DATE: 20030513

DOCKET: C35608

COURT OF APPEAL FOR ONTARIO

MCMURTRY C.J.O., DOHERTY and GILLESE JJ.A.

B E T W E E N:

E.M.

Plaintiff

• and -

James Dunn and Hillel David for the appellants, respondents by way of cross-appeal, The Great American Insurance Company and The Chateau Insurance Company

FATHER FRANCIS REED and THE ROMAN CATHOLIC EPISCOPAL CORPORATION FOR THE DIOCESE OF SAULT STE. MARIE IN CANADA

Ronald Slaght and Eleni Maroudas for the respondents, appellants by way of cross-appeal, Father Reed and The Roman Catholic Episcopal Corporation

Defendants (Respondents, Appellants by way of cross-appeal)

Mark M. O’Donnell and Mark W.

• and -

Barrett for the respondent, Ecclesiastical Insurance Office

THE GREAT AMERICAN INSURANCE COMPANY, THE CHATEAU INSURANCE COMPANY, THE PHOENIX ASSURANCE COMPANY LIMITED, THE PHOENIX ASSURANCE COMPANY OF CANADA, THE CONTINENTAL INSURANCE COMPANY, CONTINENTAL INSURANCE COMPANY OF CANADA and ECCLESIASTICAL INSURANCE OFFICE plc

Giovanna Asaro for the respondent, The Continental Insurance Company

Third Parties

(Appellants, Respondents by way of cross-appeal, Respondents)

Heard: March 31, 2003

On appeal from the judgment of Justice John C. Wilkins, of the Superior Court of Justice, dated December 15, 2000 and September 7, 2001, reported at 2000 50983 (ON SC), 24 C.C.L.I. (3d) 229 and 2001 62766 (ON SC), 32 C.C.L.I (3d) 301.

GILLESE J.A.:

[1] E.M. brought an action against Father Francis Reed and The Roman Catholic Episcopal Corporation for the Diocese of Sault Ste. Marie in Canada in which she alleged that Reed had sexually assaulted her.

[2] During the course of trial of the action, the plaintiff and all of the defendants entered into a settlement. A further settlement was entered into between the defendants Reed and the Diocese, on the one hand, and the third party insurers other than The Great American Insurance Company and The Chateau Insurance Company, on the other. (Chateau is Great American’s successor.) Because Great American and Chateau continued to deny coverage for the plaintiff’s claims against the defendants, the third party action by Reed and the Diocese continued against Great American and Chateau, as did the cross claim by the other insurers.

[3] At the trial of the third party action, the trial judge held that the insurance policy issued by Great American provided coverage for the plaintiff’s claims in the main action against the defendants, Father Francis Reed and The Roman Catholic Episcopal Corporation for the Diocese of Sault Ste. Marie in Canada. As a result, the trial judge found that Great American had a duty to defend the plaintiff’s claims against those defendants under that insurance policy. Great American and Chateau appeal from the judgment rendered in the third party proceedings.

THE APPEAL

[4] The appellants raise four issues on appeal.

[5] First, the appellants contend that the trial judge erred in finding that there was coverage for Reed under the policy for claims arising from his sexual assaults and batteries.

[6] I disagree. Legal liability for bodily injury is set out in section 1 of the policy as follows:

To pay on behalf of the Insured, all sums which the Insured shall become obligated to pay by reason of any liability imposed by law upon the Insured for damages, including damages for care and loss of services because of bodily injury, sickness, disease, mental anguish and/or mental suffering, including death at any time resulting therefrom, sustained by any person or persons, and occurring during the policy period, caused by an occurrence including assault and battery by a person, arising out of or in the course of his duties as an employee of the Insured, unless committed by or at the direction of the Insured. Without restricting the generality thereof “occurrence” shall include bodily injury, sickness or disease, and death at any time resulting therefrom sustained within the policy period, and caused by any act or acts of omission or commission whether due to negligence, lack of skill, training or qualification, or any other cause, in connection with the rendering of or omitting to render any skilful, trained or professional service which is ordinarily rendered on or to the person of an individual, or in connection with the dispensing of any prescription, remedy, drug or medical supplies. [emphasis added]

[7] I agree with the reasoning of the trial judge on this issue and his conclusion, at paragraph 119, that “[t]he policy as written provides coverage for the very circumstances of the case at bar.”

[8] Second, the appellants submit that Reed was not an employee of the Diocese and that coverage was limited to assaults and battery by a person arising out of “his duties as an employee of the Insured”. This point was not raised or argued at trial. It is not open to the appellants to raise this issue for the first time on appeal. In any event, based on the evidence at trial and the terms of the insurance contract, Reed was an employee. Indeed, the appellants’ own pleadings treat him as such.

[9] Third, the appellants submit that coverage ought to be precluded as the risk of assault or battery by a priest was neither contemplated nor reasonably anticipated at the time that the insurance policy was issued. I disagree. The point of an insurance policy is to transfer the risk of future events, foreseen and unforeseen. Had Great American intended to limit coverage to certain types of events, it ought to have used express words to that effect in the policy. Instead, it chose to use words that are remarkably broad and expansive.

[10] Finally, the appellants contend that insurance coverage for the Diocese is limited to assault and battery committed by an employee who is not an insured under the policy. They argue that because Reed is an additional insured under the policy, he cannot also be an employee of the Insured. I do not agree. There is nothing in the policy that stipulates or even suggests such a limitation. Had Great American wished such a limitation, it was open to it to insert language to that effect. The purpose of the insuring agreement was to insure the Diocese against vicarious liability claims against it. To accept the appellants’ contention would be to substantially nullify the very coverage that the Diocese bargained for.

[11] Accordingly, the appeal is dismissed.

THE CROSS-APPEAL

[12] Reed and the Diocese raise three issues on cross appeal.

[13] First, the cross-appellants contend that the trial judge erred in allocating liability for the defence costs in such a way as to result in a gap in coverage for Reed and the Diocese.

[14] I reject that contention for the following reasons. The trial judge was satisfied that the settlement entered into by Reed and the Diocese with the plaintiff was fair and reasonable and that the attribution of 50% of the Diocese’s and Reed’s liability to Great American was fair and just. He noted, at para. 32, that “it does not necessarily follow that the contribution as among the three insurance policies to the solicitor/client defence costs of Reed and the Diocese, should be on the same basis”.

[15] The trial judge found that all three policies of insurance were triggered and that each of the three insurers was obliged to defend both Reed and the Diocese. He referred to an “overall agreement” between Phoenix and Ecclesiastical and the Diocese in which they agreed to pay certain of the Diocese defence costs beginning about six months before the settlement. They never agreed to pay any part of Father Reed’s costs.

[16] The trial judge proceeded to consider various factors and found no reason to differentiate among the three insurers, in terms of liability for the costs of defending the main action. Applying authority from this court[^1], he held that each insurer was obliged to bear an equal share of defence costs.

[17] The cross-appellants argue that the trial judge’s order, combined with the agreement they reached with the other two insurers as to defence costs, will result in Reed recovering only one third of his defence costs for the period during which he was separately represented. They contend that such a result is contrary to their entitlement to full recovery of defence costs.

[18] To the extent that there is any shortfall, it results from the agreement made with the two other insurers as to defence costs and not from the order of the judge. The trial judge had to exercise his discretion when determining how to allocate the defence costs. He considered the agreement, along with the other relevant factors, in determining a fair distribution of those costs among the three insurers. I see no error in the manner in which he exercised his discretion. Consequently, there is no basis upon which to interfere with his order in that regard.

[19] Second, the cross-appellants submit that they ought to have been awarded the costs of submissions and briefs made on the issue of costs. The trial judge determined that no costs should be awarded for the preparation of costs submissions. He gave reasons for that decision, which include the complexity and importance of the issues raised. I see no basis upon which to interfere with the exercise of the trial judge’s discretion in this regard.

[20] The third issue relates to the costs of the third party action, which were ordered against Great American on a party-and-party basis. The cross-appellants submit that the trial judge erred in failing to order Great American to pay Reed and the Diocese their costs of the third party proceedings on a solicitor-and-client basis. They say that injustice will occur if the insureds are not fully indemnified for the costs incurred as a result of the wrongful denial of coverage under an insurance policy for which premiums were paid and under the terms of which they are entitled to full indemnification.

[21] This court addressed the issue of costs in a third party proceeding to enforce a duty to defend in Godonoaga (Litigation Guardian of) v. Khatambakhsh (2000), 2000 16891 (ON CA), 191 D.L.R. (4^th) 221. As in the instant case, Godonoaga involved an insurer that wrongfully denied its duty to defend. Third party proceedings were commenced and a declaration sought that the insurer had a duty to defend. This court found such a duty and awarded costs on appeal and below. The parties requested clarification as to the scale upon which costs had been awarded. This court held, at para. 4, that costs in both courts on all issues should be awarded on a solicitor-and-client basis.[^2]:

The appellants were entitled to a defence by their insurer without expense to them. Accordingly, that matter now having been determined in their favour, they should have their costs on a solicitor-and-his-own-client scale for the defence of the main action and cross-claims until such time as the respondent insurer serves and files a Notice of Change of Solicitors and takes over the insureds’ defence. Such costs would include the conduct of the third party proceedings and the motion before Pitt J. and this appeal.

[22] Entitlement to solicitor-and-client costs in the third party proceeding flows directly from the unique nature of the insurance contract which entails a duty to defend at no expense to the insured. The obligation to save harmless the insured from the costs of defending the action is sufficiently broad to encompass the third party proceedings. It is the contractual basis for the claim to solicitor-and-client costs that justifies the award and therefore constitutes an exception to the usual rule that solicitor-and-client costs will not be awarded except in unusual circumstances.

[23] I note that English jurisprudence also appears to support the award of solicitor-and-client costs in such situations. See R. Merkin, Colinvaux’s Law of Insurance, 7^th ed. (London: Sweet & Maxwell, 1997) at 405:

The assured is entitled to any costs reasonably incurred by him in resisting a claim, by way of damages, where the insurers wrongfully repudiate liability on the policy, and the insurers will face liability for any costs incurred by the assured in forcing the insurers to admit liability under the policy. [emphasis added]

[24] The American case law similarly favours the view that where an insurer breaches its duty to defend and the insured is required to bring a declaratory action to establish the duty, the insured should be reimbursed for those costs that are attributable to establishing the duty.[^3]

[25] Thus, in my view, the trial judge erred in awarding costs of the third party proceedings against Great American on a party-and-party basis. Accordingly, the cross-appeal is allowed in part. Paragraph 4 of the judgment of Wilkins J. dated December 15, 2000 and September 7, 2001, shall be altered to provide that Great American shall pay to the Diocese and Father Reed their costs of the third party proceedings as against Great American, from commencement to resolution, on a solicitor-and-client basis.

[26] In my view, Reed and the Diocese ought to be entitled to a substantial portion of their costs as they successfully resisted the appeal and succeeded on one of three issues on cross-appeal. However, if the parties are unable to agree upon costs, they may make brief written submissions within 15 days of the release of these reasons.

“E.E. Gillese J.A.”

“I agree R.R. McMurtry C.J.O.”

“I agree D.H. Doherty J.A.”

Released: May 13, 2003

[^1]: Broadhurst & Ball v. American Home Assurance Co. (1990), 1990 6981 (ON CA), 1 O.R. (3d) 225 (C.A.).

[^2]: This court reached the same conclusion in Carwadine (Litigation Guardian of) v. Northunberland Clarington Board of Education, [2001] O. J. No. 63 as did the New Brunswick Court of Appeal in Dionne Farms Ltd. v. Fermes Gervais Ltee., 2002 NBCA 98, [2002] N.B.J. No. 402 (C.A.).

[^3]: See, e.g., Chicago Title Ins.Co. v. F.D.I.C., 172 F. 3d 601 (8^th Cir.1999) and Preferred Mut. Ins. Co. v. Gamache, 686 N.E. 2d. 989 (Mass. Sup. Ct. 1997)