Canada: Insurers Have To Explain The Basis For Denial Of Coverage; But What About Privilege?

In the July 29th, 2015 decision in Lica v. Dhaliwal, Price J ordered that State Farm, the insurer of the Defendants provide the reasons and basis for the denial of coverage. State Farm insured the Defendants in this action. However, State Farm denied coverage and added itself as a statutory third party in the action. However, State Farm did not provide detailed reasons for the denial of coverage. The Court was to determine the following issues:

  1. Are the Plaintiff's questions to State Farm relevant to the action
  2. Is State Farm required to answer the Plaintiff's questions
  3. Is State Farm required to deliver an affidavit of documents

The Plaintiff brought a motion stating he required State Farm's reasons for denial:

  1. To enable him to claim underinsurance coverage from his own insurer Intact Insurance Company pursuant to the OPCF 44R endorsement to his insurance policy from Intact
  2. For Intact to assess its potential liability and make an informed decision re: reserves in relation to this action

The Plaintiff had asked questions via written interrogatories regarding the denial of coverage by State Farm, which State Farm refused to answer.

The Plaintiff was involved in a motor vehicle accident on March 7th, 2011 and alleges that the Defendants' vehicle T-boned his vehicle. The Defendants did not defend the action and were noted in default.

State Farm denied coverage for the following reasons:

  1. A material representation
  2. Lack of cooperation by the Defendants

When State Farm was added as a Statutory Third Party, the coverage applicable was reduced to $200,000.00, the statutory minimum. When State Farm denied coverage, the Plaintiff amended the Statement of Claim to add his own insurer Intact. Intact's position was that it would be liable only if the Plaintiff's claim exceed State Farm's policy limits. Intact sent a letter to State Farm's lawyer confirming that the underinsured coverage would not be triggered until there was a legal determination confirming State Farm's denial of coverage and reduced policy limits.

The examination for discovery of State Farm was scheduled but the State Farm representative did not attend. State Farm refused to answer the written interrogatories that dealt with the denial of coverage to its insured. State Farm relied on the 2010 decision in Ahmed v. Maharaj. Which stated:

"as a general rule, issues of liability and insurance coverage therefore are to be kept separate (see: Gordon v. Pendleton, O.J. No. 3664) ....[a]ccordingly, an insurer added as a statutory third party should not be required to define or explain its position regarding any coverage issues in examination for discovery by other parties to the proceedings."

Price J then examined the applicable rules in the Rules of Civil Procedure

Rule 31.06 (4) and (5) govern the scope of examination of a party in relation to an insurance policy. Those sub-rules provide:

31.06 (4) A party may on an examination for discovery obtain disclosure of,

(a) the existence and contents of any insurance policy under which an insurer may be liable to satisfy all or part of a judgment in the action or to indemnify or reimburse a party for money paid in satisfaction of all or part of the judgment; and

(b) the amount of money available under the policy, and any conditions affecting its availability.

(5) No information concerning the insurance policy is admissible in evidence unless it is relevant to an issue in the action.[14]

Price J held that

Mr. Lica can access his insurance coverage under his OPCF 44R endorsement only if it is determined that State Farm was legally justified in denying coverage to its insured. State Farm's refusal to answer the questions it was asked in this regard prevents the court from making this determination, and may affect Mr. Lica's ability to be fully compensated for the losses he says he has suffered.

Most of the questions that State Farm has refused to answer are based on documents that it listed in Schedule "A" of its draft affidavit of documents. By listing these documents in Schedule "A", State Farm acknowledges that the documents, and the subject matter to which they pertain, are relevant to the action.

Price J. then considered the Court of Appeal's decision from 2011 in Maccaroni v. Kelly.

The Court of Appeal in Maccaroni held that it is not sufficient for a statutory third party to allege a breach of the conditions of its policy to reduce the limits of coverage available to pay third party claimants. That is, the court requires more than the statutory third party's "say-so" to determine whether the limits of its liability are "reduced by operation of law". [20] The court held that the words "by operation of law" in the OPCF 44R endorsement must have some meaning beyond a liability insurer merely denying coverage and settling on this basis. The third party liability coverage is intended as first-loss insurance, and the OPCF 44R as excess coverage. There must, therefore, be a legal determination that the third party liability coverage has been limited before the OPCF 44R excess coverage becomes available.[

Furthermore, based on Maccaroni, it was determined that since State Farm is a party to the action, it must be assumed that a statutory third party is required to answer relevant question as to its denial of coverage.

Price J further held that

Based on the foregoing, I conclude that where coverage has been denied, the court should determine whether an insurer must disclose the information and documents relating to its decision on a case by case basis, having regard to whether the documents are relevant, whether their disclosure at this time would cause prejudice, whether they are protected by litigation privilege and whether that privilege, if it exists, has been waived.

Information as to "material misrepresentation and lack of cooperation" may or may not affect Mr. Lica's third party claim, and may or may not prejudice Mr. Dhaliwal and Mr. Nur in their defence, or involve litigation privilege. If State Farm has concerns in these respects, it is incumbent on it to submit an answer-by-answer analysis, so that the court can determine the relevance of the evidence for Mr. Lica and Intact against, the potential prejudice to Mr. Dhaliwal and Mr. Nur, and any claims of privilege. A hypothetical prejudice to State Farm's insured does not justify a wholesale refusal by State Farm to answer the questions put to it.

In his order, Price J did state that if State Farm was of the opinion that the answers to the interrogatories may prejudice the defence of the Defendants or raise an issue of prejudice, then it may seal its answers and tender them to the Court for review, with a letter outlining specific concerns. Accordingly, the relief sought was granted.

Price J recognized the issue of privilege and provided a way to protect any allegations of privilege. However, simply asserting privilege is not going to allow an insurer "an out" to explain the basis for its denial of coverage in this context.

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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