An insurer’s duty to defend generally implies a corresponding right to control the defence, including the right to appoint and instruct defence counsel.1 The insurer’s right to control the defence is not, however, absolute. In decisions released in 2010 and 2011, Ontario courts have shown that they are increasingly willing to permit the insured to appoint and instruct independent counsel at the insurer’s expense if the insurer has initially denied a duty to defend or reserved its rights on some aspect of coverage.
The “conduct-based” approach
In its 2002 decision in Brockton v Frank Cowan Co., the Ontario Court of Appeal held that the insurer’s right to appoint and instruct counsel can be removed if the interests of the insurer and the insured diverge.2 The insurer in that case could be required to surrender control of the defence and pay for counsel chosen and instructed by the insured.
The court held in particular that allegations regarding the insured’s conduct could give rise to a divergence of interest between the insurer and the insured. A conflict could arise, for example, where an insurer has reserved its rights with respect to indemnity for fraud or intentional misconduct. The insurer in this scenario would have an interest in characterizing the insured’s impugned conduct as fraudulent or intentional, resulting in an outcome not requiring any indemnity under the policy. The insured, on the other hand, would have an interest in characterizing the conduct as innocent, to preserve the right to indemnity obligation.
Based on Brockton, Ontario courts took a “conduct-based” approach to disputes about who can appoint and instruct defence counsel.3 Recent cases, however, reveal a shift toward a broader “dispute-based” approach.
The “dispute-based” approach
In Appin Realty Corp. v Economical Mutual Insurance Co., the plaintiff sued for damages resulting from exposure to mould and bacteria.4 The defendant’s insurer initially denied a duty to defend because the policy excluded coverage relating to mould. The Ontario Superior Court of Justice held that the exclusion clause relating to mould did not relieve the insurer of its duty to defend the claim as it related to bacteria. It further found that, due to the conflict over the extent of the policy’s coverage, counsel instructed by the insurer might steer the conduct of the case to an outcome not requiring indemnity (i.e., the damages were caused entirely by mould and not even partly by bacteria). As a result, it ordered that the insured should retain counsel of its choice, at the expense of the insurer.
Based on the analysis in Appin, an insured could be entitled to instruct counsel of its choice at the insurer’s expense not only in cases where its conduct is at issue, but where more broadly speaking the source of liability or type of damages owed is at issue. Following this broader “dispute-based” approach, in 2010 and 2011 Ontario courts concluded that a sufficient degree of conflict may exist in any case where the insurer has initially denied a duty to defend,5 where there is any potential for minimizing the insurer's exposure at the expense of the insured,6 or wherever there is an active and ongoing coverage dispute and the insured seeks to retain its own counsel.7
Ontario decisions over the last two years indicate an incremental erosion of the insurer’s general right to appoint counsel in common law provinces in Canada. In certain cases this may affect the decision to deny a duty to defend or to make a reservation of rights based on a coverage dispute.
Mr. Bryan Stephens, articling student, helped in preparing this legal update.