Ontario judge rules on auto insurer’s duty to defend beyond limits

An Ontario court ruled this week against Jevco Insurance when a judge decided that auto insurance providers must defend actions against their policyholders even after paying their policy limits, but slammed the province’s Standard Automobile Policy (SAP) for “muddled and contradictory” wording.

Jevco wrote an insurance policy for Vishal Malaviya, who was sued as a result of a car accident in October 2005. In 2008, after hiring a lawyer who filed a statement of defence for Malaviya, Jevco offered to pay $200,000, which was the limit of Malaviya’s policy, to the party suing Malaviya.

The action against Malaviya was still proceeding, so Jevco applied to the court to get a declaration it has “has no continuing duty to indemnify or defend” Malaviya, who argued that the policy “requires a full defense … until it is tried on the merits or a final settlement is reached.”

In a Jan. 29 decision, Judge Edward Morgan ruled against Jevco, noting that Section 245 of the provincial insurance act applies in the case of Jevco v. Malaviya.

Section 245 states that every motor vehicle liability policy “shall provide that, where a person insured by the contract is involved in an accident … in respect of which insurance is provided under the contract and resulting in loss or damage to persons or property, the insurer shall … defend in the name and on behalf of the insured and at the cost of the insurer any civil action that is at any time brought against the insured on account of loss or damage to persons or property.”

Judge Morgan noted the SAP is unclear on the issue of an insurer’s duty to defend.

“The SAP takes muddled and contradictory drafting to a rarified level,” Judge Morgan noted in his decision. “On one hand, the second paragraph of section 3.3.1 advises insured parties that if they are sued the insurer will provide a defence and cover the costs of that defence. On the other hand, three paragraphs later in that very same section, insureds are advised that if they are sued for an amount beyond the policy’s coverage they may wish to hire a lawyer at their own cost to protect against that above-coverage risk. This latter advisory is set apart in the text by placing it in a box.

“Then, as if to really clear things up, section 3.3.2 provides certain examples in an even larger box. These examples let insured parties know that the insurer will hire lawyers to defend any claim, and that the insurer will pay the losses and, if ordered, the other side’s legal costs up to the amount of the coverage limit.”

But section 3.3.2 of the SAP “is utterly silent,” Judge Morgan wrote, “on the one question that is not clearly answered in section 3.3.1- i.e. will the insurer pay the insured’s own legal costs above and beyond the coverage limit?”

According to court records, Jevco argued: “There is simply no good reason to require an insurer to cover defense costs for an insured when it is not responsible to indemnify the insured against liability.”

Jevco quoted from an Ontario Superior Court judgement in 2004 in Boreal Insurance Inc. v Lafarge Canada Inc., and from the judgement in the 2001 case of Dominion of Canada General Insurance Co. v Kingsway General Insurance Co.

In the latter case, a Kingsway policyholder, Benjamin Ross, was sued by four parties after a serious car accident, and had exceeded the policy limits. Dominion was the underinsurance carrier for and being sued by one of the plaintiffs, Laura Talarico, who had a $1 million Dominion policy.

The Dominion was opposing a motion removing Ross’s counsel of record and sought standing to argue the issue. The Dominion argued “that the duty to defend under the policy continues as long as the insured is exposed in a law suit, even if that exposure is only in a personal capacity.”

Judge Harrison Arrell ruled in February 2011 against Dominion, stating: “To rule that Kingsway must continue to defend and pay all defence costs, of which only the Dominion would in reality benefit, is illogical and flies in the face of encouraging primary insurers to enter into timely resolution of cases.”

In his Jan. 29 ruling, Judge Morgan stated the Jevco case was different in that “what was at issue (in Dominion v. Kingsway) was the defendant’s desire to determine the liability of her own excess insurer and to have the legal expense of that determination borne by her primary insurer rather than by her.”

In Ontario’s SAP, Judge Morgan wrote, Section 3.1.1 “is drafted in a rather terse and cryptic fashion” and “has led to confusion as to where the insurer’s duty to defend ends.”

But Section 245 of the Insurance Act is clear, he added.

“Nowhere does it say, or even suggest, that the insurer must bear the cost of defending the insured only up to the coverage limits; quite the contrary, it provides that the defence costs of a claim are to be borne by the insurer,” he wrote. “There is no limiting language in section 245.”

He noted Ontario auto insurance law “promotes efficient running of the system by ensuring that all parties facing motor vehicle claims are defended by counsel, and it achieves comprehensiveness by ensuring that this defense requirement is unqualified for all insured parties.”

The duty of insurers to defend “has the effect of eliminating what could otherwise be the difficult personal and systemic problem of litigants representing themselves – a challenging enough task at the best of times, let alone for parties in the aftermath of a motor vehicle accident.”