Jevco Insurance Company v. Malaviya

[Indexed as: Jevco Insurance Co. v. Malaviya]

Ontario Reports

Ontario Superior Court of Justice,

Morgan J.

January 29, 2013

114 O.R. (3d) 141 | 2013 ONSC 675

Case Summary

Insurance — Automobile insurance — Insurer's obligation to defend — Insurer required to defend its insured after paying its policy limits to plaintiffs.

The insured was covered under a standard automobile policy with a policy limit of $200,000. He was sued for damages of substantially more than that arising out of a motor vehicle accident. His insurer paid $200,000 to the plaintiffs [page142] and then applied for a declaration that it had no continuing duty to defend the insured since it had no further obligation to pay damages to the plaintiffs.

Held, the application should be dismissed.

There is an ambiguity in the standard automobile policy as to whether an insurer is required to defend its insured after paying the policy limits to a plaintiff. The general principle that any ambiguity in an insurance contract should be construed against the insurer is inapplicable as the policy was not drafted by the insurer; it was a statutory policy whose words were those of the legislature. However, s. 245 of the Insurance Act, R.S.O. 1990, c. I.8 is clear. It provides that the defence costs of a claim are to be borne by the insurer. It contains no limiting language. It does not say, or even suggest, that the insurer must bear the cost of defending the insured only up to the coverage limits. In the case of any contradiction between the policy and s. 245 of the Act, the unqualified words of s. 245 would prevail.

Cases referred to

Boreal Insurance Inc. v. Lafarge Canada Inc. (2004), 2004 66335 (ON SC), 70 O.R. (3d) 502, [2004] O.J. No. 1571, [2004] O.T.C. 329, 10 C.C.L.I. (4th) 212, [2004] I.L.R. I-4305, 130 A.C.W.S. (3d) 840 (S.C.J.); Dominion of Canada General Insurance Co. v. Kingsway General Insurance Co., [2011] O.J. No. 811, 2011 ONSC 1249, [2011] I.L.R. I-5110, 12 C.P.C. (7th) 145 (S.C.J.); 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, consd

Other cases referred to

Brissette Estate v. Westbury Life Insurance Co., 1992 32 (SCC), [1992] 3 S.C.R. 87, [1992] S.C.J. No. 86, 96 D.L.R. (4th) 609, 142 N.R. 104, J.E. 92-1622, 58 O.A.C. 10, 13 C.C.L.I. (2d) 1, 47 E.T.R. 109, [1992] I.L.R. para. 1-2888Â at 2051, 36 A.C.W.S. (3d) 449; Consolidated Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 10 (SCC), [1980] 1 S.C.R. 888, [1979] S.C.J. No. 133, 112 D.L.R. (3d) 49, 32 N.R. 488, [1980] I.L.R. Â1-1176 at 595, 1 A.C.W.S. (2d) 169; July v. Neal (1986), 1986 149 (ON CA), 57 O.R. (2d) 129, [1986] O.J. No. 1101, 32 D.L.R. (4th) 463, 17 O.A.C. 390, 19 C.C.L.I. 230, 12 C.P.C. (2d) 303, [1986] I.L.R. Â1-2126 at 8217, 44 M.V.R. 1, 1 A.C.W.S. (3d) 409 (C.A.); McClelland and Stewart Ltd. v. Mutual Life Assurance Co. of Canada, 1981 53 (SCC), [1981] 2 S.C.R. 6, [1981] S.C.J. No. 60, 125 D.L.R. (3d) 257 at 258, 37 N.R. 190, [1981] I.L.R. Â1-1393 at 321, 9 A.C.W.S. (2d) 264; 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; Pope v. Pope (1999), 1999 2278 (ON CA), 42 O.R. (3d) 514, [1999] O.J. No. 242, 170 D.L.R. (4th) 89, 117 O.A.C. 275, 43 R.F.L. (4th) 209, 85 A.C.W.S. (3d) 855 (C.A.); Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, [2010] 2 S.C.R. 245, [2010] S.C.J. No. 33, 2010 SCC 33, 293 B.C.A.C. 1, [2010] I.L.R. I-5051, 406 N.R. 182, 323 D.L.R. (4th) 513, 9 B.C.L.R. (5th) 1, EYB 2010-179515, 93 C.L.R. (3d) 1, 2010EXP-3049, J.E. 2010-1683, [2010] 10 W.W.R. 573, 73 B.L.R. (4th) 163, 89 C.C.L.I. (4th) 161; Riddoch (Litigation Guardian of) v. Anderson, [1991] O.J. No. 2667 (Gen. Div.); Simison (Litigation guardian of) v. Catlyn (2004), 2004 22313 (ON CA), 73 O.R. (3d) 266, [2004] O.J. No. 3608, 242 D.L.R. (4th) 577, 190 O.A.C. 141, 13 C.C.L.I. (4th) 163, [2004] I.L.R. I-4332, 14 M.V.R. (5th) 31, 133 A.C.W.S. (3d) 536 (C.A.); Tedford v. TD Insurance Meloche Monnex (2012), 112 O.R. (3d) 144, [2012] O.J. No. 2821, 2012 ONCA 429, 292 O.A.C. 374, 9 C.C.L.I. (5th) 15, 216 A.C.W.S. (3d) 227, [2012] I.L.R. I-5302, 351 D.L.R. (4th) 239 [page143]

Statutes referred to

Insurance Act, R.S.O. 1990, c. I.8 [as am.], ss. 227, 245, (b)

Rules and regulations referred to

Unfair or Deceptive Acts or Practices, O. Reg. 7/00

Authorities referred to

Brown, Craig, and Thomas Donnelly, Insurance Law in Canada (Toronto: Carswell, 2004)

Ontario Auto Insurance Anti-Fraud Task Force, Interim Report (Toronto: Queen's Printer for Ontario, 2011)

Wilde, Oscar, The Importance of Being Earnest

APPLICATION by the insurer for a declaration that it was not obliged to defend the insured against a claim after paying policy limits to the plaintiff.

John D. Dean, for plaintiff.

John D. Campbell, for respondent.

[1] MORGAN J.: — Under the Insurance Act, R.S.O. 1990, c. I.8 (the "Act") and Ontario's Standard Automobile Policy [Automobile Insurance Policy (OAP 1)] ("SAP"), is an insurer obliged to defend its insured against a claim after paying its policy limits to the plaintiff?

I. The Background Facts

[2] The respondent was covered under the SAP for motor vehicle insurance through the applicant. He opted for the minimum liability limit of $200,000. On October 14, 2005, the respondent was in a car accident and, as a result, has been sued in Court File No. 06-CV-311774PD2 (the "Atilho action") for substantially more than the liability limit.

[3] The applicant retained Beard Winter LLP to defend the respondent in the Atilho action. A statement of defence on behalf of the respondent was entered in that action on September 27, 2006.

[4] In February 2008, the applicant offered to pay the limits of the policy -- i.e., $200,000 -- to the plaintiffs in the Atilho action, plus the plaintiffs' legal costs to be agreed upon or assessed. The $200,000 has now been paid to the Atilho plaintiffs and the determination of costs is still pending. The Atilho action itself is still proceeding.

[5] Having exhausted the liability limits of the insurance policy, the applicant here seeks a declaration that it has no continuing duty to indemnify or defend the respondent in the Atilho [page144] action. It also seeks an order removing Beard as lawyers of record for the respondent in the Atilho action.

[6] The respondent concedes that the liability limit under its motor vehicle insurance policy is $200,000, and there is no serious contention that the applicant is obliged to cover any damages in the Atilho action above the $200,000 that has already been paid. Liability has not yet been determined in that action, but it is clear that if it turns out to be more than $200,000 only the balance will be owed by the respondent to the Atilho plaintiffs. If liability in the Atilho action turns out to be less than $200,000, the applicant will be in a position to claim back the difference.

[7] The contentious issue in this application is not the liability limit, but whether the applicant is obliged under the policy to provide an ongoing defence of the Atilho action on the respondent's behalf. The applicant submits that since it has no further liability to pay damages to the Atilho plaintiffs, it has no further duty to defend the respondent. The respondent contends that the policy requires a full defence of the Atilho action until it is tried on the merits or a final settlement is reached.

II. The Standard Automobile Policy

[8] The obligation of an insurer to defend an insured party is set out in some detail in ss. 3.3.1 and 3.3.2 of the SAP:

3.3.1 If Someone Sues You

By accepting this policy you and other insured persons irrevocably appoint us to act on your or their behalf in any lawsuit against you or them in Canada, the United States of America or any other jurisdiction designated in the Statutory Accident Benefits Schedule arising out of the ownership, use or operation of the automobile.

If someone sues you or other insured persons insured by this Section for losses suffered in an automobile incident, we will provide a defence and cover the costs of that defence, including investigation costs. We will pay all legal costs the court assesses against you and other insured persons in the lawsuit we have defended.

If there is a judgment against you or other insured persons, we will pay any post-judgment interest owed on that part of the amount the court orders that falls within the liability limits of your policy.

We reserve the right to investigate, negotiate and settle any claim out of court if we choose.

If you are sued for more than the limits of your policy, you may wish to hire, at your cost, your own lawyer to protect yourself against the additional risk.

[page145]

3.3.2 How Much We Will Pay

The most we will pay on your behalf and on behalf of all other insured persons insured by this Section, for any one incident (over and above legal costs and post-judgment interest) will be determined by the extent of your coverage. The limit under your policy is shown on the Certificate of Automobile Insurance.

Example

You are sued for injuries suffered by another person in an accident that you are legally responsible for. We will hire lawyers at our expense and cover all costs of your defence in court.

The court orders you to pay $10,000 in costs and $600,000 to cover losses. Your liability is $500,000.

We will cover the $10,000 in costs and $500,000 of the judgment. We will also pay any interest owed on that amount from the day of the judgment. You will be responsible for the remaining $100,000 of the judgment and any interest owed on that.

[9] The parties are generally in agreement that the resolution of the question at bar turns on the wording of the contract. As Craig Brown and Thomas Donnelly put it in Insurance Law in Canada (Toronto: Carswell, 2004), at p. 29:

The main issue is whether the policy wording is clear enough to terminate the duty to defend upon exhaustion of the limits. This depends in a large part upon the policy wording at issue.

[10] The Supreme Court of Canada has instructed that "[t]he primary interpretive principle is that when the language of the policy is unambiguous, the court should give effect to clear language, reading the contract as a whole . . .": Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, [2010] S.C.J. No. 33, at para. 22. The problem, of course, is that just as the pure and simple truth "is rarely pure and never simple", Oscar Wilde, The Importance of Being Ernest, act I, l. 76, the language of contract is rarely clear and never entirely unambiguous. The history of contract law scholarship, from Blackstone's Commentaries to the latest American Law Institute Restatement, is replete with guides to interpretation, none of which would be needed were this not the case.

[11] Nevertheless, the SAP takes muddled and contradictory drafting to a rarified level. On one hand, the second paragraph of s. 3.3.1 advises insured parties that if they are sued the insurer will provide a defence and cover the costs of that defence. On the other hand, three paragraphs later in that very same [page146] section, insureds are advised that if they are sued for an amount beyond the policy's coverage they may wish to hire a lawyer at their own cost to protect against that above-coverage risk. This latter advisory is set apart in the text by placing it in a box.

[12] Then, as if to really clear things up, s. 3.3.2 provides certain examples in an even larger box. These examples let insured parties know that the insurer will hire lawyers to defend any claim, and that the insurer will pay the losses and, if ordered, the other side's legal costs up to the amount of the coverage limit. With all of its accentuated boxing, however, all that s. 3.3.2 does is illustrate what is already obvious in s. 3.3.1. It is utterly silent, however, on the one question that is not clearly answered in s. 3.3.1 -- i.e., will the insurer pay the insured's own legal costs above and beyond the coverage limit?

[13] This omission from the s. 3.3.2 "Example" box of the one example that actually needs illustrating is, in its own way, an example of what is found just above it in s. 3.3.1. That is, it underscores the fundamental ambiguity about defence costs found in s. 3.3.1 and otherwise unanswered in the text of the SAP.

III. Insurance Policy Interpretation

[14] In Brissette Estate v. Westbury Life Insurance Co., 1992 32 (SCC), [1992] 3 S.C.R. 87, [1992] S.C.J. No. 86, at p. 101 S.C.R., Cory J. stated that "[a] policy of insurance constitutes a contract. Yet there are some significant differences between a contract of insurance and an ordinary commercial contract." This comment about special considerations that might apply to insurance policies picked up on an earlier observation by Estey J. in Consolidated Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 10 (SCC), [1980] 1 S.C.R. 888, [1979] S.C.J. No. 133, at p. 899 S.C.R., to the effect that "[i]nsurance contracts and the interpretative difficulties arising therein have been before courts for at least two centuries", and that the courts have long been at pains to work out special interpretive doctrines that apply specifically to this industry.

[15] In this vein, counsel for the respondent urges the court to acknowledge that the Act is remedial and accordingly that it be given a "fair, large and liberal construction . . . as will best ensure the attainment of the object of the Act according to its true intent, meaning and spirit": July v. Neal (1986), 1986 149 (ON CA), 57 O.R. (2d) 129, [1986] O.J. No. 1101 (C.A.). He also submits that where doubt exists about the interpretation of any aspect of the insurance policy, the contra proferentem rule should apply and the [page147] interpretation most favourable to the insured should govern. Tedford v. TD Insurance Meloche Monnex (2012), 112 O.R. (3d) 144, [2012] O.J. No. 2821, 2012 ONCA 429, at para. 14.

[16] I agree that those are general propositions for the interpretation of insurance contracts. However, I am not convinced that they are applicable to the present case.

[17] The Court of Appeal has observed that the SAP does not fit easily into the insurance contract paradigm. The policy here is not drafted by the applicant. It is a statutory policy whose words are those of the legislature and not of the insurance company. Simison (Litigation guardian of) v. Catlyn (2004), 2004 22313 (ON CA), 73 O.R. (3d) 266, [2004] O.J. No. 3608 (C.A.), at para. 14.

[18] The contra proferentem rule has been held to apply only where the court is safe in "assuming the statute does not limit the latitude of the author of the contract . . .": McClelland and Stewart Ltd. v. Mutual Life Assurance Co. of Canada, 1981 53 (SCC), [1981] 2 S.C.R. 6, [1981] S.C.J. No. 60, at p. 15 S.C.R. Accordingly, that approach to interpretation cannot be helpfully applied to the SAP. Not only is the SAP a statutorily mandated contract, but O. Reg. 7/00, Unfair or Deceptive Acts or Practices specifically prohibits the use of any other motor vehicle insurance policy in its place.

[19] It remains true, of course, that the SAP must, like any statutory or regulatory text, be interpreted broadly to give meaning to "all of the words that the legislature has chosen to use": Pope v. Pope (1999), 1999 2278 (ON CA), 42 O.R. (3d) 514, [1999] O.J. No. 242 (C.A.), at p. 521 O.R. However, the applicant had no great advantage over the respondent in drafting the policy. It stands to reason that it should labour under no interpretive handicap in seeking to decipher it.

[20] For his part, counsel for the applicant states that there is simply no good reason to require an insurer to cover defence costs for an insured when it is not responsible to indemnify the insured against liability. In support, he cites the judgment of Croll J. in Boreal Insurance Inc. v. Lafarge Canada Inc. (2004), 2004 66335 (ON SC), 70 O.R. (3d) 502, [2004] O.J. No. 1571 (S.C.J.), who reasoned, at para. 37, that "[i]t does not make logical sense that a duty to defend would arise when there is no possibility of indemnification". Boreal, in turn, was followed in Dominion of Canada General Insurance Co. v. Kingsway General Insurance Co., [2011] O.J. No. 811, 2011 ONSC 1249 (S.C.J.), where the court found, at para. 24, that "[t]he case law . . . is clear that if there is no possibility of a duty to indemnify then there is no duty to defend". [page148]

[21] Counsel for the applicant submits that these two cases provide the guidance necessary to conclude that there is no duty to defend following exhaustion of the policy limits. In my view, however, both Boreal and Dominion are distinguishable from the instant case.

[22] The Boreal decision involved a commercial insurance policy and so had none of the public policy concerns that would accompany a standard consumer motor vehicle policy. Moreover, Justice Croll was careful to build her reasoning on a specific textual foundation. She concluded, at para. 39:

I do not consider that there is any ambiguity in the Boreal policy; rather I find that an interpretation guided by common sense and business efficacy leads to the conclusion that the reasonable meaning to attach to the words "subject to the limits of liability" in the introduction to the policy is that the phrase applies to all parts of the policy, including the duty to defend, unless otherwise stated.

[23] The Dominion case did involve a motor vehicle policy, but was concerned with the problem of an excess insurer's liability being determined at the expense of a front line insurer. The plaintiff's claim in Dominion had already settled; what was at issue was the defendant's desire to determine the liability of her own excess insurer and to have the legal expense of that determination borne by her primary insurer rather than by her. As the court put it in rejecting the duty to defend under these circumstances"[t]o do otherwise, would mean the underinsurer could have a free ride of a trial at the expense of the primary insurer": Dominion, supra, at para. 21, quoting Riddoch (Litigation Guardian of) v. Anderson, [1991] O.J. No. 2667 (Gen. Div.).

[24] Boreal presented to the court an unambiguous commercial policy, while Dominion posed the problem of one insurer free riding on another rather than a question of duty owed to the insured party. The reasoning in both of those cases was cogent, but they were each premised on a scenario that was significantly different than the one at bar. Both are useful insofar as they review the case law surrounding the duty to defend in the insurance context, but neither actually answers the question raised by an insured party confronted with the contradictory clauses in the SAP.

IV. The Statutory Context

[25] The Supreme Court has noted that "[i]t is important to keep in mind the underlying economic rationale for insurance", and that "[t]his economic rationale takes on a public policy flavour" depending on the context in which the insurance policy operates: [page149] Non-Marine Underwriters, Lloyd's of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, [2000] S.C.J. No. 26, at paras. 68 and 69. Accordingly, in interpreting the SAP it is necessary to consider the overall policy context in which it exists.

[26] The SAP is a regulatory instrument produced by the province's superintendent of financial services under authority of the Insurance Act. Section 227 of the Act requires the policy to be in the approved form. As with other types of subordinate legislation, the policy must be interpreted in conformance with the legislation that authorizes it.

[27] Of particular relevance here is s. 245 of the Act, which provides:

245. Every contract evidenced by a motor vehicle liability policy shall provide that, where a person insured by the contract is involved in an accident resulting from the ownership, or directly or indirectly from the use or operation of an automobile in respect of which insurance is provided under the contract and resulting in loss or damage to persons or property, the insurer shall,

(a) upon receipt of notice of loss or damage caused to persons or property, make such investigations, conduct such negotiations with the claimant and effect such settlement of any resulting claims as are deemed expedient by the insurer

(b) defend in the name and on behalf of the insured and at the cost of the insurer any civil action that is at any time brought against the insured on account of loss or damage to persons or property;

(c) pay all costs assess against the insured in an civil action defended by the insurer and any interest accruing after entry of judgment upon that part of the judgment that is within the limits of the insurer's liability;

(d) where the injury is to a person, reimburse the insured for outlay for such medical aid as is immediately necessary at the time.

[28] Counsel for the respondent submits in his factum that "[t]he specific object of section 245 of the Insurance Act is to ensure that insureds have defence counsel for insured claims." Given the unqualified language of section 245(b), I would have to agree. The SAP may be a model of poor drafting, but the Act itself is clear. Nowhere does it say, or even suggest, that the insurer must bear the cost of defending the insured only up to the coverage limits; quite the contrary, it provides that the defence costs of a claim are to be borne by the insurer. There is no limiting language in s. 245.

[29] As for the advisory in s. 3.3.1 of the SAP telling insureds that if they face a claim above their coverage limits they may retain their own lawyer, counsel for the respondent argues that the private lawyer would be for off-the-record advice but not for on-the-record legal representation. That may be a prudent step [page150] for an insured, since the insurer will be paying for and appointing the insured's counsel of record in the litigation.

[30] McLachlin J. (as she then was) pointed out in Nichols v. American Home Assurance Co., 1990 144 (SCC), [1990] 1 S.C.R. 801, [1990] S.C.J. No. 33, at p. 812 S.C.R., that where an insurer is defending a claim in which it has no obligation to indemnify, there may be an incentive for it to instruct counsel to settle the claim quickly. I hasten to add that this counter-incentive for the insurer should not spill over and cloud the judgment of counsel of record. Although the lawyer may be selected and paid by the insurer, as litigation counsel he or she has the same obligation as any other lawyer to provide the best possible advice to the insured party as client.

[31] The lawyer's professional obligations to the insured client aside, Justice McLachlin's observation about the potential conflict of interest is insightful about the intent of s. 3.3.1 of the SAP. In fact, it underscores that the advisory in s. 3.3.1 can be read as supporting the conclusion that the insurer is envisioned as paying the insured's legal expenses even where, as here, the policy limits have been exhausted. It is specifically because of the problematic incentives identified by McLachlin J. in Nichols that the insured is advised to seek a second opinion.

[32] Unfortunately, the advisory in s. 3.3.1 is drafted in a rather terse and cryptic fashion. It has led to confusion as to where the insurer's duty to defend ends; indeed, if taken literally, as the applicant does here, it would be contrary to the express words of the Act. In the face of any such contradiction, the unqualified words of s. 245(b) would in any case prevail. As indicated above, however, the advisory should not be read as counter to, but rather as supportive of, the overall policy thrust of the Act -- that is, as keeping the insurer and its chosen counsel on track in their defence of the insured, not as relieving them of their duty to defend.

[33] The Act seeks to provide an efficient and comprehensive system for the resolution of automobile accident claims. See Ontario Auto Insurance Anti-Fraud Task Force, Interim Report (Toronto: Queen's Printer for Ontario, December 2011), at pp. 4-6, 16-17. It promotes efficient running of the system by ensuring that all parties facing motor vehicle claims are defended by counsel, and it achieves comprehensiveness by ensuring that this defense requirement is unqualified for all insured parties.

[34] Automobile insurance purchasers can opt for minimal or extended coverage in terms of their liability, but coverage of legal costs is mandatory, not optional, under the Act. This has the effect of eliminating what could otherwise be the difficult [page151] personal and systemic problem of litigants representing themselves -- a challenging enough task at the best of times, let alone for parties in the aftermath of a motor vehicle accident.

V. Conclusion

[35] The Application is dismissed. The applicant must continue to bear the cost of the respondent's defence of the Atilho action and continue to provide the respondent with counsel in that action.

[36] The parties have conducted this application in a very civil way, with brief evidentiary records and very competent, but not overblown, argument on the law. In my view, much of the dispute has been caused not by the parties but by the unclear drafting of the SAP. Thus, although the respondent as successful party deserves costs, this is an appropriate case for a relatively modest cost award.

[37] The applicant shall pay the respondent costs in the amount of $5,000, inclusive of disbursements and HST.

Application dismissed.

End of Document