Insurer’s Duty to Defend – All Pleadings Matter

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is a litigation lawyer practicing at Perley-Robertson, Hill & McDougall LLP in Ottawa, Ontario. He may be reached at 613.566.2823 or

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From time to time a situation will arise where there are disputes between an insurance company and a potential insured party as to whether coverage will apply to a particular situation and/or a particular individual or entity (the “Potential Insured”) where the Potential Insured has been claimed against.  For example, a Potential Insured is sued for allegedly causing injury to someone passing in front of his house, but it is unclear if the person was injured on the sidewalk (public property) or the Potential Insured’s property (which is covered by the Potential Insured’s home insurance policy).  The Potential Insured’s insurance company claims that it is not required to defend the claim because the injured party may have been off the Potential Insured’s property at the time the injury took place.

In such circumstances the party that seeks for the insurer to defend may bring an application or motion (within an existing claim) to determine if the insurer has a “duty to defend” (I will refer to an “application” below, however the same law would apply on a motion).  Importantly, these preliminary proceedings are not to determine whether the insurance company will be require to indemnify the insured, rather the focus is whether they have to cover the cost to defend that insured party.  As outlined below, the requirement to defend arises on a different and, in fact, significantly lower standard than does the duty to indemnify.

The first step is to interpret the insurance policy at issue.  In the 2010 decision of Progressive Homes Ltd. the Supreme Court briefly summarized the principles of contractual interpretation of insurance policies:[ See 1 ]

[22] The primary interpretive principle is that when the language of the policy is unambiguous, the court should give effect to clear language, reading the contract as a whole (Scalera, at para. 71).

[23] Where the language of the insurance policy is ambiguous, the courts rely on general rules of contract construction (Consolidated-Bathurst, at pp. 900-902). For example, courts should prefer interpretations that are consistent with the reasonable expectations of the parties (Gibbens, at para. 26; Scalera, at para. 71; Consolidated-Bathurst, at p. 901), so long as such an interpretation can be supported by the text of the policy. Courts should avoid interpretations that would give rise to an unrealistic result or that would not have been in the contemplation of the parties at the time the policy was concluded (Scalera, at para. 71; Consolidated-Bathurst, at p. 901). Courts should also strive to ensure that similar insurance policies are construed consistently (Gibbens, at para. 27). These rules of construction are applied to resolve ambiguity. They do not operate to create ambiguity where there is none in the first place.

[24] When these rules of construction fail to resolve the ambiguity, courts will construe the policy contra proferentem — against the insurer [citations omitted]. One corollary of the contra proferentem rule is that coverage provisions are interpreted broadly, and exclusion clauses narrowly. [emphasis added]

Other than interpreting an insurance contract there is often the issue of determining whether the relevant claims at issue in an action raise a matter within coverage.  In that regard, the Supreme Court has confirmed the following key principles to be followed when determining whether an insurer has a duty to defend: [ See 2 ]

(a)  The duty to defend arises only where the pleadings raise claims which may be payable under the agreement to indemnify in the insurance contract.

(b)  If the pleadings filed against the insured, usually in the form of a Statement of Claim, allege a state of facts which, if proven, would fall within the coverage of the policy the insurer is obliged to defend the claim regardless of the truth or falsity of such allegations.

(c)  Where it is clear from the pleadings that the suit falls outside of the coverage of the policy by reason of an exclusion clause, the duty to defend has been held not to arise.

(d)  It is not necessary to prove that the obligation to indemnify will in fact arise in order to trigger the duty to defend. The duty to defend is broader than the duty to indemnify.

(e)  The mere possibility that a claim within the insurance policy may succeed at trial suffices.

(f)  In determining if a mere possibility exists, the widest latitude should be given to the allegations in the pleadings in determining whether they raise a claim within the policy.

(g)  Bare assertions in the statement of claim alone are not determinative. Otherwise, the parties to an insurance contract would always be at the mercy of a third-party pleader.  What really matters is not the labels used by the plaintiff, but the true nature of the claim.

(h)  Where the pleadings are not framed with sufficient precision to determine whether the claims are covered by a policy, the insurer’s obligation to defend will be triggered where, on a reasonable reading of the pleadings, a claim within coverage can be inferred.

(i)  Any doubt as to whether the pleadings bring the incident within the coverage of the policy ought to be resolved in favour of the insured.

(j)  Extrinsic evidence that has been explicitly referred to within the pleadings may be considered to determine the substance and true nature of the allegations, and thus, to appreciate the nature and scope of an insurer’s duty to defend.

The theme among all of the above principles, is that we are dealing with a low standard when determining whether a duty to defend exists.  So low that the courts refer to a “mere possibility”, which is to say any possibility, that liability will arise to require insurers to defend.

Until recently there was arguably a lack of clarity in the law in terms of what pleadings should be reviewed when determining whether the insurer has a duty to defend.  This issue arises where a Statement of Claim fails to allege facts that bring the matter within the insurance coverage, however, a review of related pleadings, including defences and third party claims, indicates that the matter may fall within the policy.  While the cases in Ontario and before the Supreme Court all refer to “pleadings” generally, none had actually dealt with a situation where the Potential Insured party was relying on a pleading other than the main claim  (such as a Statement of Claim) to force the insurer to defend.

This situation is precisely what occurred in Keys v. Intact Insurance Company where, in the main action, certain employees were sued individually for defaming their employer’s competitor.  The Statement of Claim in the main action made no reference of the employees’ employer and only sued them individually.  Therefore, the employer’s insurer denied coverage for the employees and forced them to defend the defamation action themselves.  In that action the defences, cross-claims and third party pleadings (against the employer that held the relevant insurance policy) all contained factual allegations that the defamatory statements were made in the context of their employment.  The Superior Court decision denied coverage for the employees, taking a narrow view of the duty to defend law and how other pleadings are to be assessed, stating:

From the Statement of Claim, it appears that the substance of the claim is for damages for defamation from words used in a video posted on the internet by the defendants – including the applicants. The other pleadings in the action do not change the substance of the claim against the applicants. I find that, in any event, the substance of the claim is clear; and in no way implicates the applicants as employees of CASA making a video in the course of their employment.

The Court of Appeal firmly disagreed, set aside the Application decision, holding as follows:

[4] We do not accept the respondent’s argument that the characterization of the claim for the purposes of the duty to defend is limited to the statement of claim. That may be the usual case, but our view of the authorities is that all the pleadings may be considered, with the most weight placed on pleadings against potential insured: Monenco Ltd. v. Commonwealth Insurance, 2001 SCC 49 (CanLII), [2001] 2 S.C.R. 699. The object of the exercise is to ascertain the “substance” and the “true nature” of the claims: Monenco at para. 35, and Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24 (CanLII), [2000] 1 S.C.R. 551, at para. 79.

[5] The statement of claim, the cross-claims and third party claims in this case are claims against potential insureds within the meaning of the policy. The defence to the third party claims is a pleading filed by a party other than the appellants.

[6] When the pleadings in the cross-claims and third party claims are included in the consideration with the statement of claim, we have no difficulty concluding it may be reasonably inferred that there is at least the mere possibility that the appellants were employed by CASA and acting in the course of their employment when they made and posted the video on the internet.

Therefore, it is clear now that when a court is determining whether a duty to defend exists it is to review not only the main claim, but rather all pleadings, with “the most weight placed on pleadings against potential insured”.  This undoubtedly raises the bar, and should force insurers to step up earlier rather than drag out duty to defend proceedings.

It is also noteworthy, that where an insurer fails to accept its duty to defend and forces a Potential Insured to bring an application then it will forfeit its entitlement to appoint counsel of its choice.  In that circumstance, the Potential Insured party is entitled to appoint counsel of its choosing and then insured will be required to to indemnify the Potential Insured for all costs incurred to date and moving forward to the resolution of the underlying litigation. [See 3 ]

  1. Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, [2010] 2 SCR 245, 2010 SCC 33 (S.C.C.)
  2. Nichols v. American Home Assurance Co., [1990] 1 SCR 801, 1990 CanLII 144 (SCC); Non-Marine Underwriters, Lloyd’s of London v. Scalera, [2000] 1 SCR 551, 2000 SCC 24 (SCC); Monenco Ltd. v. Commonwealth Insurance Co., [2001] 2 SCR 699, 2001 SCC 49 (SCC); Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, [2010] 2 SCR 245, 2010 SCC 33 (SCC)
  3. See Zhou v. Markham (Town), (2014) CarswellOnt 736 (S.C.J.) at paras 22-27; Coakley v. Allstate Insurance Co. of Canada, (2009) CarswellOnt 2434 (Ont. S.C.J.) at paras 33-34