Preparing the Adjuster’s File for Litigation — Part II: Maximizing the Value of the Adjuster’s File When Retaining Coverage Counsel

In the October/ November 2009 issue of Claims Canada, I provided my opinions and recommendations pertaining to how an adjuster’s file can be properly prepared and provided to defence counsel in order to allow counsel to effectively and efficiently commence work on a new matter and minimize costs. Response to that article has spawned this follow-up article on how to prepare an adjuster’s file when retaining and instructing coverage counsel.

As a matter of first principles, before any material are sent to counsel on a new retainer, counsel should be contacted with the name of the insured and all other potential insureds, as well as the parties in the underlying action. This will allow for a conflicts search to be conducted before time is spent on a matter upon which there may be a conflict. Once conflicts are cleared, there are certain fundamentals that should be followed by an insurer when preparing to retain and instruct coverage counsel.

Firstly, coverage counsel will, of course, require a complete copy of the policy or policies in play. While this may seem evident, more often than not I receive less than a full copy of the policy. It is best to provide counsel with the declarations page, a full copy of the policy including the coverage section that may be at issue and copies of all endorsements. Frequently, coverage can turn on an endorsement attached to the policy and if full and complete endorsements are not supplied in the first instance, unnecessary time and expense can be incurred.

When supplying the full copy of the policy, there may be an issue as to what policy period applies. To that end, insurers must be live to the issue and supply the copies of policies for two or three different policy years if it is unknown which policy or policy year may apply.

Along the same lines, an insured may learn of a potential claim — the definition of which can vary from policy to policy — and have given a Notice of Circumstances in cases where a claim — as defined by the policy — may not have arisen but which is expected to arise in the future. It is necessary for counsel to have those notices when determining the applicable policy year which govern coverage.

Further, any notices or other documentation which give rise to the claim, are also required. Most often the claim arises through pleadings issued against the insured which alleges that the insured is “legally obligated to pay compensatory damages.” While there is something of a live issues as to whether all pleadings ought to be provided to coverage counsel, it should be remembered that the insuring agreement typically covers those allegations against the insured which relate to the insured’s legal obligation to pay compensatory damages. Therefore, statements of defence, cross-claims or counterclaims are not necessarily helpful in the coverage analysis, despite the fact that some courts have considered them in determining the duty to defend. Perhaps the better view is to provide all available pleadings to counsel and allow counsel to determine those which are relevant, which often includes only the Statement of Claim or initiating document for reasons articulated above.

In determining the duty to defend, it is well established that the pleadings govern the duty to defend and the widest latitude is to be given to the allegations in the pleadings to determine whether they raise a claim within the policy. The mere possibility that a claim falls within coverage suffices.

However, in the Supreme Court of Canada decision in Non-Marine Underwriters, Lloyd’s of London v. Sclarea, the Supreme Court indicated that in certain circumstances, a broader approach to the interpretation of the analysis must be taken. When examining the true substance of the pleadings, the court must determine whether the allegations as pleaded can be supported by the factual allegations and thereupon, decide if the harm caused by any alleged negligence is really caused by, for example, intentional or otherwise excluded conduct.

For this reason, it is often wise to provide coverage counsel not only the pleadings (and likely only the Statement of Claim will be necessary) but also the factual background to the case. Counsel will need to determine whether any of the claims as pleaded are derivative in nature, such as allegations of negligence, which actually amount to harm caused by intentional acts or otherwise excluded conduct.

The same can be said for the underlying facts exception to the pleadings rule which states that a claim may be covered even if it is not correctly pleaded. To this extent, statements of the critical witnesses ought to be gathered by the insurer and provided with the original letter of instruction, pleadings, a full copy of the policy or policies, and the factual outline of the claim and any extraneous matters.

The Supreme Court in Monenco Ltd. v. Commonwealth Insurance Co. considered the underlying facts exception and indicated that extrinsic evidence could be used to determine the duty to defend in some cases. That extrinsic evidence should be supplied to counsel, but the underlying facts exclusion applies only to extrinsic evidence in relation to documents referred to in the pleadings.

Other insurance policies that may cover the insured also need to be gathered and provided to counsel to the extent that there needs to be an allocation of defence costs and possibly, indemnity, where two policies apply to the same claim.

Similarly, where excess insurance may be in play, excess insurers will certainly want to receive not only the pleadings in the underlying action, but also the primary and other excess policies that are below it in the insurance program or tower of the insured. The coverage positions of those insurers who are primary or underlying the excess carrier in questions will also need to be obtained, whether the excess policies follow form to the primary or not.

In summary, an insurer needs to be mindful of the way in which a coverage analysis is conducted and provide clear instructions along with the following:

• The pleadings, and especially the Statement of Claim, along with the relevant and possibly relevant policies, in full;

• Any Notices of Circumstances that have been issued by the insured;

• Witness statements and perhaps copies of the documents referred to in the pleadings should also be provided to allow counsel to conduct a proper analysis of coverage, whether on the basis of strictly the pleadings rule, the substance of the pleadings or the underlying facts exception;

• Copies of other policies that may potentially be triggered in order that such things as a potential allocation of defence costs can be considered;

• In an excess primary limits situation, an excess carrier will also want to receive the primary policy including all endorsements, the coverage position of the underlying primary carrier and the coverage positions of those insurers that are below it in the excess tower.

With this information, the coverage analysis can proceed more promptly and more precisely, thereby saving counsel time and saving the insurer money.

Don McGarvey is a partner with McLennan Ross LLP practicing insurance and commercial litigation. McLennan Ross LLP is an independent member firm with the ARC Group Canada.