The Latest Word On Allocation Of Defence Costs Between Covered And Uncovered Claims

The Ontario Court of Appeal recently advanced the discussion as to how insurers and the insureds allocate defence costs between covered and uncovered claims.

In Tedford v. TD Insurance Meloche Monnex, 2012 ONCA 249, the Ontario Court of Appeal was faced with a claim by the insured, Tedford, for a defence to be paid for by the insurer.

Significantly, the Court's decision in Tedford on this topic differed from, or at least clarified to a degree, the Court's decision in Hanis v. Teevan, [2008] OJ No. 3909. In Tedford, there were two distinguishing features from the Hanis decision. The first was that the insured was seeking a defence at the outset of the underlying action whereas the Hanis decision on allocation of defence costs was made after the action was over. Secondly, in Hanis, the covered claims represented only a small portion of the total damages sought.

It was alleged in Tedford that the insured had made negligent misrepresentations in a Seller Property Information Statement completed in connection with the sale of his home. It was further alleged that the misrepresentations in the Seller Property Information Statement caused the Plaintiff to incur not only repair costs, but also damages for anxiety, sleep disturbance, headaches, and other symptoms of what could be described as "bodily injury".

The Tedford homeowner's policy provided coverage for not only bodily injury but also property damage. The policy in play did not provide a predetermined allocation between covered and uncovered claims and it was therefore left to the parties to determine that allocation failing which the matter would be determined by the Court.

The Court upheld the application judge's determination that a duty to defend the alleged misrepresentations fell under the bodily injury coverage. Significantly, the Court also determined that there was only one cause of action being advanced, unlike the Hanis decision, and that the one cause of action, being negligent misrepresentation, was not a derivative, but rather a direct allegation.

The Court found that the insured was essentially seeking to having the insurer assume conduct of the defence notwithstanding that the covered claims represented a small portion of the total damages claimed, unlike the Hanis case. As a result, the Court found that it would be unfair to have the insurer defend the entire action. The Court said:

... Where there is an unqualified obligation to pay for the defence of claims covered by the...