Duty to indemnify sometimes broader than duty to defend?

Mr. Justice Timothy D. Ray just released a decision that is something of an anomaly: he ruled that a liability insurer did not owe a duty to defend two individuals who had been sued for defamation. But he acknowledged that it might turn out at trial, that the two are covered after all and might therefore recover their defence costs. How can that be, given that there need only be a “possibility” of coverage to trigger a duty to defend?

The case is Virani v. Intact Insurance Company, 2014 ONSC 7369 (CanLII). Two individuals were sued by the Canadian Federation of Students for having defamed it in a video published on the Internet.

The defendants sought coverage from Intact Insurance, which is the insurer of the Canadian Alliance of Student Associations (“CASA”). They claimed to be employees of that Association. Intact’s policy provided coverage to “’employees’, other than the Named Insured’s ‘executive officers’ only while performing duties related to the conduct of the Named Insured’s business”.

Intact denied coverage and the defendants both brought applications in which they asked the court to declare that they were owed defences by the insurer. It was those applications that Justice Ray decided.

The defendants (applicants before Justice Ray) sought to introduce evidence that they were entitled to coverage and defence, as being employees of CASA and having performed duties related to the conduct of the latter’s business when they made the video that was the subject of the suit.

Intact evidently agreed (para. 11 of the reasons) that “there was an employment relationship between CASA…and the applicants”. However, the statement of claim in the underlying action did not allege that and neither did it allege that the applicants had been performing duties in the conduct of CASA’s business when making the video. So, the requirement that they have been “performing duties related to the conduct of the Named Insured’s business” was the barrier to coverage.

The applicants were left to argue that “it is a reasonable inference that the video was made while they were in the course of their employment. The argument is that the claim against the applicants is so vague and general that the inference is not foreclosed.”

Justice Ray reviewed the well-established jurisprudence and acknowledged that “[t]he duty to defend test being a ‘mere possibility’ has been held to be broader than the duty to indemnify”.

His Honour was not prepared to consider all of the extrinsic evidence that was urged upon him by the applicants. Based upon his review of the statement of claim, he concluded:

[T]he substance of the claim is clear; and in no way implicates the applicants as employees of CASA making a video in the course of their employment. The extrinsic evidence is of no assistance and should not be considered. I cannot expand the ‘mere possibility’ to include that the videos were made in the course of their employment. There is simply nothing on which that inference can be based.

So far, so good. But what is odd is the next paragraph in the reasons

While I have a good deal of sympathy with the applicants’ dilemma in defending a lawsuit of this kind, I am satisfied that, if as suggested, the applicants are found not liable, or alternatively found to have made the video in the course of their employment, that they will have recourse to recover their costs, including the costs of this motion.

This would appear to recognize that indeed, there is a possibility that the applicants will be found, at trial, to have made the video in the course of their employment. And if such a finding were to be made, they would, it appears, be entitled to coverage from Intact, which would include being reimbursed for their defence costs. That would mean, in this case, that the duty to defend will have ended up being narrower than the duty to indemnify.

It strikes me that if the applicants’ liability in the underlying action depended upon them being employees of CASA and acting in the course of that employment, the absence of any allegation to that effect in the statement of claim would have been fatal to coverage. But it appears that Intact’s definition of “insured” did not require that the liability arise from the employment with CASA, only that, as a matter of fact, the applicants be employees and be “performing duties related to the conduct of [CASA’s] business”. Was that finding not one that was still “possible” at this stage?

If that is not the right approach, then I am not sure how best to resolve this problem. Leaving the issue to trial seems to run counter to the rationale underlying the “mere possibility” approach of Nichols v. American Home Assurance Co. (1990), 68 D.L.R. (4th) 321, [1990] 1 S.C.R. 801 and the cases that have followed it.

Marcus Snowden and Mark Lichty, in their Annotated Commercial Liability Policy, observe (§12.20.3(2)), that “the application of the ‘mere possibility’ principle necessarily depends on the nature of the coverage issues raised and the evidence submitted”. They mention the decision of Justice Heidi Polowin in Spezzano v. Spezzano, 2002 CanLII 49488 (ON SC), where the court heard evidence in a coverage dispute in order to determine the issue of whether or not, at the time of the motor vehicle accident, the driver’s licence had expired. Justice Polowin made an “interim order” of relief from forfeiture and ordered the insurer to defend. Snowden and Lichty, commenting on that decision, observed that “the judgment is noticeably lacking in ‘mere possibility’ language, and this is hardly surprising, given that determinations were made on questions of fact after hearing extensive evidence”. Still, they appear to acknowledge that, in an appropriate coverage dispute (and they cite the Court of Appeal’s ruling in Longo v. Maciorowski, 2000 CanLII 16897 (ON CA) as having opened the door in at least certain types of cases, being those involving allegations of breach of condition), a departure from the conventional “mere possibility” analysis might be called for, involving some sort of evidentiary hearing.

It would certainly have been a departure from the jurisprudence to have such a hearing place in this case, where no breach of condition was alleged. Still, with that sort of extrinsic evidence, the court would have been in a much better position to decide the case.

This entry was posted in CGL, Duty to Defend, Insurance News. Bookmark the permalink.