When an insured incurs defence costs prior to giving their
insurer notice of the claim, who bears responsibility for those
"pre-tender" defence costs? The insurer, which is
otherwise responsible for the insured's defence? Or the
insured, which incurred costs without the insurer's knowledge
This was the issue before the British Columbia Court of Appeal
in Lloyd's Underwriters v. Blue Mountain Log Sales
Ltd., 2016 BCCA 352. The Court, in a unanimous opinion,
overturned the lower court's decision requiring Lloyd's to
pay the pre-tender defence costs. In doing so, the Court affirmed
that an insurer's duty and right to defend cannot arise until
the insured provides notice of the claim.
The case originated in a Washington State action commenced in
2012 against companies affiliated with Blue Mountain. When Blue
Mountain was added as a defendant, its chief financial officer did
not immediately realize that this triggered coverage under the
company's Lloyd's general liability insurance policies. It
was not until 2014 that Blue Mountain gave notice and tendered its
defence to Lloyd's. At that point, its defence costs amounted
to approximately $588,000.
Lloyd's brought a petition against Blue Mountain in the
British Columbia Supreme Court seeking a declaration that it did
not owe a duty to reimburse Blue Mountain for the pre-tender
defence costs. Lloyd's relied, in part, on a voluntary payment
clause in the policy, which provided that any voluntary payment
made by Blue Mountain would be at its own cost.
The chambers judge dismissed Lloyd's' petition, holding
that the duty to defend arises when a claim potentially falling
within the policy is made, and, in the absence of identified
prejudice to the insurer caused by the insured's failure to
give timely notice, the insurer is liable for pre-tender defence
costs. The chambers judge based his decision, in part, on an
insured's right to relief against forfeiture.
On appeal, Lloyd's argued that the chambers judge erred in:
(1) holding that an insurer's duty to defend arises when a
claim falling within the policy is made, and (2) employing a relief
against forfeiture analysis instead of giving effect to the
unambiguous terms of the insurance contract.
The Court of Appeal found there was no consensus in the case law
as to when the duty to defend arises. The Court found the view that
the duty is immediately present upon payment of the premium to be
unpersuasive, in part, due to the fact that it fails to recognize
that the insured may elect to mount its own defence. Instead, the
Court agreed that the duty cannot arise until the insured provides
The Court stated:
 ... the policies in this case gave the respondents a
contractual right to demand that Lloyd's provide a defence, and
Lloyd's was contractually bound to do so. The right and duty to
defend could not arise, however, until the respondents made that
demand by providing notice or tender of the claims, thereby
enabling Lloyd's to determine whether they potentially fell
within the scope of the policy. The chambers judge erred in holding
the duty to defend arises as soon as a claim is made and before
The Court held that relief against forfeiture did not apply.
Because Lloyd's waived Blue Mountain's breach of the
policy's notice clause and honoured the "essential
bargain" of the policy by providing coverage upon receiving
notice, Blue Mountain was not at risk of a forfeiture of its
The Court of Appeal's decision is good news for
underwriters, as it means that insureds will be held responsible
for any defence costs incurred prior to providing notice. The
decision highlights the importance of including voluntary
payment/assumption of liability clauses in policies to protect
against costs outside the underwriter's control. If an insured
wants to disregard its policy and run its own defence, it can still
do so, it just can't expect someone else to foot the bill.
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Under B.C.'s former and current Limitation Act, the limitation period for a Plaintiff's claim can be extended on the basis of a Defendant having acknowledged in writing some liability for the cause of action.
Automobile drivers, like fine wine, tend to get better with age. Older drivers can draw on a wealth of experience from their years on the road to assist them when faced by a variety of dangerous conditions.
The insurance industry will be interested in Ledcor Construction Ltd v. Northbridge Indemnity Insurance Co because of principles the Supreme Court of Canada applied to the "faulty workmanship" exclusion in a Builders' Risk policy.
For the first time in BC, a Court has decided that an insured is entitled to special costs, rather than the lower tariff costs, solely because they were successful in a coverage action against their insurer.
Subrogation is the mechanism by which an insurer can recover monies that it has paid to its insured by bringing an action in the name of the insured as against a third party who is responsible for the loss.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).