Liability Notice

For obvious reasons, liability insurers want to receive prompt notice of claims and suits that may be covered under their policies. To accomplish this end, notice provisions are included in the standard CGL wording. The notice provisions typically require the insured to report an accident or occurrence “as soon as practical” and to forward to the insurer any demand or notice “immediately,” once a claim or suit is brought. Despite these stipulations, delay on the part of the insured in reporting will not always relieve an insurer of its obligations under the policy.

On many occasions, Canadian courts have concluded that the notice provisions of the standard CGL policy are terms of the policy, rather than condition precedents for coverage. Courts have found that late reporting constitutes “imperfect compliance” with the policy, and have allowed insureds relief from forfeiture where an insurer has denied a claim due to late reporting, but cannot identify any prejudice caused by the delay.

In the recent case of Lloyd’s Underwriters v. Blue Mountain Log Sales Ltd. 2015 BCSC 630, Mr. Justice McEwan considered whether the insurer, Lloyd’s, was required to reimburse their insured, Blue Mountain, for costs expended by Blue Mountain to defend a claim prior to the claim being reported to Lloyd’s – referred to as pre-tender defense costs.

The claim related to six lawsuits commenced against Blue Mountain in Washington State. Blue Mountain reported the claims to its American insurer, but did not appreciate that the lawsuits could trigger the Lloyd’s polices issued in British Columbia. While the American insurers were put on notice in September 2012, Lloyd’s was not given notice until April 2014. In the interim, significant costs had been incurred defending the claims.

Upon receiving notice, Lloyd’s accepted the claim and sought a determination as to whether the policy covered pre-tender defense costs. Lloyd’s sought to distinguish cases where courts had granted relief from forfeiture due to late reporting, given a lack of prejudice. Lloyd’s pointed out that it had not denied coverage. Rather, at issue, was the proper interpretation of the policy. Lloyd’s relied not only on the “notice” provision but also the “no voluntary payment” clause in the policy, which read:

The Insured shall not, except at his own cost, voluntarily make any payment, assume any obligation or incur any expenses other than for first aid or other medical dental or surgical relief to others at the time of accident.

Lloyd’s argued that the “no voluntary payment” clause had the effect of rendering any pre-tender defence costs the responsibility of the insured. Lloyd’s relied upon a recent American decision from Oregon, which canvassed the case law in the United States and concluded that the balance of authority supported the view that pre-tender defence costs were not recoverable.

Ultimately, McEwan J. refused to follow the majority view in the United States and opted to follow two Canadian decisions: Kelowna (City) v. Royal Insurance Co. of Canada, 1992 CanLII 858 (BCSC) and International Comfort Products Corp. (Canada) v. Royal Insurance Co. of Canada, [2000] O.J. No. 893.

In Kelowna (City), the City failed to notify the insurer of the claim until shortly before the trial. The insurer denied the claim because in its opinion the allegations did not fall within the scope of coverage. The City defended the claim at trial and obtained a dismissal. The City then commenced an action seeking recovery of its defence costs under the policy. The court concluded that there was no prejudice suffered by the insurer because the City had successfully defended the claim. The court also pointed out that when the insurer was eventually notified of the claim it denied the claim on grounds other than the late reporting and that there was no reason to believe it would not have denied the claim had it been reported at the outset. In such circumstances, the court noted that the usual practice would have been for the City of Kelowna to defend the claim and seek to be indemnified at the end. Having found that the grounds of denial were without merit, the court ordered the insurer to pay all of the defense costs.

In International Comfort, the insurer received notice after the case settled. The insured had not contributed to the settlement, but had incurred defense costs of approximately $100,000. As in Kelowna (City), the insurer denied the claim on grounds other than the late reporting. In particular, it was the insurer’s position that various policies were triggered by the claim and that the total deductible payable was in excess of the amount of the defense costs. The court agreed that a number of policies were triggered by the claim, but disagreed with the insured’s application of the deductibles, such that approximately $40,000 was still payable after the deductibles were taken into account. After resolving the deductible issue, the court considered the issue of late reporting, noting that the insurer had admitted that no prejudice had been suffered:

I note that Royal initially denied coverage on the basis of the deductible exceeding the defence costs. That being the case, it can hardly say it was prejudiced due to late notice. In the circumstances, I exercise my discretion under s. 129 and relieve against forfeiture.

As stated above, Lloyd’s sought to distinguish Kelowna (City) and International Comfort on the basis that it had not denied Blue Mountain’s claim. Rather, it had accepted there was coverage and was only seeking a determination on whether pre-tender defense costs were recoverable. On this point, McEwan J. concluded:

Accordingly, while I appreciate the petitioner’s submission that it has taken no adverse position against the respondents, other than to rely on the notice provision, and that it cannot be said to have declared the respondents in breach, I am of the view that, in the absence of identified prejudice, the respondents may be relieved from the negative consequences asserted by the petitioner. The petitioner is, therefore, not entitled to a declaration that it has no liability for pre-tender defence costs. Put in positive terms, the petitioner may not avoid pre-tender defence costs on the basis of the respondents’ failure to give more timely notice.

In coming to this conclusion, McEwan J. stated that to find otherwise would result in the insurer avoiding “an expense for which it has received a premium from the insured, effectively getting something for nothing.” In the authors’ opinion, this concern seems misplaced. The insurer was not “getting something for nothing”. Indeed, Lloyd’s had agreed to defend the matter going forward, and thus would be earning its premium. It was Lloyd’s that did not get what it bargained for, given the clear wording of the “no voluntary payment” clause.

It is also unfortunate that our courts have adopted a very narrow view of prejudice, focusing only on prejudice in investigating and defending the claim in question, rather than the general prejudice to an insurer in operating its insurance business. Issues concerning the effect late reporting has on properly setting reserves and financial reporting are ignored by the courts, in favour of a myopic analysis of what the insurer would have done differently with the particular claim.

Lloyds Underwriters v. Blue Mountain Log Sales Ltd. is presently under appeal. It is expected that the appeal will be heard in the spring of 2016.

Todd Davies is a partner with Alexander Holburn Beaudin LLP and a member of the firm’s Insurance and Motor Vehicle Practice Groups. Scott Harcus is an associate with Alexander Holburn Beaudin and a member of the firm’s Insurance, Construction/Engineering, Environmental, Defamation/Reputation Risk Management, and Insolvency/Restructuring Practices. Alexander Holburn Beaudin LLP is a member firm of The ARC Group of Canada, a network of independent law firms across Canada.