It was snowing heavily on February 8, 2013 when Antonio Carneiro Jr. drove his car downhill on Brock Rd. near Pickering, Ontario. He lost control. His vehicle slid into the path of an oncoming vehicle at the intersection with Whitevale Road. Carneiro was killed.
His grieving family sued a number of parties including the Regional Municipality of Durham and Durham’s road maintenance contractor, Miller Maintenance.
Talaal Bond, partner, Matthews Abogado LLP
Zurich had issued a CGL to Miller. This dispute gave rise to a common coverage problem: What is the decision tree to determine the scope of an insurer’s duty to defend an additional insured?
A duty to defend?
The duty to defend is triggered on the mere possibility that a claim falls within the policy (Progressive Homes v. Lombard General Insurance, 2010 SCC 33). Given the laundry list of allegations in the claim, there was little doubt that the court was going to find at least some allegations that would trigger the duty to defend.
However, Zurich agreed it would defend only those allegations against Durham that were subsumed in the defence of Miller. It argued that by defending Miller it was also defending Durham. Durham argued that the duty was broader. The motions judge agreed with Zurich. Durham appealed.
The Court of Appeal followed its decision in Hanis v. Teevan, 2008 ONCA 678, a nasty employment case with allegations of theft, wrongful dismissal and malicious prosecution. In that case, it held that the insurer had to pay all defence costs associated with defending covered claims whether or not they furthered the defence of uncovered claims. If the insurer contracted to cover all defence costs relating to a claim, those costs do not increase because they also assist the insured in the defence of an uncovered claim. The insured receives nothing more than what it bargained for: payment of all defence costs related to covered claim. This includes uncovered claims so long as they are related. Costs are not payable for uncovered claims unrelated to the defence of covered claims. In Hanis, the insurer was required to indemnify the additional insured (an insured under the policy) for 95 percent of the defence costs – around $2m.
The court in Hanis identified the different classifications of claims: covered, uncovered-related and uncovered-unrelated. So, the question is what is an uncovered-related claim? This is dependent on a factual analysis. If the covered and uncovered claims share the same factual foundation, then it is next to impossible to allocate with any precision the legal expenses incurred with respect to covered, mixed and uncovered claims. However, if the factual foundations are different, then the defence of the uncovered claims will not be indemnified.
In Carneiro the court then held the duty to defend was triggered if the allegation the deceased lost control of his car because of the ice and snow was true. Any claims, covered or uncovered, related to this allegation, triggered the duty to defend the additional insured, per Hanis. It was noted that there was no authority for Zurich’s argument that it could satisfy its duty to Durham by defending Miller. Indeed, this would render meaningless Durham’s status as an additional insured. As in Hanis, Zurich had to indemnify Durham for defence costs associated with counsel of its own choosing.
Insurers have sought to find the boundaries of the extent of the duty to defend an additional insured. This is not always so clear, since each determination must be based on a review of the allegations and the characterization of their factual underpinnings. In Riocan Holdings Inc. v. Intact Insurance Co., 2017 ABCA 73, the plaintiff sued the property manager and its contractor in relation to a slip and fall. Again, the insurer was sued for coverage, but in this case, it argued that the judge should have looked at the nature of each of the plaintiff’s specific claims. This turned out to be essentially the same argument as Zurich attempted in Carneiro. The judge ordered the insurer to provide a defence in respect of all covered and uncovered related claims.
In Markham (City) v. Intact Insurance Co., 2017 ONSC 3150, another similar slip and fall case, the insurer took the position that the City was not entitled to a defence to plaintiff action because the contractor performed no work on the day of the fall. Rather than challenge the law, the argument focused on the interpretation of the factual underpinnings for the claim. The judge did not accept the insurer’s characterization of the facts and ordered it to defend the additional insured. (The insurer also argued that the City was not an additional insured under the policy, but this too was rejected.)
More recently, in National Gallery of Canada v. Lafleur de la Capitale, 2017 ONCA688 (September 6, 2017), a man was killed during the course of his employment. As in Carneiro, his family sued both the employer and additional insured. However, in this case, there was an exclusion in respect of claims arising from employer’s liability. The judge agreed with the additional insured but did not provide sufficient reasons explaining why. The insurer was successful on appeal for that reason and the matter was returned to the lower level for a second hearing before a different judge.
To determine the extent of the duty to defend for additional insureds, an insurer should first look to the factual underpinnings of a claim and determine if there is coverage. If so, then it should identify the additional insureds and examine whether the claims are related-uncovered.
It is often the case that the additional insured maintains that the named insured is fully or largely liable for the event giving rise to the lawsuit and in that event, the insurer has to consider whether it must appoint separate adjusters, examiners and lawyers for the defence of the additional insured. Losing control of the defence is the penalty for failing to consider the implications of that conflict.
In cases of conflict between an insured and an additional insured, parties should be put on notice. If the insurer wants to avoid losing control of the litigation and costs, it should consider reconciling conflicts where possible. In some cases, it would make sense to simply extend coverage to the additional insured, regardless of conflict, to avoid splitting the defence, particularly where unrelated-uncovered claims have a very low chance of success. It would not make sense to split the defence because the plaintiff used a “laundry list” of allegations. In any event, good communication with the various insureds ought to be fostered.
Talaal Bond is a member of Canadian Defence Lawyers Board of Directors and a Partner at Matthews Abogado LLP in London, Ontario.