Beyond Pleading

The “pleadings rule” was originally articulated by Justice Wallace of the British Columbia Supreme Court in Bacon v. McBride as follows: The pleadings govern the duty to defend – not the insurer’s view of the validity or nature of the claim or of the possible outcome of the litigation. If the claim alleges a state of facts which, if proven, would fall within the coverage of the policy the insurer is obliged to defend the suit regardless of the truth or falsity of such allegations. If the allegations do not come within the policy coverage the insurer has no such obligation.

In this respect, the duty to defend may well be broader than the insurer’s obligation to indemnify the insured for liability imposed by law. The insurer’s obligation to defend arises when notice of the claim is received and continues as long as it is outstanding, even though the insurer may consider the allegation to be groundless. This reasoning was later adopted by the Supreme Court of Canada in Nichols v. American Home Assurance Co., where Justice McLachlin writing for the court expressed her views as follows: General principles relating to the construction of insurance contracts support the conclusion that the duty to defend arises only where the pleadings raise claims which would be payable under the agreement to indemnify in the insurance contract. Courts have frequently stated that the pleadings govern the duty to defend. Where it is clear from the pleadings that the suit falls outside of the coverage of the policy by reason of an exclusion clause, the duty to defend has been held not to arise.

At the same time, it is not necessary to prove that the obligation to indemnify will in fact arise in order to trigger the duty to defend. The mere possibility that a claim within a policy may succeed suffices. In this sense the duty to defend is broader than the duty to indemnify. Normally, the duty to defend arises only with respect to claims which, if proven, would fall within the scope of coverage provided by the policy.

DEFENCE OF CLAIMS

The insurer’s interest in defending a claim is related to the possibility that it may ultimately be called upon to indemnify the insured under the policy. It is in the insurer’s interest that if liability is found, it be on a basis other than falling under the policy. Requiring the insurer to defend claims which cannot fall within the policy puts the insurer in the position of having to defend claims which it is in its interest should succeed.

The practice is for the insurer to defend only those claims which potentially fall under the policy, while calling upon the insured to obtain independent counsel with respect to those which clearly fall outside its terms.

Considerations relating to insurance law and practice, as well as the authorities, overwhelmingly support the view that the duty to defend should, unless the contract of insurance indicates otherwise, be confined to the defence of claims which may be argued to fall under the policy. That said, the widest latitude should be given to the allegations in the pleadings in determining whether they raise a claim within the policy.

In Nichols, the duty to defend was held to apply because it was unclear whether the insurer would be liable for indemnification under the policy. In Non-Marine Underwriters, Lloyd’s of London v. Scalera, the Supreme Court of Canada reaffirmed many of the principles regarding the scope of the duty to defend as set out in Nichols. The Court endorsed the reasoning of the Colorado Court of Appeals in Colorado Farm Bureau Mutual Insurance Co. v. Snowbarger, and provided additional perspective on determinations as to whether there is a duty to defend in any one case: “Duty to defend arises when the underlying complaint alleges any facts that might fall within the coverage of the policy.”

SUBSTANCE OF PLEADINGS

In Scalera, the court was asked to decide whether an insurance company has a duty to defend the holder of a homeowner’s insurance policy against a civil sexual assault suit. Justice Iacobucci held that the basic principle is that an insurance company has a duty to defend where the insured’s claim could potentially fall within the indemnity coverage of the policy. The policy provided coverage for damages for bodily injury – but bodily injury or property damage caused by an intentional or criminal act were excluded. The court held that the true nature of the claim was battery, which was excluded through the intentional tort exclusion.

What is new is that Justice Iacobucci focused on the substance and true nature of the pleadings. He outlined a three-step process to construe pleadings, to determine whether a claim triggers the duty to defend.

The court must determine which of the plaintiff’s legal allegations are properly pleaded. In this respect, the following considerations are outlined:

The court is not bound by the legal labels chosen by the plaintiff;

The court must examine the substance of the factual allegations contained in the pleadings to determine the true nature of the legal claims;

The court must review the pleadings which govern the scope of the duty to defend;

The court must not decide whether the plaintiff’s claims have any merit or what the likely outcome of the litigation will be;

The court must decide the true nature of the claims and ask whether they could be supported by the allegations set out in the plaintiff’s pleadings.

The court must determine if any claims are derivative in nature. A claim is derivative if it is an ostensibly separate claim which nevertheless is clearly inseparable from a claim of intentional tort. A claim which is entirely derivative in nature does not trigger the duty to defend.

Specifically:

The duty to defend will apply if neither claim is derivative;

The duty to defend may exist if the plaintiff has pleaded in the alternative.

The court must decide if a pleaded, non-derivative claim could trigger the insurer’s duty to defend.

The following factors are noted:

Do the claims fall within the scope of coverage by the policy. If yes, the duty to defend is triggered;

Are any of the claims subject to an exclusion. If yes, the duty to defend does not apply.

EXTRINSIC EVIDENCE

In Monenco v. Commonwealth Insurance Co., the Supreme Court of Canada released its most recent judgment on the insurer’s duty to defend. The Supreme Court held that extrinsic evidence – namely a contract or a report – explicitly referred to in the pleadings may be considered to determine the “substance” and “true nature” of the plaintiff’s claim in order to appreciate the scope of the duty to defend.

According to rule 26(8)8 of B.C. Supreme Court Rules, an opposing party may request the other party to produce for inspection and copying any document referred to in a statement of claim. A similar rule exists under Ontario’s “Rules of Civil Procedure”. The intention of the rule is to allow the opposing party to get a perspective on the pleadings and the litigation involved. Justice Iacobucci held that a court should also be permitted to review any documents explicitly referred to in the statement of claim to determine the substance or true nature of the claim.

The Supreme Court focused on the underlying complaint but did not decide the extent to which extrinsic evidence can be considered. The Supreme Court did not advocate an approach that will cause the duty to defend application to become a “trial within a trial”. As a result, a court should not look to “premature” evidence, for instance, evidence that if considered would require findings to be made before trial that would affect the underlying litigation.

Pleadings continue to play a central role in insurance litigation. Prior to the decision of the Supreme Court of Canada in Scalera, insurers had a duty to defend based on the allegations of fact in the plaintiff’s pleadings, which if proven fall within the coverage, whether or not the allegations would actually trigger coverage under the insurance policy.

Scalera has provided insurers with guidelines to protect against manipulative pleadings. The inqu
iry as to the duty to defend is no longer based on the factual allegations in the pleadings.

Courts, and in turn insurers, can now look beyond the literal terms of pleadings. Looking beyond will help in the assessment of the substance and true nature of the pleadings and whether legal claims can be supported by factual allegations. The Supreme Court of Canada in Moneco has held that extrinsic evidence explicitly referred to in the pleadings will be used to gain insight as to the insurer’s duty to defend. We will likely see a significant amount of litigation as to the interpretation of facts and allegations to determine their true nature.