Court Decides Whether An Additional Insured On A Policy Is Entitled To Independent Representation

The Ontario Superior Court of Justice was recently tasked with determining whether a municipality, which was named as an additional insured on a highway maintenance company’s insurance plan, could appoint their own counsel and manage their own defence.

The action arose after the plaintiff was struck from behind by a vehicle while walking along the shoulder of the road. The plaintiff started an action against the driver as well as two municipalities (Durham and Clarington), the company in charge of road maintenance (the “maintenance company”), and the company in charge of the street lights (the “utility company”).

The Relationships Between The Defendants

Durham contracted out winter maintenance of many of its roads, including the one the accident occurred on, to the maintenance company. The contract with the maintenance company (the “maintenance contract”) required the maintenance company to fully indemnify Durham for any claims against Durham arising from the maintenance company’s responsibility under the contract. The maintenance company added Durham as an additional insured on its insurance policy.

Meanwhile, Clarington contracted out its street lighting maintenance to the utility company. Like we saw with Durham and the maintenance company, the contract between Durham and the utility contract specified that the utility company was obliged to fully indemnify Clarington for any claims arising from the utility company’s responsibilities under the contract. The utility company added Clarington as an additional insured to its insurance policy.

Each municipality brought actions against their insurance companies, arguing the maintenance and utility companies were negligent in their responsibilities under each contract respectively. The municipalities sought to hire their own legal representation, but the insurance companies did not believe they should be able to do so. Instead, the insurance companies argued they were obliged to defend the municipalities in respect of any claims advanced in the main action.

The positions of the parties

 The position of the municipalities was that the policies covered the municipalities in the event that the maintenance and utility companies were found to be negligent. However, in the event that the maintenance and utility companies were not found to be negligent, then the insurance policies would not cover damages ordered against the municipalities. Following this logic, the municipalities argued there was a conflict of interest in that it would be in the insurance companies’ best interest if it was found that there was no negligence on behalf of the maintenance and utility companies, because it would mean the insurance companies would be able to avoid paying damages.

Meanwhile, the insurance companies argued they had a contractual right to appoint counsel and manage the defence of all of those covered by their policies. They submitted that if they are obliged to pay for the defence, they should also be entitled to oversee it.

The court’s analysis

The court was quick to point out in its decision that the duty to defend is a contractual one. If the facts of a case determine that the insurer is required to  indemnify the insured, the insurer is obliged to defend the claim.

In most cases, the insurer’s interests are aligned with those of the insured. Accordingly, in these situations the insurer is entitled to appoint counsel and manage the defence. While it’s true that there is always an “inherent tension” in the presence of covered and uncovered claims, such a tension will usually not result in an additional insured party being able to manage their own defence. The court referred to a 2002 Ontario Court of Appeal decision that stated looked at finding the balance between an insured’s right to a full and fair defence and an insurance company’s contractual right to control the defence. The Court of Appeal explained what would be needed in order to allow the insured to manage its own defence.

The balance is between the insured’s right to a full and fair defence of the civil action against it and the insurer’s right to control that defence because of its potential ultimate obligation to indemnify. In my view, that balance is appropriately struck by requiring that there be, in the circumstances of the particular case, a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer before the insured is entitled to independent counsel at the insurer’s expense. The question is whether counsel’s mandate from the insurer can reasonably be said to conflict with his mandate to defend the insured in the civil action. Until that point is reached, the insured’s right to a defence and the insurer’s right to control that defence can satisfactorily co-exist.

The court determined that there was an inherent conflict of interest in the case at hand. The court wrote, “In this respect, the (municipalities’) defence directly conflicts with the pecuniary interests of the Respondent Insurers. This conflict is exacerbated by the fact that the Respondent Insurers are only liable to indemnify the (municipalities) to the extent of the Contractors’ liability. There are even concerns that the information obtained from the (municipalities)  may be used against them in the litigation to protect the Respondent Insurers’ pecuniary interest. Clearly the insurers cannot be overseeing the (municipalities’) defence in such circumstances.”