The Complexity of an Abuse Claim

In a split decision, the Newfoundland and Labrador Court of Appeal (NLCA) held that an insurer’s earlier consent order to defend a school abuse claim was not binding in light of the discovery of new evidence. Accordingly, the insurer was entitled to assert the policy was void due to knowledge of prior circumstances amounting to misrepresentation when entering into the policies. (Guardian Insurance Company of Canada v. Roman Catholic Episcopal Corporation of St. John’s, 2013 NLCA 62.)

Specifically, the NLCA held that there was no judicial discretion to apply the doctrine of res judicata when new evidence has been subsequently discovered that entirely changes an aspect of the original case. Res judicata, literally meaning a “matter judged,” is the principle that a case cannot be re-litigated once it has been judged on its merits.

Background

In 1989, Archbishop Penny and the Roman Catholic Episcopal Corporation of St. John’s (RCEC) were sued by a minor claiming damages for sexual abuse alleged to have been committed by Father James Hickey, a Roman Catholic priest from 1982 to 1988 (the “1989 Proceedings”). The Statement of Claim in the 1989 Proceedings alleged that Archbishop Penny knew or ought to have known of Fr. Hickey’s activities. Archbishop Penny and RCEC brought a third party claim against Guardian Insurance Company of Canada claiming defence and indemnification under liability policies held with Guardian.

While admitting the existence of the policies, Guardian denied the obligation to indemnify and defend on the grounds that Archbishop Penny or RCEC either knew or ought to have known of the actions of Fr. Hickey. Guardian relied on their failure to communicate this knowledge to it as grounds for relieving Guardian of its obligations.

Having conducted extensive investigation enquiries, including an Examination for Discovery of Archbishop Penny, Guardian’s counsel came to the conclusion that there was no “credible, probative or admissible evidence that would allow” Guardian to maintain a denial of coverage.

Accordingly, Guardian entered into a Consent Order in 1992 agreeing to indemnify Archbishop Penny and RCEC with respect to any liability arising out of the 1989 Proceedings only (the “1992 Consent Order”). Subsequent to entering into the 1992 Consent Order, further proceedings were brought against RCEC and Archbishop Penny by various parties claiming that they were abused by Fr. Hickey. As with the 1989 Proceedings, RCEC and Archbishop Penny issued third party claims against Guardian seeking that it indemnify and defend them.

After the making of the 1992 Consent Order, new evidence came to light relating to the nature and extent of knowledge that Archbishop Penny, other officials in the Church and RCEC had about the alleged sexual activity of Fr. Hickey. Despite becoming aware of this information, Guardian continued to represent Penny and RCEC in the 1989 Proceedings and in the subsequently resolved cases up to and including their resolution. 

Present Proceedings

In 2009, another plaintiff sued RCEC alleging sexual abuse by Fr. Hickey and that Archbishop Penny and RCEC knew or ought to have known of Fr. Hickey’s activities. RCEC third partied Guardian claiming that it had a duty to defend RCEC with respect to the claim.

Guardian responded to this third party claim asserting that the actions alleged were not covered by the policy because Fr. Hickey’s improper sexual activities were known to RCEC. Guardian pleaded the doctrine of utmost good faith on the part of insureds in their dealings with insurers. Guardian claimed that the policy was void as a result of material non-disclosure of the knowledge RCEC had regarding Fr. Hickey at the time of entering into the initial policy or at the time of the subsequent renewals.

RCEC filed a reply to Guardian’s defence and specifically raised the issue of res judicata as a result of the 1992 Consent Order. RCEC also alleged that subsequent to the making of the 1992 Consent Order, Guardian had assumed RCEC’s defence and indemnified it in the subsequently resolved cases.

At first instance, the Newfoundland and Labrador Supreme Court found Guardian could not deny coverage because, despite the presence of new evidence, the doctrine of res judicata applied to Guardian’s continued defence and indemnification.

Issues on Appeal

Numerous issues were addressed on appeal. For this article, we will focus on two:

1) Did the trial judge err in applying the “special circumstances” exception to the doctrine of res judicata?

2) If the trial judge did err in holding that the doctrine of res judicata applied, would allowing Guardian to re-litigate amount to an abuse of process?

Issue 1

In agreeing with the trial judge, the majority found that some of the information discovered after the making of the 1992 Consent Order, regarding RCEC’s and Archbishop Penny’s knowledge, did amount to new evidence. The evidence was such that if it had been considered, it could have changed the outcome of the original decision.

However, the majority found that the trial judge was wrong in holding that he had discretion to deny re-litigation. The majority held that while there is a general discretion not to apply res judicata after considering general notions of fairness, this discretion does not empower a court to apply res judicata where new evidence is discovered. The majority held that this is so because the new evidence exception in itself is designed to achieve fairness.

The majority went on to hold that even if there is a residual discretion to apply res judicata in the face of the new evidence, the trial judge nevertheless erred in how he applied and exercised this discretion. In coming to this conclusion, the majority appeared to be swayed by the fact that in the subsequently resolved cases, Guardian did not enter into any consent order as it had done in the 1989 Proceedings. Thus, Guardian’s involvement in those cases did not in itself engage the doctrine of res judicata.

Issue 2

In holding that the doctrine of res judicata should not be applied, the majority went on to consider whether Guardian’s ability to rely on the new evidence should nevertheless be precluded by the application of the doctrine of abuse of process.

In determining that abuse of process did not arise, the majority held that it was satisfied that the refusal to allow the use of new evidence in the current proceeding would undermine, rather than enhance, the judicial system. The court found that Guardian had every right to make a concession and enter into the 1992 consent order either because at that time, it had no evidence of RCEC’s prior knowledge of Fr. Hickey’s activities. The majority held that the doctrine of abuse of process could not be invoked.

The majority further noted that in any event, the focus of an abuse of process claim is not on the fairness issues between the parties but rather on the integrity of the judicial system as a whole.

Conclusion 

In respect of the procedural issue, it appears clear that there is no discretion to continue to apply res judicata where one of the exceptions to the doctrine arises. While the court does leave open the possibility that in the right circumstances, there may still be a residual discretion to apply the doctrine, it is unclear to what extent, if any, such a residual discretion would operate.

In relation to the insurance issue, the majority decision has potentially significant consequences. It indicates that in cases of misrepresentation, an insurer can adopt a changed position if new evidence develops. And this is so whether or not a consent order is involved. Often, when an insurer reserves its rights, it will assert that it is entitled to change its position if new facts emerge. This decision appears to supp
ort that approach.

The interesting twist here is that there was some knowledge after the initial consent order, yet the insurer still defended and indemnified, and is now being allowed to contest the misrepresentation issue. We will not be surprised if leave to appeal is sought from the Supreme Court of Canada.

Michael S. Teitelbaum is a partner with Hughes Amys LLP. Hughes Amys LLP is a member of The ARC Group of Canada, a network of independent insurance law firms across Canada.