The classic example of the additional insured and the duty to defend is an action arising from a slip and fall. The property owner and the contractor tasked with performing winter maintenance are both named as defendants. The property owner confirms that it is named as an "additional insured" under the contractor's commercial general liability insurance, and counsel dutifully writes to counsel for the contractor and demands that the insurer assume the defence of the property owner. Such a demand is typically met with deafening silence and counsel for the property owner, or any defendant that finds itself in a similar position, must decide what to do next. 

The test for establishing a duty to defend has long been determined but the courts continue to reach different conclusions about what the effect of meeting the test will be. In each case, this is due to the court's assessment of the pleadings. In cases such as RioCan Real Estate Investment Trust v. Lombard General Insurance Co. [2008] O.J. No. 1449 and the more recent decisions of Demets v. Brant (County) [2014] O.J. No. 430 and Liardi v. Riotrin Properties (Kingston) Inc. [2013] O.J. No. 5557, the court focused on the "essence" or "true nature" of the claim and, if that essence fell within the scope of the insurance policy, the insurer was obligated to defend the entire action. Similarly, in Zhou v. Markham (Town) [2014] O.J. No. 351, the court decided that the allegations clearly and unambiguously fell within the scope of the policy. 

On the other hand, in Papapetrou v. 1054422 Ontario Ltd. [2012] O.J. No. 3373, the Ontario Court of Appeal endorsed the contrary but not necessarily conflicting principle expressed in Atlific Hotels and Resorts Ltd. v. Aviva Assurance Co. of Canada [2009] O.J. No. 2005, in which the court found that the duty to defend only arose with respect to specific allegations, the result of which was that the insurer was ordered to pay only partial defence costs. As was the case in Atlific, the deciding factor in Papapetrou was the separate allegations of negligent supervision and occupier's liability against the property owner, which the court held did not fall within the policy and could form the basis for liability. 

In the more recent cases of Liardi and Zhou, the court found ways to distinguish Atlific and Papapetrou. In Liardi, the additional insured, Future Shop, was a tenant, not a property owner. The court found that the allegations against Future Shop were related to its business practices and were patently irrelevant to the fact that the plaintiff slipped on ice in the loading bay. In Demets, the allegations against the contractor and municipality were "for all intents and purposes" identical. There were no allegations made against the municipality that did not also include the contractor. Even where the wording of specific allegations differed, the court found that the intent of the wording in the pleading was the same. Similarly, in Zhou, the allegations against the town were identical to those against the winter maintenance contractor.

Assuming an application is successful, in whole or in part, the next consideration is whether the applicant is entitled to retain its own counsel. In the case of an additional insured, there is likely a compelling case that independent counsel ought to be appointed. Although the insurer's right to control the defence is understood by the court to be significant, the courts have also held that where the insurer initially denied coverage, as was the case in Zhou, a conflict exists and the additional insured is entitled to retain independent counsel with legal expenses paid by the insurer. 

With respect to costs, the decision in Demets is particularly noteworthy. Following a summary judgment motion, the court granted judgment on the third party claim and the cross-claim, finding a duty to defend on the part of the insurer and an obligation to "hold harmless" on the part of the contractor. As a result, the court ordered full indemnity costs, noting that an obligation to hold harmless a party regarding certain claims means that party "should never have to put his hand in his pocket" in respect of such a claim, subject to the overriding proviso that such costs must be reasonable and in proportion to the work required.

Where counsel feels that a case looks more like Atlific or Papapetrou than Zhou or Liardi, the parties may still successfully negotiate an agreement for the partial recovery of defence costs. For example, an agreement may have the insurer paying 50 per cent of defence costs from the outset until after the examinations for discovery are complete, at which point the parties will reassess and renegotiate based on the evidence. Once again, even if the insurer is paying the majority of defence costs, the additional insured should be entitled to appoint independent counsel, particularly where the insurer's position is that some of the allegations are not within the policy and the defendants have advanced cross-claims against each other. 

Originally published inThe Lawyers Weekly

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