2091533 Ontario Limited et al. v. Vertigo Investments Limited et al.; The Wawanesa Mutual Insurance Company, ThirdParty
[Indexed as: 2091533 Ontario Ltd. v. Vertigo Investments Ltd.]
Ontario Reports
Ontario Superior Court of Justice,
Leitch J.
June 10, 2013
115 O.R. (3d) 457 | 2013 ONSC 2731
Case Summary
Insurance — Insurer's obligation to defend — Exclusion clauses — Insured failing to disclose existence of asbestos in building prior to selling it to plaintiffs — Plaintiffs suing insured for damages for breach of contract, breach of collateral warranty, breach of express and/or implied warranty, negligence, fraudulent misrepresentation and negligent misrepresentation — Insurance policy excluding coverage for loss or damage caused by dishonest or criminal acts of insured — Insurer having duty to defend action — Allegations in statement of claim supporting both claim for negligence and claim for intentional conduct — Negligence claim not derivative — Mere fact that insurer had challenged its duty to defend not giving rise to reasonable apprehension of conflict of interest that would disentitle it to control defence and appoint counsel for insured.
The plaintiffs purchased a building from the insured. Prior to the sale, the insured did not disclose the existence of asbestos material in the building to the plaintiffs. The plaintiffs brought an action against the insured seeking damages for breach of contract, breach of collateral warranty, breach of an express and/or implied warranty, negligence, fraudulent misrepresentation and negligent misrepresentation. The insurance policy excluded coverage for loss or damage caused directly or indirectly by dishonest or criminal acts of the insured. The insured brought a motion for a determination that the insurer had a duty to defend it. It also sought an order allowing it to select and retain counsel of its own choice to conduct its defence of the action.
Held, the motion should be granted in part.
The allegations in the statement of claim supported both a claim for negligence and a claim for intentional misconduct. Therefore, the negligence claim was not derivative. As a result, the insurer had a duty to defend the insured.
The mere fact that the insurer had challenged its duty to defend on this motion did not give rise to a reasonable apprehension of a conflict of interest that would disentitle it to control the defence and appoint counsel for the insured.
Aitken v. Unifund Assurance Co. (2012), 112 O.R. (3d) 391, [2012] O.J. No. 4450, 2012 ONCA 641, 298 O.A.C. 139, 13 C.C.L.I. (5th) 1, 355 D.L.R. (4th) 50, 220 A.C.W.S. (3d) 615, affg (2011), 108 O.R. (3d) 147, [2011] O.J. No. 5083, 2011 ONSC 1809, 5 C.C.L.I. (5th) 78, 209 A.C.W.S. (3d) 677 (S.C.J.); Brockton (Municipality) v. Frank Cowan Co. (2002), 2002 7392 (ON CA), 57 O.R. (3d) 447, [2002] O.J. No. 20, 154 O.A.C. 125, 34 C.C.L.I. (3d) 1, [2002] I.L.R. I-4097, 110 A.C.W.S. (3d) 914 (C.A.), consd
Other cases referred to
Appin Realty Corp., Ltd. v. Economical Mutual Insurance Co. (2008), 89 O.R. (3d) 654, [2008] O.J. No. 436, 2008 ONCA 95, 57 C.C.L.I. (4th) 187, 233 O.A.C. 191, [2008] I.L.R. I- 4676, 164 A.C.W.S. (3d) 322; [page458] Coakley v. Allstate Insurance Co. of Canada, [2009] O.J. No. 1832, [2009] I.L.R. I-4841, 73 C.C.L.I. (4th) 113, 177 A.C.W.S. (3d) 486, 2009 22549 (S.C.J.); Glassford v. T.D. Home and Auto Insurance Co. (2009), 2009 10397 (ON SC), 94 O.R. (3d) 630, [2009] O.J. No. 1011, [2009] I.L.R. 1-4823, 73 C.C.L.I. (4th) 135, 176 A.C.W.S. (3d) 221 (S.C.J.); Monenco Ltd. v. Commonwealth Insurance Co., [2001] 2 S.C.R. 699, [2001] S.C.J. No. 50, 2001 SCC 49, 204 D.L.R. (4th) 14, 274 N.R. 84, [2002] 2 W.W.R. 438, J.E. 2001-1712, 155 B.C.A.C. 161, 97 B.C.L.R. (3d) 191, 32 C.C.L.I. (3d) 165, [2001] I.L.R. I-3993, 108 A.C.W.S. (3d) 159; Nichols v. American Home Assurance Co., 1990 144 (SCC), [1990] 1 S.C.R. 801, [1990] S.C.J. No. 33, 68 D.L.R. (4th) 321, 107 N.R. 321, J.E. 90-643, 39 O.A.C. 63, 45 C.C.L.I. 153, [1990] I.L.R. Â1-2583 at 10058, 20 A.C.W.S. (3d) 699; Non-Marine Underwriters, Lloyd's of London v. Scalera, [2000] 1 S.C.R. 551, [2000] S.C.J. No. 26, 2000 SCC 24, 185 D.L.R. (4th) 1, 253 N.R. 1, [2000] 5 W.W.R. 465, J.E. 2000-935, 135 B.C.A.C. 161, 75 B.C.L.R. (3d) 1, 18 C.C.L.I. (3d) 1, 50 C.C.L.T. (2d) 1, [2000] I.L.R. I-3810, 96 A.C.W.S. (3d) 479; Roman Catholic Episopal Corp. of St. Georges v. Insurance Corp. of Newfoundland, [2003] N.J. No. 324, 2003 NLCA 65, 232 Nfld. & P.E.I.R. 79, 6 C.C.L.I. (4th) 83, 127 A.C.W.S. (3d) 818
Statutes referred to
Occupational Health and Safety Act, R.S.O. 1990, c. O.1 [as am.]
Rules and regulations referred to
Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 21.01(1) (a)
MOTION by the insured for a determination that the insurer had a duty to defend and for an order allowing the insured to retain counsel of its choice.
Peter Dobbie, for defendants Vertigo Investments Limited.
D. Lee, for third party.
[1] LEITCH J.: — Vertigo Investments Limited ("Vertigo") has brought a motion pursuant to rule 21.01(1)(a) [of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194] for a determination that its insurer, the Wawanesa Mutual Insurance Company ("Wawanesa"), has a duty to defend it in this action. Vertigo is not seeking a declaration of indemnification under its policy of insurance.
[2] Vertigo also seeks an order that it may select and retain counsel of its own choice to conduct its defence of the main action and that Wawanesa pay its reasonable fees and proper disbursements on a solicitor and client scale from the date of hearing until the proceedings are concluded.
The Claim against Vertigo
[3] The plaintiffs purchased a commercial building (the "building") from Vertigo in 2009. Prior to the sale, Vertigo did not disclose the existence of asbestos material in the building to the [page459] plaintiffs. As a result, the plaintiffs brought an action against Vertigo, and the other named defendants, seeking damages for breach of contract, breach of collateral warranty, breach of an express and/or implied warranty, negligence, fraudulent misrepresentation and negligent misrepresentation.
[4] Wawanesa, Vertigo's insurer, was added as a third party to the action.
The Specific Allegations against Vertigo in the Statement of Claim
[5] The statement of claim alleges that Vertigo effected renovations to the building in 1989 which required review of the original building plans and drawings and resulted in interior portions of the ceilings, walls and floors being temporarily exposed (statement of claim, at paras. 13-14).
[6] The plaintiffs further allege that the original building plans and drawings indicate the use and presence of asbestos in the building and, furthermore, that the 1989 renovations exposed portions of the building where material containing asbestos was present and apparent (statement of claim, at paras. 15-16). As a result, the plaintiffs allege that Vertigo knew of the existence of the asbestos-containing materials in the building from, at the very latest, the time of the 1989 renovations (statement of claim, at paras. 17 and 21).
[7] The plaintiffs allege that 2091533 Ontario Limited was induced to complete the purchase of the building without an environmental inspection as a result of the representations made by the defendants, Vertigo and Jack Lane (statement of claim, at para. 27).
[8] The plaintiffs further plead that Vertigo and Jack Lane willfully concealed the complete contents of the appraisal report of Valco Consultant's Inc. from the plaintiffs prior to the sale of the building (statement of claim, at para. 31).
[9] The plaintiffs plead that the defendants knew, or ought to have known, about the existence of asbestos throughout the building (statement of claim, at para. 45).
[10] The plaintiffs specifically plead that Vertigo is in breach of the express terms of the agreement of purchase and sale or, in the alternative, the implied terms thereof (statement of claim, at para. 46).
[11] The plaintiffs state that Vertigo owed the plaintiffs a duty arising from O. Reg. 278/05 -- Designated Substance -- Asbestos on Construction Projects and in Buildings and Repair Operations of the Occupational Health and Safety Act, R.S.O. 1990, c. O.1 [page460] to disclose the existence of the asbestos (statement of claim, at para. 47).
[12] The plaintiffs plead that Vertigo had or ought to have had knowledge of the asbestos prior to the closing of the sale of the building as a result of, but not limited to, the 1989 renovations and the inspection conducted by Valco Consultants Inc. (para. 48).
[13] The plaintiffs plead that Vertigo ought to have informed the plaintiffs of the asbestos and, in fact, owed the plaintiffs a duty of full disclosure regarding the building (statement of claim, at para. 49).
[14] The plaintiffs plead that Vertigo, negligently and/or in breach of its agreement with the plaintiffs, did by its acts and/or failure to act, and by material negligent and false misrepresentations made to the plaintiffs, caused the plaintiffs to suffer damages. The particulars of the negligence and breach include, but are not limited to
(a) negligently and/or knowingly and with reckless disregard, falsely representing to the plaintiffs that, during the period of its ownership of the building, all environmental laws and regulations had been complied with, and that no hazardous conditions or substances existed in the building;
(b) breaching its duty of care under the Occupational Health and Safety Act to inform the plaintiffs of the existence of asbestos in the building; and
(c) inducing the plaintiffs to complete the sale of the building without an inspection to determine that no hazardous conditions or substances existed on the property by waiving a condition in the agreement of purchase and sale that the plaintiffs conduct such an inspection at their own expense (statement of claim, at para. 50).
[15] In the alternative, the plaintiffs state that they relied, to their detriment, upon untrue representations made by Vertigo regarding the condition of the building and that, at all material times, the plaintiffs believed that no such deficiencies existed, and that the representations made were untrue, inaccurate and misleading (statement of claim, at paras. 51-52).
The Relevant Provisions of Vertigo's Insurance Policy
[16] Wawanesa has a legal obligation to pay compensatory damages because of "property damage" caused by an "occurrence". The policy provides that Wawanesa has the right and duty to defend any action seeking those compensatory damages. [page461]
[17] Property damage is defined in the policy to include "physical injury to tangible property, including all resulting loss of use of that property" and "loss of use of tangible property that is not physically injured".
[18] Occurrence is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful condition".
[19] The policy sets out a number of exclusions from coverage. Specifically relevant to this motion is the provision that Wawanesa will not pay for loss or damage caused directly or indirectly by dishonest or criminal acts of the insured or any of its partners, employees, directors, trustees, authorized representatives, or anyone to whom it has entrusted the property for any purpose.
Vertigo's Position on the Motion
[20] Vertigo's position is that Wawanesa's policy provides indemnity for the plaintiffs' claim and for the cost of defending that claim.
[21] Vertigo submits that the "occurrence" here is an accident and there may be coverage for the allegations pleaded in the statement of claim. Vertigo submits that because coverage under the policy is a possibility, Wawanesa's duty to defend is a certainty.
[22] Vertigo suggests that there are three possible outcomes to the action:
(1) Vertigo knew there was asbestos in the building and intentionally failed to disclose that condition;
(2) Vertigo did not know that there was asbestos in the building but ought to have known the building's condition and negligently did not disclose the existence of the asbestos; or
(3) Vertigo had no knowledge of the asbestos in the building and had no means to know of that condition.
[23] Vertigo acknowledges that Wawanesa has no liability for the consequences of any fraudulent act but asserts that, according to the allegations in the statement of claim, the result of the action could be that Vertigo is exposed to damages arising from its accidental conduct.
[24] Vertigo also submits that, where there may be a duty to indemnify and there is therefore a duty to defend, it has the right to select and appoint counsel for its defence in circumstances where counsel selected and appointed by Wawanesa may be in a conflict of interest.[page462]
[25] Vertigo submits that a potential conflict of interest exists here because one factual trial outcome would allow Vertigo to be indemnified under its insurance policy while it would not be indemnified under another possible outcome. Vertigo further submits that this potential conflict is exacerbated in the context of an ongoing coverage dispute.
The Position of Wawanesa on the Motion
[26] Wawanesa's position is that there is no coverage for the type of claim asserted against Vertigo and therefore it is free to refuse to fund the defence of the action.
[27] Wawanesa submits that the action has nothing to do with negligence, but rather the allegations in the statement of claim relate to potential acts of fraud and dishonesty. Wawanesa emphasizes the facts pleaded as distinct from possible findings that could be made on the facts.
[28] Wawanesa in particular emphasizes the following allegations:
(i) that Vertigo knew of the existence of the asbestos in the building (statement of claim, at paras. 16, 17 and 21);
(ii) that Vertigo induced the plaintiffs to purchase the building (statement of claim, at para. 27); and
(iii) that there was willful concealment of an appraisal report (statement of claim, at para. 31).
According to Wawanesa, para. 45 of the statement of claim relates to all defendants and it does not represent an allegation against Vertigo.
[29] Wawanesa's position is that there are no allegations in the statement of claim respecting negligent acts by Vertigo. Rather, it is alleged that Vertigo had full knowledge of the asbestos, willfully failed to disclose it and actively shielded that information from the plaintiffs. Therefore, the true nature of the claim is based on intentional acts and any allegation of negligence is clearly derivative of the claimed intentional torts.
[30] Wawanesa submits that, if the facts alleged in relation to Vertigo are true, there is no possibility of indemnity under the policy because all of the facts relate to willful acts and none of the facts pleaded support a finding of negligence. Thus, there is no duty to defend.
[31] However, if the finding on this motion is that Wawanesa has a duty to defend Vertigo, Wawanesa's position is that it is entitled to choose counsel (other than counsel on this motion) to [page463] defend the plaintiff's claim against Vertigo. Wawanesa asserts that no conflict of interest has arisen which would entitle Vertigo to retain and instruct counsel of its own choosing at Wawanesa's expense.
Relevant Legal Principles
[32] The Supreme Court of Canada has provided considerable guidance in relation to an insurer's duty to defend. Counsel for Wawanesa set out these principles, in paras. 14-21 of his factum:
- An insurer is obligated to provide a defence if the pleadings allege facts which, if true, would require the insurer to indemnify the insured for the claim.
Reference: Nichols v. American Home Assurance Co., 1990 144 (SCC), [1990] 1 S.C.R. 801, Responding Party's Brief of Authorities, Tab A.
- The duty to defend is much broader than the duty to indemnify: "[it] is not necessary to prove that the obligation to indemnify will in fact arise in order to trigger the duty to defend." The mere possibility that the claim is within the policy is sufficient to raise the duty to defend.
Reference: Nichols v. American Home Assurance Co., 1990 144 (SCC), [1990] 1 S.C.R. 801-808, Responding Party's Brief of Authorities, Tab. A.
- The duty to defend is nonetheless related to the duty to indemnify: "absent express language to the contrary, the duty to defend extends only to claims that could potentially trigger indemnity under the policy."
Reference: Non-Marine Underwriters v. Scalera, 2000 SCC 24 at para. 49, Responding Party's Brief of Authorities, Tab B.
- An insurer's obligation to defend is triggered where, on a reasonable reading of the pleadings, a claim within coverage can be inferred.
Reference: Nichols v. American Home Assurance Co., 1990 144 (SCC), [1990] 1 S.C.R. 801 at 808, Responding Party's Brief of Authorities, Tab A.
- The determination of whether an insurer's duty to defend has arisen lies with an examination of the claims contained within the pleadings.
Reference: Nichols v. American Home Assurance Co., 1990 144 (SCC), [1990] 1 S.C.R. 801 at 810, Responding Party's Brief of Authorities, Tab A.
- The Court must accept the allegations contained in the pleadings as true: "if the claim alleges a state of facts which, if proven, would fall within the coverage of the policy, the insurer is obliged to defend the suit regardless of the truth or falsity of such allegations."
Reference: Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699 at para. 28, Responding Party's Brief of Authorities, Tab C.
- It does not matter that the actual facts surrounding the claim may be different than the alleged facts as stated in the pleadings. In determining whether or not the duty to defend has arisen, the court must [page464] remain disinterested in the truth or falsity of allegations contained within the statement of claim. A court must not become engaged in a fact-finding analysis.
Reference: Cooper v. Farmers' Mutual Insurance Co. (2002), 2002 44938 (ON CA), 59 O.R. (3d) 417 (C.A.) at para. 9, Responding Party's Brief of Authorities, Tab D.
- The court is not bound by the plaintiff's choice of wording or labels contained within the pleadings. The nature of the plaintiff's claim is both determinative and the paramount consideration: "the existence of the duty to defend depends on the nature of the claim made."
Reference: Nichols v. American Home Assurance Co., 1990 144 (SCC), [1990] 1 S.C.R. 801 at 808, Responding Party's Brief of Authorities, Tab A; citing Prudential Life Insurance Co. v. Manitoba Public Insurance Corp. (1976), 1976 1099 (MB CA), 67 D.L.R. (3d) 521 (Man. C.A.) at 524, Responding Party's Brief of Authorities, Tab E.
[33] Vertigo, in paras. 12-15 of its factum, has outlined additional statements of law arising from cases of the Court of Appeal in which the principles established by the Supreme Court of Canada have been defined:
- The insurer will owe a duty to defend if the claim alleges a state of facts which, if proven, would fall within the coverage of the policy. The insurer is obliged to defend the suit regardless of the truth or falsity of such allegations.
Reference: Halifax Insurance Co. of Canada v. Innopex Ltd., 2004 33465 (Ont. C.A.) at para. 34, citing Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49.
- It is not necessary to prove that the obligation to indemnity will in fact arise in order to trigger the duty to defend. The mere possibility that a claim falling within the policy may succeed will suffice. The insurer's duty to defend is broader than the duty to indemnify.
Reference: Ibid
- Courts must interpret the provisions of a policy in light of general principles of interpretation of insurance policies, including:
(1) the contra proferentum rule;
(2) the principle that coverage provisions should be construed broadly and exclusion clauses narrowly; and
(3) the desirability, at least where the policy is ambiguous, of giving effect to the reasonable expectations of the parties.
Reference: Zurich Insurance Company v. 686234 Ontario Limited, 2002 33365 (Ont. C.A.) at para. 23, citing Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., 1993 150 (SCC), [1993] 1 S.C.R. 252 at 268-269.
- The onus of establishing the applicability of coverage, an exclusion, or an exception to an exclusion rests on the party seeking to rely on that policy provisions. [page465]
Reference: Aitken v. Unifund Assurance Co. (2011), 2011 ONSC 1809, 108 O.R. (3d) 147 at 151 (S.C.), aff'd 2012 ONCA 641, 112 O.R. (3d) 391 (C.A.), citing Non-Marine Underwriters, Lloyds of London v. Scalera 2000 SCC 24, [2000] 1 S.C.R. 551 at para. 49.
Disposition
[34] The first issue on this motion is whether the plaintiffs' claim against Vertigo could potentially fall within the scope of the coverage provided by Wawanesa.
[35] In Aitken [Aitken v. Unifund Assurance Co. (2011), 2011 ONSC 1809, 108 O.R. (3d) 147, [2011] O.J. No. 5083 (S.C.J.), affd (2012), 2012 ONCA 641, 112 O.R. (3d) 391, [2012] O.J. No. 4450 (C.A.)], the principles set out above from Monenco [Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, [2001] S.C.J. No. 50], Nichols [Nichols v. America Home Assurance Co., 1990 144 (SCC), [1990] 1 S.C.R. 801, [1990] S.C.J. No. 33] and Scalera [Non-Marine Underwriters, Lloyd's of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, [2000] S.C.J. No. 26] were applied. Counsel for Vertigo placed considerable emphasis on Aitken and submitted that the circumstances considered in Aitken are analogous to those present in this case. In Aitken, the applicants had sold their home after completing a seller property information statement which made a number of representations to the purchaser regarding the condition of the home. Eleven months after the sale was completed, the new homeowners issued a statement of claim against the sellers claiming that they had knowingly misrepresented the condition of the home.
[36] When the original statement of claim was issued in Aitken, it alleged the conduct was largely intentional. The sellers issued a statement of defence and notified their insurer of the action against them. The insurer denied coverage for the intentional acts and the sellers moved for a declaration that their insurer had a duty to defend and indemnify. Shortly before the application was heard, the new homeowners modified their statement of claim. They continued to plead the same facts, but relabelled the alleged misconduct as negligent instead of intentional.
[37] The Court of Appeal in Aitken upheld the trial judge's declaration that the insurer had a duty to defend the action. Epstein J.A., at para. 30, noted that:
The focus of a court's inquiry is not the labels attached to the claims but whether the facts, as pleaded, if proven true, would require Unifund [the insurer] to indemnify the Aitkens [the sellers].
[38] In contemplating this question, the court noted that the new homeowners, in their amended statement of claim, advanced various possibilities relating to the sellers' state of mind when making the alleged misrepresentations. These [page466] included alternate theories that the sellers made the representations deliberately, knowing them to be untrue, or made them carelessly. The court held that, as such, the facts set out in the amended pleading, if proven, could support a finding of either negligent or intentional misconduct and required the insurer to put forward a defence (Aitken, at para. 30).
[39] In Aitken, the insurer asserted that the claim of negligent misrepresentation was derivative of the intentional misrepresentation which had been the basis of the original claim. However, Epstein J.A. did not accept the insurer's argument and found [at para. 30], referencing Scalera, at para. 86, that
[s]ince the concern is not whether the pleadings are designed to generate insurance coverage, only with the facts as pleaded, I agree with the application judge that the claim for negligent misrepresentation is not derivative of the claim for intentional misrepresentation.
[40] In Scalera, at para. 85, the court explained that
a claim for negligence will not be derivative if the underlying elements of the negligence and of the intentional tort are sufficiently disparate to render the two claims unrelated. If both the negligence and intentional tort claims arise from the same actions and cause the same harm, the negligence claim is derivative, and it will be subsumed into the intentional tort for the purposes of the exclusion clause analysis. If, on the other hand, neither claim is derivative, the claim of negligence will survive and the duty to defend will apply.
[41] On this motion, Wawanesa submits that these circumstances are distinct from Aitken because, while there had been alternative pleadings in Aitken, there is no such alternative pleading in the plaintiffs' statement of claim issued against Vertigo.
[42] I cannot accept Wawanesa's position and instead agree with the position of Vertigo. Wawanesa has emphasized the paragraphs of the statement of claim that allege intentional dishonest conduct; however, I find that the plaintiffs have also pleaded negligent conduct. The statement of claim alleges that Vertigo ought to have known about the asbestos and was negligent in its representations respecting the condition of the building and because it did not disclose the existence of the asbestos (statement of claim, at paras. 45, 47-50).
[43] In following the approach outlined by Iacobucci J. in Scalera, at para. 82, I have asked myself whether the allegations, properly construed, sound in intentional tort. If they do, the plaintiffs' use of the word "negligence" will not be controlling.
[44] In their statement of claim, the plaintiffs allege different conduct by Vertigo as well as different states of mind in relation to each tort. The allegations in the statement of claim support [page467] both a claim for negligence as well as a claim for intentional misconduct. Therefore, the negligence claim is not derivative. It is a separate and distinct allegation from intentional dishonest conduct. As a result, I find that Wawanesa has a duty to defend Vertigo in this action and I will turn next to the choice of counsel issue.
[45] In Appin Realty Corp., Ltd. v. Economical Mutual Insurance Co. (2008), 89 O.R. (3d) 654, [2008] O.J. No. 436, 2008 ONCA 95, the Court of Appeal upheld the decision of the motion judge that counsel for the insured should be retained by the insurer to defend the action at the insurer's expense. In that case, there was also an issue with respect to insurance coverage. In Appin Realty, the motion judge referred to an earlier decision of the Court of Appeal, Brockton (Municipality) v. Frank Cowan Co. (2002), 2002 7392 (ON CA), 57 O.R. (3d) 447, [2002] O.J. No. 20 (C.A.).
[46] In Brockton, the Court of Appeal considered the nature of the insurer-insured relationship and the respective roles and rights of the parties. At para. 31, the court stated:
The appellant does not contest that in the first instance this right to control the defence (including the appointment of counsel) is that of the insurer. The insurance contract makes this clear . . . It is the insurer which conducts the defence. This includes the appointment of defence counsel. Indeed this right of the insurer to control the defence can be seen as being in return for its obligation to pay a proper claim. LeBel J.A. made this point in Zurich of Canada v. Renaud & Jacob, 1996 5801 (QC CA), [1996] R.J.Q. 2160 (Que. C.A.) at 2168.
[47] However, the court went on to note that the right of the insurer to control the defence of an action is not absolute: where an "appearance of impropriety" arises as a result of a conflict of interest between the insurer and insured, it may be sufficient to override the normal right of the insurer to control the defence and appoint counsel for the insured (Brockton, at paras. 32-33). Citing the decision of LeBel J.A. in Zurich, the court in Brockton elaborated on the degree of conflict necessary to justify altering the contractual rights of the insurer under the insurance agreement, at paras. 41-42:
LeBel J.A. concluded that the potential tension which inheres in the relationship between the insurer and the insured and which is manifested by the reservation of rights by the insurer is not per se sufficient to require the insurer to surrender control of the defence. It would too quickly cost the insurer the right it contracted for. Rather, the focus must be on the mandate given by the insurer to the counsel it appoints to conduct the defence. Do the circumstances of the particular case create a reasonable apprehension of conflict of interest if that counsel were to act for both the insurer and the insured in defending the action? If the insurer puts counsel in a position of having conflicting mandates it must surrender control of the defence to an insured who wishes to retain its own counsel paid for by the insurer. [page468]
[48] As Goudge J.A., for the court, explained, the court must engage in a balancing act to determine when alternate counsel may be appointed by an insured, at para. 43:
The issue is the degree of divergence of interest that must exist before the insurer can be required to surrender control of the defence and pay for counsel retained by the insured. 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.
[49] In Brockton, the court was of the view that no reasonable apprehension of conflict of interest had arisen to justify the appointment of separate counsel by the defendant municipality. The court noted that there was no suggestion that the advice of counsel appointed by the insurer was anything other than their "best view of how to minimize the appellant's liability in the civil actions", nor was it suggested that their advice reflected a mandate from the insurer that conflicted with the lawyers' obligation to defend the municipality (Brockton, at para. 45). Moreover, the court found that the reservation of rights by the insurer was "based on the monetary limits of the policy and its exclusion of punitive and exemplary damages", rather than any conduct by the insured that would be in issue in the underlying litigation (Brockton, at para. 47). As such, counsel for the municipality appointed by the insurer was under no mandate to show that the insured had acted in a way which would remove the insurer's indemnity obligation, thereby creating a conflict.
[50] In concluding that there was no justification to deprive the insurer of its right to appoint counsel, the court in Brockton summarized the situation, at para. 49, as follows:
The appellant's complaint is really about the way counsel proposed to conduct that defence. However, the tactics used in the defence remain the province of the insurer where the insurer retains the right to control that defence . . . However, absent an insurance contract providing specific terms (for example, allowing the insured to direct counsel appointed by the insurer in defence of claims arising from an environmental disaster) the insurer's right to control the defence remains unless there is a reasonable apprehension of conflict of interest.
[51] Appin Realty and Brockton were both considered in Coakley v. Allstate Insurance Co. of Canada, [2009] O.J. No. 1832, 2009 22549 (S.C.J.). In that case, Mr. Coakley was [page469] sued for damages arising from an incident allegedly caused by his negligence; however, his insurer asserted that his conduct was an intentional assault.
[52] Coakley considered Glassford v. T.D. Home and Auto Insurance Co. (2009), 2009 10397 (ON SC), 94 O.R. (3d) 630, [2009] O.J. No. 1011 (S.C.J.), in which Mr. Glassford was sued for damages arising from an alleged attack and had pleaded self-defence. His insurance policy excluded coverage for injuries caused by any intentional or criminal act. In Coakley, Herman J. concluded, at para. 33:
As in Glassford, the question of whether Mr. Coakley will be indemnified by the insurance policy depends on a determination and characterization of his conduct in the litigation. There is an ongoing dispute between Mr. Coakley and Allied as to whether he is excluded from coverage. Mr. Coakley is concerned that the insurer may steer the defence of the action in order to obtain a result in its favour, that is, a result that would exclude him from coverage. In my opinion, a reasonable person would perceive a conflict of interest.
[53] Wawanesa takes the position that it is entitled to select its own counsel. Counsel on this motion advised that Wawanesa would appoint counsel other than himself to defend the action. Wawanesa refers to the decision of Roman Catholic Episcopal Corp. of St. Georges v. Insurance Corp. of Newfoundland, [2003] N.J. No. 324, 232 Nfld. & P.E.I.R. 79, 2003 NLCA 65, at para. 27, where it was held that an insurer has a prima facie right to conduct its own defence of the action. Wawanesa's position is that it will fully represent the interests of the insured to the best of its ability despite the presence of a coverage issue and that Vertigo has not demonstrated that a conflict of interest exists between it and Wawanesa.
[54] Vertigo's insurance policy gives Wawanesa the right to defend an action for compensatory damages against its insured. I agree with Wawanesa that an insurer has the right to control the defence of an action, including the right to appoint its own counsel who would have a duty to defend Vertigo in the action. As outlined above, the right to appoint counsel can be interfered with if there is a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer. That is, using the words of Goudge J.A. in Brockton, in circumstances where counsel's mandate from the insurer can reasonably be said to conflict with his mandate to defend the insured.
[55] There are allegations in the statement of claim of intentional misconduct that, if found as facts at trial, will impact on Wawanesa's obligation to indemnify Vertigo. On this motion, Wawanesa's resistance to defending the action was based on those [page470] allegations. In light of the foregoing decision that Wawanesa is obliged to defend the action, Wawanesa is prepared to appoint new counsel. Once appointed, this new counsel will owe Vertigo a duty of good faith to defend this action without regard to the provisions of the policy. There is no evidence that counsel will not adhere to that duty and no evidence that counsel will have a mandate from Wawanesa which conflicts with his duty to defend Vertigo in the action. The fact that Wawanesa challenged its duty to defend on this motion is not enough to disentitle it from its right to retain and instruct counsel in the defence of the action.
[56] Based on the foregoing reasons, Wawanesa has a duty to defend Vertigo against the plaintiffs' claims. Wawanesa may retain and instruct counsel (other than counsel who appeared on this motion) to conduct the defence. The coverage issue and Wawanesa's obligation to indemnify Vertigo will be determined after trial.
[57] If necessary, counsel may make brief submissions on costs on this motion within 30 days.
Motion granted in part.
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