Insurer not obliged to pay for independent counsel retained by insured to defend against damages beyond coverage limits: Ontario court

An insurance company does not have to pay for counsel retained by an insured to defend the insured’s interests in the event that damages exceed prescribed policy coverage limits, the Ontario Superior Court has ruled.
In 137328 Canada Inc. (Alliance Security Systems) v. Economical Mutual Insurance Company, Alliance installed a security system at a warehouse occupied by Richelieu Hosiery in 2003. During the five-year contract period, the warehouse roof collapsed as a result of excessive snow, causing a water main to burst and damage to the premises and inventory alleged to be in excess of $7 million.
Richelieu commenced an action against Alliance, alleging the security company failed to notify it when the roof collapsed, contributing to the extent of the loss. Alliance purchased liability insurance of $2 million from The Economical.
The Economical advised Alliance that it would defend the action and provide coverage up to the coverage limit. It then retained a lawyer of its choosing.
Alliance, however, retained independent counsel of its own, saying there was a conflict of interest between Alliance and Economical.
Alliance argued The Economical didn’t rule out a “remote possibility” that a coverage issue might arise during litigation, which would put the insurer at odds with the insured. [The Economical gave evidence that it was not aware of any coverage issues going into the trial, and seemed to be simply cautioning the insured.]
Also, Alliance said it needed to retain independent counsel in the event that the damages exceeded the policy limits.
But none of these concerns suggested a divergence of interests between the insured and the insurer that warranted taking the defence out of the hands of the insurance company, the court ruled.
“The insurance policy does not contain any term requiring Economical to pay for counsel for Alliance to protect itself with respect to claims in excess of the policy limits,” the court ruled. “At this point in time the issue of protecting any interest it may have in any dispute with the insurer is non-existent, because the insurer acknowledges and has agreed that it will provide coverage for the claim up to its limits.”
The court ruled the insurer had a right to choose its own defence counsel and to direct the defence. Alliance had a right to retain independent counsel to defend its interests if damages went beyond the coverage limits, but the insurer was not required to pay for the independent counsel.