New “duty to defend” decision good news for additional insureds

Justice Carole J. Brown’s decision in Dufferin Construction v The Dominion of Canada, 2015 ONSC 6311 (CanLII) deals with a situation very commonly seen in additional insured/duty to defend cases: the insurer denies coverage to the additional insured, relying on a “arising out of the operations of the named insured” provision, but identical allegations are made against the insured and the additional insured in the underlying claim.

In this construction case, a subcontractor undertook a contractual obligation to obtain liability insurance and to include the general contractor as an additional insured. (Unfortunately the reasons do not specifically set out the terms of the underlying contract in this case.) The subcontractor’s insurer, Dominion of Canada General Insurance Company (now Travelers Canada) issued a certificate that said, “It is agreed that Dufferin Construction Company Limited [the general contractor] is added as an Additional Insured with respect to Commercial General Liability and Umbrella Liability and then only with respect to liability arising out of the operations of the Named Insured at the above-noted project.”

(As I have complained before in these posts, nothing was said in the reasons as to whether an actual additional insured endorsement was issued and if so, what it said. It is the endorsement that creates the coverage.)

In this case, it seems to have been agreed on all hands, that there was additional insured coverage and that it was limited to “liability arising out of the operations of the Named Insured at the above-noted project”.

This is something else that I have commented on in past posts. First of all, does coverage that purports to be limited in this way (“arising out of the operations of the Named Insured”) correspond with the named insured’s contractual obligation? If not, is the named insured in breach of that contract and if so, what are the implications for the insurer and the named insured?

Secondly, the Ontario cases have not delved very deeply into just what “arising out of the operations of the Named Insured” actually means and the extent to which it does limit coverage for the additional insured. Some cases in the United States have held that the resulting coverage is much less narrowly constrained than is often assumed to be the case in Ontario.

Leaving those cavils aside though, the underlying litigation in this case was a suit for personal injuries and both the named and the additional insureds had been sued. Identical and undifferentiated allegations were made against both in that statement of claim. It was also alleged that “the defendants are jointly and severally liable for the plaintiff’s damages”.

The insurer, Dominion, took the position that the claim against the additional insured did not trigger coverage because it did not arise out of the operations of its named insured.

The additional insured brought this application for a declaration that Dominion owed to it a duty to defend.

Justice Brown accepted Dominion’s submission that no extrinsic evidence should be received by her and counsel for the additional insured did not seriously dispute this. Oddly though, Dominion then went on to argue that “there is no evidence to establish that the alleged negligence arises from the operation of [the named insured] and no duty can be said to arise”. Justice Brown adverted to the contradictory nature of Dominion’s position, saying “I note that the same observations with regard to extrinsic evidence would apply to that argument, and evidence would not be permitted in that regard at this point.”

Thus, she decided the case on a conventional (and, I think, correct) pleadings analysis: did the underlying claim give rise to a possibility that coverage might be engaged in favour of the additional insured? If so, a duty to defend would arise.

What is of particular interest (to me, at least) in this case is Her Honour’s treatment of the fact that in the underlying action, the same allegations were made against both insured. That type of pleading is probably seen more often than not in cases like this one. Justice Brown concluded that a duty to defend arose:

I am of the view that there is vagueness as regards the pleadings and the claims set forth therein, and particularly as regards whether the alleged negligence, which is alleged against all defendants, could be attributable to the work of Downsview [named insured], which would clearly trigger Dominion’s duty to defend Dufferin [additional insured]. Due to the fact that all allegations are against all named defendants and no allegations of negligence are isolated or identified to be as against any one specific defendant, it is not possible at this early stage and on the pleadings as framed to isolate allegations of negligence by one defendant. I do not accept Dominion’s submissions that the allegations or most of the allegations relate to acts or omissions not related to the operations of Downsview such that Dufferin could never be covered under the Dominion policy in relation to these allegations. Further, I do not accept its argument that the claim alleges that each defendant is independently liable for the incident. Indeed, the claim makes allegations against all of the defendants as a group without distinguishing among them and further alleges that the parties are jointly and severally liable.

In my view, Her Honour was correct in this conclusion. As she went on to say (also correctly, I think), “where pleadings are not framed with sufficient precision to determine whether the claims are covered by a policy, as is the case here, the duty to defend will be triggered where, on a reasonable reading of the pleadings, a claim within the coverage can be inferred. Any doubt as to whether the pleadings bring the incident within policy coverage is to be resolved in favour of the insured.”

In light of this finding, it is hard to conceive of a situation in which a duty to defend will not arise in favour of the additional insured where these sorts of undifferentiated allegations are made against both it and the named insured, even if the “arising out of the operations of the Named Insured” provision does have the limiting effect that it is usually thought to have in Ontario.

Two more points worth noting about the decision. First, Dominion raised an issue as to whether its coverage or that of the additional insured’s own liability insurer, Zurich, was primary. Apparently, both policies contained provisions making them primary. But Justice Brown found that because Dominion’s policy was specific to this construction project, “[i]t is commercially reasonable to assume that the parties, both sophisticated in the industry, intended by incorporation of that provision adding Dufferin as an added insured in the Downsview subcontract, that Dufferin would be insured under the Downsview project-specific policy for all operations arising from Downsview’s work on the project covered by the insurance policy.” She also noted that “if in the circumstances of this case, the respondent’s [Dominion’s] arguments were to succeed, this would render the added insured provision in the Dominion policy of little value.” Once again, I agree with her conclusion.

Secondly, as might be expected, the issue of conflict of interest arose. This was dealt with in only two sentences at the end of the decision:

The parties are in agreement that, if the Court were to determine that a duty to defend arises, there would be an inherent conflict of interest due to the fact that Downsview and Dufferin have cross-claims against one another. Thus, Dufferin is entitled to retain its own independent counsel at Dominion’s expense.

It seems to me that the issue is somewhat more complicated than this. First of all, although the named insured and the additional insured might have crossclaimed against each other to that point in the litigation, would those crossclaims continue in light of Her Honour’s finding that Dominion was obliged to undertake the defence of the additional insured? Probably but not inevitably so. It is likely that the Dominion policy did contain a cross-liability provision that would allow a crossclaim to be made by one insured against another. But given that Dominion would potentially be exposed to indemnifying both, it might not have wanted that to be done, since the plaintiff would probably be the principal beneficiary.

Certainly though, if crossclaims were going to be advanced, there would obviously have to be separate representation of the two parties. But that would not be a reason for the additional insured to be able to retain its own counsel, rather than having Dominion select the defence lawyer.

Rather, the reason upon which the insured might have the right to choose its defence counsel is because of a conflict between its interests and those of the insurer, not those of the other insured.

Since Dominion would presumably continue to contend that the additional insured was not entitled to indemnity, a conflict probably would exist. (Counsel who acted for the additional insured on the application would probably continue to act for the additional insured in relation to the coverage issue. Justice Brown’s decision does say that the additional insured must choose “independent” defence counsel.)

Rather than simply giving to the additional insured the unqualified right to appoint its defence counsel, as was done here (apart from the requirement of “independence”), the recent cases have tended to take a more nuanced approach, one based on Justice Julie Thorburn’s decision in PCL Constructors Canada Inc. v. Lumbermens Mutual Casualty Co. (2009), 81 C.L.R. (3d) 186 (Ont. S.C.J.). The typical features of the arrangement contemplated by Justice Thorburn are:

  1. The insurer must assign the claim to claims staff who had no previous involvement in the matter;
  2. Defence counsel must not have acted for either party in the past five years;
  3. No discussions about the case can take place between defence counsel and coverage counsel; and
  4. Defence counsel must provide identical concurrent reporting to both the insurer and the insured.

The idea is that this type of arrangement strikes a better and fairer balance between the interests of the insurer and insured.

Apart from the issue of selection of defence counsel, I think that Justice Brown’s ruling in this case addresses quite well the questions that arise frequently in these types of cases. Coverage denials to additional insureds will probably become less frequent in such situations.

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