Court File and Parties

OSHAWA COURT FILE NOS.: CV-14-89926 and CV-14-89926-00A1

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Randy Lefeuvre, Plaintiff

– and –

Tanya Boekee, Daniel Boekee, The Corporation of the Municipality of Clarington, The Regional Municipality of Durham, Langley Utilities Contracting Ltd., and Miller Maintenance Limited, Defendants

– and –

The Dominion of Canada General Insurance Company and Zurich Insurance Company Ltd., Third Parties

COUNSEL:

David G. Boghosian and Shaneka Taylor, for the Applicants, The Corporation of the Municipality of Clarington and the Regional Municipality of Durham Eric J. Adams, for the Respondents, The Dominion of Canada General Insurance Company and Zurich Insurance Company Ltd.

HEARD: September 15, 2017

REASONS FOR DECISION

DE SA J.:

Overview

[1] The Applicants, the Regional Municipality of Durham (“Durham”) and the Corporation of the Municipality of Clarington (“Clarington”) are seeking a declaration that they be entitled to appoint their own counsel, and manage their own defence in the main action at the Respondents’ expense.

[2] The Applicants take the position that there is a clear conflict of interest with the Respondents directing their defence. The Respondents are already defending Miller Maintenance Limited (“Miller”) and Langley Utilities Contracting Ltd. (“Langley”). The Applicants have alleged negligence against Miller and Langley as part of their defence in the Main Action and are seeking indemnification from the Respondents for this negligence.

[3] The Respondents, The Dominion of Canada General Insurance Company (“Dominion”) and Zurich Insurance Company Ltd. (“Zurich”), collectively the (“Respondent Insurers”) have opposed the application. The Respondents take the position that the ability to appoint and instruct counsel is a natural corollary of the duty to defend.

[4] I agree with the Applicants. For the reasons outlined below, I grant the application.

Background Facts

[5] The Main Action arises from a pedestrian/motor vehicle accident that occurred, on or about February 6, 2014, wherein the Plaintiff, Randy Lefeuvre, was walking westbound on the north side of King Avenue East. Tanya Boekee, was driving a Dodge van westbound on King Avenue East behind the Plaintiff. As Tanya Boekee approached Mr. Lefeuvre from behind, she struck him. Mr. Lefeuvre has suffered serious injuries from the collision.

[6] The Plaintiff commenced an action against Tanya Boekee, the driver, as well as the owner of the vehicle. He also commenced an action against Durham, its winter maintenance contractor (Miller), Clarington and its street lighting contractor (Langley).

The relationship between Durham, Miller, and Zurich

[7] Durham contracted out winter maintenance of many of its roadways including King Avenue East pursuant to a winter maintenance contract with Miller (the “Miller Contract”). The Miller Contract was in force at the time of the accident.

[8] As a term of the Miller Contract, Miller was obliged to fully indemnify Durham for any claims against Durham arising from Miller's responsibilities under the contract.

[9] Miller obtained comprehensive general liability insurance with Zurich with Durham added as an additional insured. Durham is covered by the policy to the extent that any claims against Durham arise from Miller’s responsibilities under the Miller Contract.

[10] Durham has commenced a third party claim against Zurich for coverage alleging negligence against Miller in terms of its responsibilities under the Miller Contract.

The relationship between Clarington, Langley and Dominion

[11] Clarington contracted out its street lighting maintenance in much the same way to Langley (the "Langley Contract").

[12] As a term of its contract with Clarington, Langley was obliged to fully indemnify Clarington for any claims arising from Langley's responsibilities under the contract.

[13] Langley obtained comprehensive general liability insurance with Dominion. Clarington is covered by this same policy as an additional insured to the extent that Clarington's liability flows from Langley's negligence in the performance of its duties.

[14] Clarington has commenced a third party claim against Dominion for coverage alleging that any claim against Clarington flows from the negligence of Langley in carrying out its responsibilities.

Should Zurich and Dominion be directing the defence of the Municipalities?

The Issue

[15] Both Zurich and Dominion have agreed to defend Durham and Clarington, respectively, in respect of any of the claims advanced in the Main Action. Although there may be covered and uncovered claims engaged in the defence, Zurich and Dominion agree they are obliged to pay to defend the action on behalf of the municipalities.

[16] As the Court of Appeal explained in Carneiro v. Durham (Regional Municipality), 2015 ONCA 909, the duty to defend is a contractual obligation. When pleadings allege facts that, if true, require the insurer to indemnify the insured, the insurer is obliged to defend the claim. Apportionment of the costs of the defence, as between covered and uncovered claims, can be addressed at the end of the proceedings. The Court explained in Carneiro where the parties, the contract, and the circumstances were virtually identical to those in this case:

Durham was an additional insured under Zurich’s policy. The policy contained an unqualified promise to defend the insured for actions covered by the policy. Zurich is therefore obligated to pay the reasonable costs of Durham’s defence of covered claims, even if that defence furthers the defence of uncovered claims. However, it is not obligated to pay costs related solely to the defence of uncovered claims.

At the end of the proceedings, Zurich is entitled to seek an apportionment of the defence costs, to the extent they deal solely with uncovered claims or exceed the reasonable costs associated with the defence of the covered claims.

[17] While the insurers’ duty to defend is clear, the question raised on the application is whether or not the Respondent Insurers, Zurich and Dominion, are entitled to appoint counsel and control the defence for the Applicant Municipalities.

Positions of the Parties

[18] The Applicants take the position that the Respondent Insurers cannot manage their defence. The Applicants have alleged negligence against the Contractors as a basis for indemnification from the Respondent Insurers. Given that the Respondent Insurers are only liable to indemnify the Applicants to the extent of the Contractors’ liability, they will necessarily favour the position of the Contractors in the litigation. They are in a clear conflict of interest.

[19] According to the Respondents, their entitlement to appoint counsel and manage the defence is a contractual right, and a clear corollary of the duty to defend. If the insurers are obliged to pay for the defence, they are entitled to oversee it. They argue that there is always an “inherent tension” when dealing with covered and uncovered claims in the insurance context. Absent evidence of “wrongful conduct” on the part of the insurer, this inherent tension is not sufficient to shut the insurer out from carriage or participation in the defence.

Analysis

[20] In most cases, the insurer’s interests will be aligned with the insured for the purposes of litigating a claim. Accordingly, the insurer will be entitled to appoint counsel and manage the defence. This is true even though there is an “inherent tension” with the presence of covered and uncovered claims. The insurer’s contractual obligation to indemnify will entitle them to defend the action on behalf of the insured absent evidence of a conflict. As the Court of Appeal explained in Brockton v. Frank, at para. 43:

I agree with the approach taken in Zurich and Foremost. 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. [Emphasis added].

See also Reeb v. The Guarantee Company of North America, 2017 ONCA 771 at paras. 13-18; Hoang v. Vicentini, 2015 ONCA 780, at para. 74.

[21] In this case, the inherent conflict of interest is evident. Much of the Applicants’ defence is that the Contractors failed in carrying out their responsibilities. In this respect, the Applicants’ defence directly conflicts with the pecuniary interests of the Respondent Insurers. This conflict is exacerbated by the fact that the Respondent Insurers are only liable to indemnify the Applicants to the extent of the Contractors’ liability. There are even concerns that the information obtained from the Applicant Municipalities may be used against them in the litigation to protect the Respondent Insurers’ pecuniary interest. Clearly the insurers cannot be overseeing the Applicants’ defence in such circumstances. In Canadian National Railway Co. v. McKercher LLP, [2013] 2 SCR 649, 2013 SCC 39, the Supreme Court explained at para 23:

The law of conflicts is mainly concerned with two types of prejudice: prejudice as a result of the lawyer’s misuse of confidential information obtained from a client; and prejudice arising where the lawyer “soft peddles” his representation of a client in order to serve his own interests, those of another client, or those of a third person. As regards these concerns, the law distinguishes between former clients and current clients. The lawyer’s main duty to a former client is to refrain from misusing confidential information. With respect to a current client, for whom representation is ongoing, the lawyer must neither misuse confidential information, nor place himself in a situation that jeopardizes effective representation.

[22] Both of these concerns identified by the Supreme Court in Canadian National Railway Co. v. McKercher LLP are live on the facts of this case. Even though the Respondent Insurers suggest that the erection of ethical walls will be sufficient to address any concerns regarding the existence of a conflict, the conflict is far too acute. I agree with the Applicants that these circumstances involve an irremediable conflict of interest which cannot be addressed by anything short of independent counsel appointed by the Applicants and acting at the Applicants’ direction.

Duty to Compensate for Costs Incurred by the Applicants up to this point

[23] Given that the Respondents have acknowledged their duty to defend, the Applicants are also entitled to compensation for any “reasonable” costs incurred in relation to the litigation up to this point.

[24] Again, any disputes relating to the “reasonableness” of the costs incurred during the course of the litigation, and/or disputes as to whether or not the liability and the litigation costs properly are attributable to “covered” claims can be addressed at the time of resolution or at the end of the litigation.

Disposition

[25] For the reasons outlined above, I grant the relief sought, and direct the following:

1. Dominion is required to defend Clarington in respect of all claims made against it in the Main Action;
2. Dominion is required to reimburse Clarington for all its past defence costs in the Main Action and Third Party Action, subject to Dominion’s right to seek reimbursement for “unreasonable” costs and/or costs incurred in relation to uncovered claims;
3. Clarington is permitted to appoint and instruct counsel of its choosing to defend it in the Main Action as well as the Third Party Action, at Dominion’s expense subject to Dominion’s right to seek reimbursement for “unreasonable” costs and/or costs incurred in relation to uncovered claims; and
4. Clarington is not required to report to Dominion and/or its counsel in the litigation, other than for issues dealing with resolution/settlement of covered claims.

[26] Similarly, I also direct:

1. Zurich is required to defend Durham in respect of all claims made against it in the Main Action;
2. Zurich is required to reimburse Durham for all its past defence costs in the Main Action and Third Party Action, subject to Zurich’s right to seek reimbursement for “unreasonable” costs and/or costs incurred in relation to uncovered claims;
3. Durham is permitted to appoint and instruct counsel of its choosing to defend it in the Main Action as well as the Third Party Action, at Zurich’s expense subject to Zurich’s right to seek reimbursement for “unreasonable” costs and/or costs incurred in relation to uncovered claims; and
4. Durham is not required to report to Zurich and/or its counsel in the litigation, other than for issues dealing with resolution/settlement of covered claims.

[27] I have received the costs submissions of the parties in writing and will release follow up reasons shortly dealing with costs.

[28] I thank counsel for their submissions and their assistance in this matter.

Justice C.F. de Sa Released: November 29, 2017