In Tedford v. TD Insurance Meloche Monnex1, the Ontario Court of Appeal provides helpful guidance concerning an insurer’s duty to defend. In particular, the case includes:
- A neatly packaged seven-point summary of the legal principles governing an insurer’s duty to defend;
- Interpretation of what constitutes a “derivative claim” for the purpose of determining if an insurer’s duty to defend is triggered; and
- Confirmation of how the costs of defending a lawsuit should be apportioned when some, but not all, of the claims are covered by the policy.
The principles governing an insurer’s duty to defend
The Ontario Court of Appeal presented the following seven-point summary:
- The insurer has a duty to defend if the pleadings filed against the insured allege facts that, if true, would require the insurer to indemnify the insured.
- If there is any possibility that the claim falls within the liability coverage, the insurer must defend.
- In assessing whether the policy would cover the claim, the court must look beyond the labels used by the plaintiff to ascertain the “substance” and “true nature” of the claims. It must determine whether the factual allegations, if true, could possibly support the plaintiff’s legal claims.
- The court should determine if any claims pleaded are entirely “derivative” in nature (discussed further below). A derivative claim will not trigger a duty to defend.
- If the pleadings are not sufficiently precise to determine whether the claims would be covered by the policy, the insurer’s obligation to defend will be triggered where, on a reasonable reading of the pleadings, a claim within coverage can be inferred.
- In determining whether the policy would cover the claim, the usual principles governing the construction of insurance contracts apply–namely, the contra proferentemrule; the principle that coverage clauses should be construed broadly and exclusion clauses narrowly; and, where the policy is ambiguous, the desire to give effect to the parties’ reasonable expectations.
- Extrinsic evidence that has been explicitly referred to in the pleadings may be considered to determine the substance and true nature of the allegations.
What constitutes a derivative claim?
As stated in the fourth principle above, a derivative claim will not trigger the insurer’s duty to defend. As such, it is important to understand what constitutes a derivative claim.
The Court of Appeal in Tedford stated that when the court is faced with a situation where both an intentional tort (which is excluded from coverage) and a non-intentional tort are pleaded, the court construing an insurer’s duty to defend must decide which of the following circumstances exist:
- The underlying elements of the negligence and of the intentional tort are sufficiently disparate to render the two claims unrelated–in this circumstance, the claim for negligence is not derivative, and the duty to defend will apply.
- The negligence claim and the intentional tort claim both arise from the same actions and cause the same harm–in this circumstance, the negligence claim is derivative and the duty to defend will not apply.2
Apportionment of costs
In many cases, only some, but not all, of the claims made in a lawsuit are covered by the policy. In these situations, there is often some debate as to how the costs of defending the lawsuit should be apportioned between the insurer and the insured.
In Tedford, the Ontario Court of Appeal confirmed that the insurer is responsible for all reasonable costs associated with the defence of the covered claim(s)3:
- Where there is an unqualified obligation to pay for the defence of claims covered by the policy, the insurer is required to pay all reasonable costs associated with the defence of those claims, even if those costs further the defence of uncovered claims.
- The insurer is not obligated to pay costs that are related solely to the defence of uncovered claims.