Lloyd's insured a group of Canadian affiliated companies and
individuals, including Blue Mountain Log Sales Ltd. and Scott
Clarke (collectively, the "Clarke Group"), under annual
general liability insurance policies. The Clarke Group carried
insurance with Evanston Insurance Company in the United States. In
June 2012, Washington affiliates of the Clarke Group became engaged
in actions in Washington State and tendered their defence to
Evanston. Allegations were later made against the Canadian members
of the Clarke Group, but notice of the claim was not given to
Lloyd's until April 18, 2014, by which time the insured and
Evanston had incurred approximately $558,000 in defence costs.
Once it received notice, Lloyd's accepted it had a duty to
defend and retained the same counsel retained by Evanston. However,
Lloyd's refused to pay defence costs incurred before it
received notice of the claim and brought a petition seeking a
declaration that it was not required to do so. Our
May 29, 2015 blog post summarized the decision in Lloyd's Underwriters v. Blue Mountain Log
Sales Ltd.,2015 BCSC 630. In brief, the British Columbia
Supreme Court dismissed Lloyd's Petition, finding that it could
not avoid pre-tender defence costs because it had suffered no
prejudice because of the late notice. The analysis was based on the
findings that: the duty to defend crystalizes when the cause of
action arises; late notice is a breach of imperfect compliance,
pursuant to s. 13 of the Insurance Act, R.S.B.C 2012, c.
1; the Clarke Group's pre-tender defence costs were forfeited
insurance, pursuant to s. 13(a)(ii) of the Insurance Act;
and Lloyd's had not been prejudiced by late notice.
On appeal, the British Columbia Court of Appeal took a
fundamentally different approach. It held that the duty to defend
cannot arise until the insurer has notice of the claim. The
"essential bargain" between the parties imposes a duty on
an insurer to defend, in exchange for the right to participate in
and control the defence; the insurer cannot be responsible for the
former until it is in a position to assert its reciprocal right to
the latter, which requires that it have notice.
However, the Court of Appeal did not say an insurer would never
be responsible for pre-tender defence costs. In reaching its
decision, it summarized a line of authority called
"repudiation cases" in which the insurer repudiates the
contract, asserting that late notice is a breach of the policy, or
denying coverage for another reason. In those cases, if the Court
finds there has been an improper denial of coverage, there is a
breach of the policy resulting in insurance being forfeited and the
conditions are met for the Court to consider relieving the insured
from forfeiture, applying s. 13 of the Insurance Act.
Where the insurer has not suffered prejudice because of the late
notice, the Court may, and often does, order the insurer to pay the
insured's pre-tender defence costs as part of the relief
However, those were not the facts before the Court. Upon
receiving late notice of the claim, rather than rely on the
insured's imperfect compliance to deny coverage, Lloyd's
forgave the breach, and undertook to defend the Clarke Group
affiliates going forward. The Court determined this was in the line
of "implementation cases", requiring that the decision as
to whether the insured recovers pre-tender defence costs is
grounded in the terms of the policy.
The Court then went on to decide that pre-tender defence costs
fit within the voluntary payment clause, which read:
The Insured shall not, except at his
own cost, voluntarily make any payment, assume any obligation or
incur any expenses other than for first aid or other medical denial
or surgical relief to others at the time of accident.
As a result, the pre-tender defence costs were incurred at the
insured's "own costs" and were not recoverable.
In summary, the Court held that, until the insurer has notice of
a claim, pre-tender defence costs can be voluntary payments,
incurred at the insured's "own cost". On or after
notice, if there has been a breach of the policy and resulting loss
of insurance, s. 13 of the Insurance Act entitles the
Court to decide whether it is appropriate to provide the insured
with relief. Included in any relief may be reimbursement of its
pre-tender defence costs.
However, where instead of relying on a breach to deny coverage,
the insurer forgives the breach, s. 13 of the Insurance
Act cannot apply and the interpretation of the policy will
govern who is to pay for defence costs incurred before notice.
Perhaps most interesting is the argument which was not
addressed, because it was advanced for the first time on appeal.
The insured sought to argue that its payment of defence costs was
not "voluntary". Certainly many defendants would agree
with this position, but it remains to be seen whether the Court
will accept it.
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In Irwin v. Alberta Veterinary Medical Association, 2015 ABCA 396, the Alberta Court of Appeal found that the "ABVMA" failed to afford procedural fairness to a veterinarian undergoing an incapacity assessment.
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