When a Person Is Sued In a Liability Claim Is An Insurance Company Required to Pay the Cost of Legal Defence?

An Insurance Company Is Required to Provide and Pay For the Legal Defence Where a Liability Lawsuit Will Be Covered By the Insurance Policy If the Case Is Proven At Trial.

Understanding When An Insurer Owes a Duty to Defend Litigation on Behalf of An Insured

Insurance Claim Document Facing a lawsuit is a scary proposition; especially whereas the disruption, stress, time, and cost, involved in responding to a lawsuit may be significant in addition to the risk of losing the lawsuit itself.  Indeed, it is quite possible that the costs involved in defending liability allegations can run into the tens of thousands or even hundreds of thousand of dollars.  Interesting, it is possible that the monetary costs of a defence could run ore than the sum sought in the case.  Of course, when it appears that the cost of defending a lawsuit will be more than the amount sought in the lawsuit, generally, an insurer will perform an analysis of whether it is better to settle or defend the case.  This decision can be frustrating for those who firmly believe that the allegations are unjust and could be successfully defended; however, whereas it is the pocket of the insurer that pays for the defence, it is the insurer that makes that decision and the insured person must co-operate and assist.

The Law

Per Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33 (CanLII), [2010] 2 SCR 245, an insurer is under the duty to provide and pay for the defence of an insured person if the coverage provided within the insurance policy would become triggered if the legal case against the insured person results in a successful lawsuit.  This duty to defend was explained by the Supreme Court within Progressive Homes wherein it was stated:

[19]  An insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim (Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801, at pp. 810-11; Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, at para. 28;  Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at paras. 54-55).  It is irrelevant whether the allegations in the pleadings can be proven in evidence.  That is to say, the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify.  What is required is the mere possibility that a claim falls within the insurance policy.  Where it is clear that the claim falls outside the policy, either because it does not come within the initial grant of coverage or is excluded by an exclusion clause, there will be no duty to defend (see Nichols, at p. 810; Monenco, at para. 29).

[20]  In examining the pleadings to determine whether the claims fall within the scope of coverage, the parties to the insurance contract are not bound by the labels selected by the plaintiff (Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, at paras. 79 and 81).  The use or absence of a particular term will not determine whether the duty to defend arises.  What is determinative is the true nature or the substance of the claim (Scalera, at para. 79; Monenco, at para. 35; Nichols, at p. 810).

As per Progressive Homes, the duty to defend arises where the litigation brought against the insured may, following a trial, result in a liability that falls within the scope of the liability coverage provided by the insurer.  Thus the duty to defend arises from the mere possibility of such an outcome.  Following the Progressive Homes rationale, this was well stated in Backyard Media Inc. v. HDI Global Specialty SE, 2021 ONSC 2341 where it was said:

[6]  The policy in issue is a “duty to defend” policy. The insurer is required to provide a defence for the insured in the insured litigation if there is a “possibility” that the insurance policy will have to respond to the substantive claims against the insured in that litigation. The Supreme Court of Canada has held that in the context of a duty to defend policy,  if a claim falls within the terms of coverage and is not clearly and unambiguously excluded, then, by definition, there must be a “possibility of coverage”. See: Progressive Homes Ltd. v. Lombard General Insurance Co., 2010 SCC 33, at para. 51.

As stated within Progressive Homes when reviewing whether an insurance policy might be triggered, it is necessary to review the context of the allegations rather than the express words of the allegations.  For example, where allegations may use legal terminologies such as 'breach of contract', which is generally excluded by an insurance policy, the context of the allegations may involve negligence which may be included by an insurance policy even if the word negligence is absent.  For example, the lawsuit may allege that, "the Defendant breached the contract by failing to perform in the diligent manner that would be usual to a reasonable person"; and thereby the allegations sound in negligence.

The duty to defend was also well articulated in the case of Davis v. Guardian Insurance Co. of Canada, 1996 CanLII 8232 at page 5 wherein it was said:

The duty to defend falls to be determined on the basis of the pleadings in the underlined action or actions and the coverage provisions of the policy or policies of insurance. The general principle has been stated as follows:

The duty to defend is broader than the duty to indemnify, and the mere possibility that a claim within the policy coverage provisions will succeed is sufficient to engage the insurer's duty to defend.

(St. Paul Fire & Marine Insurance Co. v. Durabla Canada Ltd. (July 10, 1996) Ontario Court of Appeal [now reported 1996 CanLII 494 (ON CA), 29 O.R. (3d) 737 at p. 739, 137 D.L.R. (4th) 126]; Bacon v. McBride (1984), 1984 CanLII 692 (BC SC), 5 C.C.L.I. 146 at p. 151, 51 B.C.L.R. 228 (S.C.). 

Summary Comment

An insurer owes the duty to defend where an insurance policy provides coverage for the liability that may arise if the legal action brought is successfully proven.

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