Defining Parameters: Insurers Duty To Defend V. Duty To Indemnify

Practically every business and homeowner obtains insurance to protect themselves against losses to their property or business caused by an unforeseen event. However, sometimes when these events happen, both the insurers and insureds alike find themselves faced with the seminal question of whether such an event is covered by the insurance policy. Two most important aspects of an insurance policy when determining what is covered are: (i) The insurers duty to defend; and (ii) The insurers duty to indemnify. The duty to indemnify is the most common and known aspect of an insurance policy. This duty requires the insurer to pay for any judgment awarded to the third party against its insured, or any settlement that the parties may reach in lieu of judgment.

However, it is the duty to defend that is usually causes alarms bulbs to go off as the law on this issue has been evolving. The duty to defend can, in some cases, also end up costing more to an insurer than actual indemnification. This article is an attempt at demystifying some of the questions and principles that insurers' should keep in mind when making this critical decision of whether or not to defend a claim that arises in Canada.

1. What is the duty to defend?

   An insurer's duty to defend is triggered when a claim is filed against an insured which alleges acts or omissions that fall within the coverage set out in the insured's policy. The mere possibility that a claim covered under the policy may succeed is sufficient to impose the duty to defend. As such, the duty to defend is quite broad and arises even if the claim is eventually dismissed.

   While connected to the duty to defend, the duty to indemnify is much narrower in scope. The duty to indemnify is only engaged when the claimant's allegations are proven at trial. Accordingly, an insurer only has a duty to indemnify for settlement or judgment amounts that fall within the coverage set out in the insured's policy. As such, an insurer's duty to indemnify is triggered far less frequently than the duty to defend.1

2. Who has a duty to defend?

   If the duty to defend is triggered, both the primary and excess insurer may have a duty to defend. Where an excess insurance policy provides for a duty to defend and it is evident that the potential judgment against the insured may be substantially larger than the amount covered by the primary policy, the excess insurer may be obligated to defend the claim.2

3. When is the duty to defend triggered?

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