Insurers Beware: Recent Developments In The Duty To Defend And Indemnify

When are the duties triggered?

Traditionally, insurers are only required to indemnify the insured for claims and damages which fall under the coverage provided in the insured's insurance policy. As a result, the insurer's duty to indemnify is not typically triggered until a legal action has been concluded.2

In contrast, the insurer's duty to defend is activated at the outset of a legal action.3 This was established in the 1990 Supreme Court of Canada case, Nichols v American Home Assurance.4 As determined in Nichols, the duty to defend would be activated if any of the facts within the pleadings (assumed to be true) would result in the insurer having to indemnify the insured. The Court in Nichols also explained that it was not necessary to prove that an insurer's duty to indemnify would be enforced for certain. Instead, the "mere possibility that a claim within the policy may succeed"5 is sufficient to activate the insurer's duty to defend the insured. As a result, it is possible for an insurer to have a duty to defend the insured without having a duty to indemnify. However, it is not possible for the insurer to have a duty to indemnify the insured without having the duty to defend.

...the final step is to evaluate whether the allegations are covered by the insurance policy.

The rule in Nichols was further clarified in the 2000 Supreme Court of Canada case, Non-Marine Underwriters, Lloyd's of London v Scalera.6 In Scalera, the Court decided that it was not only the language in the pleading that would give rise to the insurer's duty to defend. Rather, the activation of the insurer's duty to defend should be dependent on the "true nature of the claim",7 based on the pleadings. Once the Court has ascertained the true nature of the claims being pleaded, the final step is to evaluate whether the allegations are covered by the insurance policy.

Issues

Have recent developments increased the scope of the insurer's duty to defend and indemnify?

An insurer's duties to additional insureds; An insurer's duties in a situation involving a conflict of interest; An insurer's duties in a situation involving breach of contract. Analysis

Yes. Recent case law developments have increased the scope of an insurer's responsibility regarding their duty to defend and indemnify an insured. This increased responsibility can be observed in three situations:

1. An insurer's duties to an additional insured

   Two recent cases clearly outline the obligations of an insurer that provides coverage to an additional insured.

   In Carneiro v Durham,8 the Ontario Court of Appeal decided that the insurer had a duty to provide a full defence to the additional insured. This was a reversal of the motion judge's initial decision dismissing the additional insured's request for a full defence.

   Carneiro involved a motor vehicle accident. The driver lost control of his car on a patch of ice and died. The driver's family commenced an action against Miller Maintenance Limited ("Miller") and the Regional Municipality of Durham ("Durham"). Durham and Miller cross-claimed against each other.

   Durham had contracted Miller to maintain the area of the road where the accident occurred. Miller's responsibilities included plowing, sanding, and salting this area of the road...