The Quebec Court of Appeal recently had a chance to address this issue in Entreprises M. Bourget inc. c. Compagnie d'assurances Missisquoi.[1] The facts in this case can be summarized as follows: Entreprises M. Bourget inc., a construction contractor being sued by one of its clients for damages in the amount of $441,650, applied to its liability insurer, Missisquoi, to take up its defence. The insurer refused on the basis that the action was not covered under the policy.

Several months later, the insurer changed its mind and finally agreed to defend Bourget, but only with respect to a small portion of the claim. Bourget refused this offer, insisting that the insurer had a duty to defend the entire claim. It then sought a court order requiring the insurer to reimburse all its defence costs to date as well as those yet to be incurred. It took the precaution of instituting an action in warranty against the insurer calling upon the insurer to indemnify it for any amount that it might be ordered to pay the plaintiff.

The Superior Court considered the insurer's position to be justified and dismissed Bourget's motion seeking payment of its defence costs. Bourget appealed. During the appeal, the insurer finally agreed to assume Bourget's defence in its entirety. However, it sent Bourget a "reservation of rights letter" citing various coverage exclusions under its policy that could affect its duty to indemnify in the event of a judgment against Bourget. The insurer also insisted on the right to choose its own counsel to defend Bourget. Bourget, while acknowledging that, in principle, choice of counsel belongs to the insurer, objected to such choice in this instance, contending that the case had evolved in such a way that the insurer was in a conflict of interest and hence that it was justified in not trusting its choice of defence counsel. In a decision handed down on May 20, 2009, the Court of Appeal dismissed Bourget's arguments. The Court pointed out that the insurer had appointed separate law firms, one to represent it in the action in warranty instituted by Bourget and the other to represent Bourget in the action instituted by Bourget's client. The appointment of two separate firms was deemed sufficient, in the circumstances, to "[translation] resolve the conflict of interest, without depriving [the insurer] of its rights under the contract."

This recent decision by the highest court in Quebec is reminiscent of the decision it rendered in 1996 in Zurich du Canada, Compagnie d'indemnité c. Renaud & Jacob.[2] In that case, the Court found that the fact that the insurer had reserved its rights with respect to the duty to indemnify did not deprive it of its right to appoint counsel to defend its insured and to control that defence. In addition to reiterating this principle, the Bourget case clarifies that such right is also not lost merely because the liability insurer initially denied coverage or because its insured has proceeded in warranty against it and asked the judge hearing the case against it to also rule, if necessary, on the insurer's duty to indemnify.