Additional insureds were entitled to appoint their own counsel due a conflict which arose because the mix of covered and uncovered claims meant that the additional insureds’ defence directly conflicted with the pecuniary interests of the insurers and there was a risk information obtained for defence purposes might be used against the additional insureds for coverage purposes.

Lefeuvre v. Boekee, [2017] O.J. No. 6216, 2017 ONSC 6874, Ontario Superior Court of Justice, November 29, 2017, C. de Sa J.

The plaintiff, who was a pedestrian injured in motor vehicle accident, brought an action against the driver, the municipality, the regional municipality and two contractors who were responsible for road lighting and maintenance. The contractors were obliged to indemnify the municipalities against any claims arising from their responsibilities under their contracts. The municipalities were additional insureds under the contractors’ policies and brought third party claims for coverage against the contractors’ insurers, alleging that any claim against them fell within coverage as it flowed from the negligence of the contractors in carrying out their contractual responsibilities.

The insurers agreed they were obliged to defend the municipalities. However, they took the position that defence costs should be apportioned between covered and uncovered claims at the end of the action. The insurers appointed the same counsel to defend the contractors and the municipalities. The municipalities brought an application for a declaration that they be entitled to appoint their own counsel and manage their own defence at the insurers’ expense on the basis that there was a conflict of interest. The municipalities alleged the conflict arose because the insurers would necessarily favour the position of the contractors given that they were only liable to indemnify the municipalities to the extent of the contractors’ liability. The insurers argued that the circumstances were no different than the inherent tension that is always present when there is a mix of covered and uncovered claims.

The Court found in favour of the municipalities. In doing so, the Court noted that a balance must be struck between the insured’s right to a full and fair defence and the insurer’s right to control the defence due to its potential ultimate obligation to indemnify. The balance is appropriately struck by requiring that there be a reasonable apprehension of a conflict on the part of appointed counsel before the insured is entitled to independent counsel at the insurer’s expense. In this case, the Court found a conflict due to the fact that the municipalities’ defence directly conflicted with the pecuniary interests of the insurers, and because there were concerns that information obtained for defence purposes could be used against the insureds to protect the insurers’ pecuniary interests. The Court concluded that ethical walls would be insufficient and ordered that the municipalities could appoint independent counsel at the insurers’ expense, subject to later apportionment.