In The Personal Insurance Company v. Richinger, 2012 NWTSC 19, the Supreme Court recently held that an insurer that defended its insured for three years before denying coverage was not entitled to rely on an otherwise applicable exclusion to deny coverage.

The Personal’s insured intentionally crossed over the centre line of a road and struck an oncoming truck in an attempt to kill himself and his two daughters, who were passengers in his vehicle. Fortunately, the daughters survived.

The Personal decided that suicide was not excluded by the applicable policy. It did not obtain a non-waiver agreement or issue a reservation of rights letter. In 2006, it retained counsel on behalf of the insured’s estate to defend the claim advanced by the truck driver. A defence was filed and discoveries were completed.

The Personal later decided that s. 35 of the Northwest Territories Insurance Act (the equivalent of s. 529(2) of the Alberta Insurance Act), which excludes coverage for criminal acts that are intended to cause loss or damage, applied and coverage was excluded. It started an action for a declaration that there was no coverage and its exposure for third party claims was limited to $200,000 (the applicable minimum limits).

The Court ruled that The Personal was not entitled to rely on s. 35. The Court found that The Personal knew of all the facts necessary to trigger s. 35 before it filed a defence on behalf of the insured’s estate. The Court determined that, by filing that defence after it was aware of the facts necessary to trigger s. 35, The Personal waived its right to rely on s. 35.

The Court also found The Personal was estopped from denying coverage. By defending the insured’s estate without raising any coverage issues The Personal represented to the estate that there was coverage to the limits of the policy. The Court concluded that the insured’s estate would be prejudiced if The Personal was now allowed to deny coverage as they had defended the insured’s estate for three years before raising the coverage issue. Discoveries had been completed and The Personal had partially settled one of the claims against the insured.

The decision does address what insurers should do in cases where coverage is, or may be, at issue. The Court notes that, if coverage is uncertain, an insurer should notify its insured at once and either obtain a non-waiver agreement or deliver a reservation of rights letter. In the absence of either, the insurer defends the claim at its own risk if it elects to continue defending the insured before coverage is resolved.