Victory for the Insured
September 20, 2006
Jane A. Langford
On December 7, 2005, our client, the University of Western Ontario, achieved a significant victory in a long-standing dispute with its insurer, Guardian Insurance Company of Canada. In 1987, a former member of the administrative staff at UWO sued the university for damages for, among other things, malicious prosecution, wrongful dismissal, defamation, withholding of personal property, eviction from his office and conspiracy directed to laying of a criminal prosecution. The University invited Guardian to honour its duty to defend it in the action under a Commercial General Liability Policy. Guardian declined to do so, asserting that the Claim was predominantly a wrongful dismissal and copyright claim, neither of which were covered under the Policy. UWO was forced to defend itself in the action against its former employee, which took 11 years to resolve. The University incurred over $2 million in legal fees.
In October 2003, the Court declared that Guardian had a duty to defend UWO in respect to the action. Guardian was ordered to compensate UWO for the expenses incurred in defending the action. Not all of the claims against the University were covered by the Guardian policy. As a result, the Court ordered a trial to determine whether Guardian was entitled to any allocation of the defence costs between covered and uncovered claims.
On December 7, 2005, following a two week trial, Mr. Justice Denis Power ruled that the burden was on Guardian, as the defaulting party, to clearly demonstrate what work and disbursements performed and incurred by the solicitors, or the insured itself, clearly did
not relate to covered claims. This burden is a heavy one and requires an insurer to propose a consistent and rational basis for a just allocation of the defence costs. In this case, the Court ruled that it was "close to impossible" to relate the docketed legal fees and expenses to particular claims because of the nature of the claims pursued against the University. Moreover, the Court rejected Guardian’s invitation to assume that only malicious prosecution was pleaded and to value those costs incurred for just that claim. Rather, as in this case, where multiple claims are advanced and costs incurred for both covered and uncovered claims and there is no practical means of readily distinguishing these costs, the insurer is responsible for/must pay them all. In the result, Guardian was ordered to pay to UWO 95 per cent of its legal defence costs.
This case, in which McCarthy Tétrault acted for UWO, appears to have been the first Canadian case where evidence was led at a trial on allocation of defence costs1. It illustrates the risk insurance companies take in refusing the duty to defend when there is a potential that at least some of the claims are covered under the Policy. It also suggests that you should not simply accept your insurer’s rejection of your claim on the basis that certain claims are not covered. Rather, you should determine whether some claims are covered and whether there will be any overlap of legal effort in responding to the covered and uncovered claims.
In this case, the Court has acknowledged and confirmed the jurisprudence that favours the Policyholder in an allocation of defence costs undertaken "after the fact" (i.e. after liability of the insured in the underlying action has been determined and costs have been incurred). As a result, if your insurer refuses to defend you because some of the claims are not covered, it may be in your interest to seek an early determination of the duty to defend the covered claims, but await the allocation of legal defence costs between covered and uncovered claims until after the underlying action has been finally determined.
If your insurer refuses to defend, you should obtain legal advice immediately. Better yet, if you anticipate a significant claim on your policy, retain counsel prior to making your claim.
1. In Québec, there is at least one decision in the matter of Attorney General of Québec v. Benoit Girard, 2004 CanLII 47874 (QC C.A.) in which an allocation between covered and uncovered allegations was applied. However, it appears that this allocation was not proven or analyzed in detail.