Court of Appeal for Ontario

Docket: C63193

Judges: Sharpe, Lauwers and Roberts JJ.A.

Between

Ryan Reeb Applicant/Appellant

and

The Guarantee Company of North America and Co-Operators General Insurance Company Respondents

Counsel

Bruce R. Mitchell, for the appellant

Jeff M. K. Garrett, for the respondent

Heard: July 20, 2017

On appeal from the judgment of Justice C.M. Bondy of the Superior Court of Justice, dated December 6, 2016.

Reasons for Decision

Background and Conflict of Interest Issue

[1] This is an appeal from the dismissal of an application for a declaration that the appellant, Ryan Reeb, is an insured under two policies issued by the respondent insurers.

[2] The question for this court is whether to rule on the merits of the appeal, or to allow the appeal in view of the apparent conflict of interest between Mr. Reeb and Royal & Sun Alliance Insurance Company of Canada, the insurer who appointed, pays and instructs appellant's counsel. For the reasons that follow, we allow the appeal on the basis of the apparent conflict of interest.

[3] Some brief background is necessary to frame the conflict of interest issue.

Factual Background

[4] On February 25, 2007, James Riley and Ryan Reeb, both 14 years of age at the time, were playing with pellet guns at Riley's house. Reeb shot Riley who lost an eye. The underlying action is by James Riley against Ryan Reeb, his mother Laura Reeb, and his father Tim Reeb.

[5] At the time of the incident, Ryan Reeb's parents, Laura and Tim, were separated.

[6] Laura Reeb had homeowner's insurance with Royal & Sun Alliance which had a third party liability limit of $1 million. James Riley's claim was for $1.5 million.

[7] Royal & Sun Alliance appointed appellant's counsel to defend Ryan Reeb under a non-waiver and reservation of rights agreement. In respect of coverage, Royal & Sun Alliance is represented by another law firm.

[8] On behalf of Ryan Reeb, appellant's counsel brought the application for a declaration that Ryan is insured under two additional policies of insurance issued by the respondents. The first was issued to his father, Tim Reeb, by the respondent, The Guarantee Company of North America. The second was issued to Tim's second wife, Theresa Curry-Reeb, by the respondent, Co-operators General Insurance Company. The respondent insurers are represented by another law firm. The respondent insurers concede that Ryan Reeb is insured under both policies but they assert that the intentional act exclusion in both policies applies to exclude the injuries suffered by James Riley.

[9] The application judge dismissed the application based on the intentional act exclusion in both of the insurance policies issued by the respondent insurers, leading to this appeal.

[10] If this court upholds the application judge's decision, then the intentional act exclusion will apply, and Ryan Reeb will not be entitled to coverage under the additional policies issued by the respondent insurers. Moreover, it is likely that this court's decision will also eliminate coverage for Ryan Reeb under the Royal & Sun Alliance policy.

The Conflict of Interest

[11] As a result of this constellation of interests, this court raised with the parties whether appellant's counsel was in an apparent conflict of interest. On the one hand, he is being paid by Royal & Sun Alliance to defend Ryan Reeb and pursue this appeal. On the other hand, however, if the appeal fails, then Ryan Reeb will have no insurance coverage whatsoever, which would be to Royal & Sun Alliance's financial advantage.

[12] At the panel's request, counsel for the parties and coverage counsel for Royal & Sun Alliance made written submissions to address the conflict of interest issue. The following summary sets out their responses:

(i) Appellant's counsel asserts that there is no conflict: pursuing the additional insurance was necessary and in Ryan Reeb's interests because the Riley claim exceeded the policy limits of the Royal & Sun Alliance policy.

(ii) Coverage counsel for Royal & Sun Alliance submits that the status of coverage under the policy is not relevant to the court. Royal & Sun Alliance will not agree prior to this court's disposition of the appeal to pay the costs of defence or to maintain coverage for the Reebs in the event that the appeal is dismissed. Royal & Sun Alliance relies on the non-waiver and reservation of rights agreement and will decide what to do when the court rules.

(iii) Counsel for the respondent insurance companies takes the position that it is reasonable to infer Royal & Sun Alliance will not provide coverage to Ryan Reeb if the appeal is dismissed, and will rely on the non-waiver and reservation of rights agreement. He notes that the issue of coverage for Ryan Reeb and Laura Reeb by Royal & Sun Alliance was not addressed before the application judge but was raised for the first time by appellant's counsel at the hearing of this appeal. Most important, counsel submits that after the plaintiffs made a settlement offer under the policy limits, there was no benefit to Mr. Reeb in proceeding with the underlying application; he was already being defended by Royal & Sun Alliance which had not denied coverage. Respondents' counsel submits nevertheless that this court should determine the issues before it on the record and applicable case law without any consideration of Royal & Sun Alliance's duty to provide coverage. He asserts the coverage issue can be addressed in another proceeding if coverage is denied by Royal & Sun Alliance.

Legal Principles on Conflict of Interest

[13] When a lawyer is retained by an insurance company to represent its insured, a conflict of interest may arise where the interests of the insurance company and the insured are not in alignment. In her text, Understanding Lawyers' Ethics in Canada, 2d ed. (Markham: LexisNexis Canada Inc., 2016), at para. 6.87, p. 272, Alice Woolley concisely frames the conflict of interest question in the context of the tension between the insurance company's contractual rights and the insured's interests to full and fair representation, as follows:

While courts have generally been deferential to the contractual rights of insurance companies in this respect, courts have also held that a lawyer "owes a duty to fully represent and protect the interest of the insured" and have required that the insured has obtained independent counsel where there is "a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer".

[14] In Hoang v. Vicentini, 2015 ONCA 780, at para. 74, this court recently reiterated the criteria to be considered when determining whether there is a conflict of interest between an insured and his insurer with respect to the insured's legal representation:

In Brockton, this court described the degree of divergence that must exist before a court can require an insurer to surrender control of the defence. Rejecting the concept of "appearance of impropriety" as a basis for depriving an insurer of its contractual right to control the defence, this court instead adopted, at para. 43, the concept of conflict of interest:

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.

Court's Finding and Decision

[15] In our view, there is a reasonable apprehension of a conflict between the interests of Mr. Reeb and Royal & Sun Alliance. While we are not saying that appellant's counsel actually preferred the interests of Royal & Sun Alliance over those of Mr. Reeb, the apprehension of a conflict precludes this court from ruling on the merits of the appeal. In order to protect his interests in these proceedings in light of the conflict, Mr. Reeb ought to have had independent counsel who did not report to or take instructions from Royal & Sun Alliance to advise him on the advisability of bringing the underlying application in the face of a settlement offer, and representing him on this appeal. There is no way of knowing how things would have unfolded had Mr. Reeb been represented by independent counsel throughout, which impugns both the application and this appeal.

[16] As a result, we allow the appeal and set aside the application judge's decision.

Next Steps

[17] What should happen next? To determine this question, we invite written submissions from the parties and Royal & Sun Alliance. However, independent counsel for Ryan Reeb or amicus curiae should be appointed and remunerated for the purpose of assisting this court in assessing what future steps should be taken in these proceedings.

[18] Before we schedule the delivery of those submissions, in order to ensure that Ryan Reeb's interests are protected at this stage with respect to our request for additional submissions regarding his future representation and the disposition of the costs of this appeal, we intend to appoint amicus curiae to assist the court. Counsel for the parties and Royal & Sun Alliance may make brief written submissions of no more than two pages within ten days of the release of these reasons concerning the issue of amicus' remuneration before this court. Counsel may also include names of possible amicus for this court's consideration on the understanding that this court may appoint amicus who is not among counsel's suggested counsel.

Robert J. Sharpe J.A.

P. Lauwers J.A.

L.B. Roberts J.A.