Ontario Court Of Appeal Provides Guidance On When An Insurer Has To Appoint Independent Counsel To Defend An Insured

In Reeb v The Guarantee Company of North America,1 the Ontario Court of Appeal provided guidance on when an insurer must appoint independent counsel to defend an insured to deal with any conflicts of interest between the insurer and its insured.

Background

A boy and his friend were playing with pellet guns. The boy shot his friend who lost an eye. The friend brought a claim against the boy for damages of $1.5 million. The boy's mother had a homeowner's policy with a third-party liability limit of $1 million. This insurer appointed counsel to defend the claim under a reservation of rights while it investigated coverage.

The counsel appointed by the insurer brought an application on the boy's behalf seeking a declaration that the boy was covered by homeowner's policies issued to the boy's father and stepmother by two other insurers, presumably to deal with the fact the boy was faced with a claim in excess of the policy limits. The application judge found that the boy was not covered under the additional homeowner's policies because his conduct fell within the "intentional act" exclusion in each of the policies. The boy appealed.

The Ontario Court of Appeal

Before turning to the merits of the appeal, the Court of Appeal considered whether the boy's counsel was in such a conflict of interest that the insurer should have provided the boy with independent counsel.

The court recognized that if it upheld the application judge's decision and found that there was no coverage because of an "intentional act" exclusion in the additional homeowner's policies, the likely practical impact would be that the insurer would also deny coverage on the same grounds under the mother's homeowner's policy. The court accordingly saw a potential conflict of interest in the fact the insurer was paying for and instructing the boy's counsel in circumstances where the insurer would potentially benefit financially if the boy's application was unsuccessful.

The court set out the following guidelines for considering whether the insurer needed to appoint independent counsel in these circumstances:

The court must balance the insured's right to a full and fair defence with the insurer's right to control that defence because of its potential ultimate obligation to indemnify the insured. The court can strike the appropriate balance by requiring that there be a reasonable apprehension of a conflict of interest on the part of counsel appointed by the insurer before the insured is...