Court File and Parties

Court File No.: CV-21-00000236-00 Date: 2022-02-08 Superior Court of Justice - Ontario

Re: R.C. and J.M, Applicants And: Western Assurance Company, Respondent

Before: Muszynski J.

Counsel: Robert J. Reynolds, for the Applicants Mark M. O’Donnell, for the Respondent

Heard: Costs submissions in writing

Costs Endorsement

[1] On January 5, 2022 I dismissed the application wherein R.C. and J.M. sought a declaration that their insurer owed them a duty to defend in separate litigation (the “Underlying Action”): R.C. and J.M v. Western Assurance Company, 2022 ONSC 100. The Underlying alleges that the applicants were negligent in supervising their son who allegedly assaulted a classmate at school.

[2] The parties have been unable to resolve the issue of costs and have each filed written submissions.

Position of the Parties

[3] As the successful party, the respondent seeks costs on a substantial indemnity scale in the amount of $14,641.24 inclusive of HST and disbursements. In support of its claim for substantial indemnity costs, the respondent relies on the following factors:

a. The amounts in dispute were not insignificant as the application sought a full defence of the Underlying Action and costs of the application on a full indemnity basis.

b. The respondent was entirely successful as the application was dismissed.

c. The respondent, as a successful party to civil litigation in Ontario, is entitled to a reasonable expectation that it will receive an order for payment of its reasonable legal costs.

d. The applicant sought full defence costs despite the existence of clearly uncovered portion of the claims (i.e. the data exclusion) in the Underlying Action.

e. The applicants should have known that the abuse exclusion did not apply given the appellate authority of Unifund Assurance Company v. E. (D.), 2015 ONCA 423 [Unifund].

f. The respondent served an offer to settle for a dismissal of the application on a without costs basis on November 23, 2021 that was not accepted.

g. The hourly rates, time expenditures, and allocation of time are entirely reasonable in the circumstances.

h. Insureds should not expect or anticipate they can freely advance coverage applications that are devoid of merit and not face cost consequences.

[4] The applicants take the position that costs should be fixed in the amount of $2,500.00 on a partial indemnity scale. In support of their position, the applicants submit:

a. There is no basis for an award of costs on a substantial indemnity scale.

b. The costs claimed by the respondent are excessive.

c. Any costs awarded to the respondent should be reduced to reflect the divided success on the application.

Analysis

[5] In considering the issue of costs I am guided by the factors set out in Rule 57.01(1) of the Rules of Civil Procedure.

Substantial indemnity costs generally

[6] The respondent advances a claim for substantial indemnity costs. Elevated costs, that being costs on a substantial indemnity or full indemnity scale, are rarely awarded unless a formal offer to settle triggers the application of Rule 49.10. Excluding cases where Rule 49.10 applies, elevated costs awards generally arise in cases involving malicious conduct where a party’s actions warrant “rebuke from the court”: Davies v. Clarington (Municipality), 2009 ONCA 722, at paras. 45-46.

[7] There is no evidence of malicious or unreasonable conduct from either party that rises to the level that warrants rebuke from the court in this case. The parties are entitled to advance their position, regardless of whether at the end of the day the judge hearing the motion, application, or trial disagrees with it. On this basis, I decline to order costs on a substantial indemnity scale.

Offer to Settle

[8] The cost consequences of Rule 49.10 do not apply to successful respondents who are presumptively entitled to their costs throughout on a partial indemnity basis. Rather, Rule 49.13 permits a court to consider any written offers to settle when fixing costs.

[9] In this case, the respondent served an offer to settle on November 23, 2021 which states:

The respondent, Western Assurance Company, offers to settle the within application upon acceptance of all of the following terms and conditions:

1. Western Assurance Company will consent to an order dismissing the application on a without-costs basis;

2. The applicants, R.C. and J.M., will execute a satisfactory full and final release in favour of Western Assurance Company, prepared by counsel for Western Assurance Company, acting reasonably;

3. The offer to settle described above will remain open for acceptance for a period of seven (7) days following service of the offer to settle;

4. After the foregoing seven (7) day period set out above has expired, and up to five (5) minutes after the commencement of the application hearing, unless withdrawn, Western Assurance Company offers to settle this proceeding by consenting to a dismissal of the application, with the costs of Western Assurance Company to be assessed on a partial indemnity basis, less five hundred dollars ($500.00) and receipt of the documentation referred to in paragraph 2 herein

5. This offer to settle specifically revokes any previous offers to settle, whether written or oral.

[10] If the respondent’s offer to settle is deemed to be as favourable, or more favourable, than the ultimate outcome, it would be supportive of a claim for substantial indemnity costs from the date of the offer onwards.

[11] The applicants take the position that the offer should not be a factor in fixing costs as it does not contain any element of compromise, it simply asks the applicants to walk away from the application entirely before a decision is rendered. I disagree.

[12] In Mundinger v. Ashton, 2020 ONSC 2024, after dismissing the plaintiff’s claim following a trial, R.E. Charney J. addressed the cost consequences of a defendant’s formal offer to settle on a without costs basis. At paragraph 20, R.E. Charney J. writes:

The defendant’s offer accurately predicted the result of the litigation. The defendant’s offer to settle on a without costs basis contained a true element of compromise, and this cannot, in any sense, be described as ‘playing hardball’.

[13] Offering to settle litigation on a without costs basis is commonplace and, depending on the stage of litigation, can certainly represent true compromise. That said, in this case I cannot be certain that the offer to settle is as favourable or more favourable then the ultimate outcome. This is so because the offer to settle requires the applicants to enter into a full and final release that is not appended to the offer. While the offer to settle includes the proviso that the release be drafted “reasonably”, considering the applicants were insureds I have unanswered questions as to whether the release would have been focused on the subject matter of the application or whether it would extend to the policy more broadly.

[14] For this reason, while I have considered the offer to settle when determining costs to a certain extent, due to its ambiguity, I find that it does not support a claim for substantial indemnity costs.

Partial Indemnity Rate

[15] The respondent seeks partial indemnity rates based on 76% of actual rates. In support of this position, the respondent relies on the case of Clean-Mark Canada Inc. v. Home Depot Canada Inc., [2006] O.J. No. 572 (ONSC) [Clean-Mark]. In Clean-Mark, the motion judge addressed a scenario where a counsel’s actual rate ($185 per hour) fell within the partial indemnity scale. The motion judge ultimately used a partial indemnity rate of $140 because “costs on a partial indemnity basis are not intended to indemnify for actual costs even if the rate used by counsel falls within the partial indemnity scale.” There is no actual reference to 76% as being an acceptable partial indemnity rate, rather, the motion judge reduced the lawyer’s actual hourly rate to a figure she found to be reasonable in the circumstances.

[16] The notion that a 76% partial indemnity rate should be applied regularly, or in this case, is not supported by the bulk of caselaw addressing the issue. In fact, the respondent’s submission that Clean-Mark should be relied upon in this regard is misleading and flies in the face of more recent appellate authority: See e.g. Climans v Latner, 2020 ONCA 554, at para. 108; Bain v UBS Securities Canada Inc., 2018 ONCA 190, at paras. 30-34; and Agaki v Synergy Group (2000) Inc., 2015 ONCA 771, at paras. 52-57.

[17] I accept the submission of the applicants that 60% is the typical partial indemnity rate used and I see no reason to depart from it in this case. I therefore find that the respondent’s partial indemnity fees, inclusive of HST, are $9,760.83.

Reasonableness of amount claim / time extended

[18] The applicants take no issue with the rates of the respondents’ lawyers, rather, the applicants allege the claim for 56 lawyer hours is excessive given the nature of the application, and given that the lawyers for the applicants only spent 35 hours on the application. It appears, however, that the applicants have misunderstood the cost outline as filed by the respondent. The respondent is only claiming 39.1 lawyer hours, the rest is clerk time.

[19] I further note that the respondent often employed the use of a junior lawyer with a lower hourly rate, which I find is appropriate.

[20] I find the rates and the time spent by counsel for the respondent to be fair and reasonable under the circumstances of this contested application.

Divided success

[21] The applicants submit that any costs awarded to the respondent should be reduced to consider the fact that the respondent’s position that the deliberate acts / with knowledge exclusions contained in s. 6/7(a) of the policy applied was rejected.

[22] The respondent states that, at no time following the service of the application, did it rely upon or advance s. 6/7(a) exclusions.

[23] The denial of coverage letter sent to the applicants by the respondent dated April 22, 2021 specifically relies upon, in part, the deliberate acts / with knowledge exclusions. The April 22, 2021 letter states:

The allegations of negligence are entirely derivative and do not form any stand-alone cause of action or independent basis of liability separate and apart from the assault.

[24] I heard no evidence that the respondent abandoned that position and, indeed, the applicants advanced their case on the understanding that the respondent was maintaining that the deliberate acts / with knowledge exclusions applied. This is evident in reviewing the applicants’ factum wherein several pages were devoted to the issue.

[25] The crux of the respondent’s argument that it is entitled to substantial indemnity costs throughout was premised on the notion that the applicants acted unreasonably in advancing the application when they should have known that a virtually identical “failure to prevent” exclusion was upheld in Unifund. The problem with that submission is that Unifund also quite expressly confirms that the deliberate acts / with knowledge exclusions do not apply to negligence claims such as the one advanced in the Underlying Action.

[26] I find it troubling that the respondent never clarified that it was abandoning the deliberate acts / with knowledge exclusions, which is quite clearly relied upon in the denial letter as one basis for denying coverage. Without knowing the respondent was no longer relying on these exclusions, I accept and find reasonable that counsel for the applicants had to address the issue in this application and incurred legal fees in doing so unnecessarily.

[27] In these circumstances, I find that it is fair and reasonable to reduce the costs award to the respondent by 25% to address the time expended and effort associated to responding to the intentional acts / without knowledge exclusion.

Conclusion

[28] The respondent’s partial indemnity fees, inclusive of HST, are payable on a partial indemnity scale (60% of actual fees) in the amount of $9,760.83 less 25%. Further, the respondent is entitled to disbursements as claimed in the amount of $162.00.

[29] The applicants shall pay the respondent costs of the application which are fixed in the amount of $7,482.62 inclusive of HST and disbursements.

Muszynski J.

Date: February 8, 2022