In the recent decision of British Columbia Medical Association v. Aviva Insurance Company of Canada 2011 BCSC 1399 the Court addressed the duty to defend in the context of coverage for a defamation claim under a CGL policy and the right of an insurer to appoint and instruct defence counsel.

COVERAGE

The British Columbia Medical Association (“BCMA”) is a voluntary association of British Columbia doctors, residents and students and acts as a negotiating body for various issues related to physician compensation. BCMA had been insured with Aviva Insurance Company of Canada (“Aviva”) since 2002 under 3 separate CGL policies (collectively the “Policy”). The Policy was a standard form which contained coverage for claims alleging libel slander or disparagement. In addition it had exclusions for knowingly violating the rights of another and publication with knowledge of falsity.

The BCMA sought coverage for an action brought by a Dr. Caroline Wang against the BCMA and various individual directors (who were also insured under the policies) in which she alleged that the defendants had defamed her as part of a “campaign of vilification” with the direct intent to injure her and with full knowledge of the falsity of their statements.

Aviva took the position that, given the allegations of intentional falsehood, there was no coverage under the Policy. BCMA argued that the pleadings supported a claim against them in defamation even absent a finding of intentional wrongdoing. In regards to the tort of defamation the Court noted that:

[48] Defamation is a tort of strict liability, and in a defamation case, unless there is a plea of privilege or fair comment, the law looks at the tendency and consequences of the publication, rather than the motive or intention of the publisher. The court is not concerned with “what the motive of the person publishing the libel was, or whether he intended it to have libellous meaning or not” [cites omitted]

There was no dispute as to the general principles concerning the interpretation of insurance polices, and the Court noted that:

  • The pleadings govern the duty to provide a defence;
  • An insurer, under a liability policy stating a duty to defend, is required to provide for a defence where facts alleged in the pleadings, if proven to be true, could require the insurer to indemnify the insured for the claim. The duty is triggered by the mere possibility that a claim within the policy may succeed; and,
  • In this regard, it is the true nature of the substance of the claim that is to be determined, not the particular labels used by the pleader.

The Court referred to the Supreme Court of Canada in Non-Marine Underwriters v. Scalera 2000 SCC 24 (“Scalera”) which outlined the following 3-step approach to be applied in determining whether a duty to defend arises in the context of an intentional act:

  1. The Court is to determine if the plaintiff’s legal allegations are properly pleaded and in doing so the Court is to look beyond the choice of labels and examine the substance of the allegations;
  2. The Court must determine if any of the claims are entirely derivative in nature. Where the pleadings are found to contain properly pleaded allegations of both intentional and non-intentional torts, the Court must decide whether the harm allegedly inflicted by the negligent conduct is derivative of that cause by the intentional conduct; and,
  3. The Court must determine whether there are any properly pleaded, non-derivative claims that could fall under the policy’s coverage.

Aviva argued that all of the pleadings must be taken as true and that the gravamen of the plaintiff’s complaint was that the individual intentional actions to injure her were part of an organized effort to cause her harm. Aviva placed great emphasis on the fact that in the underlying pleadings there were no alternative allegations as to negligence. Aviva went on to argue that in determining coverage a Court could not pick and choose what factual assumptions in the underlying pleadings were assumed to be true. The Court rejected this argument and went on to hold that:

[60] In my view, Aviva’s contention that, for purposes of the present analysis, the court must proceed on the assumption that all the facts in the alleged underlying Claim will be made out is overly restrictive. To my mind, it is also inconsistent with the principle reiterated by the court in Progressive that a duty to defend exists if there is a possibility that the claims could fall within the insurance coverage. I think that it is implicit in that test that in considering the issue, the court should address possible outcomes at trial based upon the claims alleged in the statement of claim. In other words, in order to determine if there is a possibility of coverage, the court should consider the possibility that some but not all of the plaintiff’s allegations will succeed at trial.

Applying the Scalera test, the Court focused on whether the defamation claims are derivative and ultimately held that “in the present case it cannot be said that the plea of defamation is in any way subservient to the allegations of intentional misconduct. Rather, those allegations can be seen as aggravating factors with respect to the defamation.” The Court went on to note that the elements of a defamation claim do not require proof of conduct that proves intent to injure. As such, the Court stated that the allegations of intentional falsehood, while related, were sufficiently disparate such that it cannot be said that the defamation was derivative of the alleged intentional act. Importantly the Court noted that if the allegations of intent to injure and knowing publication of falsehood were removed, sufficient facts remained to support a pleading of defamation as a plaintiff alleging defamation does not have to establish that the defendant had any level of knowledge or blameworthy mental state.

Therefore the Court held that the defamation plea was a properly plead non-derivative claim that could potentially trigger indemnity if it were to succeed at trial. Accordingly the Court held that Aviva had a duty to defend in the underlying action.

CONDUCT OF DEFENCE

With regards to the conduct of the defence the Court noted that in general when an insurer defends against a claim it has a right to control the defence including the right to appoint and instruct counsel. However the right of the insurer to control the defence is not absolute. In particular, in circumstances where a reasonable apprehension of a conflict of interest arise it is possible that the right to appoint and instruct counsel does not rest with the insurer.  However, it was noted that the mere fact that an insurer had reserved their rights is not, in and of itself, sufficient to give rise to such a perceived conflict of interest.

The conflict in this action involved the fact that coverage questions would depend on aspects of BCMA’s conduct at issue in the litigation and in particular the intention, knowledge, and purpose of the defendants.  Given that their knowledge, purpose and intention would be a central issue at the trial of the underlying action the conflict presented between the interest of Aviva and BCMA was “too substantial to ignore”. As such, the Court held that Aviva was not entitled to exercise any right to control the defence of the BCMA and ordered that the BCMA were permitted to conduct the defence to this action with legal counsel of their choosing, to be paid for by Aviva , and that counsel chosen by BCMA was not required to report to Aviva with respect to any matters bearing on the issue of liability.

SUMMARY

While it will be rare that a pleading does not contain alternative pleas of negligence and advances only an intentional act,  this decision illustrates how a Court can use the Scalera analysis to find coverage for such a clearly plead intentional act where, by the nature of the alleged underlying tort, it is possible to have liability absent the intentional act.