Two Files or One – Conflict with Insured

The 2024 decision of the Ontario Court of Appeal Loblaw Companies Limited v. Royal & Sun Alliance Insurance Company of Canada, 2024 ONCA 145 considered numerous issues of importance to the insurance industry including the question of conflicts between insurer and insured. The coverage litigation at issue arose from a monstrous tangle of underlying litigation: five class actions in four Provinces against dozens of defendants, all alleging negligence and other misconduct in the development, marketing and sale of opioid drugs since 1996. Three of those defendants – Loblaw Companies, Shoppers Drug Mart Inc., and Sanis Health – tendered their defences to twelve different insurers who insured them for varying portions of the class period, with varying deductibles and self-insured retentions (SIRs), and under various reservations of rights. Five of the insurers provided primary coverage; they and the other seven also provided excess coverage in certain policy years.

The Court of Appeal confirmed that insurers who reserve rights based on exclusions, terms, or conditions of the applicable policy may not be entitled to full defence disclosure in some circumstances. Further, the circumstances of each case will dictate the extent of the ethical wall that is appropriate between the “coverage” arm of the insurer and the ‘defence” arm. The Court agreed with the trial judge that in cases where the reservation of rights arises due to coverage questions that turn upon the insured’s own conduct in issue in the underlying action, a reasonable apprehension of a conflict of interest exists.

A good portion of the written decision is dedicated to the issues arising from the Defence Reporting Agreement (“DRA”). In a nutshell, the DRA permitted the all insurers who had opted to participate in the defence to share otherwise privileged defence information, in the spirit of cooperation in the defence of the class action. It required participating insurers to follow a “split file protocol” that precluded contact between an insurer’s coverage and defence examiners except at much higher levels in “the corporate decision-making pyramid”, beyond the adjuster or front-line claims examiner. It also provided for certain limited information to be provided to all insurers for reserving purposes. Certain insurers had declined to sign the DRA, but still insisted on receiving privileged information. The trial judge ordered that privileged defence information (such as opinions and expert reports) would only be available to those insurers who entered into the DRA. The non-participating insurers appealed this ruling, arguing that they had the right to fully associate in the defence including access to all relevant information, including privileged defence information.

The Court of Appeal dismissed this aspect of the appeal. The Court agreed with the trial judge that, absent participation in the DRA, the reasonable apprehension of conflict arising from insurers’ reservation of rights was not adequately addressed. The Court reasoned that a conflict of interest arises in situations where insurers reserve rights on coverage questions “which depend on an aspect of the insured’s own conduct at issue in the underlying litigation”. In this case, for example, insurers reserved rights based on the intentional act exclusion. Insurers who reserved rights on this basis would have an interest in claims falling within the exclusion. The Court emphasized the primacy of an insured’s right to a “coverage neutral defence”, free from fear that its provision of information to its defence counsel might be detrimental to coverage.

The Court concluded that the trial judge had not erred in making participation in the DRA a pre-condition for receiving privileged defence information, or that the protocols proposed by the non-participating insurers would not provide sufficient protection. Notably, the Court stressed that defence lawyers’ primary duty of loyalty is owed to the insured. In sum, the court concluded that insurers may only rely on privileged defence information when determining coverage if they implemented ethical screens at least equivalent to those required by the DRA, or if the insured provided a waiver to that effect.

The impact of this portion of the appellate decision is somewhat uncertain, and will likely depend on the circumstances of each case. The Court declined to define the scope of disclosure stating that it would be premature at the early stages of litigation. This strongly signals that this determination may have to wait until well into the litigation if not to its conclusion. Likewise, the Court did not mandate specific protocols or ethical screens but concluded that the determination of appropriate ethical screens and measures would be dictated on a case by case basis. In some cases where a high degree of potential conflict exists, it may be appropriate for the insured to retain independent counsel at the insurer’s cost. In “run of the mill” reservation of rights cases or cases with relatively low indemnity exposure, a split file protocol might suffice.

C.      Implications for Insurers

Although the jurisprudence in this area is continually evolving, there are several emergent principles which provide guidance for insurers that wish to avoid the appointment of what is often called “Cumis counsel”. The following discussion offers some basis practice points for insurers facing such potential issues.

a)   When do you need two files?

The Canadian courts have clarified that the test for when an insurer must maintain two separate files, one for coverage and one for defence counsel, is the same as the test which is used to determine whether an insured is entitled to its own counsel – in either case there must be an actual conflict of interest. The mere “appearance of impropriety” is not enough to require that an insurer “split” its files.

In The Co-operators General Insurance Company v. Morrison, 2004 NBCA 62, the plaintiffs in the underlying action claimed for damages arising from a motor vehicle collision and subsequent assault at the hands of the insured defendant. The original statement of claim alleged that both acts were intentional and that the defendant drove his vehicle into their vehicle with such force that the vehicle flipped on its side causing injuries to the occupants. The plaintiffs further alleged that the defendant then exited his vehicle and assaulted two of the plaintiffs. The original statement of claim did not raise any claims which would be payable under the insurance policy and the insurer accordingly took the position that there was no duty to defend.

The plaintiffs then astutely proceeded to file an amended statement of claim alleging the collision was the result of negligence and therefore raised the possibility that some or all of the damages sustained were caused by negligent, as opposed to intentional acts. The insurer maintained that the insured had deliberately and intentionally rammed into the plaintiffs’ vehicle and then proceeded to assault the plaintiffs. The insurer took the position that the insured had therefore forfeited his right to be indemnified under the policy since he had intentionally committed a criminal act with the intent to cause loss or damage.

The insured applied for a declaration that the insurer was under a duty to defend. The insurer alleged that the plaintiffs had manipulated their Statement of Claim by amending it to circumvent the exclusions for intentional acts, in an attempt to give rise to coverage and to permit them to recover under the insurance policy if successful at trial.

The Court of Appeal concluded there was a duty to defend, rejecting the insurer’s submission that the negligence claim was purely derivative. The Court of Appeal considered the possible outcomes at trial in the course of its analysis at paragraph 29:

Having said all this, I am not convinced that, in a case such as this, a plaintiff could not claim that Mr. Morrison intentionally caused the collision in an attempt to stop the Dedam vehicle from leaving his property or, in the alternative, that he caused the injuries by driving his vehicle in a negligent manner. It is arguable, in my view, that the two torts involve different acts or conduct based upon Mr. Morrison’s state of mind, one being an intentional tort and the other a non-intentional tort. The Statement of Claim would obviously contain a claim potentially within coverage. At trial, the claim based upon the intentional tort could fail and the negligence claim succeed. This is different from the allegations in Scalera where it was alleged in the Statement of Claim that the defendant had caused damages to the plaintiff by engaging in non-consensual sexual intercourse. In that case, the negligence claim was not legally viable because on the facts as alleged, there was no possibility that a claim within coverage could succeed. That is so because “[e]ither there was consensual sexual intercourse, in which case the claim would be dismissed, or there was non-consensual intercourse, in which case the claim in battery would succeed.” In the latter case, the claim would not be within the coverage provided by the policy…

The Court of Appeal also determined that there would be a clear conflict of interest between the insured and the insurer which entitled the insured to his own counsel. The potential for conflict existed because if liability were found as a result of the assault and not the allegations of negligence, there would be no coverage. The insurer might therefore conduct the defence in such a way that favours the finding of an intentional tort. The Court of Appeal held that specific evidence of a reasonable apprehension of conflict was not necessary in this case because once counsel acts on behalf of an insurer on a coverage issue involving the insured’s conduct in the underlying action (which conduct may impact on the insurer’s obligation to indemnify its insured), a conflict of interest arises.

The Court of Appeal upheld the lower court’s order that the insured was entitled to separate legal counsel, to be paid for by the insurer, with no obligation to report to the insurer on issues of coverage.

b)   How severe can the consequences be if there is a Conflict?

The courts in some Canadian provinces have addressed conflicts between insurers and insured in a “creative” manner resulting in clearly undesirable results to insurers.

In PCL Constructors Canada v. Lumbermens Casualty Company Kemper Canada, 2009 CanLII 32915 (ON SC), the insured had provided construction services for a hospital and was later sued after water ingress resulted in damage to the hospital’s roof system. The insurer denied coverage and refused to defend or indemnify on the basis that the allegations in the statement of claim against PCL were for damages caused in the course of PCL’s own work, or at least that of one of its subcontractors (i.e. an “own work”
exclusion).

After analyzing the insuring agreement, exclusions and exceptions, the court concluded that there might be coverage for the claim, depending on whether the damage to the roof had arisen before or after PCL’s work had been completed. Since there was a possibility that the claim might ultimately be covered, the duty to defend was triggered.

The insured argued that to allow the insurer to appoint defence counsel may give rise to an incentive for that defence counsel to demonstrate that the allegations against PCL fell within policy exclusions, as this would be consistent with their stated “no indemnity” position.

The Ontario Superior Court resolved this dispute in a most unusual manner, holding that while the insurer must pay for the defence of the insured in the underlying action, defence counsel must be counsel who had not acted for either the insurer or the insured for the last 5 years such that there would be no appearance of a conflict of interest.

The court also held that defence counsel must be different from coverage counsel (which is not unusual), and must refrain from discussing the case with coverage counsel. The court further ordered that the insurer assign both a new coverage examiner and a new defence examiner to the file that would not have any communication with any individuals who dealt with the claim up until that point in time. The insurer’s file was also to be purged of any references to the coverage issue. Lastly, the court ordered the coverage examiner and counsel not to discuss the case with defence counsel, which is a most unusual order in the writer’s respectful opinion.

It does not appear that the reasoning in the PCL decision has been applied in other cases to-date. However this case further illustrates the potential risks that insurers face if a court determines that a conflict of interest exists.

c)   Do limits claims create an automatic conflict?

An insured will often perceive a conflict of interest in cases where there is a risk that an award of damages will exceed the limits of its insurance policy. However, a claim which will exceed limits does not automatically create a conflict. In Fredrickson v. I.C.B.C., 1990 CanLII 3814 (BC SC), the Court acknowledged that while an exposure in excess of policy limits sets up a potential conflict between the insurer and insured, such potential does not, in and of itself, give rise to a requirement that the insurer retain independent counsel for its insured.

However, insurers should be always keep in mind the obligation of good faith in defending and settling third party claims which may exceed the policy limits. Shea v. Manitoba Public Insurance Corp., 1991 CanLII 616 (BC SC), stands for the proposition that an insurers obligation of good faith require that the insurer take affirmative steps to settle a third party claim for the policy limits in cases where a finding of liability is highly probable and where the judgment to be awarded will probably exceed the policy limits. If an insurer fails to do so, a court is may find the insurer liable for the portions of the damages that exceed the policy limits and the insurer may be exposed to aggravated or punitive damages.

Markham v. AIG raises a further interesting point. In that case, an injured plaintiff had named both the City of Markham, who owned and operated an arena, and Hockey Canada, who oversaw some aspects of hockey programs. The plaintiff was injured while watching a minor ice hockey game in the City’s arena. The City held a liability policy which could respond to the claim, but the City was also an additional insured under a policy issued to Hockey Canada. The two insurers disputed whether the City’s insurer had a concurrent duty to defend the claim. The City and its insurer contended that Hockey Canada’s insurer was conflicted and sought control of the City’s defence at the expense of Hockey Canada’s insurer.

The insured City’s deductible ($100,000) in Markham v. AIG represented the lion’s share of the plaintiff’s claim ($150,000). Nevertheless, as that dispute was, at its heart, a dispute between insurers, this potential burden on the insured did not tip the scales against the insurer’s right to conduct the defence.

A contrasting example can be found in Temple Insurance Company v. Sazwan. The insureds in Sazwan were covered for a combined $12 Million of indemnity and defence costs for commercial claims in a pair of actions. Between the actions, damages in excess of $237 Million were sought against the insureds. The actions included both covered and uncovered claims, and the insured and insurer had a history of disagreement over defence strategy.

In Sazwan, the Court denied the insurer conduct of the defence on three grounds: the conflict between covered and uncovered losses, the history of disagreement, and the significant extent to which the insureds’ exposure exceeded policy limits.

The contrast between these two cases is interesting. The insured’s share of exposure in Sazwan was greater and the amounts in dispute were significantly greater, but the insured’s exposure in Markham v. AIG was more certain, as it had to be paid before the insurer’s contribution came into play.

These two cases offer little ground for conclusion, but three general principles can be fairly summarized:

• An insured is not entitled to control the defence simply because its share of exposure will exceed its insurer’s;
• If the insured’s exposure is high enough in absolute terms, it will likely tip the balance towards the insured’s control;
• The insured’s exposure will receive less attention where the case involves a dispute between insurers than where it involves a dispute between insurer and insured.

The City’s exposure to a deductible in the Markham v. AIG case was likely less significant because a corresponding exposure applied to Hockey Canada. Each insured would be faced with the prospect of a deductible, depending on whether claims fell within or outside of Hockey Canada’s coverage. Although the Court did not address this point explicitly, that balance may explain why the City’s exposure bore little weight. Had the City’s exposure in Markham v. AIG been for claims in excess of limits, it seems likely that the Court of Appeal would have considered it more closely.

d)   Does a ROR for future coverage issues create a conflict?

In some cases, an insurer’s best intentions, and desire to bring potential future coverage issues to the attention of an insured in advance of a conflict actually arising, have led to insureds alleging that a conflict of interest exists. Fortunately for insurers, the Ontario Superior Court has provided some helpful guidance in this regard.

In 137328 Canada Inc. v. Economical Mutual Insurance Company, 2011 ONSC 1085, the insured, a company providing security and alarm services, was named as a defendant in a lawsuit by one of its clients arising out of a roof collapse that caused extensive structural and water damage. The insured had a CGL policy with limits of $2 million. The lawsuit claimed damages well in excess of those limits. Upon notice of the claim, the insurer advised the insured that it would provide coverage and defend the lawsuit. However, in light of the likely exposure in excess of limits, the insurer further advised the insured that it may wish to retain its own counsel to advise it with respect to its excess exposure.

The insured did retain counsel and immediately instructed the insurer’s chosen defence counsel to cease taking further steps in the litigation on its behalf. The insured also demanded that the insurer fund its chosen counsel alleging that the potential exposure in excess of limits created a reasonable apprehension of a conflict of interest between itself and the insurer. The insurer objected, emphasizing that it had not raised any coverage concerns, except for the quantum of the claim. The insurer confirmed its willingness to provide coverage and defend the underlying action on behalf of the insured.

In spite of these assurances from the insurer, the insured brought an application seeking declarations that it could choose and instruct its own counsel, and that the insurer should be required to pay for its legal costs, including independent counsel.

The Court rejected the insured’s argument that exposure in excess of limits was sufficient, in itself, to create a conflict of interest requiring the insurer to fund independent counsel. The Court noted that while facts could later emerge that may raise concerns about a conflict of interest on the part of the insurer, in the absence of any present divergence of interest there was no basis at law to deviate from the normal course and require the insurer to fund independent counsel for its insured.

The Court noted the coverage concern raised by the insurer with respect to the claim had nothing to do with the conduct of the insured and related solely to the quantum of the claim. There was no reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer to defend the civil action, and no divergence of interest at that point in time, and the Court dismissed the application by the insured as it related to payment of its legal costs by the insurer. The Court also found that the possibility of an unknown coverage issue arising in the future was speculative and insufficient to raise a reasonable apprehension of a conflict of interest.

e)   When can the insured’s choice of counsel have a conflict?

It is worth emphasizing that conflicts are not always due to the acts of an insurer. In many cases it is the counsel for the insured that is placed in a position of conflict and cannot act.

In Chan v. St. James (King-Jarvis) Inc., 2005 CanLII 3206 (ON SC), the insured condominium corporation was sued by the plaintiff. Some of the allegations pled in the amended statement of claim, if proven, would be covered under the insured’s policy, while others would be excluded. Before the pleadings were tendered to the insurer for a defence, the lawyer for the insured entered a defence in the underlying action. The insured’s lawyer then issued a third party claim against the insurer alleging breach of the contract and failure or refusal to offer a defence or indemnity because the insurer had suggested that
matter be referred to an insurer previously on risk.

The insurer elected to defend the underlying action and brought an application to replace the insured’s lawyer with solicitors of its own choosing to defend the underlying action, relying on its right to retain counsel and to control the defence. In addition, the insurer argued that the insured’s lawyer, having commenced the third party claim against the insurer alleging bad faith, was in a position of conflict of interest. The insured opposed the application arguing that any counsel appointed by the insurer would be placed in a conflict of interest with the condominium corporation because of the fact that some of the allegations in the statement of claim were not subject to coverage.

The court allowed the insurer to appoint its counsel of choice to defend the underlying action. The insured’s lawyer was in a position of conflict given that he had made an allegation of bad faith against the insurer in the third party proceeding which gave rise to a reasonable apprehension of conflict on the part of the insurer.

f)   When can you disqualify the insured’s counsel of choice?

Where an insured’s choice of counsel commences and maintains a separate action against the insurer alleging bad faith, that counsel will be prohibited from acting as defence counsel for the insured in the underlying action.

In Svishchov v. Corol, 2003 CanLII 4521 (ON SC), the underlying action involved a fatal accident. The defendant was the owner of the car in which the plaintiff’s wife had died after the vehicle came to a sudden stop on the road and was struck by another vehicle. The defendant’s insurer initially denied coverage. The insured retained independent counsel who brought a third party action against the insurer alleging bad faith. The insurer later acknowledged that it had an obligation to defend the underlying action but objected to the insured’s choice of counsel and sought to appoint its own choice of counsel to represent the insured in the underlying action.

The Court held that “but for” the bad faith allegation asserted by the insured in the ongoing third party proceeding, the insurer would have been obliged to surrender conduct of the defence to the insured since it had placed the insured’s conduct in issue by contesting the insured’s version of events rather than merely reserving legal rights to later deny coverage. However, in the continued presence of the bad faith allegation against Economical, the counsel retained by the insured was clearly in a position of conflict and independent counsel should be appointed to defend the underlying action.

g)   What if only part of a claim is covered – is there a conflict?

A conflict will often arise in cases where liability against an insured can be grounded in either an intentional tort or negligence. In such cases, a conflict will often be found where the court concludes that defence counsel will have an incentive to pursue a defence theory of liability that would support an off-coverage position.

In Coakley v. Allstate Insurance Company of Canada, 2009 CanLII 22549 (ON SC), the insured was being sued after he allegedly pushed the plaintiff through a door and slammed him to the ground causing him injuries. Allstate refused to defend the action under the insured’s homeowner’s policy on the basis that the underlying action alleged intentional conduct, although negligence had also been pled. The insured brought a third party claim against Allstate seeking a declaration that it had a duty to defend in the underlying action. A major issue at trial in the underlying action was expected to be whether the insured’s impugned conduct had been in self-defence.

The court concluded that there would be an appearance of conflict if Allstate were permitted to conduct the defence through its choice of counsel, and ordered that the insured be permitted to continue with his own lawyer, with all past and future defence costs to be paid by Allstate:

… the question of whether Mr. Oakley will be indemnified by the insurance policy depends on a determination and characterization of his conduct in the litigation. There is an ongoing dispute between Mr. Oakley and Allied as to whether he is excluded from coverage. Mr. Oakley is concerned that the insurer may steer the defence of the action in order to obtain a result in its favour, that is, a result that would exclude him from coverage. In my opinion, a reasonable person would perceive a conflict of interest.

Clearly, the court’s concern in these types of cases is that defence counsel will “sculpt” the conduct of the defence to the detriment of the insured in respect of the coverage issues. In such cases, a clear conflict of interest arises and the insured will be entitled to its own choice of counsel, but, as seen below, that conflict of interest may not disqualify the insurer from controlling the defence where the issue is superimposed on a conflict between insurers.

h)   Two Overlapping Policies

There is limited authority in Canada and the Commonwealth to assist us in determining what happens when two separate insurance companies are bound to defend one insured from a claim where there is no question that one insurer will provide primary coverage and the other excess coverage.

In Prudential Assurance Co. v. Manitoba Public Insurance Corp., [1976] M.J. No. 71, two insurance policies, issued by separate insurers, were potentially triggered by the allegations in the underlying action. The plaintiff had alleged that he was injured while walking beside the insured’s vehicle in his garage when he was struck by a piece of metal protruding out from the side of the vehicle. Both insurers agreed that the insured was entitled indemnity from one of them but each sought to cast the primary responsibility onto the other policy.

The Court of Appeal concluded that both insurers were bound to defend the action on behalf of the insured and noted that it was also possible, and in fact likely, that both insurers would be bound to indemnify the insured against any judgment to be obtained by the plaintiff. The Court acknowledged the clear conflict between the insurers noting that the personal lines insurer would seek to establish that the sole cause of the accident was the Automobile while the auto insurer would take the position that the sole cause of the accident was the insured’s negligence as an occupier. The Court ordered that the insurers agree upon a “neutral” counsel, and in further ordered that if the insurers were unable to agree the insured could then select the counsel of his choosing.

The same result obtained in Markham v. AIG Insurance Co. of Canada. A young boy was injured by a flying puck while watching a hockey game at a community centre. The Plaintiff sued both the City of Markham, who ran the community centre, and Hockey Canada, who oversaw the hockey league program. The Plaintiff claimed $150,000 in damages.

The City was insured under its own CGL policy, but was also an additional insured under Hockey Canada’s policy. The City’s policy provided that it would be excess if other insurance applied to a covered occurrence. Hockey Canada’s policy had no such provision. Each insurer brought a competing application to determine their respective duties to defend and entitlements to participate in the defence.

The City of Markham and its CGL insurer were represented by the same counsel. Their counsel took the position that the City was entitled to appoint and instruct counsel without having to report to or take instructions from Hockey Canada’s insurer. Hockey Canada’s insurer took the position that defence counsel should be jointly appointed and instructed.

In support of its position, the City’s insurer argued that:

1)   Hockey Canada’s insurer was conflicted because some claims advanced against the City were not covered under       Hockey Canada’s policy, incentivizing Hockey Canada’s insurer to “sway” the proceeding to impose liability on       the City;
2)   The City had brought a third-party claim against Hockey Canada; and
3)   A separation between coverage and defence counsel and adjusters at Hockey Canada’s insurer (a “split file”)        would not address the conflict because:
          a.   there was no mechanism in place to detect whether one adjuster had improperly “peeked” at the other’s                 materials; and
          b.   Hockey Canada’s insurer had not produced a written policy setting out
                how such conflicts were to be managed.

The Application Judge accepted these arguments, and concluded that there was an “irremediable conflict of interest”. As a result, she ordered that the City could appoint and direct its own counsel without having to report to Hockey Canada’s insurer.

The Court of Appeal disagreed. The Court upheld the “reasonable apprehension of conflict of interest” test, but reached a different conclusion based on two points:

• the case was not one where an insurer’s conflict would sway the defence towards uncovered losses to the insured’s detriment – its focus was on which of two insurers would be responsible for the loss. Therefore, cases where an insurer’s conduct of the defence would place its insured at greater risk were distinguishable; and
• in the absence of evidence that appointed defence counsel or an insurer’s file handlers had or would breach their obligations or misuse confidential information, the Application Judge erred in concluding that a “split file” would not address the potential conflict of interest.

The Court recognized that each party to the application had a conflicting interest:

• the City would prefer Hockey Canada to bear liability so that it would not have to pay the deductible under its policy and potentially bear future premium increases;
• the City’s insurer would prefer that Hockey Canada bear liability to minimize its exposure; and
• Hockey Canada’s insurer would prefer that the City bear liability to minimize its exposure.

The objective remained the same: striking a balance between the insured’s right to a full and fair defence with the insurer’s right to control the defence. In the circumstances, the Court of Appeal overturned the Application Judge’s findings and adopted Hockey Canada’s insurer’s proposal for a “split file” with some minor additions. The insurers were to jointly appoint and instruct counsel and share defence costs equally, subject to reallocation at a later date.

Markham v. AIG makes a number of important points. First, it establishes that an inter-insurer conflict will not be treated the same way as an insurer-insured conflict. Second, it suggests that future misconduct should not be presumed – parties should be expected to conduct themselves in accordance with professional obligations and the requirements of a “split file” scenario. Any challenge to that proposition will require more than the existence of a conflict.

i)   Push it outside of coverage

A clear conflict will exist if the insurer has an incentive to defend the underlying action in a manner which would push the claim outside of the coverage afforded under the policy of insurance.

This type of conflict is illustrated by the case of Schwartz v. Kuszko Estate, [1988] O.J. No. 611. The plaintiff in the underlying action was a hearing aid technician who attended the insured’s home in regard to complaints made by the insured related to a hearing aid he had purchased from the plaintiff’s employer. The meeting reportedly became somewhat “unfriendly” and the plaintiff elected to depart from the insured’s residence. Unfortunately, before he was able to enter his car the plaintiff was shot by the insured and seriously wounded.

The plaintiff brought an action for damages pleading alternate theories of liability: he alleged that he was either shot intentionally or through the negligent use of a firearm. The insured died shortly after the commencement of litigation but had previously maintained that the rifle was discharged by accident. The insured’s estate defended the action and sought an order requiring the insurer to provide a defence. The insurer claimed that the plaintiff’s injuries were caused by an intentional act of the insured, and that it was not required to indemnify the insured since coverage for intentional acts was excluded by the policy.

In concluding that the insurer was obligated to defend the insured, the Court stated that there were two contractual obligations which arose from the policy (to indemnify and to defend) and the intentional acts exclusion did not necessarily excuse the insurer from its obligation to defend. The Court made an order requiring the insurer to defend the underlying action. However, the insurer was not permitted to defend the action with its own choice of counsel since that would result in a clear conflict in terms of which defence “theory” should be proven.

The case of Donovan Estate v. Patricia Fly-In Camps, [1989] O.J. No. 1394, illustrates another example of a clear conflict. In Donovan, the late plaintiff’s estate brought an action against the insured’s fly-in fishing camp. The plaintiff had attended a wilderness fly-in fishing trip to Coles Lake, a remote location near Kenora, Ontario when a fire destroyed the cabin his group was staying in. The plaintiff later left the campsite to search for help and was never seen again until his body was discovered in the brush several days later a short distance from the burned cabin. Interestingly, the insured has increased its liability limits from $200,000 to $1,000,000 in the days prior to the discovery of the plaintiff’s body. The plaintiff’s body was discovered at a time when the insurance coverage was admittedly $1,000,000 but it was unclear which policy limits were in effect at the time of the plaintiff’s demise.

The court concluded that the precise time of death was a matter of “obvious dispute” between the insured and the insurer. On that basis the court held that there was both a “probability of real mischief” and “appearance of impropriety” existed and the insured was allowed to retain independent counsel at the expense of the insurer.

D.      Summary

Canadian courts have recently shown an increased willingness, particularly in B.C., to interfere with the insurer’s right to appoint counsel of its choosing. The result, as illustrated in cases such as B.C. Medical Association v. Aviva Insurance Company of Canada is that insurers which have mistakenly proceeded as if no conflict had existed, have been penalized by the courts. In such cases, courts have ordered that the insured be allowed to appoint its own choice of defence counsel, with extremely limited reporting requirements to the insurer, and perhaps equally important, no ability to control that counsel’s hourly billing rate and defence strategy.

An issue for insurers is how important their choice of counsel is to them. Many preferred counsel are specifically retained by insurers for their specific expertise and a proven track record. Insurers can avoid the appointment of “Cumis” counsel by maintaining separate files for coverage and defence counsel with separate examiners for each file. Clearly not every claim will justify such an expense. However, the writers respectfully suggest that claims which suggest that insurers, faced with a claim which may likely generate a conflict as the litigation progresses, would be well served by adopting the two file system. The risk to insurers if they proceed otherwise is clear: insurers risk losing its choice of counsel, it control of the defence, its access to file materials. Perhaps most importantly, insurers in such cases risk becoming reduced to a “cheque writer”.