COURT OF APPEAL FOR ONTARIO

Date: 20220128 Docket: C68990

Before: Strathy C.J.O., Zarnett J.A. and Wilton-Siegel J. (ad hoc)

Between:

IT Haven Inc. and Ryan Hunt Applicants (Respondents)

And:

Certain Underwriters at Lloyd’s, London Respondent (Appellant)

Counsel: Jamie Spotswood and Camille Beaudoin, for the appellant Rebecca Huang and Vincent DeMarco, for the respondents

Heard: October 19, 2021 by video conference

On appeal from the order of Justice Mark L. Edwards of the Superior Court of Justice, dated December 15, 2020, with reasons reported at 2020 ONSC 7835.

Strathy C.J.O.:

[1] This appeal raises the familiar issue of whether the appellant, the respondents’ liability insurer, has a duty to provide the respondents with a defence to a lawsuit commenced against them. The issue has a twist, however, because the insurer asserts that it is entitled to avoid its obligations under the insurance policy as a result of allegedly false representations made by the insured in its application for insurance – representations that were allegedly made conditions of the policy.

[2] The motion judge granted the respondents’ application for a declaration that the appellant was required to provide a defence against a lawsuit alleging breach of copyright. He declined to consider extrinsic evidence proffered by the appellant in support of its allegations of misrepresentation and breach of conditions.

[3] For the reasons that follow, I would dismiss the appeal.

A. Factual Background

The Application for Insurance

[4] The insured, the respondent IT Haven Inc. (“IT Haven”), was incorporated in 2016 and is engaged in the information technology business. The respondent Ryan Hunt (“Hunt”) is the principal and directing mind of IT Haven. On September 2, 2016, immediately after its incorporation, IT Haven applied for and obtained an errors and omissions and comprehensive liability insurance policy from the appellant through its insurance managers, Commercial Lines Premier Canada Insurance Managers Limited (“Premier Canada”).

[5] IT Haven stated on the application for insurance that the company had one employee, that it had no revenue in the previous 12 months and that its estimated revenue for the next 12 months was $100,000. In response to specific questions, IT Haven stated on the application form that the company:

• was engaged in custom software development (10% of its services) and as computer consultants (25% of its services);
• received 100% of its revenue in Canada;
• did not provide services to the electronic games industry;
• always used written contracts with its clients;
• had not incorporated any software or product designed by others into its designs; and
• had written procedures to safeguard against the infringement of copyright or trademarks of others.

The Insurance Policy

[6] On September 2, 2016, the same date as the application for insurance, the appellant, Certain Underwriters at Lloyd’s, London, issued a policy of liability insurance to IT Haven (the “Policy”). The Policy covered the period to September 2, 2017. It was automatically renewed for one-year periods in each of September 2017 and September 2018.

[7] The Policy, with its various attachments and endorsements, was 46 pages long. It provided errors and omissions coverage on a “claims made” basis, in the aggregate of $1 million, inclusive of defence costs, [1] with a limit of $1 million per claim. [2] It covered intellectual property infringement, among other things.

[8] The Policy applied to any “Wrongful Act” or negligent act committed or alleged to have been committed anywhere in the world, and covered any claim brought against the insured in Canada or the United States. A “Wrongful Act” was defined to include “any actual or alleged unauthorized use or violation by the Insured of any copyright, trademark, service mark, trade name, or trade secret in the performance of the Insured’s professional business as stated on the Proposal form”. The “Insured’s Professional business” was described as including “the development, design, installation, modification or maintenance of computers, computer hardware, firmware and/or software [and] the provision of computer system consulting”.

[9] The Insuring Clause of the Policy provided as follows:

Whereas the company, partnership or firm as stated in Item 1 of the Schedule (the “Named Insured”) has made to Underwriters a Proposal , which is hereby agreed to be the basis of this Policy, which shall be deemed to be incorporated herein .

We, the Underwriters, in consideration of the payment of the Premium stated in the Schedule, agree, subject to all the terms and conditions of this Policy, to pay on behalf of the Insured all sums which the Insured shall become legally liable to pay as Damages and Claimants’ costs, fees and expenses as a result of any Claim first made against the Insured and notified to Underwriters during the Period of Insurance stated in Item 3 of the Schedule or during the Extended Reporting Period arising out of any Wrongful Act by the Insured or any negligent act, negligent error or negligent omission by others for whom the Insured is legally liable, in or about the conduct of the Named Insured’s professional business as stated in the Proposal . However, coverage is not afforded to services or operations that are not specifically listed in the definition of Insured’s Professional Business as contained in this Policy. [Emphasis added.]

[10] The term “Proposal”, referred to in the Insuring Clause, was defined as:

[A] written Proposal made by or on behalf of the Insured to the Underwriters for the insurance evidenced by this Policy, including any statements, declarations, application forms, warranties or information upon which the Underwriters have relied on and, where a special form or presentation has been used for the purpose, bearing the date stated in item 10 of the Schedule.

It was not disputed that the application form signed by IT Haven was the relevant Proposal.

[11] Clause 4.9 of the Policy was entitled “Material Information”. It contemplated that the Underwriters might be entitled to either (a) void the Policy as a result of inaccurate or misleading information contained in the Proposal or as a result of the insured’s failure to inform the Underwriters of a material change in the circumstances described in the Proposal; or (b) void only the coverage affected by the misleading information or non-disclosure, while maintaining the balance of the policy in full force and effect. The clause stated:

In the event of Underwriters being at any time entitled to void this Policy by reason of any inaccurate or misleading information given by the Insured in the Proposal, the Underwriters may at their election, instead of voiding this Policy, give notice in writing to the Insured that they regard this Policy as of full force and effect, save there shall be excluded from the indemnity afforded hereunder any Claim which has arisen or which may arise which is related to such information.

The Insured shall throughout the Period of Insurance give notice as soon as reasonably practicable of any material change in any fact, activity or circumstance as described in the Proposal bearing the date stated in item 10 of the Schedule. In the event of Underwriters being at any time entitled to void this Policy by reason of the Insured failing to give notice in accordance with this Condition, the Underwriters may at their election, instead of voiding this Policy, give notice in writing to the Insured that there shall be excluded from the indemnity afforded hereunder any Claim which has arisen or may arise which is related to such facts, activities or circumstances.

The Renewal of the Policy

[12] When the Policy was automatically renewed in 2018, and presumably in the prior year, a “Renewal Conditions Endorsement” was appended to it, stating:

This endorsement attaches to and forms part of this policy:

It is understood and agreed that the attached Policy Renewal has been granted on the following conditions:

– the Insureds Professional Business as described on the current Schedule accurately reflects the Insureds Professional Business during this policy period;

– during this policy period the Insured’s annual fee revenue is not expected to increase by $50,000 over that of the last Application submitted;

– the percentage of US or foreign work has not increased since the last questionnaire submitted to Premier; and

– the Insured is not aware of any fact, situation, or circumstance, that may result in a written demand or civil proceedings for compensatory damages.

[13] The appellant acknowledged in oral argument that there is no evidence that the Renewal Conditions Endorsement was ever delivered to IT Haven or brought to its attention. In April 2019, the respondents’ insurance agent emailed the appellant’s insurance manager, updating the respondents’ address and advising, “No change in operations at all, just change in location.”

The Lawsuit against IT Haven and Hunt

[14] On June 14, 2019, Niantic Inc. (“Niantic”) commenced a claim against Hunt and an entity called “Global++” in the United States District Court for the Northern District of California, seeking damages and injunctive relief. Niantic filed an amended complaint on June 24, 2020, adding IT Haven and others as defendants.

[15] Niantic is a producer of computer games played on mobile devices such as cell phones. It claims that Global++ is an association of computer hackers, led by Hunt, which sold subscriptions for unauthorized derivative versions of Niantic’s games. The core of Niantic’s complaint is that Global++, IT Haven, Hunt and the other defendants infringed its copyright in its mobile applications. It alleges that the defendants created, distributed, and profited from “unauthorized derivative versions” of Niantic’s computer applications and, in so doing, incorporated “substantial portions of Niantic’s copyrighted computer code”.

[16] Niantic’s computer games use the Internet to obtain names and locations of local characters or features, which are shown on the screens of the players’ mobile devices. Niantic claims that the respondents’ “cheating programs” permitted users to alter the GPS coordinates of their devices to make it appear that they were in other geographic locations, allowing them to play the games as if they were actually in those locations.

[17] Of the fourteen counts in Niantic’s claim, nine allege copyright infringement of one form or another. The remaining counts allege violations of the US Computer Fraud and Abuse Act , the California Comprehensive Computer Data Access and Fraud Act , and the California Unfair Competition Law ; breach of contract; and intentional interference with contractual relations.

[18] As expressed in Hunt’s affidavit, filed in this proceeding, Hunt and IT Haven claim that the Global++ software was “generic”, did not incorporate software designed by others, was designed exclusively for use on certain Apple iOS devices and was simply an “accessory”, which allowed a user to modify the GPS signal on their mobile device. Hunt claims that “[t]here were hundreds of applications or industries that could potentially take advantage of the spoofing features offered by Global++.”

[19] The appellant refused to defend IT Haven and Hunt against Niantic’s claim, alleging that they had made misrepresentations when they applied for the Policy, failed to inform them of material changes in IT Haven’s business, and breached conditions of the Policy.

The Extrinsic Evidence

[20] Although the appellant argued that Niantic’s claim was excluded from coverage based on the language of the Policy, it sought to introduce extrinsic evidence to establish that the claim was excluded based on the “Material Information” clause, arguing that the respondents had misrepresented their operations in the application for insurance, and failed to correct the misrepresentation during the policy period. The extrinsic evidence it sought to introduce included:

• statements made by Hunt to the appellant’s coverage counsel;
• a transcript of Hunt’s cross-examination on his affidavit filed in this application and exhibits referred to therein;
• communications between the respondents’ insurance agent and the appellant’s insurance manager;
• an affidavit of a representative of the appellant, who deposed that the respondents did not disclose the full nature of their activities to the appellant and that the information would have been material to the appellant; and
• an affidavit and expert report from an underwriting expert, who deposed that IT Haven’s US business and its involvement in the US gaming industry were material facts that would have influenced a prudent insurer in determining whether to issue the policy, the nature of the coverage offered and the premium to be charged.

B. The Application judge’s reasons

[21] The application judge allowed the respondents’ application, declaring that the appellant was required to defend the respondents in the Niantic proceeding and reimburse them for their legal costs.

[22] Referring to Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245 and Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, the application judge summarized the principles applicable to duty to defend cases:

• Insurers owe a duty to defend where there is a mere possibility that a claim falls within the insurance policy.
• In determining a duty to defend, the court should consider the allegations made against the insured and the policy language.
• The onus is on the insured to first establish the possibility that the pleadings fall within the insurance policy, at which point the onus shifts to the insurer to show that an exclusion clearly and unambiguously excludes coverage for a claim against an insured.
• Extrinsic evidence explicitly referred to within the pleadings may be considered for the purposes of ascertaining the substance and true nature of the claims.
• However, courts cannot look at “premature” evidence, or evidence which, if considered, would require findings to be made before trial that would affect the underlying litigation.
• Extrinsic evidence not mentioned in the underlying action, or not needed for the purpose of ascertaining the nature of the claim, should not be considered by the court in the duty to defend application.

[23] The application judge found that there was no need to rely on extrinsic evidence to determine the nature of the claim. The claim set out in Niantic’s complaint was for breach of copyright, claiming damages for the sale of an allegedly unauthorized derivative version of its electronic games. Considering extrinsic evidence would “turn what should be a relatively simple pleadings type motion into a trial within a trial”, he added that “[t]he fact that Lloyd’s relies on the evidence of an expert to support its position demonstrates why the Supreme Court in Monenco cautioned that a motion judge should not look to “premature evidence” ie. evidence which if admitted would require findings to be made before trial that could affect the underlying litigation.”

[24] Conducting the duty to defend analysis without the extrinsic evidence, the application judge concluded that the appellant had a duty to defend the respondents. It was undisputed that IT Haven and Hunt met the definition of “insured”. The Niantic proceeding fell within the coverage afforded by the Policy because a “Wrongful Act”, as defined in the Policy, included any “unauthorized use or violation by the insured of any copyright […] in the insured’s professional business” and the definition of the insured’s professional business included software development. The pleadings alleged that the wrongful act occurred in May 2019, which fell within the period covered by the Policy. Finally, the motion judge found that no exclusions applied to negate the duty to defend the respondents in the Niantic proceeding.

[25] The application judge observed:

What has happened in this duty to defend application is what Iacobucci J. cautioned against in Monenco . Lloyd’s may be proven correct with respect to the position it has taken regarding the alleged misrepresentations. Once all the evidence is heard at a trial and if the misrepresentations are established there will be no indemnity under the Policy. The same may also be true with respect to the various exclusions emphasized as reasons why Lloyd’s should not have to provide a defence to the Applicants.

C. The Parties’ Submissions

[26] The appellant contends that the Policy contained an obligation to accurately describe IT Haven’s business at the time of the application for insurance (i.e., the “Proposal”) and to disclose material changes in the business at the time of each annual renewal. It submits that IT Haven and Hunt made material misrepresentations about the nature of IT Haven’s business in the application for insurance when they stated that IT Haven: (1) did not provide products or services to the electronic games industry; (2) derived 100% of its gross revenues from Canada; (3) always used written contracts with its clients; and (4) had not incorporated software or products designed by others into its work. Relying on Clause 4.9, the appellant also submits that the Policy specifically excluded coverage for claims arising from undisclosed material changes to any fact, activity or circumstance described in the application for insurance.

[27] The appellant submits that, even without the extrinsic evidence, the questions in the application form were material to the risk accepted by the underwriters and, based on the pleadings and the Policy alone, the claim did not fall within the Policy. It submits that the application judge (a) failed to consider the entire Policy, which incorporated statements in the application for insurance that the respondents (i) did not provide products or services to the electronic games industry, (ii) did not incorporate software or products designed by others into their own designs, and (iii) did not generate US revenue; and (b) failed to give effect to exclusions in the Policy, including the Material Information clause, and to the Renewal Conditions Endorsement. The appellant submits that a claim for breach of copyright in relation to the electronic games industry in the United States is manifestly inconsistent with the respondents’ description of their business in the application for insurance and is plainly excluded from coverage.

[28] In the alternative, the appellant submits that when non-disclosure or misrepresentation is at issue, extrinsic evidence can and should be considered by the court in determining whether the insurer has a duty to defend. Had the extrinsic evidence been considered, the application judge would have found that the respondents misrepresented the nature of their business and the Material Information clause would have excluded the insurer’s liability. Ultimately, the appellant submits that the respondents made material misrepresentations about their business and it would be commercially unfair to require the appellant to defend claims arising from their involvement in the US gaming industry when it did not agree to underwrite such risks.

[29] The respondents submit that the application judge correctly identified and applied the “pleadings rule” and that, even assuming this were a proper case in which to admit extrinsic evidence, the evidence proffered is contested and does not clearly and unambiguously exclude coverage. The mere possibility of coverage is sufficient to trigger the duty to defend. In this case, a claim for copyright infringement brought in the United States in relation to software development was clearly covered by the Policy and, equally clearly, the appellant owed a duty to defend.

D. Analysis

[30] I agree with the application judge’s disposition and would dismiss the appeal, but for slightly different reasons.

[31] This is not a classic “duty to defend” case in which the courts apply the “pleadings rule”. I will explain that shortly, but first I turn to the pleadings rule and the reasons for the rule.

[32] The pleadings rule has been summarized as: “[w]hen the pleadings allege facts which, if true, would require the insurer to indemnify the insured in respect of the claim, the insurer must provide a defence”: Gordon G. Hilliker, Liability Insurance Law in Canada, 7th ed. (Toronto: LexisNexis Canada, 2020), at p. 111; see also Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801, at p. 810; Panasonic Eco Solutions Canada Inc. v. XL Specialty Insurance Company, 2021 ONCA 612, at para. 22. The duty to defend is therefore broader than the duty to indemnify, because it is triggered by the mere possibility of coverage: Panasonic, at para. 22, citing Monenco, at paras. 28-29.

[33] In considering whether the facts pleaded fall within the policy, the court must consider the substance and true nature of the claim: Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, at paras. 50, 79; Monenco, at paras. 34-36.

[34] The pleadings must be interpreted broadly, with any doubt being resolved in favour of the insured. Where the claim alleges facts that might fall within coverage, the duty to defend arises: Panasonic, at para. 22; Monenco, at paras. 31-33.

[35] According to the rule, the court may look only to the provisions of the insurance policy and to the pleadings in the underlying action to determine whether the insurer has a duty to defend the insured: Mark G. Lichty & Marcus B. Snowden, Annotated Commercial General Liability Policy, loose-leaf (2021-Rel. 2) (Toronto: Thomson Reuters Canada Ltd., 2021), at §12:22; Monenco, at para. 28. In a typical duty to defend case, the issue can be addressed by determining whether the claim, on the face of the pleadings, “falls within” the policy coverage or is plainly excluded by the policy language.

[36] The onus is on the insured to establish that the allegations made by the plaintiff, if proven, would bring the claim within the four corners of the policy. Once that threshold is met, the onus shifts to the insurer to show that the claim falls outside the coverage provided by the policy, because of an applicable exclusion clause: Trafalgar Insurance Co. of Canada v. Imperial Oil Ltd. (2001), 57 O.R. (3d) 425 (C.A.), at para. 18.

[37] As with many rules, there are exceptions to the pleadings rule. One such exception permits the court to consider documents, such as contracts, expressly referred to in the pleadings in the underlying action: see Hilliker, at p. 114. Another permits the court to give effect to an exclusion clause in the policy where it clearly and unambiguously excludes coverage: Progressive Homes, at paras. 19, 51; Monenco, at para. 29. It has also been suggested that the court may consider extrinsic evidence of “underlying facts” where those facts are unrelated to, and not disputed in, the underlying action: see Hilliker, at p. 121; Lichty & Snowden, at §12:22; Craig Brown et al., Insurance Law in Canada, loose-leaf (2021-Rel. 8) (Toronto: Thomson Reuters Canada Ltd., 2021), at §18:15; 1540039 Ontario Limited v. Farmers’ Mutual Insurance Company (Lindsay), 2012 ONCA 210, 110 O.R. (3d) 116, at paras. 26, 30. This appears to be based on the proposition that there can be no prejudice to the insured in so doing.

[38] Two reasons have been identified for judicial reluctance to consider extrinsic evidence to resolve duty to defend applications at an early stage. First, as observed by the application judge, the use of extrinsic evidence to determine whether the insurer owes the insured a duty to defend could require findings of fact or the resolution of live issues in the underlying litigation. This could operate to prejudice the insured in the underlying litigation and could potentially result in inconsistent findings in the underlying litigation on the one hand, and the insurance dispute on the other. As well, the findings of fact made on the application could ultimately be “contrary to the evidence tendered on the full record at trial”: Family and Children’s Services of Lanark, Leeds and Grenville v. Co-operators General Insurance Company, 2021 ONCA 159, 457 D.L.R. (4th) 714, at para. 60, citing Monenco, at paras. 36-37.

[39] The second reason to exclude extrinsic evidence when determining whether the insurer has a duty to defend arises out of the practical need for an expeditious determination of the issue: McLean (Litigation Guardian of) v. Jorgenson (2005), 78 O.R. (3d) 308 (C.A.), at para. 5. It reflects a concern for fairness to the insured, who may be left stranded, without a defence to the third party’s action, while the insurer contests its liability under the policy. It has been observed that for this reason a duty to defend application should not become a “trial within a trial”: Monenco, at para. 37; Halifax Insurance Co. of Canada v. Innopex Ltd. (2004), 72 O.R. (3d) 522, at paras. 1, 39, 55.

[40] As I have noted above, the appellant would have us treat this as a typical duty to defend case, because the Policy incorporates the representations made in the application. I do not accept that characterization.

[41] On its face, Niantic’s claim falls within the Policy. It is a claim for the violation of Niantic’s copyright, committed in the performance of the “Insured’s Professional business”, which included the development and design of software.

[42] Unlike a typical duty to defend case, the appellant’s claim here is that the insured made misrepresentations in the application for insurance and breached a policy condition that required it to inform the insurer of any material change in the information set out in the application. Thus, the appellant says that it had no duty to defend, because Niantic’s claim alleges that IT Haven engaged in activities it represented it was not engaged in – participating in the computer gaming industry in the United States and incorporating the software of others in its product.

[43] At this stage, however, Niantic’s claims are simply unproven allegations. The existence of misrepresentations or breaches of policy conditions are factual issues that cannot be determined simply by looking to Niantic’s pleadings. Moreover, whether the respondents were involved in the electronic gaming industry in the US, and violated Niantic’s copyright while doing so, is the central issue in Niantic’s lawsuit. The respondents contend that their product was “agnostic” to its use in one industry or another and that they did not violate Niantic’s intellectual property.

[44] Determining whether IT Haven made misrepresentations about its business, or failed to correct its representations at the time of renewal, would therefore require a determination of some of the very issues at play in the Niantic action.

[45] Moreover, as the appellant itself points out, to enable the insurer to void the policy, the misrepresentation must be “material”, in the sense of affecting the insurer’s decision whether to underwrite the risk, on what conditions and at what premium. While the appellant tendered both expert and lay evidence on this issue, it is not amenable to summary disposition and will likely require a trial.

[46] The judgment of this court in Longo v. Maciorowski (2000), 50 O.R. (3d) 595 (C.A.) is instructive in cases such as this. The insured was sued for damages arising out of a motor vehicle accident. He had pleaded guilty to impaired driving and operating a motor vehicle with a blood alcohol level over 80 milligrams. The insurer denied coverage for the third-party claim on the ground that the insured had breached a number of policy and statutory conditions and added itself as a statutory third party to the action. The motion judge dismissed the insured’s motion for a declaration that he was entitled to a defence of the action at the insurer’s expense. This court, speaking through Catzman J.A., dismissed the appeal, but did not accept the principle articulated by the motion judge that there was an automatic suspension of the duty to defend on the insurer’s allegation of a breach of condition and its addition as a statutory third party.

[47] Catzman J.A. observed that where an insurer asserts a breach of condition by the insured, and where that assertion is unchallenged by the insured and there are no grounds for raising estoppel against the insurer or statutory relief from forfeiture, “the insured is disentitled both to indemnity under the policy and to the costs of a defence”: at para. 15, citing Craig Brown & Julio Menezes, Insurance Law in Canada: A Treatise on the Principles of Indemnity Insurance as Applied in the Common Law Provinces of Canada, 2nd ed. (Toronto: Carswell, 1991), at p. 252. He noted, however, that the reported appellate decisions in Canada had not been uniform on the issue of whether the duty to defend arises in the context of an alleged breach of condition. He also observed that although there was some inconsistency in the case law of this province as to whether a motor vehicle insurer added as a statutory third party has a duty to defend, the preponderance of authority favoured the approach taken by the motion judge.

[48] Catzman J.A. concluded that there should be no hard and fast rule for determining whether an insurer is required to provide a defence where the insurer alleges a breach of condition, but rather the court should adopt a flexible approach. Depending on the circumstances, a hard and fast rule might be unfair to either the insured or to the insurer. A rule that the insurer was never obliged to defend once it alleged breach of condition would be unfair to an impecunious insured. Conversely, a rule that automatically required the insurer to defend in spite of the breach of condition could work to the prejudice of the insurer, which provided a defence to an impecunious insured, but was unable to recover the costs from the insured after the breach of condition was made out. He concluded, at paras. 35-37:

With respect, I do not place much confidence in the solution suggested in Featherstone v. Zurich Insurance Co. (1991), 6 O.R. (3d) 639 (Gen. Div.)], endorsed in Laughlin v. Sharon High Voltage Inc. (1993), 12 O.R. (3d) 101 (Gen. Div.)] and followed in Colitti v. Popp (1998), 20 C.P.C. (4th) 363 (Ont. Gen. Div.)], that the tort action should be put on hold while the breach of condition issue is decided "on an expedited basis". That solution may be practical where the issue admits of summary disposition: where the breach of condition is clear and the case for estoppel or relief from forfeiture unmeritorious or, conversely, where the breach of condition is technical or insubstantial and the case for estoppel or relief from forfeiture overwhelming. But in the many cases that are not clear - where the alleged breach of condition, the basis of the alleged estoppel or the grounds for relief from forfeiture are in serious dispute and require the testimony of witnesses and the resolution of conflicting evidence - there seems to me to be no justification for compelling the trial of the plaintiff's tort action to await the final disposition of the breach of condition issue.

Thus, rather than establishing an immutable legal principle, I would suggest that the question should be determined upon consideration of the circumstances of each case, including the relative strength of the positions asserted by the insurer and the insured and the necessity and urgency to furnish the insured with a separate defence.

[49] In Longo, this court affirmed the motion judge’s order dismissing the insured’s motion for an order compelling the insurer to defend the action. It did so primarily because the insurer had made “allegations of clear and uncontested breaches of condition on the part of the insured” (emphasis added), the insured had put forward nothing to support a claim for estoppel or relief from forfeiture, and the insurer had invoked the statutory remedy to be added as a third party, thereby enabling it to contest the liability of the insured in the underlying action.

[50] The New Brunswick Court of Appeal applied Longo in Drane v. Optimum Frontier Insurance Co., 2004 NBCA 52, 272 N.B.R. (2d) 241, an automobile accident case. The insurer alleged that Mr. Drane had been driving while his ability to drive was impaired by alcohol and had made material misrepresentations concerning the operation and ownership of the vehicle when he claimed indemnity and a defence from the insurer. The insurer invoked the statutory right to be added as a third party and the issue was whether, in this circumstance, the insurer could be compelled to provide the insured with a defence.

[51] Dêschenes J.A., speaking for the court, identified the distinction in Longo between “coverage” cases, considered in Nichols, and cases grounded on allegations of a breach of a policy condition and the addition of the insurer as a third party. The insurer argued that once it invoked the statutory third party right, the duty to defend was suspended and had to be resolved in a separate proceeding before the insurer could be required to defend. In rejecting this submission, Dêschenes J.A. found that the insurer’s position that there was an immediate suspension of the defence obligation had been rejected by Longo.

[52] In adopting the “flexible” approach of Longo, Dêschenes J.A. identified a number of factors that could inform the court’s discretion. She observed, at para. 24:

I would adopt the approach taken by the Ontario Court of Appeal in Longo. The decision whether to suspend the insurer's duty to defend the underlying action against its insured, pending the determination of the question of an alleged breach of condition of the policy, must be informed by certain considerations which, in turn, depend on the facts of each case. In my view, the relevant factors are numerous and, without being exhaustive, relate to such questions as:

• Is the breach of condition contested and, if so, on what basis? Is the existence of the breach in serious dispute?
• Is it reasonable to expect that the question of the breach of the condition can be dealt with summarily, on an expedited basis? If so, what are the facts supporting such an expectation?
• Despite a clear breach of statutory condition, are there circumstances that militate in favor of relief from forfeiture under the Act ? Are such circumstances in serious dispute?
• If the insured invokes estoppel by reason of the insurer's conduct, what are the circumstances being relied upon? Is the question of estoppel in serious dispute?
• What is the status of the main action against the insured? Has discovery been held? Has a date for trial been secured? If not, when is the main action likely to be heard?
• What is the nature of the conflict between the insured and the insurer? For example, what are the specific reasons that prompted the insurer to deny indemnity and to apply to be added as a third party under the Act ?
• Is the language used in the third party defence filed by the insurer congruent with the language of the statement of defence filed by the insured on his or her own behalf? (Although I hold the view that an insurer is not entitled to file a statutory third party defense that is incongruent with its insured's interest, it is not necessary to deal with the issue in this case.)
• If the conflict between the insurer and its insured is not apparent on the face of the third party defence, is the conflict such as to require, in any event, separate and independent counsel to adequately represent the interest of the insured? If so, why?
• What is the particular financial position of the defendant? Is he or she capable of assuming the costs of independent counsel until the issue of the breach of condition is resolved?

[53] She added, at para. 26:

In my view, when the parties to a dispute such as this one appear before the court, they should adduce sufficient evidence to allow the judge to make an informed decision. Thus, the position advocated by Optimum's counsel and adopted by the application judge to restrict the inquiry to a consideration of the statement of claim and the insurance policy to resolve the question of the duty to defend was wrong in law. Mr. Drane was entitled to adduce evidence, which supported his position, and so was Optimum, in order to put the application judge in a position to make an informed decision pertaining to the factors just enumerated.

[54] On the facts before her, Dêschenes J.A. upheld the application judge’s decision to recognize the duty to defend and compel the insurer to appoint separate and independent counsel to represent the interests of the insured in the third party action: the insured contested the insurer’s allegations of breach of policy terms and statutory conditions; there was no evidence concerning whether the insurer’s statutory third party defence in the underlying action was congruent with the position taken by the insured in that action; there was a clear conflict between the position taken by the insurer and the insured on the issue of whether the insured was a passenger in the vehicle (as he alleged) or whether he was the driver (as the insurer alleged); the record did not disclose any information that the alleged breaches of the policy or statutory conditions could be adjudicated summarily; the record did not disclose any information allowing one to believe that the insured had sufficient income or assets to assume the costs of obtaining counsel until the question of the alleged breach of condition was resolved; and there was no evidence as to the status of the underlying action.

[55] In my view, the case at bar is fundamentally a misrepresentation case, rather than one of breach of condition, because the breach of condition is founded on the existence of a misrepresentation. However, the flexible approach of Longo is appropriate in determining whether the appellant has a duty to defend in this case. In each case, the issue is whether the actions of the insured have invalidated coverage that would otherwise be applicable on the face of the policy, given the nature of the claim in the underlying litigation.

[56] In considering, among other things, the factors identified in Longo and Drane, I make the following observations:

• the insurer’s allegations of misrepresentation and breach of condition are hotly contested;
• there is a manifest risk of inconsistent findings of fact and prejudice to the insured if the court were required to determine whether IT Haven’s product is unique to the gaming industry or “agnostic” and whether it incorporated Niantic’s proprietary information;
• the resolution of the misrepresentation issue, and therefore the issue of whether coverage has been invalidated, will involve contested factual matters and expert evidence;
• there is no information before us concerning the state of the underlying litigation in California, but it is unrealistic to think that the plaintiff or the court would hold the proceeding in abeyance while the defendants and their insurer litigate their dispute;
• there is no evidence before us concerning IT Haven’s financial position and its ability to finance the defence of the Niantic proceedings; and
• there is no evidence that IT Haven will be unable to reimburse its insurers for defence costs, should it ultimately be found that it is required to do so.

[57] Having regard to the foregoing, and applying the approach in Longo and Drane, I conclude that the motion judge correctly found that the appellant had a duty to defend the respondents against the Niantic claim.

[58] It may be that at the end of the day the appellant will be able to establish its claims of misrepresentation and breach of policy conditions, in which case it may be entitled to recover the defence costs from the respondents.

E. Disposition

[59] For these reasons, I would dismiss the appeal, with costs to the respondents.

[60] We did not hear full submissions on costs. If costs are not resolved, I would direct the parties to make written submissions. The respondents’ submissions shall be served and filed within fifteen (15) days of the release of these reasons and the appellant’s submissions shall be served and filed within fifteen (15) days of receipt of the respondents’ submissions. The submissions shall not exceed five (5) pages, excluding costs outlines.

Released: January 28, 2022 “G.R.S.” “George R. Strathy C.J.O.” “I agree. B. Zarnett J.A.” “I agree. Wilton-Siegel J.”

Footnotes:

[1] The defence clauses provided: “With respect to the coverage afforded by this Policy, the Underwriters shall appoint legal counsel or other experts to take up the defence of the Insured and pay those Defence Costs. Defence Costs are included in the Limit of Liability for each Claim.”

[2] The limit was increased from $250,000 to $1 million effective January 23, 2017.