In liability insurance matters, the control of the defence is a
recurring issue before the courts. A recent ruling of the Superior Court dealt with
this issue after an insurer had denied coverage following its own
investigation of the facts. This ruling may cause liability
insurers to reconsider the way they handle their insureds'
files where no formal claim has yet been filed.
In this case, a house partially collapsed following work
performed by a contractor. The latter quickly informed his
liability insurer of a possible claim. After having conducted its
own investigation of the facts, the insurer denied coverage on the
basis of two exclusions.
A year later, a claim for damages was filed against the
contractor. Following its analysis of the statement of claim, the
liability insurer indicated that the allegations confirmed its
investigation and therefore, its coverage position.
The contractor then presented a Wellington motion in order to
determine whether the insurer owed a duty to defend and, if
necessary, decide who would choose defence counsel: the insurer or
Having concluded that the insurer did not establish that the
exclusions applied in a clear and unequivocal manner at this stage
of the proceedings, the Court held that the insurer had the duty to
defend its insured. The Court then considered the second issue,
[translation] "[T]he fact that
an insurer had initially wrongfully refused to defend its insured
does not cause it to automatically lose its right to appoint
counsel and control the defence where the court subsequently orders
it to defend its insured. For the insurer to lose this right, the
circumstances must be such that the insured can no longer have
confidence in the grounds of defence that the insurer will put
Given that the insurer justified its position on the exclusions
by its own investigation of the circumstances of the accident
rather than its analysis of the allegations contained in the
statement of claim, the Court held that [translation] "the
insured was justified in losing confidence in the defence that his
insurer will now be forced to provide him following this
ruling." The insurer was thus [translation] "in
a conflictual situation regarding the specific performance of its
duty to defend".
The Court therefore left the choice of attorney and the control
of the defence up to the insured. It also ordered the insurer to
pay the defence costs incurred to date by the insured and those to
come, except for those incurred for the Wellington motion.
This decision highlights that it is in the interest of liability
insurers to wait for the statement of claim before taking a final
position on insurance coverage if they wish to retain control of
the defence. Indeed, it seems that a denial of coverage based
solely on a factual investigation before a claim is made against
the insured might allow the latter to later invoke its loss of
confidence in the insurer in regard to the control of the
insured's defence. It will be interesting to see if the courts
find other circumstances amounting to the legitimate loss of
confidence in the insurer that allow the insured to gain control of
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