decision in Hanis v. Teevan,  OJ No. 3909. In Tedford, there were two distinguishing features from the Hanis decision. The first was that the insured was seeking a defence at the outset of the underlying action whereas the Hanis decision on allocation of defence costs was made after the action was over. Secondly, in Hanis, the covered claims represented only a small portion of the total damages sought.
It was alleged in Tedford that the insured had made negligent misrepresentations in a Seller Property Information Statement completed in connection with the sale of his home. It was further alleged that the misrepresentations in the Seller Property Information Statement caused the Plaintiff to incur not only repair costs, but also damages for anxiety, sleep disturbance, headaches, and other symptoms of what could be described as "bodily injury".
The Tedford homeowner's policy provided coverage for not only bodily injury but also property damage. The policy in play did not provide a predetermined allocation between covered and uncovered claims and it was therefore left to the parties to determine that allocation failing which the matter would be determined by the Court.
The Court upheld the application judge's determination that a duty to defend the alleged misrepresentations fell under the bodily injury coverage. Significantly, the Court also determined that there was only one cause of action being advanced, unlike the Hanis decision, and that the one cause of action, being negligent misrepresentation, was not a derivative, but rather a direct allegation.
The Court found that the insured was essentially seeking to having the insurer assume conduct of the defence notwithstanding that the covered claims represented a small portion of the total damages claimed, unlike the Hanis case. As a result, the Court found that it would be unfair to have the insurer defend the entire action. The Court said:
... Where there is an unqualified obligation to pay for the defence of claims covered by the policy ... the insurer is required to pay all reasonable costs associated with the defence of those claims even if those costs furthered the defence of the uncovered claims. The insurer is not obligated to pay costs related solely to the defence of uncovered claims.
In the result, the Ontario Court of Appeal found that unless the parties came to a different understanding and agreement, the insurer's counsel:
... should be instructed to defend both covered and uncovered claims, in a manner commensurate with the aggregate amount claimed, and that the insureds [should] bear the costs of the defence, to the extent they exceed the reasonable costs associated with the defence of the covered claims.
In determining the reasonable costs associated with the defence of the covered claims, it is appropriate to consider the quantum of the covered claims.
It would be unfair to the insurer to fix it with defence costs that are disproportionate with the extent of its potential liability for the covered claim.
Certainly, this does advance the discussion with respect to allocation of defence costs where there is no predetermined allocation in the policy. Further, this analysis will not doubt be used in cases arising across several lines of insurance coverage.
However, a number of questions remain. For example, does this decision apply where there are multiple theories of liability that require a defence to be provided with respect to one or more of them? In Hanis, there were multiple theories of liability whereas in Tedford, there was only one theory of liability.
Further, does this decision apply only where the parties seek a determination as to allocation before the conclusion of the action, another distinguishing feature between Tedford and Hanis.
Furthermore, it appears that the basis for this decision may have been that the covered claims made up only a small portion of the total damages claimed. Where there is a less disproportionate ratio between the amount claimed for covered and uncovered claims or even when the covered claims make up a majority of the amounts claimed in the way of damages, will this decision continue to apply?
While the Court of Appeal has obviously taken steps to clarify this troubling area, there are still more questions to be answered which will likely require further cases to be litigated on the issue of allocation of defence costs for covered and uncovered claims.
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