COURT OF APPEAL FOR ONTARIO

CITATION: Carneiro v. Durham (Regional Municipality), 2015 ONCA 909

DATE: 20151222

DOCKET: C60366

Strathy C.J.O., LaForme and Huscroft JJ.A.

BETWEEN

Leena Carneiro and Jessica Carneiro

Plaintiffs

and

Regional Municipality of Durham, Miller Maintenance Limited o/a The Miller Group, Her Majesty the Queen in Right of Ontario, Brandon Lee and Judson Alexander Moore

Defendants/Appellant

and

Zurich Insurance Company Ltd.

Third party/Respondent

David G. Boghosian and Laura M. Day, for the appellant

Van Krkachovski, for the respondent

Heard: November 27, 2015

On appeal from the order of Justice Gordon Lemon of the Superior Court of Justice, dated April 15, 2015, with reasons reported at 2015 ONSC 2427.

By the Court:

[1] The Regional Municipality of Durham appeals the dismissal of its motion for an order requiring Zurich Insurance Company Ltd. to defend the claims made against it in this automobile negligence case.

[2] We allowed the appeal with reasons to follow. These are our reasons.

Background

[3] Antonio Carneiro Jr. died in a car accident on a snowy day in Pickering, in the Regional Municipality of Durham. His family members, who are not involved in this appeal, claim damages for the alleged negligence of Durham, Miller, Ontario and two individual defendants.

[4] Durham contracted Miller Maintenance Limited to plow its roads in the winter. The contract required Miller to include Durham as an additional insured under its liability policy. Miller’s policy with Zurich did so.

[5] The statement of claim alleges that the accident occurred when the car driven by the deceased “suddenly and without warning … began to slide and spin on ice” on Brock Road, and slid down the hill until it was hit by cars operated by the individual defendants.

[6] The claim sets out a laundry list of identical particulars of negligence against Miller, Durham and Ontario. It asserts all manner of failings, including a failure to keep the road free of ice and snow, inadequate design and construction of the road and failure to close the road during a heavy snowstorm.

[7] Durham and Miller cross-claimed against each other. Miller claims, among other things, that Durham was responsible for supervising its work and for calling for snow removal equipment as necessary. It also claims that Brock Road was dangerous in design and construction.

The Superior Court Motion

[8] Durham brought a Third Party claim against Zurich. It sought a declaration that Zurich has a duty to defend it in the action, to pay for counsel of its choice and to indemnify it for any amounts for which it may be found liable to the plaintiffs.

[9] Zurich claimed that it has no duty to defend Durham. This, it said, was because some of the particulars of negligence in the statement of claim – those unrelated to Miller’s winter maintenance work – fall outside the scope of the coverage it provided to Durham.

[10] Zurich acknowledged before us, however, that some of the allegations against Durham in the statement of claim are covered by its policy. They relate to Durham’s liability arising out of Miller’s winter maintenance responsibilities.

[11] Zurich argues that by defending Miller it is protecting Durham against any liability it may have for Miller’s negligence. It adds that, given the other allegations of negligence against Durham, it should have no obligation to defend Durham. It says Durham must defend all claims itself, leaving for another day the issue of whether Zurich is required to pay for any portions of the defence costs.

[12] The motion judge dismissed Durham’s motion. He found that Zurich was only required to defend Durham “with respect to the claims insured for Miller”. He added that “Durham will continue with its own counsel to defend with respect to all other causes as alleged in the claim.” It appears the motion judge accepted Zurich’s argument that by defending Miller it was effectively protecting Durham against liability for Miller’s failure to discharge its contractual obligations.

Analysis

[13] Durham was an additional insured under Zurich’s policy. The policy contained an unqualified promise to defend the insured for actions covered by the policy. Zurich is therefore obligated to pay the reasonable costs of Durham’s defence of covered claims, even if that defence furthers the defence of uncovered claims. However, it is not obligated to pay costs related solely to the defence of uncovered claims: Hanis v. Teevan, 2008 ONCA 678, 92 O.R. (3d) 594, at para. 2.

[14] We come to this conclusion for the following reasons. First, the allegations in the statement of claim triggered Zurich’s duty to defend Durham. Second, nothing in the policy qualified Zurich’s duty to defend. Third, Zurich did not satisfy its duty to Durham by defending Miller. Fourth, Zurich’s best interests do not negate its obligation to Durham. Fifth, the duty to defend is a separate contractual obligation that is not met by Zurich simply indemnifying Durham at the end of the day. Each of these is explained in turn.

[15] First, when pleadings allege facts that, if true, require the insurer to indemnify the insured, the insurer is obliged to defend the claim: Monenco v. Commonwealth, 2001 SCC 49, [2001] 2 S.C.R. 699, at para. 28. The mere possibility that a claim may fall within the policy is sufficient to trigger the duty to defend: Monenco, at para. 29. In assessing whether the facts pleaded fall within the policy, the court must consider the substance and true nature of the claim: Monenco, at paras. 34-36. Extrinsic evidence expressly referred to in the pleadings may be considered: Monenco, at para. 36.

[16] The true nature of the claim was clearly expressed in the statement of claim – the deceased lost control of his car because it skidded on ice and snow on the roadway. That pleading, coupled with the allegation that Durham and Miller failed to keep the road clear of ice and snow, relates directly to Miller’s obligations under the contract. It engages Zurich’s obligation to defend Durham, subject to any qualification in the policy.

[17] The trial judge erred in holding otherwise. Although he identified the correct test – set out in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at para. 19, and Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801 – he failed to correctly apply that test.

[18] Second, Zurich’s policy required it to defend the action, not just the covered claims.

[19] In Hanis, this court addressed the situation where, as here, some but not all of the claims made in the lawsuit are covered by the policy, and there is an unqualified obligation in the policy to provide the defence. In that event, this court held that 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. It added that the insurer is not obliged to pay costs related solely to the defence of uncovered claims.

[20] Here, Zurich’s policy of insurance imposed on it a duty to defend its insured, including an added insured, against “any action” seeking damage to which the insurance applies. It provided that there was no duty to defend “any action” seeking damages to which the policy did not apply. An “action” is defined to mean a civil proceeding in which compensatory damages are alleged because of bodily injury or property damage to which the policy applies.

[21] As in Hanis, there was nothing in the language of the Zurich policy to qualify the duty to defend or to suggest that the duty to defend did not apply to “mixed” claims.

[22] As the action against Durham sought damages to which the insurance applied, Zurich had a duty to defend Durham against the action.

[23] Third, there is no authority for Zurich’s argument that it satisfied its duty to Durham by defending Miller. Arguments to that effect were rejected by this court in Papapetrou v. 1054422 Ontario Limited, 2012 ONCA 506, 111 O.R. (3d) 532, at paras. 53-54. See also Atlific Hotels and Resorts Ltd. v. Aviva Insurance Co. of Canada (2009), 2009 CanLII 24634 (ON SC), 97 O.R. (3d) 233 (S.C.J.), at para. 21.

[24] Indeed, counsel for the respondent acknowledged that there is no authority for this position. It would render meaningless Durham’s status as an additional insured. As an additional insured, Durham has independent rights, including a right to a defence, regardless of the defence provided to the named insured. If Zurich’s position were correct, it would seldom be required to provide a defence to an additional insured because it would usually be defending the named insured against the same liabilities.

[25] Fourth, in deciding that it was not in Zurich’s best interests to defend Miller when there were both insured and uninsured claims, the motion judge gave preference to Zurich’s interests over those of the insured. That ignored Zurich’s contractual duty to defend.

[26] Fifth, and finally, we disagree with the motion judge’s conclusion that Durham was protected because it would be entitled to recover costs at the end of the litigation if it were not found liable. That misses the point. The duty to defend is a separate contractual obligation. The outcome of the trial is irrelevant to the duty to defend. The duty would be a hollow one if the insurer’s only obligation were to indemnify its insured at the end of the day. That was not the obligation Zurich undertook when it issued a policy naming Durham as an additional insured. It promised to defend Durham and it should have been held to that promise.

Conclusion

[27] In our view, the motion judge should have ordered Zurich to provide Durham with independent counsel, at Zurich’s expense, to defend the action in its entirety, having regard to (i) Zurich’s unqualified contractual undertaking to defend Durham; and (ii) the conflict between the interests of Durham and Miller, and between those of Durham and Zurich: see Zhou v. Markham (Town), 2014 ONSC 435; Day v. Wood (2008), 2008 CanLII 42425 (ON SC), 92 O.R. (3d) 438 (S.C.), at paras. 12-13, 15; Appin Realty Corp v. Economical Mutual Insurance Co., 2008 ONCA 95, 89 O.R. (3d) 654.

[28] At the end of the proceedings, Zurich is entitled to seek an apportionment of the defence costs, to the extent they deal solely with uncovered claims, or exceed the reasonable costs associated with the defence of the covered claims: Tedford v. TD Insurance Meloche Monnex, 2012 ONCA 429, 112 O.R.(3d) 144, at para. 24.

[29] In closing, we repeat this court’s observation in Halifax Insurance Co. of Canada v. Innopex, (2004), 2004 CanLII 33465 (ON CA), 72 O.R. (3d) 522, at para. 55, that the duty to defend issue must be determined expeditiously, on the basis of the allegations in the underlying litigation, read with the insurance coverage. The failure to do so in this case has undoubtedly increased the costs of the litigation and has caused delay to all parties.

Disposition

[30] For these reasons, the appeal is allowed. Zurich is directed to defend Durham, to provide it with independent counsel at Zurich’s expense and to reimburse Durham for reasonable defence costs incurred to this date.

[31] If, at the end of the day, the parties are unable to agree on an allocation of the costs, Zurich shall be entitled to apply to the Superior Court of Justice to determine the allocation in accordance with Hanis.

[32] Durham is entitled to its costs in this court and in the court below. Its costs in this court are fixed at $12,500, inclusive of taxes and all applicable disbursements.

“G.R. Strathy C.J.O.”

“H.S. LaForme J.A.”

“G. Huscroft J.A.”

Released: December 22, 2015