In liability insurance matters, the control of the defence is a recurring issue before the courts. A recent ruling of the Superior Court dealt with this issue after an insurer had denied coverage following its own investigation of the facts. This ruling may cause liability insurers to reconsider the way they handle their insureds’ files where no formal claim has yet been filed.
In this case, a house partially collapsed following work performed by a contractor. The latter quickly informed his liability insurer of a possible claim. After having conducted its own investigation of the facts, the insurer denied coverage on the basis of two exclusions.
A year later, a claim for damages was filed against the contractor. Following its analysis of the statement of claim, the liability insurer indicated that the allegations confirmed its investigation and therefore, its coverage position.
The contractor then presented a Wellington motion in order to determine whether the insurer owed a duty to defend and, if necessary, decide who would choose defence counsel: the insurer or the insured?
Having concluded that the insurer did not establish that the exclusions applied in a clear and unequivocal manner at this stage of the proceedings, the Court held that the insurer had the duty to defend its insured. The Court then considered the second issue, noting that:
[translation] "[T]he fact that an insurer had initially wrongfully refused to defend its insured does not cause it to automatically lose its right to appoint counsel and control the defence where the court subsequently orders it to defend its insured. For the insurer to lose this right, the circumstances must be such that the insured can no longer have confidence in the grounds of defence that the insurer will put forth."
Given that the insurer justified its position on the exclusions by its own investigation of the circumstances of the accident rather than its analysis of the allegations contained in the statement of claim, the Court held that [translation] “the insured was justified in losing confidence in the defence that his insurer will now be forced to provide him following this ruling.” The insurer was thus [translation] “in a conflictual situation regarding the specific performance of its duty to defend”.
The Court therefore left the choice of attorney and the control of the defence up to the insured. It also ordered the insurer to pay the defence costs incurred to date by the insured and those to come, except for those incurred for the Wellington motion.
This decision highlights that it is in the interest of liability insurers to wait for the statement of claim before taking a final position on insurance coverage if they wish to retain control of the defence. Indeed, it seems that a denial of coverage based solely on a factual investigation before a claim is made against the insured might allow the latter to later invoke its loss of confidence in the insurer in regard to the control of the insured's defence. It will be interesting to see if the courts find other circumstances amounting to the legitimate loss of confidence in the insurer that allow the insured to gain control of its defence.