Canada: The Latest Word From The Ontario Court Of Appeal On The Insurance Tripartite Relationship: A Cautionary Reminder

Last Updated: December 23 2015
Article by Anna Casemore

The general concept of the tripartite relationship is a familiar one to those in the insurance industry: An insurer retains a lawyer to represent its insured in a civil proceeding. The lawyer's primary duty and loyalty is to the insured, not the insurer, despite the fact that the insurer is responsible to pay the lawyer for his or her legal services. Typically, a conflict does not arise, in the context of the defence, because the insurer's and the insured's interests are aligned – they both want the same thing, which is to defend, successfully, the plaintiff's claim. It can become tricky, however, when, during the course of defending the insured, an issue arises that can ultimately affect the prospect of indemnity under the insurance policy.

In Hoang v. Vicentini, 2015 ONCA 780, the Ontario Court of Appeal reviewed the issue of conflict of interest in the context of the tripartite relationship.

Christopher Hoang, a minor, had been struck as a pedestrian after his father, Can Hoang ("Hoang"), dropped him off at an intersection in Toronto. Christopher's hat blew off, and he chased it into the intersection, where he was struck and seriously injured by a passing motor vehicle, driven by Adriano Vicentini, and leased by Ford Credit Canada Leasing Company.

Proceedings were commenced against Hoang, Vicentini and Ford Credit, in the Superior Court. The Personal Insurance Company, Hoang's automobile insurer, retained the law firm of Flaherty McCarthy ("FM") to represent Hoang.

At trial, most of the particulars of negligence alleged by the plaintiffs related to Hoang's negligent parental supervision, which would not have given rise to coverage under The Personal's policy. The jury specified, however, that Hoang's negligence was founded also on his "unsuitable choice of unloading area", an allegation which could, in fact, have triggered coverage. Ultimately, the jury held Hoang solely liable for the loss, based on all particulars of negligence.

As The Personal did not add itself as a third party in the action (which it could have done to protect its interests and seek an early determination of the coverage issue), Hoang sued The Personal for indemnification, and Christopher sued it for direct payment of the judgment under section 258(1) of the Insurance Act, R.S.O. 1990, c. I.8. Both claims were based on the jury's finding of 'unsuitable choice of unloading area'.

The plaintiffs appealed the trial decision on two bases: (1) that the judgment dismissing the action against Vicentini and Ford Credit ought to be set aside, and (2) that liability ought to be apportioned equally between Vicentini, Ford Credit and Hoang. FM, who had acted for Hoang at trial, cross-appealed, seeking an order that all particulars of negligence against Hoang (including the particular of 'unsuitable choice of unloading area') be set aside, and that the action against him be dismissed.

The appeal of the 'unsuitable choice of unloading area' prompted both the plaintiffs and Hoang (in his personal capacity) to seek the disqualification of FM from representing Hoang on the appeal and cross-appeal, contending that by FM continuing to represent Hoang and challenge the jury's finding of 'unsuitable choice of unloading area', The Personal had placed itself in a conflict of interest with its insured, or at least had created a reasonable apprehension of a conflict (Note: If the allegation of 'unsuitable choice of unloading area' was set aside, but the particulars relating to negligent parental supervision were not, Hoang would lose any chance of being indemnified under The Personal's policy for the judgment against him).

Conversely, FM argued that the cross-appeal did not create a reasonable apprehension of a conflict of interest, and that it was acting only in the best interest of Hoang. At trial, FM's mandate had been to defend the action on behalf of Hoang, to attempt to avoid liability attaching to Hoang, and to minimize damages. Those objectives, FM argued, would also govern FM's conduct on the appeal.

The lawyer for the plaintiffs (appellants) set out the following three principles, which he viewed as being fundamental to the Court's determination, and which the Court accepted:

  1. Where a lawyer is appointed by an insurer to defend its insured, the lawyer's primary duty is to the insured, irrespective of the fact that the lawyer would be paid by the insurer, and the insurer may eventually have to indemnify on behalf of the insured. In doing so, he or she would be also acting in the best interests of the insurer, in the sense that the plaintiff's claim would be challenged. But, first and foremost, the lawyer must represent and act on the insured's behalf, with the utmost loyalty, and only in the insured's best interest.
  2. An insurer may be required to relinquish control of the defence and pay for independent counsel retained by its insured, only if there is, "in the circumstances of the particular case, a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer": Brockton (Municipality) v. Frank Cowan Co. (2002), 57 O.R. (3d) 447 at para. 43 (C.A.).
  3. Where the insurer has afforded a defence to the insured, subject to a reservation of rights, or its insured has executed a non-waiver agreement, a conflict of interest may arise if coverage under the policy turns on the insured's conduct in the incident that gave rise to the litigation (as opposed to a reservation of rights that is based simply on a policy defence, which has nothing to do with the issues being litigated in the underlying action).

With these principles in mind, the Court emphasized that the potential for conflict between the interests of an insurer and its insured invariably exists because of the insurer's separate obligations to defend and to indemnify. The potential for conflict, it contended, would be exacerbated if the insurer proceeded to defend under a reservation of rights, or if the insured had executed a non-waiver agreement, thus putting in issue any available coverage under the policy. The Court was mindful to point out, however, that not every potential conflict between an insurer and its insured would require the insurer to yield control of the defence (a right for which it had contracted under the insurance policy). To require the insurer to do so, the insured must meet the 'reasonable apprehension of conflict of interest' test.

The Court held that, in this case, the potential for conflict was especially acute because Hoang had signed a non-waiver agreement (thus, coverage under The Personal's policy would depend on the Court's view of Hoang's conduct at the time of the accident, and because he is the father of the appellant, Christopher). Hoang did not want to appeal the jury's finding of 'unsuitable choice of unloading area' because that allegation afforded the only hope of indemnity under The Personal's policy. The reasonable apprehension of conflict of interest was readily apparent, the Court reasoned, because,

...a reasonable bystander might think counsel appointed by the insurer would focus on overturning the one finding for which the insurer could be liable to indemnify the insured and downplay or focus less on the jury's findings of negligent parental supervision for which the insurer has no obligation to indemnify...The test is not actual conflict of interest, but a reasonable apprehension of a conflict of interest. [emphasis added]

If the Court had overturned the finding of 'unsuitable choice of unloading area', but had upheld the finding of negligent parental supervision, it would have been disastrous for Hoang, who would have been left without any prospect of indemnification, and for Christopher, who would have been left without any hope of recovery.

So, what does this mean for insurers? While the Court of Appeal did not articulate new law in the area of conflict of interest, it reiterated the overall primacy of the insured's interest over that of the insurer, in the context of the tripartite relationship. An insurer cannot act in its own best interest when the result would be to give preference to its own interests over those of its insured1. The insurer has a contractual duty to defend.

In our view, however, the Court may have been incorrect in stating that the potential for conflict between the interests of an insurer and its insured "...invariably exists because of the insurer's separate obligations to defend and to indemnify". No such conflict would exist on that basis unless some aspect of the claim was potentially not covered.

Furthermore, the conflict of interest between Hoang and The Personal did, in fact, exist at trial as well; it was simply not raised until the appeal.

Our recommendation to insurers is that they try to circumvent these types of motions and unnecessary legal expense by seeking timely legal advice on any potential conflict, and by taking the appropriate steps beforehand to resolve or negate it.


1 Carneiro v. Durham (Regional Municipality), 2015 ONCA.

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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