Extrinsic Evidence And The Duty To Defend

• Published date: 05 February 2021
• Subject Matter: Insurance, Insurance Laws and Products
• Law Firm: Strigberger Brown Armstrong LLP
• Author: Mr Mikel Pearce

In a recent decision, an Ontario court found that an insurer has a duty to defend a "software developer" in a U.S. action alleging copyright infringement. In the U.S. action, the insured was alleged to be the head of a group of hackers which sold subscriptions for unauthorized and derivative versions of several online computer games, including the popular game "Pokemon Go".

The insurer denied that it had a duty to defend, based on facts and evidence outside of, or extrinsic to, the pleadings in the U.S. action and the Policy in question.

The court took a dim view of the use of "extrinsic" evidence in determining the duty to defend, likening it to a rule 21 motion in which the allegations in the statement of claim are assumed to be true in determining whether or not the statement of claim discloses a cause of action. In the insurance context, the court found that only extrinsic evidence which is specifically referred to in the pleadings can be used in determining whether or not the insurer has a duty to defend the insured.

The court enumerated the principles to be applied in a duty to defend application, as set out by Mr. Justice Perell in his decision in The Corporation of the Town of Lincoln v. A.I.G. Insurance Company of Canada, 2020 ONSC 1456, as follows:

1. The insurer has a duty to defend if the pleadings filed against the insured allege facts which, if true, would require the insurer to indemnify the insured.
2. The court must determine whether the factual allegations if true, could possibly support the plaintiff's legal claims.
3. The pleadings govern the duty to defend, not the insurer's view of the validity or nature of the claim nor by the possible outcome of the litigation.
4. In a duty to defend application, the court must determine the substance and true nature of the claims based on the allegations in the pleadings taking the entire pleading into account and without engaging in a fanciful reading of the statement of claim for the purpose of requiring the insurer to defend.
5. If there is any possibility that the claim falls within the liability coverage, the insurer must defend.
6. The court must look beyond the labels used by the plaintiff to ascertain the substance and true nature of the claims.
7. If there is a claim that is outside or excluded from insurance coverage and a claim within insurance coverage, but the covered claim is entirely derivative of the uncovered claim, which is to say that the claims arise from the same actions and cause the same harm,...