In Lloyd's Underwriters v. Blue Mountain Log Sales
Ltd., 2015 BCSC 630, the British Columbia Supreme Court
considered whether an insurer was obligated to pay for pre-tender
defence costs, meaning defence costs that were incurred by the
insured prior to the insurer being put on notice of the claim. Blue
Mountain, insured by Lloyd's under a number of policies, was
named as a defendant in an action in Washington State. Blue
Mountain did not realize that the lawsuit might trigger coverage
under its insurance policies and did not tender its defence to
Lloyd's for nearly two years after the litigation first
During the two years from the start of the litigation to the
time of giving notice to Lloyd's, Blue Mountain incurred
defence costs, which it argued Lloyd's was obligated to pay
despite its failure to give notice to Lloyd's during that
Lloyd's took the position that under the policy Blue
Mountain had an obligation to provide timely notice, cooperate with
Lloyd's in their defence, and to not make any voluntary
payments except at its own cost.
The insurer's position was that the failure of Blue Mountain
to give timely notice of the claim was a breach of a condition
precedent and the insurer could not be responsible for defence
costs of which it was not aware. However, Lloyd's did not
seek to deny coverage entirely. Rather, they argued that
coverage for defence costs only arose at the time of notice. Timely
notice was the condition and triggering event for Lloyd's'
duty to defend the claim.
Blue Mountain argued that Lloyd's was responsible for its
pre-tender defence costs unless it could prove that its late notice
amounted to a breach of a policy condition, and that it
was not entitled to relief from forfeiture.
The court considered whether the failure to give timely notice
was merely imperfect compliance, as opposed to non-compliance with
the policy. The court held that the weight of Canadian authority
supported that a breach of a notice provision is generally treated
as imperfect compliance rather than non-compliance. Therefore, the
imperfect compliance was subject to relief from forfeiture, as per
the relevant provisions of the Insurance Act and Law
and Equity Act.
The court held that unless the late notice caused real prejudice
to the insurer, it could not avoid pre-tender expenses because,
otherwise, the insurer may avoid expenses for which it received a
premium from the Insured, effectively, "getting something for
nothing." The court held that viewing late notice as imperfect
compliance afforded an opportunity to accurately adjust the
equities between the parties.
In light of the fact that there was no real prejudice to
Lloyd's as a result of the Blue Mountain's failure to give
timely notice, the court held that Lloyd's could not avoid the
pre-tender defence costs.
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