Hanis v. Teevan et al.; Guardian Insurance Co. of Canada et al., Third Party [Indexed as: Hanis v. Teevan]
92 O.R. (3d) 594
Court of Appeal for Ontario,
Doherty, Sharpe and Gillese JJ.A.
October 8, 2008
Insurance -- Insurer's duty to defend -- Costs of defence -- Allocation -- Allocation of costs between covered and uncovered claims being matter of contractual interpretation and not determined by considerations of fairness and equity -- Insurer not exempted from paying costs incurred to defend covered claim simply because those costs also assisted in defending uncovered claims -- Insurer not having to pay costs associated solely with defending uncovered claims. [page595]
H brought an action against the insured for damages for wrongful dismissal and malicious prosecution. The insurer denied that it had a duty to defend the insured. The insured commenced third-party proceedings seeking a declaration that the insurer was required to provide a defence. The third-party action was held in abeyance while the main action proceeded. The action was dismissed, but H's appeal was allowed in part and he was found to be entitled to damages for wrongful dismissal. The trial judge then granted the insured summary judgment on its third-party claim, holding that the insurer was obliged to pay all defence costs related to the defence of claims covered by the policy even if those same costs furthered the defence of uncovered claims. The policy covered the claim for malicious prosecution, but not the claim for wrongful dismissal. The trial judge determined that 5 per cent of the defence costs related exclusively to uncovered claims, and that the insurer was liable for 95 per cent of the costs. The insurer appealed the trial judge's allocation of defence costs.
Held, the appeal should be dismissed.
The nature and extent of an insurer's obligation to pay defence costs is not a question of fairness or equity. Rather, it is a question of what the insurer has agreed to do in the policy. The answer to that question lies in the language of the policy, not in judicial notions of fairness. The malicious prosecution claim was covered by the policy. That triggered the insurer's duty to defend and its obligation to pay defence costs associated with the malicious prosecution claim. If the costs were reasonably associated with the defence of the malicious prosecution claim, nothing in the policy exempted the insurer from paying those costs simply because they also assisted the insured in the defence of uncovered claims. The determination of what part of the defence costs related to the defence of the malicious prosecution claim was a factual one attracting appellate deference. The trial judge found that the factual foundation underlying the claims was the same and that it was impractical, artificial and next to impossible to allocate with any precision the legal expenses incurred with respect to covered, mixed and uncovered claims. However, he found that a small part of the defence costs related exclusively to uncovered claims. Those findings of fact were supported by the evidence. The trial judge did not err in finding that 95 per cent of the defence costs related to the defence of a covered claim and were, therefore, properly allocated to the insurer.
APPEAL from the judgment of Power J., 2005 CanLII 47727 (ON SC), [2005] O.J. No. 5289, 32 C.C.L.I. (4th) 255 (S.C.J.) for apportionment of costs of defence.
Cases referred to Coronation Insurance Co. v. Clearly Canadian Beverage Corp., [1999] B.C.J. No. 43, 1999 BCCA 11, 168 D.L.R. (4th) 366, [1999] 6 W.W.R. 189, 117 B.C.A.C. 22, 57 B.C.L.R. (3d) 303, 8 C.C.L.I. (3d) 288, 85 A.C.W.S. (3d) 427, apld New Zealand Forest Products Ltd. v. New Zealand Insurance Co., [1997] 3 N.Z.L.R. 1 (P.C.), revg [1996] 2 N.Z.L.R. 20 (C.A.), not folld Continental Insurance Co. v. Dia Met Minerals Ltd., 1996 CanLII 3363 (BC CA), [1996] B.C.J. No. 1293, [1996] 7 W.W.R. 408, 77 B.C.A.C. 251, 20 B.C.L.R. (3d) 331, 36 C.C.L.I. (2d) 72, [1996] I.L.R. I-3346, 63 A.C.W.S. (3d) 1147 (C.A.); Daher v. Economical Mutual Insurance Co. (1996), 1996 CanLII 639 (ON CA), 31 O.R. (3d) 472, [1996] O.J. No. 4394, 96 O.A.C. 255, [1997] I.L.R. 1-3414, 67 A.C.W.S. (3d) 996 (C.A.); St. Paul Fire & Marine Insurance Co. v. Durabla Canada Ltd. (1996), 1996 CanLII 494 (ON CA), 29 O.R. (3d) 737, [1996] O.J. No. 2505, 137 D.L.R. (4th) 126, 92 O.A.C. 157, 36 C.C.L.I. (2d) 25, [1996] I.L.R. I-3355, 64 A.C.W.S. (3d) 447 (C.A.), consd Other cases referred to Hanis v. Teevan, 1998 CanLII 7126 (ON CA), [1998] O.J. No. 2560, 162 D.L.R. (4th) 414, 111 O.A.C. 91, 39 B.L.R. (2d) 66, 37 C.C.E.L. (2d) 1, 98 CLLC Â210-026, 81 C.P.R. (3d) 496, 80 A.C.W.S. (3d) 573 (C.A.), revg [1995] O.J. No. 981, 54 A.C.W.S. (3d) 912 (Gen. Div.); [page596] Hanis v. University of Western Ontario (2003), 2003 CanLII 48367 (ON SC), 67 O.R. (3d) 539, [2003] O.J. No. 4167, [2003] O.T.C. 935, 30 C.C.E.L. (3d) 275, 5 C.C.L.I. (4th) 277, 126 A.C.W.S. (3d) 1009 (S.C.J.); Hanis v. University of Western Ontario, 2005 CanLII 47727 (ON SC), [2005] O.J. No. 5289, [2005] O.T.C. 1080, 52 C.C.E.L. (3d) 32, 32 C.C.L.I. (4th) 255, [2006] I.L.R. I-4488, 144 A.C.W.S. (3d) 732 (S.C.J.); Kelly Panteluk Construction Ltd. v. AXA Pacific Insurance Co., [2005] S.J. No. 370, 2005 SKQB 239, [2006] 6 W.W.R. 181, 263 Sask. R. 195, 26 C.C.L.I. (4th) 271, 141 A.C.W.S. (3d) 643 (Q.B.); Modern Livestock Ltd. v. Kansa General Insurance Co., 1994 ABCA 278, [1994] A.J. No. 654, 24 Alta. L.R. (3d) 21, 157 A.R. 167, 24 C.C.L.I. (2d) 254, 49 A.C.W.S. (3d) 1310 (C.A.), affg on other grounds 1993 CanLII 7121 (AB KB), [1993] A.J. No. 575, 11 Alta. L.R. (3d) 355, 143 A.R. 46, 18 C.C.L.I. (2d) 266, 41 A.C.W.S. (3d) 1199 (Q.B.); Scott v. Optimum Frontier Insurance Co., 2006 CanLII 93711 (ON SC), [2006] O.J. No. 4204, 38 C.C.L.I. (4th) 129 (S.C.J.); Sommerfield v. Lombard Insurance Group (2005), 2004 CanLII 73245 (ON SC), 74 O.R. (3d) 571, [2005] O.J. No. 1131, [2005] O.T.C. 232, 20 C.C.L.I. (4th) 301, [2005] I.L.R. I-4396, 138 A.C.W.S. (3d) 163 (S.C.J.); Vero Insurance Ltd. v. Baycorp. Advantage Ltd., [2004] N.S.W.C.A. 390 (C.A.)
Geoffrey D.E. Adair, Q.C., for appellant. Jane A. Langford and William G. Scott, for respondent.
The judgment of the court was delivered by
DOHERTY J.A.: --
I. Introduction
[1] How, if at all, should the costs of defending a lawsuit be apportioned between the insurer and insured when some, but not all, of the claims made in the lawsuit are covered by the applicable insurance policy?
[2] I would hold that the question of apportionment of costs should be determined by the operative language in the policy. Where there is an unqualified obligation to pay for the defence of claims covered by the policy, as in this case, the insurer is required to pay all reasonable costs associated with the defence of those claims even if those costs further the defence of uncovered claims. The insurer is not obliged to pay costs related solely to the defence of uncovered claims.
II. Overview
[3] Dr. Edward Hanis was hired by the respondent, the University of Western Ontario ("Western"), in 1972 as director of the university's Social Science Computing Laboratory ("SSCL"). Dr. Hanis was fired in October 1986. In March 1987, he was charged with a criminal offence arising out of his alleged misuse [page597] of the computing system at the SSCL. Western had initiated the police investigation.
[4] Dr. Hanis sued Western in June 1987, and later amended the claim to add certain senior employees of the university. The statement of claim advanced numerous allegations against Western and the individual defendants, including an allegation of malicious prosecution arising out of the criminal charges laid in March 1987. Dr. Hanis was acquitted of those charges in October of 1988.
[5] Western had comprehensive general liability insurance policies with the appellant, Guardian Insurance Company of Canada ("Guardian") in place, both when Dr. Hanis was fired in October 1986 ("Guardian Policy I") and in March of 1987 when he was charged with the criminal offence ("Guardian Policy II"). Under the policies, Guardian undertook to defend actions brought against Western if the claims were covered by the policy.
[6] Western advised Guardian of Dr. Hanis' lawsuit and sought coverage under the policies. Guardian denied its duty to defend under either policy. Western then commenced third-party proceedings seeking a declaration that Guardian was required to provide a defence. The third-party action was held in abeyance by agreement while the main action continued. Western retained its own counsel and proceeded to trial. The trial occupied some 64 days between October 1993 and February 1994. McDermid J. dismissed the main action in its entirety in reasons released March 17, 1995: see Hanis v. Teevan, [1995] O.J. No. 981, 54 A.C.W.S. (3d) 912 (Gen. Div.).
[7] Dr. Hanis launched an appeal, which was allowed in part in June 1998. This court held that Dr. Hanis had been denied procedural fairness and was therefore entitled to damages for wrongful dismissal: see Hanis v. Teevan, 1998 CanLII 7126 (ON CA), [1998] O.J. No. 2560, 162 D.L.R. (4th) 414 (C.A.).
[8] In 2002, Western moved for summary judgment on its third- party claim against Guardian. On October 21, 2004, Power J. granted summary judgment in favour of Western. He found no duty to defend under Guardian Policy I, but held that Guardian had a duty to defend at least some of the claims under Guardian Policy II: see Hanis v. University of Western Ontario (2003), 2003 CanLII 48367 (ON SC), 67 O.R. (3d) 539, [2003] O.J. No. 4167 (S.C.J.), at para. 98. Power J. concluded that Guardian should have defended Western with respect to all claims, covered or not, subject to a reservation of its rights, if any, of apportionment. On June 18, 2004, Power J. ordered the trial of the following issues: (i) Is Guardian entitled to any allocation of the legal defence costs incurred by Western and, if so, what is the proper allocation? [page598] (ii) What is the proper quantum of Western's legal defence costs? (iii) What, if any, prejudgment interest is Western entitled to on any amounts owed by Guardian under (i) and (ii) above?
[9] Following the trial of these issues, Power J. held that Guardian was obliged to pay all defence costs related to the defence of claims covered by the policy even if those same costs furthered the defence of uncovered claims. However, Guardian was not required to pay defence costs solely related to the defence of uncovered claims. The trial judge determined that 5 per cent of the defence costs related exclusively to uncovered claims. Guardian was held liable for 95 per cent of the costs, quantified at slightly more than $2 million: see Hanis v. University of Western Ontario, 2005 CanLII 47727 (ON SC), [2005] O.J. No. 5289, 32 C.C.L.I. (4th) 255 (S.C.J.), at para. 198.
[10] Guardian appeals the trial judge's allocation of defence costs, arguing that Guardian should only be held responsible for 20 per cent of the costs.
III. The Allocation Issue
[11] Most of Dr. Hanis' claims, such as wrongful dismissal, were not covered by the Guardian policies. Guardian contended that the only covered claim was malicious prosecution, which was covered by Guardian Policy II. Guardian argued that it should not be held responsible for the majority of the defence costs since the majority of claims made by Dr. Hanis, particularly those at the centre of the trial, were not covered by any Guardian policy. Guardian argued that it should not be responsible for any costs not connected to covered claims. Further, Guardian argued that costs associated with both covered and uncovered claims ("mixed claims") should be allocated between Western and Guardian on a "fair and equitable" basis having regard to several factors. In Guardian's submission, the evidence led at the trial of the allocation issue justified allocating 80 per cent of the defence costs to Western and 20 per cent to Guardian.
[12] Western submitted that its defence costs could not be attributed to one claim as opposed to another, given the manner in which the multiple claims were advanced and prosecuted by Dr. Hanis. In effect, Dr. Hanis pleaded multiple causes of action arising out of one complex and interconnected set of facts. It was Western's position that Guardian was obligated to compensate for all defence costs unless Guardian could demonstrate that some part of those costs could be attributed exclusively to an uncovered claim. [page599]
[13] The trial judge summarized his conclusions on the allocation issue at para. 193 of his reasons. For present purposes, that summary may be further distilled as follows: -- The defence costs refer to those which, having regard to the circumstances at the time, were reasonably incurred by the defence. -- Where the same defence costs are incurred in the defence of both covered and uncovered claims, there should be no allocation of those costs and the insurer must bear the entirety of those costs. -- Where there is no practical means of readily distinguishing between costs attributable to covered and uncovered claims, there should be no allocation of those costs and the insurer should pay all of those costs. -- Where the insurer has breached its contract with the insured by refusing to defend the claim, the burden is on the insurer to demonstrate what part, if any, of the defence costs clearly do not relate to covered claims. -- The insurer has no liability to reimburse an insured for defence costs that can be identified by reliable evidence as relating solely to uncovered claims.
[14] Counsel for Guardian frames the allocation issue as turning on a set of principles originating, for the most part, in American case law. The objective of these principles is to divide the costs associated with the defence of "mixed claims" in a manner that is fair and equitable. A fair and equitable division of costs is determined by considering a variety of factors, such as the proportion and significance of the covered and uncovered claims, the benefit derived by the insurer and insured in advancing the defence, the extent to which the work of the defence appears to be reasonably related to covered or uncovered claims, and the extent to which the defence effort would reasonably have been necessary if the only claims advanced were the covered claims.
[15] In contrast, counsel for Western characterizes the allocation issue as one of contractual interpretation. Counsel submits that any right Guardian might have to an allocation of defence costs where the same costs are incurred in the defence of both covered and uncovered claims must be found in the language of Guardian Policy II, the document governing the relationship between the parties. The key provision describes Guardian's duty to defend and [page600] its obligation to pay defence costs associated with that duty. It is contended that the relevant provision contains an unqualified promise by Guardian to pay defence costs associated with the defence of claims covered by the policy. It is argued that defence costs relating to covered claims are not taken out of the coverage simply because they also assist in the defence of uncovered claims.
[16] The judgments of the New Zealand Court of Appeal and the Privy Council in New Zealand Forest Products Ltd. v. New Zealand Insurance Co., [1996] 2 N.Z.L.R. 20 (C.A.), revd [1997] 3 N.Z.L.R. 1 (P.C.), provide examples of the two different approaches advanced by counsel. In that case, the insurer was obliged to pay the defence costs of officers and directors of the insured by the terms of its policy with the insured. The insured, one of its officers and several other defendants were sued in California. The officer's defence costs were covered by the relevant policy. The other defendants were not covered by the policy. The insurer argued that, insofar as defence costs were incurred for the benefit of both the covered and uncovered defendants, there should be an allocation of costs between the insurer and the other defendants. The New Zealand Court of Appeal agreed. The court held that "fairness" dictated an apportionment of defence costs when the benefit of those costs went to both covered defendants and uncovered defendants. Gault J. put the fairness argument this way, at pp. 28-29 N.Z.L.R.:
Where a director or officer commits a wrongful act as defined in the policy in the course of duties which attracts litigation it will almost invariably be the case that the company will be joined as a party. That may be because of claims against the company as vicariously liable for the acts of the director or officer or because those acts were the acts of the company by which it is bound. In such circumstances unless (as did not occur in this case) the director or officer is separately represented there will be much expenditure incurred in the defence of the proceedings which relates to the defence of each. If each were independently insured it would be expected that there should be some apportionment of, or a right of contribution to, the defence costs. Where there is insurance cover for the costs of one but not the other it is difficult to see why the same course should not be followed. It hardly would follow from that that the benefit of the insurance cover would be negated.
[17] Gault J. explained how costs should be allocated as between the insurer and the uncovered defendants. Counsel's submissions on behalf of Guardian echo the observations of Gault J., at p. 43 N.Z.L.R.:
What is appropriate will be for assessment on the facts by reference to relative exposure, relative benefit and other factors as are considered applicable in the circumstances. That may even include, where the facts dictate, recognition that the covered (count 3) claim was of such minor significance that only a very small allocation should be made to that. [page601]
[18] On appeal to the Privy Council, the issue was characterized not as one that turned on considerations of fairness or equity, but as an exercise in contractual interpretation. Lord Clyde observed, at p. 5 N.Z.L.R.:
Much of the discussion in the lower Courts has been taken up with consideration of case law, particularly from Courts in the United States of America. But Their Lordships are clearly of the view that the true question here is one of construction of the terms of the policy. (Emphasis added)
[19] He returned to that theme, at p. 6 N.Z.L.R.:
Furthermore there seems to Their Lordships to be a possible danger in concentrating on case law in that the problem might seem to be one of applying principles of general application rather than construing the language of the particular policy.
[20] At pp. 5-6 N.Z.L.R., Lord Clyde reviewed the terms of the policy, focusing on the provision requiring the insurer to pay defence costs. He found no basis in the language for the allocation of costs relating to both covered and uncovered claims:
On the ordinary meaning of the words which have been used it is reasonable to understand that the cover would extend to the whole costs incurred in the defence where the officer was the sole defendant. Why then should the meaning of the words change simply because there is another defendant who is not covered by the policy? Moreover if an uninsured co-defendant was bankrupt or otherwise without means it would seem an odd result of the insurance that it should not cover the whole of the officer's costs even though some of them related also to the defence of the co-defendant. Once it is accepted that the costs are not confined to those which relate solely and exclusively to the officer it is hard to find anything in the language which prevents the cover extending to all the costs which also relate to another defendant. On the contrary the language points to the conclusion that all such costs are covered . . . In contrast to such general terms there is no provision generally requiring the kind of allocation to be made for which the [insurers] contend. It cannot be assumed that the insurers would not have anticipated the likelihood of the company being joined as a defendant along with one of its officers and if provision of the kind contended for was intended that could readily have been included . . . The obvious inference is that where, as here, the other defendants are not covered by insurance there is to be no restriction in the extent of the loss covered by the policy provided that it reasonably relates to the claim against the officer. . . . (Emphasis added)
[21] The British Columbia Court of Appeal has favoured the contractual interpretation analysis used in the Privy Council over the "fair and equitable" approach advocated by the New Zealand Court of Appeal. In Coronation Insurance Co. v. Clearly Canadian Beverage Corp., 1999 BCCA 11, [1999] B.C.J. No. 43, 168 D.L.R. (4th) 366 (C.A.), at para. 41, the majority observed: "Ultimately, the answer to the fairness debate lies not in either party's particular [page602] view or expectations formulated after the fact, but in the parties' intentions as expressed in the contract of insurance."
[22] I also favour the contractual analysis. The relationship between an insured and an insurer is contractual and must be governed primarily by the terms of the relevant policy of insurance. The insurer's obligations are found first and foremost in the policy. Those obligations may include the obligation to pay all or some of the costs associated with the defence of covered claims. It makes eminent sense that any inquiry as to the nature and scope of the insurer's duty to pay those costs should start with the language of the policy. I agree with the observations of Newbury J.A. in Coronation Insurance, at para. 42, where, in the course of approving the contractual analysis approach, she stated:
In my view this approach construes the language of the policy in a manner consistent with the usual rules of construction rather than according to some inferred "expectations" not apparent on a fair reading of the document; and it provides insureds with the full benefit of their policy. It requires an insurer to state explicitly the basis, if any, on which coverage may be limited, and it avoids lengthy hearings designed to explore "metaphysical" underpinnings of why a corporation or its directors and officers might have acted as they did. (Citation omitted)
[23] I see no unfairness to the insurer in holding it responsible for all reasonable costs related to the defence of covered claims if that is what is provided for by the language of the policy. If the insurer has contracted to cover all defence costs relating to a claim, those costs do not increase because they also assist the insured in the defence of an uncovered claim. The insurer's exposure for liability for defence costs is not increased. Similarly, the insured receives nothing more than what it bargained for -- payment of all defence costs related to a covered claim.
[24] An analysis based on an interpretation of the language of the policy also demonstrates the inappropriateness of the analogy drawn by the New Zealand Court of Appeal to cases involving apportionment issues between insurers. Apportionment between insurers does not arise in the context of a contractual relationship that specifically addresses the obligation of one party to pay the defence costs of the other party.
[25] Counsel for Guardian referred to two cases of this court that have accepted the principle that allocation of defence costs may well be appropriate where only some of the claims are covered by the policy: St. Paul Fire & Marine Insurance Co. v. Durabla Canada Ltd. (1996), 1996 CanLII 494 (ON CA), 29 O.R. (3d) 737, [1996] O.J. No. 2505 (C.A.); Daher v. Economical Mutual Insurance Co. (1996), 1996 CanLII 639 (ON CA), 31 O.R. (3d) 472, [1996] O.J. No. 4394 (C.A.). I recognize that [page603] these cases accept that it may be appropriate to allocate defence costs between the insurer and insured where only some of the claims are covered by the policy. I do not understand counsel for Western to suggest otherwise. However, in the context of defending covered and uncovered claims in the same suit, a distinction must be drawn between cases where defence costs are related exclusively to the defence of either covered or uncovered claims, and cases where the same costs are incurred in the defence of both covered and uncovered claims. In the former circumstance, an allocation of costs would be required, barring a policy which provided for payment of defence costs relating to uncovered claims. In the latter case, allocation would not be necessary unless the policy provided for allocation where the costs related to both covered and uncovered claims. Neither St. Paul Fire & Marine Insurance Co. nor Daher refer to the allocation of costs where those costs have been found to have been directed to both covered and uncovered claims. That is the allocation issue raised on this appeal and that is the issue specifically addressed in New Zealand Forest Products Ltd.
[26] The same observation applies to Continental Insurance Co. v. Dia Met Minerals Ltd., 1996 CanLII 3363 (BC CA), [1996] B.C.J. No. 1293, [1996] 7 W.W.R. 408 (C.A.). The court recognized that an allocation of defence costs was appropriate in cases where only some of the claims made against the insured were covered by the policy. However, the court indicated at para. 19 that allocation was to be determined by reference to "what portion of the defence fees, if any, relate to claims covered by the Policy". This language suggests to me that defence fees relating to both covered and uncovered claims would be covered by the policy. However, that issue was not before the court.
[27] Counsel for Guardian also referred the court to several decisions at first instance. It is submitted that these decisions accept that there must be an allocation of defence costs as between the insurer and insured in all cases where covered and uncovered claims based on different factual allegations are advanced in the same lawsuit: see Sommerfield v. Lombard Insurance Group (2005), 2004 CanLII 73245 (ON SC), 74 O.R. (3d) 571, [2005] O.J. No. 1131 (S.C.J.); Scott v. Optimum Frontier Insurance Co., 2006 CanLII 93711 (ON SC), [2006] O.J. No. 4204, 38 C.C.L.I. (4th) 129 (S.C.J.); Kelly Panteluk Construction Ltd. v. AXA Pacific Insurance Co., 2005 SKQB 239, [2006] S.J. No. 370, [2006] 6 W.W.R. 181 (Q.B.).
[28] These cases can reasonably be read as broadly as counsel for Guardian would read them. If read that way I do not agree with them. The cases do not look to the language of the policy as the primary consideration when assessing an allocation claim. Instead, these cases assume that allocation is necessary where there are both covered and uncovered claims and impose what the court regards as a "fair" allocation. For example, in Sommerfield, [page604] after determining that the primary cause of action asserted against the insured was not covered by the policy, the court noted at para. 42, that "[t]o require the insurer to pay for the entire defence in these unique circumstances would be unfair".
[29] For the reasons set out above, I do not think that the nature and extent of the insurer's obligation to pay defence costs is a question of fairness or unfairness. Rather, it is a question of what the insurer has agreed to do in the policy. The answer to that question lies in the language of the policy, not in judicial notions of fairness.
[30] I turn now to the Guardian Policy II. It provides the following:
[T]he insurer shall:
(1) defend in the name and on behalf of the Insured and at the cost of the Insurer any civil action which may at any time be brought against the Insured on account of such bodily injury or property damage but the Insurer shall have the right to make such investigation, negotiation and settlement of any claim as may be deemed expedient by the Insurer. (Emphasis added)
An extended definition of "bodily injury" appears under the Additional Coverages part of Guardian Policy II. The definition includes malicious prosecution.
[31] I need not examine the other provisions in the policy relevant to the scope of the coverage as Guardian conceded that the malicious prosecution claim was covered. That coverage triggered Guardian's duty to defend and its obligation to pay defence costs associated with the malicious prosecution claim. Western argued that several additional claims were also covered. Although the trial judge found that certain other claims were covered by Guardian Policy II, he observed that his conclusion on the allocation issue would have been the same even if the malicious prosecution claim was the only covered claim. I agree with that observation and have proceeded on the basis that the malicious prosecution claim is the only claim covered.
[32] On a plain reading of the relevant part of the policy, Guardian was responsible for all costs associated with the defence of the malicious prosecution claim. There is nothing in the language of the policy that qualifies that obligation or suggests that it does not apply to so-called "mixed claims". For example, costs incurred by Western to meet and refute Dr. Hanis' allegation that he was wrongfully dismissed in October 1986 might also be said to have been directed at negating the malice component of the malicious prosecution claim. If the costs were [page605] reasonably associated with the defence of the malicious prosecution claim, nothing in the policy exempts Guardian from paying those costs simply because they also assisted Western in the defence of uncovered claims. Guardian could have written qualifying words into its policy providing for an allocation of "mixed costs", or requiring that the costs relate principally to a covered claim, if that had been intended. It chose not to do so. The court cannot do so for Guardian: see Vero Insurance Ltd. v. Baycorp Advantage Ltd., [2004] N.S.W.C.A. 390 (C.A.), at paras. 77-81; and Coronation Insurance, at para. 42.
[33] The determination of what part of the defence costs related to the defence of the malicious prosecution claim was a factual one attracting the well-known standard of appellate deference. The trial judge heard extensive evidence from counsel who had carriage of Western's defence of the Hanis action. Counsel explained how they characterized the case put against Western, the manner in which that case was prosecuted throughout the lengthy proceedings and the defence strategy they employed on behalf of Western. That strategy was largely successful. After reviewing counsel's evidence at length, the trial judge said, at para. 167:
In my opinion, they both gave credible testimony and were not moved off their essential thesis that, because of the mixed claims, and because the factual foundation underlying all claims was the same, it is impractical, artificial, and next to impossible to allocate with any precision the legal expenses incurred with respect to covered, mixed, and uncovered claims. Their testimony, therefore, is preferable to an after-the-fact analysis of . . . the paper record.
[34] The trial judge described Dr. Hanis' case as consisting of a single ongoing "story" about his relationship with the university over a 14-year period. According to Dr. Hanis' allegations, senior administrative officials at Western conducted a decade-long vendetta against him. These officials sought to destroy Dr. Hanis to protect their own interests and increase their own power within the university. Dr. Hanis alleged that the efforts to destroy him and ruin his reputation included false allegations of a conflict of interest, infringement of his copyright interests, unfair treatment of him as an employee, wrongful dismissal, misappropriation of his property, interference with his ongoing contractual relationships with third parties and malicious prosecution.
[35] In describing the omnibus nature of the claims made by Dr. Hanis, the trial judge observed, at para. 175:
Dr. Hanis, in his testimony and through his counsel, argued that a great deal of his damage claim was common to all his allegations -- i.e., to all his causes of action. I find that it was impossible for the defence to pin down the damages to any particular cause of action even though the trial judge ordered Mr. Hanis to do so and even though an attempt was made to do so. [page606]
[36] The trial judge also found that the approach taken on behalf of Western in defence of the claims was reasonable. His conclusions are found at paras. 176-77:
I find that, given this state of affairs, it was reasonable for the Defendants to treat the damages as being attributable to all causes of action.
I agree with the submission of counsel for the University that I cannot, and indeed should not, attempt to resolve this dispute by trying to relate the docketed legal feels and expenses to the particular claim or claims. While it might be an overstatement to state categorically that this would be an impossible task, in my opinion, it would be close to impossible. I agree with the University that it was reasonable for it not to have focused on specific legal labels or causes of action or allegations in the course of defending against Mr. Hanis' claims. Counsel's decision to treat the case against the Defendants as a fact-based one and attempting to undermine his entire "story" was a reasonable manner in which to defend the action.
[37] Having accepted Western's characterization of the nature of the case put forward by Dr. Hanis and having found that the approach taken to the defence of that claim was reasonable, the trial judge held, at paras. 194 and 198, that a small part of the defence costs related exclusively to uncovered claims. While acknowledging that the amount attributable solely to uncovered costs could not be fixed with scientific certainty, the trial judge valued those costs at 5 per cent of the total defence costs.
[38] The findings of fact outlined above are supported by the evidence heard on the trial of the issue. Indeed, the evidence is virtually uncontradicted. Counsel for Guardian, no doubt sensitive to the deference owed to factual findings, does not really challenge those findings. He argues that, on a reasonable view of the evidence led by Western, the defence costs attributable to both covered and uncovered claims went principally to uncovered claims and called for an allocation of those costs even if that allocation must be done on a "rough and ready" basis. For the reasons set out above, I do not agree that Guardian's policy provides for allocation of defence costs if those costs relate to a covered claim. I would affirm the trial judge's finding that 95 per cent of the defence costs related to the defence of a covered claim and were, therefore, properly allocated to Guardian.
[39] My characterization of the allocation issue as one of contractual interpretation leads to three additional observations concerning the principles drawn from the cases put forward by both counsel.
[40] First, a contractual interpretation approach dictates the rejection of the position taken in some cases that where the insurer fails to defend a covered claim, it must, presumably by way of some sort of penalty, assume the defence costs of all [page607] claims, both covered and uncovered: see e.g., Modern Livestock Ltd. v. Kansa General Insurance Co., 1993 CanLII 7121 (AB KB), [1993] A.J. No. 575, 11 Alta. L.R. (3d) 355 (Q.B.), at p. 368 Alta. L.R., affd on other grounds 1994 ABCA 278, [1994] A.J. No. 654, 24 Alta. L.R. (3d) 21 (C.A.).
[41] I can see no justification for imposing upon the insurer, as a consequence of its breach of contract, an obligation to pay defence costs that are clearly not covered by the contract. That does not mean that the insurer's failure to defend will not have ramifications in a subsequent dispute over the allocation of defence costs. As this case demonstrates, if the insured is left to defend the case on its own, the insurer may have a very difficult time in a subsequent proceeding refuting the insured's position as to the allocation of the defence costs. If those costs are reasonable, and if under the terms of the policy the insurer is obligated to pay those costs, the insurer cannot escape that obligation by demonstrating that the litigation could have been conducted differently, or that with the benefit of hindsight certain costs were unnecessary.
[42] My second observation arises out of the language of the cases, as reflected in the reasons of the trial judge, at para. 193, to the effect that the insurer must pay the costs where there is no practical means of distinguishing between costs referable to the covered and uncovered claims. This language is potentially misleading. I think the cases are, in the main, referring to situations where the costs are incurred for both covered and uncovered claims. It is preferable to express the finding in that way, as it makes more obvious the insurer's obligation to pay those defence costs, assuming the policy requires payment of all costs related to the defence of a covered claim.
[43] My third observation relates to the onus of proof. The trial judge, at paras. 193-98, relying on a line of authority, appeared to place the legal burden of proof on Guardian to clearly demonstrate what portion of the defence costs related exclusively to uncovered claims. I question whether there is any compelling reason to depart from the general rule that the party claiming damages bears the ultimate or legal burden of proof on that issue, including proving the quantum of damages suffered. However, on the trial judge's findings of fact, I am satisfied that Western clearly established that only a very small fraction of the defence costs related exclusively to uncovered claims. The trial judge's finding that 5 per cent of the defence costs related only to uncovered claims is fully justified even if Western carries the burden of proof on that issue.
IV. Other Grounds of Appeal
[44] Guardian advanced additional arguments in its factum. Two of these grounds, one relating to the prejudgment interest [page608] awarded and the other to one facet of the costs award made by the trial judge, were not pressed in oral argument. I need not set out the particulars of either award. Both reflect an exercise in judicial discretion and I see no reason to interfere with the manner in which that discretion was exercised.
[45] Counsel for Guardian also argued that the trial judge erred in holding that certain claims other than the malicious prosecution claim were covered by Guardian Policy II. It is not necessary to address the merits of this submission as my analysis of the allocation issue has assumed that the malicious prosecution claim was the only claim covered by the policy. I would uphold the trial judge's ruling on the allocation issue assuming that malicious prosecution was the only claim covered.
[46] Further, counsel for Guardian submitted that the allocation of defence costs was justified because almost all of the relevant events predated the coverage provided by Guardian Policy II. I cannot accept this submission. The alleged act of malicious prosecution occurred during the currency of Guardian Policy II. Guardian accepts that it had a duty to defend the malicious prosecution claim and to pay the defence costs relating to that claim. As Guardian was on coverage when the alleged malicious prosecution occurred, the timing of the events germane to the proof or defence of that claim is irrelevant to Guardian's duty to defend and its obligation to pay defence costs related to the malicious prosecution claim.
V. Disposition
[47] I would dismiss the appeal. If counsel are unable to agree on the costs of the appeal, they should provide written submissions of no more than five pages within 30 days of the release of these reasons.
Appeal dismissed.