Court Permits Insurer To Appoint Counsel At Insurer's Expense: Temple Insurance Company v Sazwan, 2018 ABQB 156

In 2018, the Alberta Court of Queen's Bench (Court) handed down a decision that provided a precedent for an insured to choose its preferred counsel that the insurers will have the onus of financing. This is permitted in certain circumstances only, and requires a reasonable apprehension of conflict of interest.

Background

The Court reached its 2018 decision by way of an Amended Originating Application. In this case, the Applicants were Temple Insurance Company, Aviva Insurance Company of Canada, XL Reinsurance America Inc, Arch Insurance Canada Ltd, Everest Insurance Company of Canada and Lloyd's Underwriters (Insurers). The Respondents in this action were Clark Sazwan and Denise Sazwan (Sazwans). The Sazwans were being sued in two actions (Underlying Actions) in which they were claiming insurance coverage. The Application sought a declaration against the Respondents that the right and duty to defend the Respondents in the Underlying Actions rested with the Insurers. The Sazwans sought a declaration that there was a divergence of interest between them and the Insurers.

One of the Underlying Actions sought damages in excess of CA$136 million. The action alleged that the Sazwans misrepresented material facts and engaged in fraud. The Insurers issued a Policy to a corporation owned by the Sazwans, with a policy limit of CA$10 million and sub-limit of CA$2 million for defence costs. The Insurers issued a Reservation of Rights letter for each Underlying Action, indicating that the policy did not provide coverage for one of the corporations owned by the Sazwans.

Held:

The Courts directed that the Sazwans could appoint counsel of their choice at the expense of the Insurers. The Court held that under the circumstances of the case, there was a reasonable apprehension of conflict of interest between the Insurers request to take over the defence. The Court found this for three reasons:

The conduct of Sazwans was squarely an issue in the Underlying Actions, and an issue in terms of what claims were entitled to indemnify under the policy. The advancing claims were grossly in excess of the policy limits, therefore leaving the Sazwans exposed personally to enormous claims. The relationship between the Insurers and Sazwans was strained and could lead to more conflict in the future, which was not in the best interest of the Insurers, the Sazwans or administration of justice. Discussion:

The Underlying Actions against the Sazwans were complex and involved...