Canada: Motion To Appoint Independent Defence Counsel Creates Confusion Over Insured's Right To Full Indemnity Costs

In a potentially controversial ruling, an Ontario judge recently refused to grant two insured applicants full indemnity for costs on a motion related to the duty to defend. This decision is likely to create some confusion regarding an insured's entitlement to full indemnity costs in duty to defend proceedings. Appellate authority has long established that when an insured applies to the court to enforce an insurer's duty to defend, that insured is entitled to full indemnification for both the costs of the defence and the costs of the insured to litigate with the insurer over entitlement to the defence. However, in Lefeuvre v. Boekee,1 the court may have deviated from this general principle.

In Lefeuvre, the underlying case was a pedestrian/motor vehicle collision. Two municipalities had been sued in the action along with two winter maintenance companies. The two municipalities sought a defence from their insurers — however, those insurers were also defending the winter maintenance companies, who were adverse in interest. Due to this apparent conflict, the two municipalities brought a motion requesting that they be entitled to appoint and manage their own counsel at the insurer's expense. The insurers admitted coverage for the defence but maintained that there was no conflict. In the result, the insureds were successful and independent counsel was ordered. The insureds sought their costs on a full indemnity basis.

In additional reasons, the court concluded that full indemnity costs on the motion were not appropriate. Instead, the court applied the general rules for costs on a motion and found that the insureds were instead entitled to "reasonable indemnification". In arriving at that conclusion, the court held that the costs of the motion were not legal fees owing under a contract but instead, simply costs under the Rules of Civil Procedure.

This ruling appears to be out of step with appellate authority which holds the costs borne by an insured to secure his or her right to a defence under an insurance policy should be paid on a full indemnity basis. The Ontario Court of Appeal has consistently held that the insured is "entitled to a defence ... at no cost to them".2 In other words, an insured is "entitled to be made financially whole" for legal costs incurred in securing a defence under the policy.3 This broad principle has not only been used to indemnify insureds for their past defence costs, but also the future defence costs of counsel of their choice, the costs of the coverage application and the costs of any subsequent appeal.4 This principle of full indemnity is based, not in the law of costs, but in the law of contract. The "costs" of the insured on an application are in fact damages for a breach of the insurance contract. A successful insured is therefore entitled to be placed in the same position it would have been in had the contract been fulfilled. In duty to defend cases, that includes the legal expenses incurred by the insured to ensure their rights under contract are secured.5

Despite this accepted principle, the court in Lefeuvre — without relying on any prior authority —  held that the motion costs did not flow from any contractual right under the policy and were not "incurred in 'defending' the action". Instead, the court decided that the costs were incurred to "[interpret] the meaning and scope of the duty to defend".  The court further concluded that the insured's right to costs flowed from "success on the motion" rather than the policy.  In arriving at this conclusion, the court in Lefeuvre appears to have characterized the conflict of interest question as one defining the "extent" of the duty to defend and not necessarily a "breach" of that duty. This is problematic for two reasons.

First, there is little difference between defining the "extent" of the duty to defend and determining whether there has been a breach of duty. In the face of a conflict of interest, an insurer's refusal to rectify that conflict is better characterized as a breach of duty. To allow the defence to proceed with a conflict would have undoubtedly been a breach of the insurer's obligations to the insured. Indeed, a conflicted defence is really no defence at all. As a result, the application to remove that conflict is not a mere question of "extent" or "interpretation", but a matter of securing a definitive right to a defence under the policy. If the conflict of interest issue were characterized in this way, the insured's right to full indemnity costs ought to have flowed from the principle that an insured should not to be put to expense in securing a defence under the policy.

Second, in concluding that the question before it was one of "extent" and not a breach of duty, the court noted in obiter that the underlying action may deal with a "mixed" claim of covered and uncovered allegations. For that reason, the court decided that, even if it were wrong, a portion of the defence costs may relate to uncovered claims for which there would be no entitlement to indemnity. If the court relied on this reasoning, it would have been conflating the concept of indemnity on an application for coverage with the concept of an after-the-fact "allocation" of defence costs.

The basis for such an allocation of defence costs was laid down in the Court of Appeal's well-known decision in Hanis v. University of Western Ontario.6 Contrary to the court's suggestion in Lefeuvre, the Court of Appeal in Hanis held that even in cases of "mixed" claims, "the insurer is required to pay all reasonable costs associated with the defence of [the underlying claim] even if those costs further the defence of uncovered claims".7 It is only where the "costs [relate] solely to the defence of uncovered claims" that an insurer need not indemnify the insured.8 The decision that a portion of a claim is "solely" uncovered is a finding of fact that is generally dealt with after final resolution of the underlying matter. It is only in exceptional cases that an allocation can be reliably made at an early stage in the proceeding. In the absence of any findings of fact, the court in Lefeuvre could not have decided the allocation issue.

In any event, an allocation of defence costs under Hanis is entirely distinct from the costs of an application to secure a defence under the policy. In an allocation case, there is no breach of duty. On a duty to defend application, the insurer's breach is the central issue: the insured is forced to litigate in order to gain benefit of a conflict free defence under the policy.  As noted above, damages for that breach of duty are the full indemnity costs of the application. Accordingly, where there is a breach of duty, the insured's entitlement to full indemnity for the application costs would apply even if an allocation of subsequent defence costs were ordered.

In the absence of confirmation of Lefeuvre from the Court of Appeal, the general rule remains: full indemnity is applicable to all breaches of the duty to defend. In any event, policyholders seeking coverage for defence costs are still encouraged to follow the best practice of addressing any potential conflict of interest issues as early as possible and ideally during the initial application for coverage.

Footnotes

1 Lefeuvre v. Boekee, 2018 ONSC 1010 (Ont. Sup. Ct.).

2 Aitken v. Unifund Assurance Co., 2012 ONCA 641 at para. 43-45. See also, M.(E.) v. Reed, 2003 CarswellOnt 1723 at para. 22, 2003 CanLII 52150 (Ont. C.A.); Godonoaga (Litigation Guardian of) v. Khatambakhsh (Guardian of), [2000] O.J. No. 3807 at para. 4 (Ont. C.A.); Carwardine (Litigation Guardian of) v. Northumberland Clarington Board of Education, [2001] O.J. No. 63 at para. 5 (Ont. C.A.); Savage v. Belecque, 2011 ONSC 5771 at para. 4 (Ont. S.C.J.), aff'd, 2012 ONCA 426 (Ont. C.A.); Austco Marketing and Service (Canada) Ltd. v. Lloyd's Underwriters, 2013 ONSC 6486 at paras. 4-5 (Ont. S.C.J.).

3 See e.g. Austco Marketing and Service (Canada) Ltd. v. Lloyd's Underwriters, 2013 ONSC 6486 at para 5.

4 See e.g. Aitken v. Unifund Assurance Co., 2012 ONCA 641 and Markham (City) v. Intact Insurance Co., 2017 ONSC 3150.

5 Savage v. Belecque, 2011 ONSC 5771 at para. 3-4, aff'd 2012 ONCA 426.

6 Hanis v. University of Western Ontario, 2008 ONCA 678.

7 Hanis v. University of Western Ontario, 2008 ONCA 678 at para. 2.

8 Ibid.

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.

Authors
Shaun Hashim
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
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).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions