The Halifax Insurance Company of Canada v. Innopex Limited et al. [Indexed as: Halifax Insurance Co. of Canada v. Innopex Ltd.]

72 O.R. (3d) 522

[2004] O.J. No. 4178

Docket: C40261

Court of Appeal for Ontario,

Borins, Feldman JJ.A. and Then J. (ad hoc)

October 15, 2004

*Application for leave to appeal to the Supreme Court of Canada was dismissed with costs April 28, 2005 (McLachlin C.J., Binnie and Charron JJ.)

Civil procedure -- Summary judgment -- Rule 20 not lending itself to determination of existence of insurer's duty to defend as that issue should be determined expeditiously -- Rules of Civil Procedure, R.R.O. 1990, Reg. 194, Rule 20.

Insurance -- Insurer's obligation to defend -- Insurer bringing application for declaration that it did not have duty to defend insured against trademark infringement action and moving for summary judgment -- Motion judge erring in relying on extrinsic evidence to find that insured was not engaged in "advertising" when it sold knock-off watches - Insurer obliged to provide defence where pleadings allege facts which, if true, would require insurer to indemnify insured, even if actual facts differ from allegations pleaded -- Plaintiff in underlying action pleading that insured infringed its trademark by distributing and selling knock-off watches in United States -- Pleadings containing allegations which by inference amounted to offence in course of advertising -- Insurer having duty to defend action.

The insured sold knock-off Gucci watches. Gucci brought an action against the insured in the United States based on trademark infringement and unfair competition. The complainant claimed that the insured had "marketed, distributed and sold goods" in connection with a colourable imitation and simulation of the Gucci trademark and sought permanent injunctive relief, an accounting and damages. The insured's insurance policy required the insurer to "pay those sums that the [page523] insured becomes legally obligated to pay as compensatory damages because of . . . 'advertising liability' to which this insurance applies".

Advertising liability arising out of "infringement of trademark, service mark or trade name, other than titles or slogans, by use thereof on or in connection with goods, products, or services sold, offered for sale or advertised" was excluded ("exclusion 2(5)(b)"). "Advertising liability" was defined as meaning "injury arising out of an offence committed during the Policy Period occurring in the course of the Named Insured's advertising activities, if such injury arises out of libel, slander, defamation, violation of right of privacy, piracy, unfair competition, or infringement of copyright, title or slogan".

The insurer obtained a legal opinion that the allegations in the Gucci complaint would trigger the insurer's duty to defend based on the commission of an advertising offence within the meaning of the coverage described in the policy and the exception to exclusion 2(5)(b), that is"other than titles or slogans". The legal opinion recommended that the insurer commence an action seeking a declaration that on the basis of "the true uncontroversial and indeed admitted facts", the allegations in the underlying litigation did not come within the coverage in the policy and, accordingly, that it had no duty to defend the insured against the Gucci suit. The insurer did just that, and the insured counterclaimed for a declaration that the insurer was under such a duty. The insured included in its counterclaim a claim for punitive damages against the insurer on the ground that it was in breach of its contract of insurance. The insurer moved for summary judgment on its claim and the insured responded with a motion for summary judgment on the counterclaim.

The motion judge found on the basis of the evidence before her that the insured was not engaged in advertising within the meaning of the policy when it sold the watches to an American purchaser, with the result that the insurer had no contractual duty to indemnify the insured if the Gucci lawsuit were to succeed. She interpreted the word "title" in the exception to exclusion 2(5)(b) in favour of the insurer, again holding that the Gucci complaint was excluded from coverage. Notwithstanding those findings, the motion judge determined that the insurer owed the insured a duty to defend the Gucci lawsuit from its commencement until the date on which the hearing of the motions commenced and, consequently, was required to indemnify the insured for its legal costs in defending the lawsuit during this period. On the basis of the evidence before her, she found that there was no factual basis to support the insured's counterclaim for punitive damages. The insurer appealed the order that it pay the legal costs and disbursements of the insured. The insured cross-appealed from the summary judgment declaring that the insurer was not under a duty to defend. The insured also appealed the summary judgment dismissing its counterclaim for punitive damages.

Held, the cross-appeal should be granted.

In finding that the insured did not engage in "advertising" when it sold the knock-off watches, the motion judge erroneously relied on extrinsic evidence. An inquiry into whether the insured had in fact engaged in the conduct complained of in the underlying action should not be part of the inquiry on a duty to defend application. If the pleadings allege facts which, if true, would require the insurer to indemnify the insured for the claim, then the insurer is obliged to provide a defence. This remains so even though the actual facts may differ from the allegations pleaded.

A duty to defend arises where the underlying action raises a claim that could potentially fall within the scope of the coverage. What the insurer did in this case, [page524] by the procedure it followed, was to turn a duty to defend application into a duty to indemnify application by introducing extrinsic evidence pertaining to what it terms "the true facts". The duty to defend is broader than the duty to indemnify. The time to determine the insurer's duty to indemnify, if at all, is at the conclusion of the underlying litigation. In addition, the procedure undertaken by the insurer demonstrated that Rule 20 of the Rules of Civil Procedure does not lend itself well to deciding duty to defend issues. The delay involved in bringing a motion for summary judgment, that can be resorted to only after the defendant has delivered a statement of defence, necessarily defeats the objective of deciding duty to defend issues expeditiously as a preliminary issue. Moreover, further delay is possible if genuine issues arise which cannot properly be resolved by a motion judge on a Rule 20 motion.

On their substance and true nature, the essence of the claims in the Gucci complaint was trademark infringement on the part of the insured arising from the unauthorized use of Gucci's trademark on the watches that the insured sold in the United States. Gucci alleged that when the distribution and sale of watches took place, its trademark was infringed. Although the term "advertising" did not appear in Gucci's complaint, the pleadings contained allegations that by inference amounted to an offence in the course of advertising. It is implicit in any allegation of trademark infringement that the offences were committed in the course of advertising because infringement does not take place until the insured promotes its products to its customers. Moreover, the pleading of a violation of ss. 43(a) and 35(a) of the U.S. Trademark Act of 1946, 15 U.S.C. 1051, raises the possibility that the impugned activity involved advertising.

In determining that the exception to exclusion 2(5)(b) did not apply, the motion judge erred in interpreting "title" as a "literary or artistic work". She failed to take into consideration the substantial body of caselaw that has consistently found coverage for a number of different trademark infringements under the "title" exception to exclusion 2(5)(b). She erred in her analysis of whether the name "Gucci" qualified as a title. The complaint alleged conduct, for duty to defend purposes, that could be conceived as falling within the infringement of title or slogan offences.

As the insurer was under a duty to defend and as the record contained evidence on which a trial judge could find liability and award punitive damages, the summary judgment dismissing the insured's claim for punitive damages should be set aside.

APPEAL and CROSS-APPEAL from an order of Greer J. of the Superior Court of Justice, dated May 30, 2003, granting an insurer's motion for summary judgment declaring that it had no duty to defend the insured.

Monenco Ltd. v. Commonwealth Insurance Co., [2001] 2 S.C.R. 699, 97 B.C.L.R. (3d) 191, 204 D.L.R. (4th) 14, 274 N.R. 84, [2002] 2 W.W.R. 438, [2001] I.L.R. Â1-3993, 2001 SCC 49; Nichols v. American Home Assurance Co., 1990 144 (SCC), [1990] 1 S.C.R. 801, 72 O.R. (2d) 799n, 39 O.A.C. 63, 68 D.L.R. (4th) 321, 107 N.R. 321, [1990] I.L.R. 1-2583, consd Other cases referred to Am. Employer's Ins. Co. v. Delorme Publ'g Co., 39 F.Supp.2d 64 (D. Me. 1999); Energex Sys. Corp. v. Fireman's Fund Ins. Co., [1997] W.L. 358007 (S.D.N.Y. 1997); Hunt v. Carey Canada Inc.,1990 90 (SCC), [1990] 2 S.C.R. 959, 49 B.C.L.R. (2d) 273, 74 D.L.R. (4th) 321, 117 N.R. 321, [1990] 6 W.W.R. 385, 4 C.C.L.T. (2d) 1, 43 C.P.C. (2d) 105 (sub nom. Hunt v. T & N plc); J. A. Brundage Plumbing & Roto-Rooter v. Massachusetts Bay Ins. Co., 818 F.Supp. 553 (W.D.N.Y. 1993); Non-Marine Underwriters, Lloyd's of London v. Scalera, [2000] 1 S.C.R. 551, 185 D.L.R. (4th) 1, [2000] S.C.J. No. 26, 2000 SCC 24, 253 N.R. 1, [2000] 5 W.W.R. 465, J.E. 2000-935, 135 B.C.A.C. 161, 75 B.C.L.R (3d) 1, 18 C.C.L.I. (3d) 1, 50 C.C.L.T (2d) 1, [2000] I.L.R. ÂI- 3810; [page525] Palmer v. Truck Insurance Exchange, 988 P.2d 568 (Cal. 1999); Sentex Sys. v. Hartford Accident & Indem. Co., 93 F.3d 578 (9th Cir. 1996), affg 882 F.Supp. 930 (C.D. Cal. 1995); Slough Estates Canada Ltd. v. Federal Pioneer Ltd. (1994), 1994 7313 (ON SC), 20 O.R. (3d) 429, [1995] I.L.R. Â1-3129, [1994] O.J. No. 2147 (Gen. Div.); Union Ins. Co. v. Knife Co., 897 F.Supp. 1213 (W.D. Ark. 1995); Web Offset Publications Ltd. v. Vickery, (1999), 1999 4462 (ON CA), 43 O.R. (3d) 802n (C.A.) [Leave to appeal to S.C.C. refused 256 N.R.200n], affg (1998), 1998 14858 (ON SC), 40 O.R. (3d) 526, 34 C.P.C. (4th) 343 (Gen. Div.); Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 595, 209 D.L.R. (4th) 257, 283 N.R. 1, [2002] I.L.R. ÂI-4048, 2002 SCC 18, 20 B.L.R. (3d) 165, [2002] S.C.J. No. 19; Zurich Insurance Co. v. 686234 Ontario Ltd. (2002), 2002 33365 (ON CA), 62 O.R. (3d) 447, 222 D.L.R. (4th) 655, [2003] I.L.R. ÂI-4137 (C.A.) Statutes referred to Trademark Act of 1946, 15 U.S.C. 1051 (the "Lanham Act"), ss. 35, 43 Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, Rule 20, rules 14.05, 21.01, Authorities referred to Lichty, M.G., and M.B. Snowden, Annotated Commercial General Liability Policy (Aurora: Canada Law Book Inc., 2003)

Geoffrey D.E. Adair, Q.C. and Michael I. Burgar, for the appellant. Craig S. Burgess, for the respondents.

The judgment of the court was delivered by

BORINS J.A.: --

I

[1] Motions or applications to determine whether an insurance company has a duty to defend a policyholder who is a defendant in an underlying lawsuit are intended to be decided expeditiously. Invariably, such proceedings are decided by reading the claim or claims asserted in the statement of claim in the underlying action with the coverage provided by the insurance policy. If one or more of the claims in the underlying action fall within the coverage, the insurer has a duty to defend the action on behalf of the insured. As the Supreme Court of Canada has observed, a duty to defend application should not be permitted to become "a trial within a trial". However, that is what happened in this case.

[2] The hearing before the motion judge required three days to argue. It consisted of competing motions for summary judgment [page526] in the context of an action commenced by the insurer for a declaration that it did not have a duty to defend and a counterclaim by the insured for a declaration that the insurer was under such duty. The insured included in its counterclaim a claim for punitive damages against Halifax on the ground that it was in breach of its insurance contract. When the insurer moved for summary judgment on its claim, the insured responded with a motion for summary judgment on its counterclaim. Each party filed affidavits containing evidence in support of its motion. The evidence included opposing legal opinions on American law regarding, inter alia, trademark infringement and the interpretation of the insurance policy. The affiants were cross-examined. At the end of the day, the record before the motion judge consisted of about 3,000 pages, inclusive of the transcripts of the cross-examinations. In addition, the parties provided casebooks containing dozens of authorities, as well as legislation. All of this material, and more, is now before this court.

[3] The motion judge granted a summary judgment declaring that the insurer, The Halifax Insurance Company of Canada ("Halifax"), did not have a duty to defend the insured, Innopex Limited, its owner, Aaron Wagschel (incorrectly referred to as Wexel, in the title of proceedings), and its employee, Joshua Frankel ("Innopex"), in a lawsuit commenced against them by Gucci America, Inc. ("Gucci") in the United States District Court, Southern District of New York. She also ordered Halifax to pay Innopex and its employees "all legal costs and disbursements that they incurred before March 5, 2003, in defending the Gucci claim".

II

[4] Halifax has appealed the order that it pay the legal costs and disbursements of Innopex, Wagschel and Frankel. They have cross-appealed from the summary judgment declaring that Halifax is not under a duty to defend. Innopex also appeals the summary judgment dismissing its counterclaim against Halifax for punitive damages. The appeal and the cross-appeal raise the following issues:

(1) Was the motion judge correct in holding that Halifax has no duty to defend Innopex and its employees in the Gucci lawsuit?

(2) If she was correct, did she err in ordering Halifax to pay Innopex's legal costs to March 5, 2003? [page527]

(3) In determining whether an insurer has a duty to defend its insured in a legal proceeding brought against the insured, is it permissible for the court to consider extrinsic evidence?

[5] In respect to the third issue, it is helpful to set out the following chronology:

(1) On December 13, 1999, Gucci issued a claim in the United States District Court in New York State against Innopex, its employees and other defendants.

(2) On April 17, 2000, Frankel provided a statement to an insurance adjuster representing Halifax in respect to Innopex's request that Halifax defend the Gucci claim.

(3) On May 1, 2000, Mark Lichty, a well-known insurance lawyer, provided Halifax with an opinion on whether it was under a duty to defend.

(4) On August 17, 2000, Halifax issued a statement of claim in Ontario against Innopex for a declaration that it had no duty to defend the defendants in the Gucci lawsuit.

(5) On September 21, 2000, Innopex delivered a statement of defence and a counterclaim for a declaration that Halifax was under a duty to defend, that Halifax was in breach of the contract of insurance and for punitive damages of $2.5 million, on the ground that Halifax failed to act in good faith in its dealings with Innopex.

(6) On October 10, 2000, Halifax delivered a reply and statement of defence to the counterclaim.

(7) On February 15, 2001, Halifax moved under Rule 20 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, for summary judgment declaring that it was not under a duty to defend Innopex.

(8) On February 15, 2001, Innopex and its employees moved under Rule 20 for summary judgment for the relief claimed in the counterclaim.

(9) On April 6, 2001, Halifax brought a cross-motion under Rule 20 for summary judgment dismissing the counterclaim.

(10) On March 5, 6 and 7, 2003, the motions were heard by Greer J. whose reasons for judgment were released on May 30, 2003. [page528]

III

[6] Several affidavits were filed in support of, and in opposition to, the motions. For Halifax, these included affidavits from a senior claims representative, James Strachan, its insurance adjuster, Jan Perkins, and an American attorney, Leslye Davidson, who provided an expert opinion about the federal, state and common law causes of action raised in Gucci's claim and various intellectual property subjects.

[7] For Innopex, there were several affidavits from Wagschel and Frankel, together with two affidavits from an American attorney, Julius Rabinowitz, who provided his expert opinion about the laws governing trademarks in the United States as set forth in the Lanham Act in respect to the claims raised in the Gucci claim.

[8] Strachan, Perkins, Wagschel, Frankel and Rabinowitz were cross-examined on their affidavits.

[9] Mark Lichty also prepared a legal opinion for Halifax respecting its duty to defend. It appears that Mr. Lichty's opinion played a significant role in the procedure followed by Halifax when it issued a claim seeking to resolve this issue by obtaining a declaratory judgment. Mr. Lichty's opinion was produced by Mr. Strachan at his cross-examination. Mr. Lichty is the co-author of a text book on commercial general liability insurance coverage: Mark G. Lichty and Marcus B. Snowden, Annotated Commercial General Liability Policy (Aurora: Canada Law Book Inc., 2003). At the time he provided his opinion, Mr. Lichty was a member of the law firm that represented Halifax on the motion and on this appeal. Subsequently, I will make extensive reference to Mr. Lichty's opinion. However, to put his opinion in its proper context, it is necessary to outline the claims in the Gucci complaint against Innopex and the coverage provided by Halifax in the commercial general liability policy that it sold to Innopex.

IV

[10] As alleged in its complaint, Gucci's claims arise from Innopex's distribution and sale in the United States, without authorization or approval from Gucci, of watches bearing copies of the Gucci trademark, as that trademark appears on Gucci's merchandise. Such items, referred to as "knock offs", are copies or imitations of another person's exclusive products that are sold for considerably less than the true product. Gucci's claims, which are based on trademark infringement and unfair competition, are for injunctive relief, an accounting of profits, damages and costs. [page529]

[11] Gucci's complaint consists of the following five counts:

COUNT I -- This claim under the provisions of the Trademark Act of 1946, 15 U.S.C. 1051 et seq., referred to as the Lanham Act, is based on the infringement of trademarks registered in the United States Patent and Trademark Office.

COUNT II -- This claim also arises under the provisions of the Trademark Act and alleges the use in commerce of false designations of origin and false descriptions and representations. The central allegation in this count is in para. 29 of Gucci's complaint that reads as follows:

29. Upon information and belief, defendant has marketed, distributed and sold goods in connection with a colorable imitation and simulation of the Gucci Trademark with the express intent of causing confusion and mistake, of deceiving and misleading the purchasing public to buy and otherwise trade in its products in the erroneous belief that they were relying upon the reputation of plaintiff Gucci; and in so doing, the defendant improperly appropriated the valuable trademark of plaintiff Gucci [emphasis added].

COUNT III -- This claim, also under the Trademark Act, is for "dilution of plaintiff's famous Gucci Trademark" based on Innopex's "distribution of goods".

COUNT IV -- This claim is for unfair competition and trademark dilution in violation of N.Y. General Business Law 368-d. The central allegations in this count are in paras. 40 and 41 of the complaint that read as follows:

40. The use by defendant of a confusingly similar mark is likely to injure the business reputation of Plaintiff Gucci by causing the trade and purchasing public to believe that defendant is authorized by, sponsored by, approved by or connected with plaintiff Gucci.

41. The use by defendant of a confusingly similar variant of the Gucci Trademark will tend to and does dilute the distinctive quality of the Gucci Trademark in violation of N.Y. Business Law 368-d and will cause the trade and purchasing public to believe that defendant is authorized by, sponsored by, approved by or connected with plaintiff Gucci.

COUNT V -- This claim arises out of the common law of New York state relating to trademark infringement and unfair competition. The central allegation in this count is in para. 46 of the complaint:

46. On information and belief, defendant has intentionally appropriated the Gucci Trademark with the intent of causing confusion, mistake, and deception as to his relationship with plaintiff Gucci, and with the intent to palm off himself as being authorized by, sponsored by, approved by or connected with plaintiff Gucci, and, as such, defendant has committed trademark infringement and unfair competition under the common law of this State. [page530]

[12] Arising from these counts, Gucci compendiously seeks: (1) preliminary and permanent injunctive relief enjoining Innopex, inter alia"from using the Gucci Trademark or any mark similar thereto in connection with sale of any goods""from infringing plaintiff Gucci's registered trademark""from otherwise unfairly competing with plaintiff Gucci" and "from falsely representing themselves as being connected with plaintiff Gucci or sponsored by or approved by or associated with plaintiff Gucci"; (2) an accounting to Gucci for all profits and damages arising from Innopex's infringing activities, or, in the alternative, statutory damages under the Trademark Act; and (3) costs of the action and Gucci's reasonable counsel fees.

V

[13] The relevant provisions of the insurance policy that Innopex contends gives rise to Halifax's duty to defend the Gucci complaint are contained in Section I of the policy entitled Coverages and reads as follows:

COVERAGE B -

PERSONAL INJURY AND ADVERTISING LIABILITY

This insurance policy applies only when a PERSONAL INJURY AND ADVERTISING LIABILITY LIMIT is indicated on the "Declaration Page(s)".

1. Insuring Agreement

a. The Insurer will pay those sums that the insured becomes legally obligated to pay as compensatory damages because of "personal injury" and "advertising liability" to which this insurance applies.

b. This insurance applies to "personal injury" and "advertising liability" only if caused by an offence:

(1) Committed in the "coverage territory" during the Policy Period;

(2) Arising out of the conduct of the Named Insured's business; and

(3) Arising out of advertising done by or for the Named Insured in the normal course of the Named Insured's business.

2. Exclusions

This insurance does not apply to:

a. "Personal injury" and "Advertising liability":

(5) Arising out of:

. . . . . [page531]

(b) infringement of trademark, service mark or trade name, other than titles or slogans, by use thereof on or in connection with goods, products, or services sold, offered for sale or advertised.

(Emphasis added)

[14] "Advertising liability" is defined in Section V of the policy:

2. "Advertising liability" means injury arising out of an offence committed during the Policy Period occurring in the course of the Named Insured's advertising activities, if such injury arises out of libel, slander, defamation, violation of right of privacy, piracy, unfair competition, or infringement of copyright, title or slogan.

(Emphasis added)

[15] Innopex contends that the claims against it in the underlying lawsuit brought by Gucci arise out of advertising which it carried out in the normal course of its business in the marketing of the knock off watches that are at the heart of the lawsuit. It says that this is clear from the claims alleged by Gucci's complaint. Therefore, it contends that if Gucci is successful, Halifax will be required to indemnify it under clause 1(b) for any damages recovered by Gucci. It further contends that the exception to the exclusion in clause 2(5)(b) applies - "other than titles or slogans" - because the infringement of a trademark is synonymous with the infringement of title. It relies, as well, on the definition of "advertising liability".

VI

[16] Having summarized the claims in the underlying lawsuit and having set out the advertising liability coverage in the policy, I turn to Mr. Lichty's opinion. He correctly pointed out that the duty to defend is determined by the allegations pleaded in the underlying lawsuit, read together with the coverage provided by the insurance policy. At the outset of his opinion he stated: "Bluntly the pleadings, when read with the policy language, raise a number of very difficult coverage issues. . . . Unfortunately, for reasons noted below, Halifax may well have an obligation to defend this claim."

[17] Mr. Lichty then provided the following executive summary of his opinion:

By way of executive summary, the Halifax policy contains a fairly liberal "Advertising Liability" offence list. In the circumstances much of the alleged wrongful activity committed by the policyholder may well fall within one or more of the offences set out in the Advertising Liability definition. As well, Count II of the pleading alleges the commission of an offence in the course of advertising. It may be questionable whether Counts III, IV and V allege the [page532] commission of an offence in the course of advertising. However, for duty to defend purposes, a Court may well find that these offences, particularly that set out in Count III, are sufficiently alleged to have been committed in the course of advertising.

The policy contains an exclusion for trademark infringement. However there is an exception for infringement of title. A majority of U.S. Courts have found that infringement of title clearly encompasses claims for trademark infringement. Bluntly the inclusion of the exception impedes Halifax's ability to rely on the trademark exclusion.

I do not want you to think that I have been naïve or less than careful in my review of the file. I am well aware that, in reality, there was little or no advertising activity conduct by the policyholder. Indeed the policyholder simply purchased and almost immediately resold the alleged infringing products. Unfortunately, as we are well aware, the defence obligation is determined from the pleaded allegations. The pleaded allegations do not simply allege sale of the offending counterfeit products. The pleaded allegations allege (see for example para. 29 of the Complaint) marketing and other activity that has frequently been equated, by the Courts, with advertising activity.

In my view a Court is likely to find that the pleading triggers an obligation to defend this U.S. litigation. There may be a possibility of bringing a separate declaratory proceeding seeking an Order that the true facts, none of which appear to be substantially in dispute, do not involve any marketing or advertising activity. Some Ontario cases have suggested that an insurer may terminate its pleading by relying on uncontradicted facts which demonstrate that there can be no indemnity (see for example the Slough and Marcoccia cases). A word of warning. Some policyholder's counsel strongly argue that the defence obligation, once triggered by the pleadings, cannot be terminated until all non-covered claims are dismissed from the underlying action. Put at its simplest our ability to immediately obtain a declaration that there is no defence obligation remains in some doubt.

(Emphasis added)

[18] Following the executive summary, Mr. Lichty provided a 13-page analysis of the policy, Gucci's complaint, and what he referred to as "the known facts". Those "facts" had apparently been obtained when Halifax's insurance adjuster interviewed the policyholder's principal in the presence of its counsel.

[19] In my view, it is implicit in Mr. Lichty's analysis of Gucci's complaint that he believed the allegations gave rise to a duty to defend. In particular, he referred to allegations that Innopex had distributed, sold and marketed watches to which, as stated in para. 27 of the complaint, it had "affixed, applied or used . . . false descriptions and representations which tend falsely to describe or represent that the goods and services offered by [Innopex] are sponsored by, authorized by or connected with plaintiff Gucci". As well, he referred to Gucci's reliance on s. 35(c) of the Trademark Act, known as the Lanham Act, that forbids any entity from falsely designating the origin of goods or falsely describing or representing its goods as the product of another. [page533]

[20] However, Mr. Lichty was of the opinion that the "known facts" appeared to differ from the allegations in Gucci's complaint. He stated that these facts indicated that there was no marketing or advertising involved in the "Gucci watch transactions". He believed that the Gucci lawsuit was "a strategic manouevre" on its part to try to determine the entity responsible for putting the watches "into the chain of commerce" and that "unfortunately" Halifax was being called on to pay Innopex's costs in responding to the lawsuit. He added that in his experience "the costs of defending U.S. trademark, patent and copyright actions is potentially extraordinary".

[21] In a lengthy coverage analysis, Mr. Lichty referred to the legal test the court is to apply in determining whether there is a duty to defend as stipulated in Nichols v. American Home Assurance Co., 1990 144 (SCC), [1990] 1 S.C.R 801, 68 D.L.R. (4th) 321. His overall conclusion, based on an extensive review of the American caselaw, was that the allegations in each of the five counts in the Gucci complaint would trigger Halifax's duty to defend based on the commission of an advertising offence within the meaning of the coverage described in the policy and the exception to exclusion 5(b).

[22] In my view, the following passage from Mr. Lichty's opinion, offered in support of his conclusion, is significant:

A policyholder does not obtain coverage and in particular a paid defence simply by proving that the allegations in the pleading fall within one or more of the listed offences. The policy holder must also demonstrate that the offence (not the injury) arose out of the advertising done by Innopex. Unfortunately the defence obligation is not governed by facts which are outside of the pleaded allegations. Rather the Court will carefully construe the pleading to determine whether there are any allegations of the commission of an offence in the course of advertising.

Put at its simplest, policyholder's counsel will argue that the very essence of the commission of certain trademark infringement offences involves communication to the public. In essence the infringement takes place because the defendant promotes his infringing products to the public and/or causes the public to believe that he is a licensed distributor of the "real thing". Undoubtedly policyholder's counsel will argue that implicit within any of these trademark violation allegations is the possibility that the offences were committed in the course of advertising.

I have very little doubt that the Court will find that the allegations in Count II of the pleading allege the commission of "infringement of title" in the course of advertising. As well there is a mere possibility [emphasis in original] that the allegations set out in Counts II, III and IV allege the commission of defined offences in the course of advertising.

I am very aware that there is no explicit allegation in Counts III, IV or V of the pleading alleging marketing or advertising. Certainly Halifax can argue that on a plain reading the language used in Counts III, IV and V there is [page534] not the slightest allegation that the offences were committed through advertising or marketing. I simply point out that certain U.S. Courts have held that implicit within the allegation of any trademark offence is a suggestion that it might well have been committed as a result of communication to the public.

(Emphasis added)

[23] Mr. Lichty then noted that Halifax could avoid the duty to defend if exclusion (5)(b) applied. This exclusion removes coverage where there is an infringement of a trademark, service mark or trade name. He pointed out that although the exclusion is triggered by the allegations in the Gucci complaint, there is an exception within the exclusion. Specifically, a claim that arises out of an "infringement of title" is excepted from the exclusion. In Mr. Lichty's opinion, therefore, a duty to defend arises from the exception. As I will discuss, in concluding that Halifax did not have a duty to defend, the motion judge largely based this conclusion on the application of the exclusion, being of the opinion that the infringement of title exception to the exclusion did not apply. Earlier, based on a review of American caselaw, Mr. Lichty stated: "An overwhelming majority of U.S. Courts have found that trademark infringement falls within the 'infringement of title or slogan offence'." He concluded:

In my view this exception creates difficulties for Halifax. I pointed out in an analysis of the trademark offences that U.S. Courts have frequently found that trademark infringing activities fall within the offence of "infringement of title". While it is true that not every trademark violation amounts to an infringement of title, the majority of Courts have found that most trademark infringement activity amounts to a "violation of title". The Courts have essentially adopted Black's Law Dictionary definition of "title" to find explicitly that the term "title" includes amongst other things a trademark violation.

I am markedly concerned that, in any duty to defend application, a Court would find that those parts of the allegations in the Complaint which in any way allege wrongful use of the trademark or the trade name allege a violation of a title. If there is a violation of title, the exception to the trademark exclusion is applicable.

(Emphasis added)

[24] The final section of Mr. Lichty's opinion is entitled "Summary & Recommendation". In it, he reiterates his opinion that Halifax has a duty to defend the underlying litigation and provides a summary of the reasons on which his opinion is based. Recognizing that this result would follow a conventional Nichols application to determine whether there is a duty to defend by reading the Gucci complaint with the coverage provided by the Halifax policy, he recommended that Halifax initiate a "proactive" procedure that involved putting the true facts before the court. As indicated earlier, it was Mr. Lichty's belief that the true [page535] facts would disclose that Innopex was not engaged in advertising or marketing activity in the sale of the watches.

[25] Mr. Lichty pointed out that although the conventional Nichols application is determined on the basis of the pleadings in the underlying action read together with the provisions of the insurance policy without considering extrinsic evidence, he noted that there were two cases in which the court had "evidenced a willingness to permit affidavit evidence showing the true and undisputed state of facts". He made reference to Slough Estates Canada Ltd. v. Federal Pioneer Ltd. (1994), 1994 7313 (ON SC), 20 O.R. (3d) 429, [1994] O.J. No. 2147 (Gen. Div.). He, therefore, recommended that Halifax commence an action seeking a declaration that on the basis of "the true uncontroversial and indeed admitted facts" that the allegations in the underlying litigation do not come within the coverage in the Halifax policy and, accordingly, that it has no duty to defend the Gucci suit against Innopex. As Mr. Lichty put it:

I believe that Halifax has to be proactive and initiate declaratory proceedings seeking an order that any obligation that might have existed, given the pleadings, does not continue to exist given the true non-controversial and indeed admitted state of facts.

VII

[26] Halifax accepted Mr. Lichty's recommendation. It commenced an action for a declaration that it had no duty to defend Gucci's complaint against Innopex. Innopex counterclaimed for a declaration that Halifax was under a duty to defend the Gucci complaint and for punitive damages of $2.5 million. Thereafter, Halifax moved for summary judgment for a declaration that it had no duty to defend and for dismissal of Innopex's claim for punitive damages, while Innopex moved for summary judgment that Halifax had a duty to defend. As I indicated earlier, these summary judgment motions produced several affidavits and hundreds of pages of cross-examinations of the affiants. Following a three-day hearing, the motion judge allowed Halifax's motion and dismissed Innopex's motion. In addition, she found that Halifax was required to indemnify Innopex for its legal fees in defending the Gucci complaint from its inception until March 5, 2003, the date on which the hearing of the motions commenced. Halifax appeals from this order, while Innopex appeals from the order granting Halifax's motion for summary judgment and the dismissal of its own motion, both on the duty to defend issue.

VIII

[27] The motion judge commenced her reasons for judgment with a description of how Innopex purchased and sold the [page536] watches that are the subject of the Gucci lawsuit. She followed this outline with a reference to the advertising liability coverage in Halifax's commercial general liability policy. She then referred to the competing motions for summary judgment. However, although she referred to the principles and the test that the court is to apply in deciding a duty to defend issue as explained in Nichols, she failed to address the fundamental question of whether Halifax had a duty to defend on the basis of the pleadings in the underlying lawsuit when read with the relevant provisions of the insurance policy.

[28] Ultimately, the motion judge determined the following:

(1) On the basis of the evidence before the court on the summary judgment motions, she found as a fact that Innopex was not engaged in advertising within the meaning of the policy when it sold the watches to an American purchaser, with the result that Halifax had no contractual duty to indemnify Innopex if the Gucci lawsuit were to succeed.

(2) She interpreted the word "title" in the exception to exclusion (5)(b) in favour of Halifax, again holding that the Gucci complaint was excluded from coverage.

(3) Notwithstanding these findings, the motion judge determined that Halifax owed Innopex a duty to defend the Gucci lawsuit from its commencement until the date on which the hearing of the motions commenced and, consequently, was required to indemnify Innopex for its legal costs in defending the lawsuit during this period.

(4) On the basis of the evidence before the court, she found that there was no factual basis to support Innopex's counterclaim for punitive damages of $2.5 million instituted on allegations that Halifax had breached the implied obligation of an insurer to deal in good faith with claims of its insured, with the result that she awarded Halifax summary judgment dismissing the counterclaim.

Throughout her reasons, it is obvious that the motion judge relied on the evidence generated by the summary judgment motions.

IX

[29] To the motion judge, the competing motions for summary judgment presented two issues: (1) Did Innopex engage in "advertising" within the meaning of Coverage B, clause (1) (b)(3) [page537] and Section V, clause 2, of the policy when it sold the knock-off watches that are the subject of the Gucci lawsuit; (2) If Innopex was engaged in advertising, was coverage excluded by the exclusion in clause 2(5)(b), or did the exception to the exclusion apply on the basis that the true nature of the Gucci lawsuit pertained to an alleged infringement of title. Those were issues that involved finding the true facts, rather than looking only at the pleadings and the insurance policy.

[30] Although Innopex challenged the admissibility of the extrinsic evidence generated by the summary judgment motions, the motion judge applied that evidence in making findings of fact relative to the underlying Gucci claim. This was contrary to the procedure generally followed on a Nichols application to determine a duty to defend issue. In fairness to the motion judge, this was the result of the tactic devised by Mr. Lichty to avoid the virtually certain finding of a duty to defend by recommending a procedure intended to manufacture a record which would disclose the "true facts". An inquiry into whether the insured had in fact engaged in the conduct complained of in the underlying action should not be part of the inquiry on a duty to defend application.

[31] On the approach taken to the motions by the motion judge, having decided that Innopex was not engaged in advertising in selling watches this should have ended the inquiry. This is because if Innopex was not engaged in advertising there was no advertising coverage and, therefore, there was no duty to defend. Nevertheless, the motion judge went on to determine whether the exception to exclusion 2(5)(b) applied. This involved the interpretation of "title" in the exception to the exclusion. In interpreting "title" as a "literary or artistic work", she failed to take into consideration the substantial body of case law that has consistently found coverage for a number of different trademark infringements under the "title" exception to exclusion 2(5)(b). In my view, the motion judge erred in her analysis of whether the name "Gucci" qualified as a title. She made no reference to Mr. Lichty's opinion that considered many cases that broadly interpret "title" by adopting the definition of title in Black's Law Dictionary as a "mark, style or designation; a distinctive appellation; the name by which anything is known". I will return to this question. Cases contrary to the opinion of the motion judge include J. A. Brundage Plumbing & Roto- Rooter v. Massachusetts Bay Ins. Co., 818 F.Supp. 553 (W.D.N.Y. 1993); Union Ins. Co. v. Knife Co., 897 F.Supp. 1213 (W.D. Ark. 1995); Sentex Sys. v. Hartford Accident & Indem. Co., 882 F.Supp. 930 (C.D. Cal. 1995), affd 93 F.3d 578 (9th Cir. 1996); Energex Sys. Corp. v. Fireman's Fund Ins. Co., [1997] W.L. 358007 (S.D.N.Y. 1997). [page538]

[32] In the final analysis, although the motion judge correctly referred to the legal principles governing the determination of an insurer's duty to defend, by approaching that issue in the manner that I have described, she failed to deal with the duty to defend issue pursuant to Nichols and other cases. As an insurer's duty to defend can, and should, be decided without the consideration and application of extrinsic evidence bearing upon the underlying action, this court is in a position to decide the issue by looking at the pleadings and the insurance policy.

X

[33] I intend to quote liberally from the reasons for judgment of Iacobucci J. on behalf of the Supreme Court of Canada in Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, 204 D.L.R. (4th) 14. These reasons are helpful in reviewing the legal principles and the test governing an insurer's duty to defend and for the admonition against admitting extrinsic evidence on a motion or application to determine this issue.

[34] With respect to the governing legal principles, Iacobucci J. wrote at paras. 28, 29, 31, 33, 34 and 35:

The starting premise for assessing whether an insurer's duty to defend has been triggered rests in the traditional "pleadings rule". Whether an insurer is bound to defend a particular claim has been conventionally addressed by relying on the allegations made in the pleadings filed against the insured, usually in the form of a statement of claim. If the pleadings allege facts which, if true, would require the insurer to indemnify the insured for the claim, then the insurer is obliged to provide a defence. This remains so even though the actual facts may differ from the allegations pleaded. The "pleadings rule" was articulated by the British Columbia Supreme Court in Bacon v. McBride (1984), 1984 692 (BC SC), 5 C.C.L.I. 146, where Wallace J. stated, at p. 151:

The pleadings govern the duty to defend -- not the insurer's view of the validity or nature of the claim or by the possible outcome of the litigation. If the claim alleges a state of facts which, if proven, would fall within the coverage of the policy the insurer is obliged to defend the suit regardless of the truth or falsity of such allegations. If the allegations do not come within the policy coverage the insurer has no such obligation . . .

This reasoning was subsequently adopted by this Court in Nichols v. American Home Assurance Co., 1990 144 (SCC), [1990] 1 S.C.R. 801, where McLachlin J. (as she then was) indicated that general principles regarding the construction of insurance contracts support the conclusion that the duty to defend arises where the pleadings [emphasis in original] raise claims which would be payable under the agreement to indemnify in the insurance contract. McLachlin J. also referred to the ruling in Opron Maritimes Construction Ltd. v. Canadian Indemnity Co. (1986), 1986 89 (NB CA), 73 N.B.R. (2d) 389 (C.A.), leave to appeal refused by this Court, [1987] 1 S.C.R. xi, for the proposition that, where it is clear from the pleadings that a suit falls outside [emphasis in original] policy coverage by reason of an exclusion clause, the duty to defend does not arise. McLachlin J. further noted that it is not necessary to prove that the obligation [page539] to indemnify will in fact arise in order to trigger the duty to defend. The mere possibility that a claim falling within the policy may succeed will suffice. In this sense, the insurer's duty to defend is broader than the duty to indemnify (Nichols, supra, at p. 810).

Where 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. This principle is congruent with the broader tenets underlying the construction of insurance contracts, namely the contra proferentem rule, and the principle that coverage provisions should be construed broadly, while exclusion clauses should receive a narrow interpretation. In Opron Maritimes, supra, the New Brunswick Court of Appeal conveyed these principles by stating at para. 15 that"[a]ny doubt as to whether the pleadings bring the incident within the coverage of the policy ought to be resolved in favour of the insured". Moreover, in Nichols, McLachlin J. stated at p. 812:

I conclude that considerations related to insurance law and practice, as well as the authorities, overwhelmingly support the view that the duty to defend should, unless the contract of insurance indicates otherwise, be confined to the defence of claims which may be argued to fall under the policy. That said, the widest latitude should be given to the allegations in the pleadings in determining whether they raise a claim within the policy.

The pleadings rule was further considered by this Court in Non-Marine Underwriters, Lloyd's of London v. Scalera, [2000] 1 S.C.R. 551, 2000 SCC 24. In that case, the Court unanimously affirmed the principles set out in Nichols. The majority also endorsed the reasoning of the Colorado Court of Appeals in Colorado Farm Bureau Mutual Insurance Co. v. Snowbarger, 934 P.2d 909 (1997) at p. 912, to the effect that the "duty to defend arises when the underlying complaint alleges any facts that might fall within the coverage of the policy" (at para. 78, (emphasis added)).

At the same time, Scalera held that the bare assertions advanced in a statement of claim are not necessarily determinative. If so, the parties to an insurance contract would always be at the mercy of a third-party pleader. As such, it was stated at para. 79 that "[w]hat really matters is not the labels used by the plaintiff, but the true nature of the claim" (emphasis added). Based on this, courts have been encouraged to look behind the literal terms of the pleadings in order to assess which of the legal claims put forward by the pleader could be supported by the factual allegations. This analysis is undertaken with a view to discerning the true "substance" of the allegations. Thus, the key question is not whether the claims are meritorious, but "whether, assuming the verity of all of the plaintiff's factual allegations, the pleadings could possibly support the plaintiff's legal allegations" (at para. 84).

Based on this line of authority, it follows that the proper basis for determining whether a duty to defend exists in any given situation requires an assessment of the pleadings to ascertain the "substance" and "true nature" of the claims. More specifically, the factual allegations set out therein must be [page540] considered in their entirety to determine whether they could possibly support the plaintiff's legal claims.

(Emphasis added)

[35] As for the admissibility of extrinsic evidence, in paras. 36 and 37 Iacobucci J. wrote:

While these principles are instructive for the purposes of the present case, one important question arising in this appeal has been left open by the jurisprudence to date. That is, whether, in seeking to determine the "substance" and "true nature" of a claim, a court is entitled to go beyond the pleadings and consider extrinsic evidence. Without wishing to decide the extent to which extrinsic evidence can be considered, I am of the view that 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. I now turn to that question.

2. Application of Legal Principles to the Present Case

(a) Reference to Extrinsic Evidence

It should be recalled that the question whether an insurer is bound to provide defence coverage in an action taken against the insured arises as a preliminary matter. Of course, after trial, it may turn out that there is no liability on the insurer, and thus, no indemnity triggered. But that is not the issue when deciding the duty to defend. Consequently, we cannot advocate an approach that will cause the duty to defend application to become "a trial within a trial". In that connection, a court considering such an application may not look to "premature" evidence, that is, evidence which, if considered, would require findings to be made before trial that would affect the underlying litigation.

(Emphasis added)

[36] I would add a word on the role of extrinsic evidence in determining an insurer's duty to defend. The procedure advocated in the authorities discussed in Monenco is similar to a rule 21.01(1)(b) motion to strike out a pleading on the ground that it discloses no reasonable cause of action or defence, in that the test established by Nichols and Non-Marine Underwriters, Lloyds of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, 185 D.L.R. (4th) 1 is similar to the test established by Hunt v. Carey Canada Inc., 1990 90 (SCC), [1990] 2 S.C.R. 959, 74 D.L.R. (4th) 321 on the hearing of a rule 21.01(1)(b) motion. There is another similarity as under rule 21.01(2)(b) no evidence is admissible on a substantive adequacy motion. However, the court is entitled to consider documents referred to and relied on in the pleadings, as such are not evidence precluded by rule 21.01(2) (b): Web Offset Publications Ltd. v. Vickery (1998), 1998 14858 (ON SC), 40 O.R. (3d) 526, [1998] O.J. No. 6478 (Gen. Div.), affd 43 O.R . (3d) 802n, 1999 4462 (ON CA), [1999] O.J. No. 2760 (C.A.). Similarly, on a duty to defend application the court may consider documents referred to in the underlying statement of claim where to do so may assist in determining the substance and true nature of that claim. [page541]

[37] Generally speaking, in this province the process adopted to decide a duty to defend issue is an application under rule 14.05(3)(d) or (h). This is a summary procedure well suited to determining a duty to defend issue which necessarily arises, as Iacobucci J. noted in Monenco, as a preliminary matter. To follow this procedure avoids a duty to defend application becoming "a trial within a trial" into the truth of the allegations in the underlying statement of claim, as occurred in this case. As Iacobucci J. made clear in Monenco, so long as the facts as pleaded come within the coverage in the policy, the insurer is under a duty to defend even though the actual facts may differ from the pleading. That is why extrinsic evidence going to the truth of the allegations pleaded, as occurred in this case, is not receivable. Moreover, as the motion judge did in this case, the court must avoid findings that would compromise or affect the underlying litigation. This is not to say that evidence is never permissible on a duty to defend application. Indeed, as in this case, it is not uncommon that expert evidence is helpful to the court in the interpretation of the insurance coverage and, on occasion, in interpreting technical language in the underlying claim.

[38] What the insurer did in this case, by the procedure it followed, was to turn a duty to defend application into a duty to indemnify application by introducing extrinsic evidence pertaining to what it termed "the true facts". It is well-recognized that the insurer's duty to defend is broader than its duty to indemnify. The time to determine the insurer's duty to indemnify, if at all, is at the conclusion of the underlying litigation.

[39] In addition, the procedure undertaken by the insurer, albeit a misguided effort to persuade the court on the basis of "the true facts", demonstrates that Rule 20 does not lend itself to deciding duty to defend issues. The delay involved to bring a motion for summary judgment, that can be resorted to only after the defendant has delivered a statement of defence, necessarily defeats the objective of deciding duty to defend issues expeditiously as a preliminary issue. Moreover, further delay is possible if genuine issues arise which cannot properly be resolved by a motion judge on a Rule 20 motion.

XI

[40] On the application of the proper legal principles, I am satisfied that Halifax has a duty to defend the Gucci complaint.

[41] As the authorities discussed in Monenco indicate, Nichols determined that the duty to defend arises only with respect to claims, which if proven, would fall within the scope of coverage [page542] provided by the policy. In Scalera, the Supreme Court modified this inquiry by focusing not on the bare allegations in the underlying pleadings, but on their substance and true nature, adding that a duty to defend arises where the underlying action against the insured raises a claim that could potentially fall within the scope of the coverage.

[42] On their substance and true nature, the essence of the claims in Gucci's complaint is trademark infringement on the part of Innopex arising from the unauthorized use of Gucci's trademark on the watches that Innopex sold in the United States. Gucci alleges that when the distribution and sale of watches took place, its trademark was infringed. Although Halifax contends that a claim for trademark infringement is not within the coverage, as I will discuss, the exception to exclusion 2(5)(b) retains infringement of "titles or slogans" as an advertising offence.

[43] As I have indicated, the motion judge appreciated that the threshold in terms of the duty to defend issue was whether Innopex was engaged in advertising when it sold and distributed the watches that resulted in the infringement of Gucci's trademark. However, instead of making this determination on the basis of the allegations in Gucci's complaint, relying on the extrinsic evidence in the extensive motion record she found as a fact that Innopex was not engaged in advertising. As Iacobucci J. pointed out in Monenco, this determination is to be made on the pleadings even though "the actual facts may differ from the allegations pleaded".

[44] In my view, although the term "advertising" does not appear in Gucci's complaint, the pleadings contain allegations that by inference amount to an offence in the course of advertising. For example, para. 25 pleads that there were false descriptions and false representations made by Innopex. In para. 27 it is alleged, in connection with the sale of goods, that there were false descriptions and false representations made by Innopex. More importantly, in para. 29, which I have reproduced in para. 11, it is alleged that Innopex marketed, distributed and sold goods that were imitations of the plaintiff's product, all for the purpose of causing confusion and mistakes. In a passage in his legal opinion, reproduced in para. 22, Mr. Lichty points out that a number of courts have held that the term "marketing" encompasses advertising activity. In my view, implicit in any allegation of trademark infringement is the fact that the offences were committed in the course of advertising because infringement does not take place until the insured promotes its products to its customers: Am. Employers' Ins. Co. v. Delorme Publ'g Co., 39 F.Supp.2d 64 (D. Me. 1999), at p. 74. Moreover, as Mr. Lichty states, citing Delorme and other cases, the pleading of a violation of ss. 43(a) [page543] and 35(a) of the Lanham Act, as Gucci has pleaded, raises the possibility that the impugned activity involved advertising. Although, should Gucci succeed in its suit against Innopex these allegations without more may not be sufficient for indemnity purposes, they are sufficient for duty to defend purposes.

[45] The next question is whether Gucci's trademark infringement claim is excluded by clause 2(5)(b), or whether it falls within the "titles or slogans" exception. As I discussed in para. 31, the motion judge erred in holding that the exception to the exclusion did not apply when she interpreted "title" to mean a "literary or artistic work". I agree with Mr. Lichty's opinion that Counts II and III of the complaint allege conduct, for duty to defend purposes, that can be conceived as falling within the infringement of title or slogan offences.

[46] It will be recalled that in her reasons for judgment the motion judge interpreted "title" in the context of the exception to the trademark exclusion to mean the name of a "literary or artistic work". In arriving at this conclusion, she determined that the distinctive trademark "Gucci" is neither a title nor a slogan. As a result, she found that because the essence of the underlying claim was trademark infringement it fell within the trademark exclusion in clause 2(5)(b) and was not saved by the "title" exception to the exclusion. Hence, Halifax was not under a duty to defend. In support of her conclusion the motion judge relied on Palmer v. Truck Insurance Exchange, 988 P.2d 568 (Cal. 1999). In doing so, she overlooked the majority of American authorities that do not limit the definition of "title" to literary or artistic works and do not exclude personal names.

[47] In the opinion that the insurer's expert, Mr. Lichty, prepared he stated:

The policy contains an exclusion for trademark infringement. However there is an exception for infringement of title. A majority of U.S. Courts have found that infringement of title clearly encompasses claims for trademark infringement. Bluntly the inclusion of the exception impedes Halifax's ability to rely on the trademark exclusion.

In my view this exception creates difficulties for Halifax. I pointed out in an analysis of the trademark offences that U.S. Courts have frequently found that trademark infringing activities fall within the offence of "infringement of title". While it is true that not every trademark violation amounts to an infringement of title, the majority of Courts have found that most trademark infringement activity amounts to a "violation of title". The Courts have essentially adopted Black's Law Dictionary definition of "title" to find explicitly that the term "title" includes amongst other things a trademark violation.

Not surprisingly, this opinion conforms with the discussion on the subject in Mr. Lichty's treatise, [page544] Annotated Commercial General Liability Policy, supra, at pp. 26A-14.1 to 26A-14.3, where an excellent summary of the law in relation to the definition of title is found.

[48] In para. 31 of my reasons I referred to some of the cases included in the substantial body of case law referred to by Mr. Lichty that interprets "title" in the context of the trademark exclusion as including a trademark violation. It is helpful to refer to one of the cases as typical of the reasoning in the other cases.

[49] In Brundage Plumbing, supra, at p. 559 the court noted that as "title" was not defined in the policy, it was to be defined in the context of "the common law and in ordinary language". The court then resorted to the standard legal dictionary definition followed in the U.S., Black's Law Dictionary, and compared the definitions for the word "title", and for the word "trademark". As follows:

"Title" is defined as: "[a] mark, style or designation; a distinctive appellation; the name by which anything is known".

As the word "trademark", Black's Law Dictionary provided:

[a] title may become a subject of property; as one who has adopted a particular title for a newspaper, or other business enterprise, may, by long and prior usage, or by compliance with statutory provisions as to registration and notice, acquire a right to be protected in the exclusive use of it.

Based on this comparison of definitions, the court concluded that a reference to infringement of "title" within insurance coverage should be deemed a reference to trademark infringement. The District Court held in Brundage Plumbing that infringement of a title included a trademark infringement arising from improper use of the trade name "Roto-Rooter".

[50] The motion judge referred to the Black's Law Dictionary definition of title that clearly encompasses a name such as Gucci. However, she went on to conclude that "the name 'Gucci' is a personal name that has come to be associated with that company's product. Such personal names are not considered 'titles' for intellectual property purposes". She does not cite authority for her conclusion that a personal name that is a registered trademark cannot be considered a title.

[51] On the other hand, the vast majority of American courts have concluded that the phrase "titles or slogans" encompasses trademark infringement. Most courts have adopted the meaning of "title" that is set out in Black's Law Dictionary, i.e."a mark, style or designation; a distinctive appellation; the name by which anything is known". This seems to be the better view. There would seem no reason in logic or policy to exclude personal names from the definition of title, particularly when those names are registered trademarks. [page545]

[52] It follows, that Halifax is under a duty to its insured, Innopex, to defend the Gucci complaint.

XII

[53] Finally, I must consider Innopex's appeal from the summary judgment dismissing its counterclaim for punitive damages against Halifax on the ground that it failed to deal in good faith with its request to provide a defence to the Gucci complaint. This counterclaim is based on Whiten v. Pilot Insurance Co., 2002 SCC 18, [2002] 1 S.C.R. 595, 209 D.L.R. (4th) 257. The motion judge dismissed the counterclaim consequent to her finding that Halifax had no duty to defend, adding that as on the record before her she could find no misconduct on the part of Halifax, she could award no claim for punitive damages. In my view, as I have found that Halifax is under a duty to defend and as the record contains evidence on which a trial judge could find liability and award punitive damages, I would set aside the summary judgment. If so advised, Innopex can proceed to trial with its counterclaim for punitive damages.

[54] Based upon the foregoing, there is no need to consider Halifax's appeal from the order that it pay Innopex's legal costs of defending the Gucci complaint from its commencement until the date that the motion judge heard the summary judgment motions.

XIII

[55] In closing, I return to the procedure employed by Halifax to bring the duty to defend issue to the court for its determination. It is unfortunate that Halifax adopted a proactive, preemptive strike tactic that resulted in the creation of a substantial record containing considerable extrinsic evidence that diverted the motion judge from deciding the duty to defend issue expeditiously on the basis of the legal principles and test explained by the Supreme Court of Canada in Nichols, Scalera and Monenco. Moreover, it is very disturbing that Halifax followed this procedure in what appears to be a deliberate effort to divert the court from deciding the real issue of whether it had a duty to defend, a result which its own expert believed to be virtually inevitable. When an insured person is sued for a claim that may fall within a risk that is insured, it is essential that he or she know at a very early stage whether or not the claim falls within the coverage, thereby creating a duty to defend, as it is necessary that prompt steps be taken to defend the lawsuit and to forestall default judgment. No doubt this underlies the principle that the duty to defend issue is to be decided expeditiously as a preliminary matter on the basis of the allegations in the underlying litigation read with the insurance coverage. The [page546] insurer's procedure in this case did not result in either an early or an economical resolution of the issue. Indeed, it has now been more than four years since Halifax commenced its action claiming a declaration that it was not under a duty to defend.

[56] In addition, I should say a brief word about my reliance on American authorities. In Zurich Insurance v. 686234 Ontario Ltd. (2002), 2002 33365 (ON CA), 62 O.R. (3d) 447, 222 D.L.R. (4th) 655 (C.A.), at p. 461 O.R., this court stated that where there is little or no Canadian authority interpreting language commonly used in Canada and the United States in standard form insurance contracts, resort is had to American authorities to ensure uniformity in the construction of insurance contracts in use in both countries.

XIV

[57] In the result, I would set aside the entire order of the motion judge and order that Halifax is required to defend Innopex in the lawsuit commenced against it and its employees by Gucci America, Inc. in the United States District Court. Innopex is entitled to the costs of both motions and of the appeal on a partial indemnity basis. If the parties cannot agree on the costs of the motions, they are to be assessed. The costs of the appeal are fixed in the amount of $30,000, inclusive of disbursements and GST.

Insured's cross-appeal allowed.