Application, prior to trial, by the insureds for a declaration that the insurers had a duty to indemnify them for all damages (other than punitive damages). Application dismissed. Where the material facts are in dispute, the insurer's duty to indemnify should not be determined prior to trial.

[2012] O.J. No. 4887

2012 ONSC 4069

Ontario Superior Court of Justice

V. Mitrow J.

July 13, 2012

The insureds, two incorporated municipalities, were sued by the plaintiffs for allegedly engaging in wrongful and bad faith conduct by taking steps to expropriate lands owned by the plaintiffs.

Prior to trial, the insureds applied for a declaration that the insurers had a duty to indemnify the insureds pursuant to their errors and omissions policies for all damages sought in the underlying action (other than punitive damages). The insurance policies provided coverage for "compensatory damages" which the insureds were required to pay because of a "wrongful act".

The insurers argued the application was premature and the Court should not engage in a process of determining the obligation to indemnify until after trial. Further, the insurers argued the claims were excluded under the following exclusions:

EXCLUSIONS

This policy does not apply to any claim for a Wrongful Act that directly or indirectly causes, results in or arises out of:

4. The Insured(s) gaining any personal profit or advantage to which they were not legally entitled or the return by the Insured(s) of any money paid to them if payment of such money is held to be in violation of law; …

7. Any claim for legal or equitable restitution or any expenditure, compensation or damages payable pursuant to Statute or Regulation; ….

The insureds submitted the claims in the underlying action were for damages as a consequence of wrongful acts and any damages awarded would necessarily amount to "compensatory damages". The insureds also argued the two exclusions were not engaged on the facts.

Ultimately, the Court concluded that as a general rule, the determination of an insurer's duty to indemnify must await the trial of the underlying action. In certain circumstances, exceptions may arise where it is appropriate to determine the coverage issue prior to trial - usually in cases where there are no material facts in dispute or the facts are agreed or the issue is very narrow. However, where the underlying actions involve a significant dispute as to the facts, then the coverage issue should not be determined prior to trial. The Court found that the facts in this matter were disputed to a substantial extent and this reason alone was sufficient to defer dealing with the coverage issue until after trial.

The Court also considered the applicability of exclusion 4 and exclusion 7 and concluded that without the benefit of a trial judgment, the Court was unable to find that the exclusions were inapplicable. In the result, the insureds' application was dismissed without prejudice to the right of the insureds to seek similar relief after trial.