Court File and Parties

Court File No.: CV-18-00604516 Date: 20190515 Ontario Superior Court of Justice

Between: Her Majesty the Queen in Right of Ontario, Applicant – and – AIG Insurance Company of Canada, Respondent

Counsel: Luciana I. Amaral, for the Applicant Marcus B. Snowden, Akash Brijpaul and Pearl Rombis, for the Respondent

Heard: May 1, 2019

Reasons for Decision

[1] The applicant, Her Majesty the Queen in Right of Ontario (“HMQ”), brings this application pursuant to Rule 14.05(d) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 against the respondent, AIG Insurance Company of Canada (“AIG”) for:

(a) an order that HMQ is entitled to appoint and instruct counsel of its choice, who need not report to or take instructions from AIG, at the expense of AIG, in respect of two actions (arising from blasting/construction work carried out on Highway 17 in June of 2014 which allegedly resulted in elevated levels of nitrate entering the ground water); and (b) an order that AIG reimburse HMQ for all past legal and administrative expenses incurred in defending the actions.

[2] On May 1, 2018 in a letter, AIG acknowledges its right and duty to defend HMQ and agrees to pay HMQ’s approved post-tender defence costs but contends that (a) deciding AIG’s duty to indemnify HMQ is premature at this stage, (b) any pre-tender defence costs are for HMQ’s own account, and (c) HMQ’s reliance on a “party-based” conflict in AIG’s retainer of defence counsel is not the “coverage-based” conflict required at law to oust AIG’s contractual right to participate in HMQ’s defence.

[3] For the purposes of this application, AIG agrees that:

(a) the AIG policy issued to Aecon covers Aecon’s operations; (b) Aecon agreed to add HMQ as an additional insured to the AIG policy; (c) Aecon requested a broker-issued certificate of insurance which concisely describes HMQ’s limited status and scope of coverage.

[4] The AIG policy gives HMQ additional insured status for “liability arising out of” Aecon’s operations at issue in the underlying actions.

[5] The AIG policy treats each insured interest separately, in a “Severability of Insureds” clause commonly used by commercial liability insurers, which imposes a separate contractual right and duty to each insured as follows:

…this insurance shall apply separately to each Insured in the same manner and to the same extent as though a separate policy had been issued to each Insured.

[6] AIG’s “Defence – Settlement – Supplementary Payments” section outlines the scope of its duty to defend assumed which states in relevant part:

The insurer shall: (1) If claim is made or civil action brought within Canada… defend in the name and on behalf of the insured and at the cost of the insurer any civil action which may be brought against the insured…but the insurer shall have the right to make such investigation, negotiation and settlement of any claim as may be deemed expedient by the insurer; (5) reimburse the insured for all reasonable expenses… incurred at the Insurer’s request.

[7] AIG’s “insureds’ duties in the event of accident, occurrence, claim or suit” clause 3(c) clearly sets out what costs AIG does not cover and states in relevant part:

The Insured shall not, except at his own cost, voluntarily make any payment, assume any obligation, or incur any expenses…

HMQ’s Position

[8] AIG agrees to defend HMQ in respect of the claims advanced in the main actions; however, it insists that counsel for HMQ report to and share privileged reports with AIG, despite the clear presence of an actual if not at least reasonable apprehension of conflict of interest between HMQ and AIG’s insured, Aecon. AIG has an interest in foisting liability onto HMQ on the basis that the plaintiffs’ damages were caused by some independent act of negligence on the part of HMQ rather than as a result of Aecon’s performance under the contract.

AIG’s Position

[9] On May 1, 2018, AIG acknowledged its right and duty to defend HMQ and agreed to pay HMQ’s approved post-tender defence costs but contended that any pre-tender defence costs were for HMQ’s own account; and HMQ’s reliance on a “party-based” conflict in AIG’s retainer of defence counsel is not the “coverage-based” conflict required at law to oust AIG’s contractual right to participate in HMQ’s defence.

[10] The Ontario Court of Appeal has held that an insurer’s contractual duty to defend includes its right to select and instruct defence counsel, a right only surrendered – a remedy that should not be too quickly imposed – if the insurer puts its appointed defence counsel in a position of a conflicted retainer or mandate. Brockton (Municipality) v. Frank Cowan Co., 2002 ONCA 7392, [2002] O.J. No. 20 (CA) at paras 31-43.

[11] Once an insurer’s duty to defend is established, a court may consider evidence on the factual issue of a “conflict of interest” in defence counsel’s retainer or mandate. 2091533 Ontario Limited et al. v. Vertigo Investments Limited et al., 2013 ONSC 2731, 115 O.R. (3d) 457 (SC) at para 55; PCL Constructors Canada v. Lumbermens Casualty Co. Kemper Canada, 2009 ONSC 32915, [2009] O.J. No. 2664 at paras 88, 95 and 96.

[12] The dispute in this case is over AIG’s exercise of its corresponding right and how its duty to HMQ is met under the policy.

[13] AIG’s uncontested evidence from its employee Joe Picha (“Mr. Picha”) shows that it acknowledges its duty to defend, offers to fully fund from the tender date forward and asks current defence counsel to stay on and to comply with AIG’s usual requirements in this context.

[14] Mr. Picha in his affidavit explains that AIG follows a “split file” protocol where potentially conflicting interests insured by one policy need to be handled separately:

(a) the “split file” handling is a non-written protocol administered by management level claims staff on a case-by-case basis; (b) HMQ’s defence as an additional insured is handled and screened internally so that HMQ’s information is held separate and confidential from information received in defending the named insured Aecon; (c) physical files are scanned and converted into digital format upon receipt. A file subject to the “split file” protocol is digitally marked as confidential and cannot be accessed by any other handler, including the handler responsible for the defence of another adverse insured party; (d) the purpose of the “split file” protocol digitally screening AIG’s paperless file for HMQ’s defence in the underlying actions is to avoid any perceived or actual “party-based” conflict of interest between the insured interests; (e) a breach of the “split file” protocol by a claims handler would be a breach of AIG’s Code of Conduct and subject to disciplinary action; and (f) where a matter involves the conflicting interests of more than one AIG insured, Mr. Picha does what he can to assist in the defence of the particular insured interest assigned to him, in this case HMQ.

[15] AIG’s May 1, 2018 letter also agreed to keep current defence counsel on the record to act in HMQ’s defence of the underlying actions, provided that counsel was prepared to comply with AIG’s usual handling protocols.

[16] I agree that AIG ensures any potential “party-based” conflict of interest in defence counsel’s retainer is avoided by ensuring defence counsel appointed for HMQ and Aecon are separately instructed and are free to act in the best interests of each insured interest.

[17] I also agree that HMQ puts forward no evidence to show that AIG is improperly attempting to instruct defence counsel in a way which favours AIG’s interest in the coverage.

[18] The evidence put forward by HMQ includes the following:

(a) HMQ offers affidavits sworn not by an employee of HMQ but by current defence counsel’s law clerk who, on cross-examination, admitted or acknowledged: (i) she is not an employee of HMQ; (ii) she has not reviewed AIG’s February 13, 2019 affidavit evidence; (iii) that AIG has offered to defend HMQ; (iv) that paragraph 17 of her November 17, 2018 affidavit alleges solely a “party‑based” conflict of interest between the insured interests in the underlying actions and the “terms that are necessary to avoid a conflict of interest” are not otherwise specified or set out in her affidavit; (v) that, although HMQ cross-claims against Aecon, as pleaded there is no cross‑claim by Aecon against HMQ.

[19] HMQ’s counsel also conceded, on the affiant’s behalf, that:

(a) there is no other evidence of actual or potential conflict of interest, stating: “that is a legal” question and “a legal argument we intend to rely on”. (b) other than the application record, HMQ offers “no other evidence, no” evidence addressing AIG’s concerns about being properly informed, giving input on and setting reserves for HMQ’s defence and potential exposure; (c) on whether AIG’s “split file” protocol adequately addresses any actual or potential conflict of interest, HMQ’s evidence is “we cannot agree on that”.’

[20] Ontario and other appellate courts have consistently held that, until notice or “tender” is received, where a voluntary payment wording or notice wording so states, a liability insurer only covers approved expenses, so any pre-tender defence costs incurred voluntarily or before such notice is given are payable by the insured or in the case of a shared obligation, another earlier responding insurer. Brockton (Municipality) v. Frank Cowan Co., 2002 ONCA 7392, [2002] O.J. No. 20 (CA) at paras 53-55; Lloyd’s Underwriters v. Blue Mountain Log Sales Ltd., 2016 BCCA 340 at paras 38, 55, 61.

[21] An insurer’s duty to defend includes the contractual right to select and instruct defence counsel, which right is only surrendered if evidence shows the insurer has given defence counsel a conflicted retainer or mandate. The focus of inquiry is therefore confined to the quality of the insurer’s retainer of defence counsel. Brockton (Municipality) v. Frank Cowan Co., 2002 ONCA 7392, [2002] O.J. No. 20 (CA) at paras 31-43.

[22] Brockton (Municipality) v. Frank Cowan Co., 2002 ONCA 7392, [2002] O.J. No. 20 (CA) remains the leading authority in this specific context, the Court of Appeal explained courts must weigh and balance “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”, stating:

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. Brockton (Municipality) v. Frank Cowan Co., 2002 ONCA 7392, [2002] O.J. No. 20 (CA) at paras 43, 45-47.

[23] The court concluded that because separate coverage counsel had been appointed, this removed any potential “coverage-based” conflict in defence counsel’s retainer.

[24] As the court recently stressed in Fridel Limited v Intact Insurance, 2018 ONSC 5923 at paras 22-24, the focus must be on the particular mandate that the insurer gives to defence counsel it appoints.

Conclusion

[25] The application is dismissed. The pre‑tender defence costs were incurred voluntarily before notice was given. Further HMQ has not established a “coverage‑based” conflict nor a “party‑based” conflict of interest, real or perceived.

[26] If the parties cannot agree on costs, I am prepared to receive the respondent’s submissions within 20 days and the applicant’s responding submissions within 10 days thereafter. The respondent’s response, if any, can be provided within 7 days thereafter. All of these brief submissions may be sent by email to my assistant at lorie.waltenbury@ontario.ca.

J. E. Ferguson J. Released: May 15, 2019