The Corporation of the Municipality of Brockton v. Frank Cowan Company Limited et al.; Walkerton Public Utilities Commission, Intervenor

[Indexed as: Brockton (Municipality) v. Frank Cowan Co.]

57 O.R. (3d) 447

[2002] O.J. No. 20

Docket No. C35470

Court of Appeal for Ontario

Abella, Goudge and Simmons JJ.A.

January 11, 2002

Insurance -- Insurer's obligation to defend -- Control of defence -- Insurer surrenders right to control defence only where conflict of interest is made out -- "Appearance of impropriety" does not constitute proper basis for requiring insurer to surrender control of defence and to pay for counsel retained by insured -- Conflict of interest will exist where insurer puts counsel in position where his mandate from insurer can reasonably be said to conflict with his mandate to defend insured in civil action.

The insured municipality suffered a catastrophic bacterial infection of its water supply which gave rise to investigations by the Ontario Provincial Police and the Office of the Chief Coroner, and the launching of a class action lawsuit. The municipality's insurer appointed the BLG law firm to defend the municipality. The municipality was not satisfied with the legal representation which it received from BLG. In particular, the municipality strongly disagreed with BLG's advice to separate itself from the Walkerton Public Utility Commission and let the latter take the lead role in reacting to the emerging legal and administrative proceedings. The municipality was also concerned about the insurer's reservation of rights concerning the policy limits and the exclusion from coverage of punitive and exemplary damages. The municipality retained another law firm, MT, which orchestrated responses to the regulatory authorities, including the Ministry of the Environment, the Coroner's investigation and the criminal in vestigation launched by the Ontario Provincial Police. It assisted in negotiating government loans and remediation contracts, and it was involved in preparing for the civil litigation and for the Public Inquiry. The insurer refused to reimburse the municipality for payments made to MT. The municipality brought an application for, inter alia, a declaration that it had the right to control the defence of the civil actions and to appoint counsel, and a declaration that the insurer had a duty to defend it in the civil actions, and that the scope of that duty included reimbursing the municipality for all defence costs incurred in remediation, responding to regulatory compliance and criminal and regulatory investigations, including the Public Inquiry. The insurer brought a counter-application for a declaration that it was entitled to control the defence of the civil actions and had the right to appoint counsel. The applications judge held that the municipality had not demonstrated such an appearance of im propriety or such an apprehension of conflict that would entitle it to be able to appoint its own counsel paid for by the insurer. She determined that the insurer had the duty to defend the municipality in the civil actions and that the scope of that duty did not include legal fees for the responses to the regulatory and investigative authorities, including the O.P.P., the Coroner, the Minister of the Environment and the Public Inquiry, nor did it include engineering reports ordered in response to MOE field orders or public relations and remediation expenses. The municipality appealed, arguing that the representation by BLG created an appearance of impropriety which required the insurer to surrender control of the defence and pay for counsel retained by the municipality to do what was necessary. The insurer cross-appealed, seeking an order confirming the scope of the duty to defend as determined by the application judge and confining its duty to reimburse the municipality to those costs either authorized by t he insurer or incurred at its request.

Held, the appeal should be dismissed; the cross-appeal should be allowed.

The law did not permit the municipality to build the concept of appearance of impropriety onto the concept of conflict of interest as a basis to require the insurer to surrender control of the defence. Even if it were advanced merely as an addition to conflict of interest"appearance of impropriety" carries a vagueness which would make it difficult to apply with much consistency and therefore unwise to adopt. More importantly, the relevant jurisprudence both in Canada and in the United States has developed so as to clearly articulate the governing principle in this kind of case to be limited to conflict of interest.

The potential tension which inheres in the relationship between the insurer and the insured and which is manifested by the reservation of rights by the insurer is not per se sufficient to require the insurer to surrender control of the defence. Rather, the focus must be on the mandate given by the insurer to the counsel it appoints to conduct the defence. Do the circumstances of the particular case create a reasonable apprehension of conflict of interest if that counsel were to act for both the insurer and the insured in defending the action? If the insurer puts counsel in a position of having conflicting mandates, it must surrender control of the defence to an insured who wishes to retain its own counsel paid for by the insurer.

The municipality's complaints in this case did not raise a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer to defend the civil actions. There was no suggestion that the advice given by BLG was anything other than its best view of how to immunize the municipality's liability in the civil actions and therefore minimize the indemnity obligation of the insurer. It did not reflect a mandate from the insurer that conflicted with BLG's obligation to defend the municipality in the civil actions. The reservation of rights by the insurer was based on the monetary limits of the policy and its exclusion of punitive and exemplary damages. The reservation was not based on any conduct of the insured that would be in issue in the underlying litigation. Hence defence counsel was under no mandate to show that the insured had acted in a way which would remove the insurer's indemnity obligation. Moreover, the insurer had appointed separate coverage counsel, thereby removing any c onflict that could have arisen from the reservation of rights in this case. Counsel appointed by the insurer to defend the civil action was not under any set of contradictory mandates in defending the civil actions. In the circumstances of this case, the insurer had not surrendered the right to control the defence of the civil actions and was not obliged to pay for independent counsel retained by the municipality.

The resolution of the issue which arose on the cross-appeal turned simply on the provision in the contract of insurance which obliged the insurer to reimburse the insured only for those reasonable expenses which were incurred at the insurer's request. None of the expenses incurred by MT were incurred at the insurer's request.

APPEAL and CROSS-APPEAL from a judgment of Caswell J. (2000), [2001] I.L.R. 1-3905 dismissing an application for a declaration that the insured had a right to control the defence of civil actions and to appoint counsel, and that the insurer had a duty to reimburse the insured for legal costs.

Foremost Insurance Co. v. Wilks, 253 Cal. Rptr. 596 (1988); Zurich of Canada v. Renaud & Jacob, 1996 5801 (QC CA), [1996] R.J.Q. 2160 (C.A.), apld Laurencine v. Jardine (1988), 1988 4574 (ON SC), 64 O.R. (2d) 336, [1988] I.L.R. 1-2292 (H.C.J.), consd Other cases referred to MacDonald Estate v. Martin, 1990 32 (SCC), [1990] 3 S.C.R. 1235, 70 Man. R. (2d) 241, 77 D.L.R. (4th) 249, 121 N.R. 1, [1991] 1 W.W.R. 705, 48 C.P.C. (2d) 113 (sub nom. MacDonald Estate v. Martin & Rossmere Holdings; Martin v. Gray; Gray v. Martin); 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; San Diego Navy Federal Credit Union v. Cumis Insurance Society Inc., 208 Cal. Rptr. 494 (1984); Szebelledy v. Constitution Insurance Co. of Canada (1985), 1985 6500 (ON SC), 11 C.C.L.I. 140 (Ont. Dist. Ct.) Authorities referred to Ferguson, D.S."Conflict Between Insured and Insurer: An Analysis of Recent Canadian Cases" (1990), 12 Adv. Q. 129

Rod McLeod, Q.C. and M. Jasmine Sweatman, for appellant. Steven Stieber and Heleni Maroudas, for respondent.

The judgment of the court was delivered by

[1] GOUDGE J.A.: -- In the spring of 2000, the community of Walkerton suffered a catastrophic bacterial infection of its water supply. Through amalgamation, Walkerton had become part of the new municipality of Brockton. Hence, it was Brockton that had to develop the multitude of municipal responses required by this disaster.

[2] To assist it in responding to various legal aspects of this crisis, including the inevitable civil actions, Brockton sought help from its insurer. However, it very quickly became dissatisfied with the legal assistance provided by its insurer and retained its own lawyers.

[3] The central issue in these proceedings is whether Brockton had the right to take over control of the defence of the civil actions from its insurer in the circumstances of this case and whether it therefore had the corollary right to appoint counsel for this purpose at the insurer's expense.

[4] At first instance, Caswell J. decided against Brockton. For the reasons that follow, I agree with that conclusion and would therefore dismiss the appeal.

The Facts

[5] The dramatic events in Walkerton began in mid-May 2000 with the discovery that the water supply system contained a deadly form of E-coli bacteria. The crisis came emphatically to public attention when, on May 21, the medical officer of health issued a boil water advisory. Despite this, hundreds of residents were infected and became seriously ill. Tragically, several people died as a result.

[6] An atmosphere of crisis swept the community, accompanied by the intense glare of national media attention. Very quickly, people began to demand both information and explanations from municipal officials. The Ontario Provincial Police began an investigation, as did the Office of the Chief Coroner. On May 23, the Ministry of the Environment issued a request requiring the municipality to retain an engineer to respond with an action plan by May 26. On May 26, the media reported that a class action lawsuit had been launched seeking damages of at least $100 million.

[7] Understandably, the municipality felt the need of assistance from its insurers. Brockton was the named insured under a policy of liability insurance underwritten by Guarantee Company of North America, Lombard General Insurance Company of Canada and CGU Insurance Company of Canada through their managing general agent Frank Cowan Company Limited. I will refer to them collectively as "Cowan". They are the respondents in this appeal.

[8] Brockton was also insured as an additional interest under a policy of liability insurance which extended primary coverage to the Walkerton Public Utilities Commission as the named insured. That policy was underwritten by the Municipal Electrical Association Reciprocal Insurance Exchange (MEARIE). I will refer to this policy as the "MEARIE policy".

[9] In their attempt to obtain legal assistance, Brockton officials met on May 25 with Cowan representatives and lawyers from Borden Ladner Gervais LLP (Borden Ladner) whom Cowan had appointed to defend Brockton. The next day, Borden Ladner wrote to confirm its position and the advice it had given. The letter said this:

We wish to confirm that we were instructed by Frank Cowan Company to meet with its insured, the Municipality of Brockton, under a reservation of rights. As we discussed with you and the members of Council, and your local solicitor, the reservation of rights means that our attendance to investigate and assist is without prejudice to the insurer's rights, and the insured's rights, under the policy of insurance.

As we discussed, it is our understanding that the Municipal Electrical Association Reciprocal Insurance Exchange (MEARIE) will respond where third parties sue not only the Public Utilities Commission, but also the municipality, alleging that they have been negligent in the operation of the utility. This understanding is supported by the special bulletin published by MEARIE and the 1996 letter from the PUC to its insurance broker, copies of which we left with you. The wording of the MEARIE policy also supports this position. Accordingly, if and when lawsuits or other claims are made against the municipality, those claims should be sent to MEARIE for response. For information purposes, in order that Frank Cowan Company can monitor the situation, copies of such documents should also be sent to Frank Cowan Company on the understanding that a response in the first instance is expected from MEARIE.

We would also strongly encourage the municipality to continue to emphasize the separate roles of the municipality and the PUC in relation to this matter. This separation should be carried forward in dealing with the public and the media, and should be considered when any municipal action in respect of this matter is taken. This strategy is particularly important for the Mayor.

[10] Brockton was not satisfied with this response from the Cowan insurers, and had received no response at all from the MEARIE insurers. Brockton officials felt an urgent need for the fullest possible legal representation and, as a result, on May 26, Brockton appointed Miller Thomson LLP (Miller Thomson) as counsel with instructions to act with respect to "any and all suits, claims, actions and inquiries arising from the contamination of the Walkerton water system". Miller Thomson moved quickly to assemble a team to deal with the immediate requirements of the regulatory and investigative agencies and to prepare a broad defence to the anticipated civil actions.

[11] At a meeting on June 12, Brockton officials made clear to Cowan that they felt that Borden Ladner had taken no steps to prepare to defend the civil actions and that the municipality wished to be represented by Miller Thomson in all matters arising out of the contamination of the water system. Brockton further asserted that Cowan should pay for these services. Cowan responded that this would have to be authorized by the underwriters of the Cowan policy. No such authorization was ever forthcoming.

[12] On June 13, the Province of Ontario ordered a public inquiry into the water tragedy and appointed Mr. Justice O'Connor of this court as Commissioner.

[13] On June 14, Borden Ladner wrote to Miller Thomson to follow up on its previous correspondence. The June 14 letter read as follows:

First, we confirm that Frank Cowan Company continues to investigate and handle this matter pursuant to a reservation of rights. As we advised, Frank Cowan Company has appointed separate coverage counsel to provide it with advice in that regard.

In our earlier letter, we strongly encouraged the municipality to emphasize the separate roles of the municipality and the PUC in relation to this matter. The obvious concern was that actions taken by the municipality, including dealing with the public, the media and regulators, not compromise, or be seen to compromise, the possible requirement that insurers defend third party claims in connection with this matter. Frank Cowan Company understands that the municipality is working hard to respond to the various investigations, inquiries and regulatory requirements at this time. However, it is concerned that it appears that the municipality, and not the PUC, has taken the leading role in responding to regulators, the media and other related aspects at this time. For example, while the MOE may have issued an order, or orders, to the municipality, perhaps those orders should have been directed to the PUC, the entity charged with the responsibility for the water supply. Again, Frank Cowan Company urges the municipality to carefully consider the extent and nature of municipal action in order that the municipality's own interests are protected vis-à-vis its obligations and rights under insurance policies.

Frank Cowan Company also wishes to remind the municipality to forward copies of third party claims in order that Frank Cowan Company can monitor such claims. We trust that the municipality will otherwise co-operate with Frank Cowan Company as required under the policy, including providing copies of orders, reports and other relevant documentation as it becomes available.

(Emphasis added)

[14] On June 16, coverage counsel wrote to Miller Thomson indicating that whether or not there is coverage with respect to indemnity, there is no coverage for costs incurred with respect to the Public Inquiry, the coroner's inquest, or, until charges are laid, any investigation by the Ministry of the Environment.

[15] On June 23, coverage counsel informed Miller Thomson that Cowan had retained the Lawson McGrenere law firm to act as defence counsel on behalf of Brockton in the civil actions. Cowan had released Borden Ladner because two members of that firm had become part of the legal team assisting Mr. Justice O'Connor at the public inquiry.

[16] On July 24, coverage counsel wrote to Brockton confirming that Cowan had accepted the obligation to defend Brockton in the civil actions in accordance with the Cowan policy. The letter also affirmed the insurer's right to appoint Lawson McGrenere as counsel to conduct this defence.

[17] Then on August 3, coverage counsel advised that Cowan was extending coverage to Brockton under the policy. The letter noted, however, that this coverage was subject to the limits of liability in the policy and, further, that the claims in the class action for punitive and exemplary damages were excluded from coverage.

[18] Throughout this period of time, the MEARIE insurers provided no legal assistance to Brockton. Their response to Brockton's request for reimbursement for payments made by Brockton to Miller Thomson was that no coverage was available to Brockton under the MEARIE policy.

[19] In the several months following its retainer, Miller Thomson provided significant assistance to Brockton. It orchestrated responses to the regulatory authorities including the Ministry of the Environment, the Coroner's investigation and the criminal investigation launched by the Ontario Provincial Police. It assisted in negotiating government loans and remediation contracts. It was involved in preparing for the civil litigation and for the Public Inquiry. Brockton's view was that these efforts cannot be segregated and all contributed to the defence of the civil actions. Hence, it sought reimbursement from its insurers for the payments made to Miller Thomson. Both Cowan and MEARIE refused.

[20] To resolve this stand-off between Brockton and its insurers, Brockton commenced this proceeding on July 24. In its application it sought the following relief:

1. A Declaration that there is primary coverage responsibility by Cowan and MEARIE triggering their respective duties to defend Brockton under their respective policies of insurance.

2. A Declaration that Brockton has the right to control the defence of the civil actions and to appoint counsel.

3. A Declaration that Cowan and MEARIE each has a respective duty to defend Brockton in the civil actions, and the scope of that duty includes reimbursing Brockton for all defence costs and costs incurred in remediation, responding to regulatory compliance and criminal and regulatory investigations including the Public Inquiry.

[21] Cowan commenced a counter-application seeking a declaration that Cowan is entitled to control the defence of the civil actions and has the right to appoint counsel.

[22] Originally, Cowan also sought a declaration that Brockton had breached the conditions of its policy by appointing Miller Thomson, thereby freeing Cowan from any further obligation to defend the civil actions. However, at the hearing of this application, that assertion was withdrawn.

[23] Caswell J. heard both the application and the counter-application. She decided first that the Cowan policy provides the primary insurance and that the MEARIE policy can only be accessed after the Cowan policy limits are exhausted and then only in the limited circumstances set out in the MEARIE policy.

[24] Second, she found that Brockton had not demonstrated such an appearance of impropriety or such an apprehension of conflict that would entitle Brockton to be able to appoint its own counsel paid for by the insurer.

[25] Third, she determined that Cowan has the duty to defend Brockton in the civil actions and that the scope of this duty does not include legal fees for the responses to the regulatory and investigative authorities including the O.P.P., the Coroner, the Ministry of the Environment and the Public Inquiry. Nor does it include engineering reports ordered in response to the MOE field orders or public relations and remediation expenses.

[26] Brockton appealed from this decision. After the appeal was perfected, the class action was settled on terms that required Brockton to discontinue its appeal as against MEARIE. Since the class action has been concluded, the real question on this appeal is whether the costs already incurred by Brockton in retaining Miller Thomson must be paid by Cowan.

[27] Several provisions of the Cowan policy provide the contractual backdrop for that issue. The "municipal liability" part of the policy covers property damage and personal injury where liability is imposed on the insured by law for compensatory damages. The "errors and omissions liability" part of the policy covers compensatory damages imposed on the insured by law because of a wrongful act. Both parts contain additional insuring agreements in essentially identical terms. The most relevant of these provisions are as follows:

ADDITIONAL INSURING AGREEMENTS

1. Upon receipt of notice of loss or damage caused to persons or property, to serve any person insured by this policy by such investigation thereof, or by such negotiations with the claimant, or by such settlement of any resulting claims, as may be deemed expedient by the Insurer; and

2. To defend in the name and on behalf of, any Corporation or person insured by this policy and at the cost of the Insurer, that part of any civil action claiming compensatory damages covered by this policy which may at any time be brought against such Corporation or person on account of such loss or damage to persons or property, even if any of the allegations in such action are groundless, frivolous, false or fraudulent; and

3. To reimburse the Insured for all reasonable expenses, other than loss of earnings, incurred at the Insurer's request.

CONDITIONS

11. ASSISTANCE AND CO-OPERATION OF THE INSURED: The Insured shall co-operate with the Insurer and, upon the Insurer's request, shall attend hearings and trials and shall assist in effecting settlement, securing and giving evidence, obtaining the attendance of witnesses and in the conduct of suits.

[28] With this background, I turn then to an analysis of the issues raised in this appeal.

Analysis

[29] The application judge found that the Cowan policy provided the primary coverage to Brockton and that the respondents were therefore obliged to provide Brockton with a defence to the civil damage claims. The respondents do not contest this on appeal and indeed have never denied a duty to defend Brockton under the Cowan policy.

[30] The first and central issue is whether in the circumstances of this case the respondents surrendered their right to control Brockton's defence of the civil actions. In particular, did the respondents lose the right to appoint defence counsel, thereby entitling the appellant to retain independent counsel at the respondents' expense?

[31] The appellant does not contest that in the first instance this right to control the defence (including the appointment of counsel) is that of the insurer. The insurance contract makes this clear. It provides that it is the role of the insurer to investigate and defend claims covered by the policy and it is the role of the insured to assist in that regard. It is the insurer which conducts the defence. This includes the appointment of defence counsel. Indeed, this right of the insurer to control the defence can be seen as being in return for its obligation to pay a proper claim. LeBel J.A. made this point in Zurich of Canada v. Renaud & Jacob, 1996 5801 (QC CA), [1996] R.J.Q. 2160 (C.A.) at p. 2168.

[32] However, the right of the insurer to control the defence is not absolute. The question in this case is whether between May 25, 2000 (when the respondents were first notified of a claim and provided counsel to Brockton) and July 24 (when this proceeding was launched) anything happened which caused the respondents to lose their right to control the defence and appoint counsel. To answer that question, it is necessary to first address the legal test to be met before the insurer loses this right to the insured.

[33] The appellant does not cast this case as one of professional negligence where appointed counsel is alleged to have fallen below the standard demonstrated to be required. Rather, the appellant argues that the usual right of the insurer to control the defence and appoint counsel should be overriden if there is "an appearance of impropriety", which can be based on "conflicts, divergences of interest and other proper objections or factors". It relies on Laurencine v. Jardine (1988), 1988 4574 (ON SC), 64 O.R. (2d) 336, [1988] I.L.R. 1-2292 (H.C.J.) where the trial judge permitted the insured to take over the defence from an insurer which was ordered to defend but maintained that its policy did not provide coverage. Laurencine relied on the earlier case of Szebelledy v. Constitution Insurance Co. of Canada (1985), 1985 6500 (ON SC), 11 C.C.L.I. 140 (Ont. Dist. Ct.) where the trial judge used the notion of "appearance of impropriety" to remove lawyers acting for a defendant insurer because those lawyers had previously acted for the plaintiff insured in another action arising from the same accident. This approach to assessing whether a lawyer has a conflict of interest because of a previous retainer has since been displaced by MacDonald Estate v. Martin, 1990 32 (SCC), [1990] 3 S.C.R. 1235, 77 D.L.R. (4th) 249 which does not rely on this notion.

[34] Laurencine also drew on a line of American jurisprudence exemplified by San Diego Navy Federal Credit Union v. Cumis Insurance Society Inc., 208 Cal. Rptr. 494 (1984). In Cumis, the California Court of Appeal found that an insurer which defended a claim but reserved its rights based on possible non-coverage must give up control of the defence and must pay for counsel chosen by the insured.

[35] The appellant argues that the facts of this case demonstrate an appearance of impropriety requiring the insurer to surrender control of the defence of the civil actions arising from the Walkerton water disaster. The appellant's fundamental complaint is the nature of the advice given by Borden Ladner, counsel appointed by the respondents. Right from the beginning, the municipality was advised by Borden Ladner that it should separate itself from the Walkerton Public Utility Commission and that the latter should take the lead role in reacting to the emerging legal and administrative proceedings. The appellant felt strongly that the disaster required it to give it a much more active and comprehensive response to these events. The appellant's other major concern was the insurer's reservation of rights concerning the policy limits and the exclusion from coverage of punitive and exemplary damages.

[36] The appellant says that these circumstances created an appearance of impropriety requiring the respondents to surrender control of the defence and pay for counsel retained by the insured to do what was necessary.

[37] I cannot agree with the appellant's position.

[38] In my view, the law does not permit the appellant to build the concept of appearance of impropriety on to the concept of conflict of interest as a basis to require the insurer to surrender control of the defence. The older jurisprudence such as Szebelledy, supra, which applies the notion of appearance of impropriety, does so in a conflict context rather than as an entirely "stand alone" concept. Moreover, even if it were advanced merely as an addition to conflict of interest"appearance of impropriety" carries a vagueness which would make it difficult to apply with consistency and therefore unwise to adopt. More importantly however, the relevant jurisprudence both in Canada and in the United States has developed so as to clearly articulate the governing principle in this kind of case to be limited to conflict of interest.

[39] In Zurich, supra, LeBel J.A. carefully set this out. In that case, Zurich provided professional liability insurance to the chartered accountancy firm of Renaud & Jacob. When the accounting firm was sued, the insurer provided counsel to defend but reserved its rights because certain of the claims, namely, those for fraud, conflict of interest and breach of trust were not covered by the policy. The question was whether by reserving its rights in this way, the insurer had given up its right to control the defence and entitled the insured to retain its own counsel at the insurer's expense.

[40] LeBel J.A. decided that without more, this was not a conflict of interest costing the insurer its right to control the defence. He reviewed the origin of this right arising from the insurance contract itself and the duty of an insurer to provide a defence as described in Nichols v. American Home Assurance Co., 1990 144 (SCC), [1990] 1 S.C.R. 801, 68 D.L.R. (4th) 321. He underlined the duty of counsel appointed by the insurer to fairly ensure the defence of the insured and fully protect its interests. He recognized the potential tension between the insurer and the insured which is inherent in both the structure of liability insurance policies and in the separate and different obligations of the insurer to defend and to indemnify.

[41] LeBel J.A. concluded that the potential tension which inheres in the relationship between the insurer and the insured and which is manifested by the reservation of rights by the insurer is not per se sufficient to require the insurer to surrender control of the defence. It would too quickly cost the insurer the right it contracted for. Rather, the focus must be on the mandate given by the insurer to the counsel it appoints to conduct the defence. Do the circumstances of the particular case create a reasonable apprehension of conflict of interest if that counsel were to act for both the insurer and the insured in defending the action? If the insurer puts counsel in a position of having conflicting mandates, it must surrender control of the defence to an insured who wishes to retain its own counsel paid for by the insurer.

[42] In coming to this conclusion, LeBel J.A. noted that American jurisprudence had moved towards a similar position and away from the broader basis for shifting control of the defence to the insured that was articulated in Cumis. For example, after Cumis, in Foremost Insurance Co. v. Wilks, 253 Cal. Rptr. 596 (1988), the California Court of Appeal made clear that not every case where the insurer elects to defend the insured under a reservation of rights creates a conflict of interest requiring the insurer to furnish independent counsel. If the reservation of rights arises because of coverage questions which depend upon an aspect of the insured's own conduct that is in issue in the underlying litigation, a conflict exists. On the other hand, where the reservation of rights is based on coverage disputes which have nothing to do with the issues being litigated in the underlying action, there is no conflict of interest requiring independent counsel paid for by the insurer.

[43] I agree with the approach taken in Zurich and Foremost. The issue is the degree of divergence of interest that must exist before the insurer can be required to surrender control of the defence and pay for counsel retained by the insured. The balance is between the insured's right to a full and fair defence of the civil action against it and the insurer's right to control that defence because of its potential ultimate obligation to indemnify. In my view, that balance is appropriately struck by requiring that there be, in the circumstances of the particular case, a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer before the insured is entitled to independent counsel at the insurer's expense. The question is whether counsel's mandate from the insurer can reasonably be said to conflict with his mandate to defend the insured in the civil action. Until that point is reached, the insured's right to a defence and the insurer's right to control that defence can satisfactorily co-exist.

[44] In speaking of the insured and the insurer, D.S. Ferguson (now Ferguson J.) put it this way in "Conflict Between Insured and Insurer: An Analysis of Recent Canadian Cases" (1990), 12 Adv. Q. 129 at pp. 142-43.

It is important to recognize what the two parties have not agreed to. They have not agreed, unless the policy says so, that the insurer will provide free counsel to the insured to protect his separate interest whether to defend himself against uninsured claims, or to consider his position with respect to claims in excess of limits, or to protect his interest in any dispute with the insurer. Conversely, they have not agreed that the insurer will be able to instruct defence counsel to act to the prejudice of the insured's rights.

(Footnotes omitted)

[45] I turn then to whether the complaints of the appellant in this case raise a reasonable apprehension of conflict of interest on the part of counsel appointed by the respondents to defend the civil actions.

[46] There is no suggestion that the advice given by Borden Ladner was anything other than its best view of how to minimize the appellant's liability in the civil actions and therefore minimize the indemnity obligation of the insurer. In my view, it does not reflect a mandate from the insurer that conflicts with Borden Ladner's obligation to defend the appellant in the civil actions.

[47] The reservation of rights by the respondents was based on the monetary limits of the policy and its exclusion of punitive and exemplary damages. The reservation was not based on any conduct of the insured that would be in issue in the underlying litigation. Hence, defence counsel was under no mandate to show that the insured had acted in a way which would remove the insurer's indemnity obligation. Moreover, the insurer had appointed separate coverage counsel, thereby removing any conflict that could have arisen from the reservation of rights in this case.

[48] Counsel appointed by the respondents to defend the civil action was not under any set of contradictory mandates in defending the civil actions. Counsel's single mandate was simply to provide a sound defence to those actions. This counsel proceeded to do.

[49] The appellant's complaint is really about the way counsel proposed to conduct that defence. However, the tactics used in the defence remain the province of the insurer where the insurer retains the right to control that defence. One can sympathize with the appellant, given the catastrophic circumstances which faced the community of Walkerton. However, absent an insurance contract providing specific terms (for example, allowing the insured to direct counsel appointed by the insurer in defence of claims arising from an environmental disaster) the insurer's right to control the defence remains unless there is a reasonable apprehension of conflict of interest.

[50] I would therefore conclude that in the circumstances of this case the respondents had not surrendered the right to control the defence of the civil actions and were not obliged to pay for independent counsel retained by the appellant.

[51] The second issue in this appeal arises from the finding of the application judge that the scope of the duty to defend resting on the respondents includes the appellant's legal costs and other expenses directly related to the defence of the civil actions, but excludes both legal fees for the responses to regulatory and investigative authorities and engineering reports and other remediation expenses.

[52] In this court, the appellant seeks an order including within the duty to defend those costs excluded by the application judge and requiring the respondents to reimburse the appellant for all costs falling within that duty.

[53] The respondents cross-appeal from the finding below. They seek an order confirming the scope of the duty to defend as determined by the application judge but, more importantly, confining the respondents' duty to reimburse the appellant to those costs either authorized by the respondents or incurred at their request.

[54] In my view, the resolution of this issue turns simply on the provision in the contract of insurance which obliges the insurer to reimburse the insured only for those reasonable expenses (other than loss of earnings) which were incurred at the insurer's request.

[55] I do not find it necessary to address which of the services performed by Miller Thomson could be said to fall within the scope of the duty to defend. Had those services been performed by counsel appointed by the insurer it may well be that all would fall within that duty. However, Miller Thomson was retained and proceeded without the respondents' consent. Absent some subsequent authorization about which we were not advised, there is no obligation on the respondents to reimburse the appellant for those services. None of those expenses were incurred at the insurer's request.

[56] In summary therefore, I would dismiss the appeal. I would allow the cross-appeal and vary para. 4 of the order below consistent with these reasons. The respondents shall have their costs of the appeal and the cross-appeal.

Appeal dismissed; Cross-Appeal allowed.