Canada: It was an accident…Duty to Defend Intentional Torts in Canada

The duty to defend intentional torts under liability insurance policies continues to preoccupy Canadian courts despite two Supreme Court of Canada (SCC) decisions released in 2000, wherein the court considered the duty in the context of the tort of sexual assault. In the companion decisions of Non-Marine Underwriters, Lloyd’s of London v. Scalera and Sansalone v. Wawanesa Mutual Insurance Co., [2000] 1 S.C.R. 551, the plaintiffs alleged sexual battery, negligent battery, negligent misrepresentation and breach of fiduciary duty. The court held that insurers did not have a duty to defend insureds who were alleged to have committed the sexual battery. The court further held that the other alleged torts were derivative of sexual battery and, accordingly, there was no duty to defend those torts despite the fact that they were described as "negligent" acts.

In Scalera, Justice Iacobucci set forth a three-part test for determining whether an insurer has a duty to defend:

  1. What is the true nature of the claims?
  2. To determine the true nature of the claims the court will look beyond the mere words contained in the claim to examine the substance of the allegations.

  3. What claims, if any, are derivative?
  4. For a claim to be derivative, the alleged negligence is based on the same harm as the intentional tort.

  5. What, if any of the non-derivative claims could potentially trigger the insurer’s duty to defend?

The court must ask whether the substance of these allegations could possibly support a claim for indemnity.

Despite the clarity of the test set out by the SCC, Canadian courts continue to grapple with the defence duty in the context of a variety of intentional torts, including racial and age discrimination, assault and trespass to land.

In the recent case of Liberty Mutual Insurance Co. v. Hollinger Inc., [2004] O.J. No 481 (C.A.), the insureds were owners of the Chicago Sun Times, headed by its chairman and C.E.O, Conrad Black. The insureds were accused of intentional racial and age discrimination in allegedly orientating the newspaper towards a "white" audience and setting out to remove "Black images". The commercial general liability policy provided coverage for claims made against the newspaper for bodily injury, property damage and personal injury, including discrimination. The policy also contained an exclusion for personal injury claims arising out of "the willful violation of a penal statute or ordinance committed by or with the knowledge or consent of any Insured." Despite the apparent coverage for claims of discrimination, the Ontario Court of Appeal held that the policy language must be read and interpreted in light of the general principle of insurance that is rooted it its very nature and purpose: ordinarily, only fortuitous or contingent losses are covered by a liability policy. Therefore, where an insured intends to cause the harm that gives rise to the claim, the insured cannot look to a liability policy for indemnity.

The Court of Appeal, however, made an important distinction between intentional acts with intended consequences and intentional acts with unintended consequences. If the unintended consequences fall within the terms of the policy, they will be covered even if they result from an intentional act. In other words, for an insurer to rely on an intentional act to decline coverage, it is not enough for the act to be intentional; the consequences/harm must also be intended. In Hollinger, the Court of Appeal held that the allegations of discrimination could not be described as accidental or fortuitous. Nor could they be qualified as claims for the unintended consequences of an intentional act.

There are strong "public policy" elements in such cases. The Court of Appeal in Hollinger articulated them as follows:

On one hand, it is undesirable to indemnify those who have intentionally harmed others.

On the other hand, denying coverage may preclude recovery from a judgment-proof defendant.

While the Court of Appeal identified the public policy issues, it still decided the appeal on the basis of "fortuity" principles. It remains to be seen how other Canadian courts will balance these two competing interests.

As fall-out of the test set forth in Scalera, there is a developing practice amongst plaintiffs’ counsel to draft their clients’ claims in a manner that attempts to ensure coverage will be available under traditional policy wordings. In Morrison v. Co-operators General Insurance Co., [2004] N.B.J. No. 290 (C.A.), the insurer challenged the plaintiffs’ manipulation of the pleadings in this fashion. The plaintiffs originally claimed damages arising from a motor vehicle accident and subsequent assault suffered by the plaintiffs at the hands of the insured. Before the close of pleadings, the plaintiffs amended their claim twice to rephrase it in "negligence" language. The insurer argued that the plaintiffs amended their claim to generate insurance coverage. While the New Brunswick Court of Appeal held that the allegation of manipulated pleadings was mere conjecture, it was noted that the test set forth in Scalera was designed to protect insurers from pleadings games and abuses. In the result, courts will look at the substance of the allegations, and not just the words contained in the claim.

By way of examples, Canadian courts have held that a defence duty was owed to insureds who:

  • vandalized property, including setting small fires that resulted in a mass destructive fire;

  • were driving drunk and caused an accident resulting in personal injury; and

  • trespassed and intentionally started a fire resulting in destruction of school buildings.

On the other hand, Canadian courts have upheld the insurer’s decision not to defend the following allegations:

  • personal injury arising from the insured raising a lawnmower to threaten the plaintiff;

  • sexual battery;

  • bodily injury caused by intentional or criminal acts; and

  • racial and age discrimination.

Again, the common thread in these decisions seems to be the determination of whether the insured intended not just the act, but also the consequences. Therefore, in Canada, for purposes of determining whether there is a duty to defend an intentional tort, the insured cannot rely on the time-honoured excuse of "It was an accident…", so much as "I did not expect the outcome…".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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