Under Article 2503 of the Civil Code of Québec, a liability insurer is bound to assume the defence costs resulting from actions that are taken against its insured and covered by the insured’s insurance policy. However, a recent Quebec Court of Appeal ruling has added an important nuance to this principle.1 On January 31, 2015, the court upheld a Quebec Superior Court judgment that partially allowed a claim against an insurer for the reimbursement of defence costs incurred with respect to an action in Ontario.2 In the case in question, the Superior Court judge had determined that, because the fees spent on the case in Ontario were inflated as a result of extraneous factors, only a portion of the defence costs had to be reimbursed by the insurer.

Facts

The respondents are real estate asset management companies that held a commercial general liability (CGL) insurance policy with the appellant, Northbridge General Insurance Corporation (formerly Lombard General Insurance Company of Canada) (Lombard).

In October 2008, the respondents bought a building in downtown Toronto. Part of that building contained an underground garage. The building’s residents had entered into agreements to use the parking lot located in the basement of the building. As some agreements contained a stipulation allowing the termination of the agreement by notice, the respondents exercised this right so they could offer parking to their own tenants. The building’s condominium corporation filed an action for an injunction and damages against the respondents with the Ontario Superior Court of Justice. The claim was based on the fact that the municipal by-laws prohibited the respondents from depriving the building’s residents of their parking lot. Moreover, the respondents were alleged to have intentionally breached their contractual commitment to abide by those by-laws.

Although the final judgment in that case found in favour of the respondents, the latter incurred legal and expert fees exceeding $2.3 million. Because the respondents’ insurance policy was governed by Quebec law, the respondents sued their insurer in Quebec for reimbursement of the legal and expert fees incurred to defend against the action brought by the condominium corporation.

Decision of the Superior Court of Quebec

At trial, Justice Stéphane Sansfaçon of the Superior Court of Quebec began by rejecting the grounds for exclusion invoked by Lombard in support of its position that no coverage was available to the respondents for the Ontario action.

After finding that the insurance policy conferred a duty upon Lombard to defend the respondents, the court carried out a detailed analysis of all billed fees submitted to Lombard for payment. That analysis revealed that a large number of lawyers and paralegals had been used to fast-track the matter. In addition, the court found that the respondents, pursuing a [translation] “special agenda” (the court’s words), had given instructions to their lawyers that, in the court’s view, greatly exceeded the requirements for an adequate defence.

Justice Sansfaçon determined that a large percentage of the fees were attributable to the respondents’ “special agenda.” According to the court, it was unfair that Lombard should have to bear the costs related to this strategy. Therefore, after analyzing the reasonableness of the costs at length, the court ruled that Lombard was required to reimburse only 66% of the legal costs billed to the respondents.

Another question was raised before Justice Sansfaçon. Lombard maintained that a large percentage of the fees, because they stemmed from the motion for an injunction filed in Ontario, did not have to be assumed by Lombard. Lombard argued that this type of action was not covered by the respondents’ insurance policy. The court determined that Lombard had not demonstrated that the actions taken by the respondents’ lawyers in their defence to the motion for an injunction were separate and distinct from those required in the defence to the motion for damages. The court therefore determined that Lombard’s duty to defend covered all steps in the action brought before the Ontario Superior Court of Justice.3

Decision of the Quebec Court of Appeal

The Court of Appeal, in a unanimous ruling, upheld the judgement at trial. In its view, Justice Sansfaçon correctly directed himself in law by determining that there was a real possibility the action brought against the respondents was covered by the respondents’ insurance policy.

The court also upheld the findings of the trial judge that Lombard had not demonstrated that the motion for an injunction, even if Lombard were not obligated by the insurance policy to defend it, required the performance of tasks that were separate and distinct from those required to defend against the action for damages (which was covered by the policy). The court therefore confirmed the Superior Court’s decision not to allow the defence costs stemming from the defence against the injunction motion to be shared.

Lastly, the Court of Appeal considered Justice Sansfaçon to have adequately weighed the reasonableness of the fees charged by the respondents’ lawyers and to have correctly determined that the full amount could not be passed on to Lombard. The court therefore upheld the trial judge’s decision requiring Lombard to reimburse only 66% of the billed fees.4

This judgment of the Court of Appeal is important because it moderates the scope of the insurer’s duty to defend. The court upheld the opinion of the trial judge that extraneous factors cannot result in additional legal fees being borne by the liability insurer. In this case, the extraneous factor was the respondents’ “special agenda,” which resulted in multiple proceedings before the Ontario courts.