When does an insurer’s duty to defend arise? More specifically, does it arise before the insurer is given notice of the claim? That is the fundamental question addressed by this case.read more
When the Courts “Exclude” an Exclusionary Clause, Insurers Have a Duty to Defend
Arch Insurance Canada Ltd. v New Brunswick (Financial and Consumer Services Commission), 2016 NBCA 53.
The present litigation resulted from two actions launched by Armel Drapeau (Drapeau) following an investigation carried out by the Financial and Consumer Services Commission (Commission) into Drapeau’s business of trading securities. The first action was brought by Drapeau against employees of the Commission in 2011. He alleged that the employees had defamed him by stating to the media that he and others were involved in a Ponzi scheme. The second action was brought by Drapeau in 2013 against the Commission and Investia Financial Services Inc. (Investia). He alleged that the Commission had informed Investia of its investigation into Drapeau’s affairs leading Investia to unlawfully terminate a contract with him.
The Commission is a provincial crown corporation charged mostly with regulating and enforcing securities legislation. In order to protect itself and its employees from claims arising due to their activities, the Commission purchased liability insurance from two different Insurers. The Commission was insured by Encon Group Inc. (Encon) until 2012, and in 2012, the Commission began purchasing its insurance from Arch Insurance Canada Ltd. (Arch).
While Encon provided coverage with respect to the 2011 action, neither insurer were willing to provide coverage in the 2013 action. Encon denied its obligation on the basis that the action was commenced after the expiry of its policy. The Arch Policy provided an exclusionary clause discharging it of its duty to defend in cases regarding any interrelated wrongful acts related to the 2011 defamation action.
Encon argued that the second action was filed while the Arch Policy was in place and therefore had no duty to defend the Commission. Arch argued that the two wrongful acts were interrelated and therefore Encon had a duty to defend the claim against the Commission. In the present action, the Commission sought an order that one of the two insurers was obliged to cover the Commission in the 2013 action.
Decision at Trial
Justice Rideout of the New Brunswick Court of Queen’s Bench held that Arch, and not Encon, was obligated to provide coverage to the Commission in the 2013 action. First, Arch was the Commission’s insurer when the 2013 action was commenced. The two actions were not interrelated given that they arose at different times from distinct torts, which consisted of one in defamation and the other in inducement of breach of contract. The interrelated wrongful act clause contained in Arch’s policy could thus not be relied upon to deny coverage.
Not only was Arch required to provide coverage for the 2013 action, it was required to reimburse the Commission for the legal fees it had incurred in connection with the present action. Arch was further required to pay costs to Encon in accordance with a Sanderson order (If the Plaintiff succeeds against only one of the Defendants, then the Court has the discretion to order the unsuccessful Defendant to pay the costs of the successful Defendant).
Decision on Appeal
The New Brunswick Court of Appeal upheld Justice Rideout’s decision. Arch appealed the decision, and the New Brunswick Court of Appeal dismissed the appeal, reiterating that both claims did not allege a related wrongful act because they differed in nature, in kind and in time. The Court of Appeal, however, conceded that there was potential for some overlap in the head of damages claimed for both actions, but nonetheless, the two torts remained distinct. Arch could not hide behind its broadly-drafted exclusionary provision to deny coverage to the Commission in the 2013 action. The New Brunswick Court of Appeal further upheld the Sanderson order requiring Arch to pay costs to Encon.
Lessons for Insurers
This decision provides important reminders to insurers:
- The duty to defend is a key factor in liability insurance policies. The threshold to trigger the duty to defend is low: what is required is the mere possibility that a claim falls within the policy. Courts have held that in instances where it is unclear whether the policy affords coverage, doubts will be resolved in favour of the insured.
- Insurers should rely on reservation of rights agreements in situations where the insurer may wish to deny coverage at a later date.
- Courts will not uphold interrelated wrongful act clauses if doing so effectively nullifies coverage. Such exclusionary provisions will not exculpate an insurer from its duty to defend an insured despite the presence of common factual elements in two actions.
- Courts will readily make Sanderson orders in cases where unsuccessful defendants are found wholly responsible for an action.
This article was written by Marie-Pier Levesque, a student in the Moncton office, and Michele Brown-Gellert, a student in the Fredericton office.