B.C. Court of Appeal clarifies when insurer has duty to defend

Reporting an event or “circumstance that might lead to a professional liability insurance claim is not, in the absence of a claim, enough to trigger an insurer’s obligation to defend, the B.C. Appeal Court has ruled.
In MWH International, Inc. v. Lumbermens Mutual Casualty Company, the B.C. Court of Appeal overturned a trial judges findings that Lumbermens was obliged to pay legal fees to its policyholders solicitors on the grounds that solicitors for MWH had issued a notice of a circumstance that might have led to a claim.
Lumbermens argued it did not owe MWH solicitors any fees because no claim had been made and therefore there was no action for the solicitors to defend.
Arrow Lakes Power Corporation had acquired a professional liability policy from Lumbermens to insure the professional services it rendered in respect of the design and construction of the Keenleyside Powerplant Project, which commenced early in 1999.
The project was subcontracted in part to Harza Engineering Company International, a predecessor of MWH.
In April 2004, a major part of the structure of the project failed and was largely destroyed. The plant had to be shut down, and the Power Corporation lost approximately Cdn$50 million.
MWH solicitors tried to recoup legal fees from Lumbermens after sending a letter dated June 10, 2004, notifying the insurer of a circumstance that might lead to the claim. They noted a policy endorsement in Section 6 of the Lumermens policy, which stated: The definition of a claim shall include a circumstance.
CIRCUMSTANCE means an event reported during the policy period from which the insured reasonably expects that a claim could be made.
Lumbermens said it would not pay the MWH solicitors legal costs, because no actual claim had been made. There was, in other words, nothing for the lawyers to defend.
Noting that mere mention of a circumstance was included in the definition of a claim in the policy, a trial judge found the insurer had a duty to defend the claim (and therefore owed the solicitors for their work). But the B.C. Court of Appeal disagreed.
I conclude that, on any commercially sensible reading of Section VII of the policy, the [insurers] obligation to defend was not triggered by the letter the solicitors for MWH wrote on 10 June 2004, B.C. Court of Appeal Justice Lowry wrote for the 2-1 majority of the three-judge panel. The letter constituted no more than notice of what the solicitors said was an event giving rise to a potential claim against MWH.
While there may have been a claim in existence, as that term is defined in the policy and by endorsement, there was nothing that could be said to have been a claim against MWH seeking a judgment, an award, or a settlement to which the insurance applies.