Upon Payment of Policy Limits, Insurer No Longer Owes Duty to Defend

In a very significant decision, released yesterday, Justice Harrison Arrell has ruled that an automobile insurer that had paid its policy limits plus costs no longer owed any duty to defend its insured. In Dominion of Canada v. Kingsway Insurance, His Honour said, “I conclude that there is nothing in the Ontario Automobile Policy obligating an insured to continue to defend an insured when it has paid its limits and costs in full. The case law, in my view, is clear that if there is no possibility of a duty to indemnify then there is no duty to defend.”

This decision will be of considerable interest to insurers. The ramifications are interesting. Is an insurer free to pay its policy limits to a plaintiff at an early stage without trying to obtain a full and final release of its insured? What if the limits have been paid but no agreement has been reached on costs; is there a mechanism whereby the issue of costs payable by the insurer can be determined, even if the lawsuit is going to continue against the insured?

It is unlikely that this case will be appealed because the insured himself made no submissions on the motion. The argument came instead from Dominion of Canada, the underinsured insurer in this case. But Justice Arrell also ruled that DoC had no status to contest the motion, brought by counsel appointed by Kingsway, seeking to be removed as lawyers of record. So, it seems that this case represents the law, for now at least…

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