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ALLOCATION OF DEFENCE COSTS
BETWEEN
COVERED AND NON-COVERED CLAIMS
Prepared by:
Me
GASCO GOODHUE, s.e.n.c.r.l. / l.l.p.
1080 Côte du Beaver Hall
Suite 2100
Montréal (Québec) H2Z 1S8
Telephone: (514) 397-0066
Telecopier: (514) 397-0393
March 2006
TABLE OF CONTENTS
I. Introduction............................................................................................ 1
II. Theorical
basis of allocation................................................................. 5
III. General
considerations......................................................................... 7
1) Timing of the analysis.................................................................. 8
2) Burden of proof.......................................................................... 12
3) What criteria apply?................................................................... 13
a) Canadian
Common Law decisions................................. 24
b) American
jurisprudence................................................... 31
c)
IV. Conclusions......................................................................................... 43
ALLOCATION
OF DEFENCE COSTS BETWEEN COVERED AND NON-COVERED CLAIMS
Me
GASCO GOODHUE
s.e.n.c.r.l. / l.l.p.
I. Introduction
While the notion of "allocation" of
defence costs, also referred to as "apportionment" and in French,
"répartition", has been the subject of some judicial and doctrinal
commentary (see, for example, Mark G. Lichty and Marcus B. Snowden, Annotated
Commercial General Liability Policy, chapter 12:20.6; Heather A. Sanderson,
Commercial General Liability Insurance, pages 234 and following; and
Craig Brown, Insurance Law in Canada, volume 2, pages 18-21 and
following), the discussions have, for the most part, been limited to
generalities. Those who work in or for the insurance industry as well as
counsel for insureds and liability insurers are faced with the implementation
of these general principles with scant practical suggestions or guidelines.
That such is the case is not surprising since it has been on a relatively
infrequent basis that the Courts have been called upon to resolve other than
general disputes over allocation issues.
In Quebec prior to the advent of the so-called
"Wellington" type of recourse (named after the seminal case of Compagnie
d'Assurance Wellington v. M.E.C. Technologie Inc., [1999] R.J.Q. 443
(C.A.)), the more common procedural vehicle chosen by insureds to enforce their
rights under an insurance policy, both in respect of the duty to defend and the
duty to indemnify, was a warranty action governed by articles 216 and following
of the Code of Civil Procedure. Typically, evidence was led on the
defence costs incurred. That facilitated the allocation on a retrospective
basis, a far easier analysis, in principle, than a prospective assessment which
a Wellington-type recourse may, although not necessarily, require.
As pointed out by Brown (supra, pages
18-21 and 18-22), there are three situations which may give rise to allocation
of defence costs. First, a suit against
the insured, for which coverage is sought, may include "mixed"
allegations, that is, more than one legal foundation or theory of liability,
one of which may trigger an exclusion (such as intentional fault or exemplary
damages) while the other (such as mere negligence) may be covered under the
governing policy. Based on the now well-established principle that an insurer
is not obliged to defend or indemnify an insured for claims which are clearly beyond
the scope of the policy (see, for example, Nichols v. American Home
Assurance Co., [1990] 1 S.C.R. 801, 808), the insurer would only have to
assume the defence costs for that part of the suit for which coverage is in
order. The insured would then have to assume the defence costs for the
non-covered claims.
The second situation which may give rise to
allocation of defence costs is where different types of insurance are issued to
an insured, both of which may apply to a given claim, such as an automobile
liability policy and a CGL policy.
The third type of suit which may give rise to an apportionment
issue is where the damages claimed occurred over several insurance policy
periods and where coverage has been provided by different insurers. The latter
scenario also often involves the application of the so-called "trigger"
theories.
This paper shall deal solely with allocation in
the first situation of "mixed" allegations where coverage is sought
under one liability policy only.
The following discussion is intended to provide
the reader with an overview of the issue of allocation of defence costs and to
identify some of the considerations that may be taken into account in such an
analytical exercise.
Similarly, while reference will be made to
selected jurisprudence emanating from Common Law Courts in
As will be discussed below, for the Quebec-based
reader, special attention should be paid to the legal principles that have
application in the Canadian Common Law provinces and which may not be
consistent with or have an equivalent principle under
In this latter regard, while the Courts have long
recognized and sought to protect the distinct concepts of Quebec civil law,
including the law of insurance, they have nevertheless recognized the influence
of the French, English, American and Canadian Common Law authorities and
legislation on the substantive provisions of Quebec insurance law set out
principally in the Civil Code of Quebec and on the interpretation and
application of Quebec insurance law principles, where appropriate.
In the matter of Caisse Populaire des Deux
Rives v. Société Mutuelle d'Assurance contre l'incendie de la Vallée du
Richelieu, [1990] 2 S.C.R. 995, the Supreme Court of Canada considered the
issue of whether the intentional fault of an insured mortgage debtor could be
invoked against its mortgage creditor under an insurance contract containing a
standard mortgage clause.
In discussing the relevance of
"foreign" authorities to
"However, this apparent similarity of the fundamental rules should
not cause us to forget that the courts have a duty to ensure that insurance law
develops in a manner consistent with the rest of
However, the development of insurance law must necessarily take place
within its own particular socio-economic context, namely North American
insurance practice. In
this regard Faribault notes ("Du papillon à la chrysalide ou l'étrange
métamorphose de l'assurance de responsabilité" (1987), 55 Assurances 300,
at. p. 308):
[TRANSLATION] Without arguing for the introduction into our law of North
American solutions to insurance problems, it is worth bearing in mind that our
legislature has drawn inspiration from the "genius of the French
language" and "North American practice" in the matter, so that
Quebec insurers may develop a competitive industry in the North American
context."
Similar considerations apply to the persuasive
authority of American decisions since many of the standard insurance policy
forms used in the Canadian insurance business (including Quebec) originate from
the United States (Co-Operative Fire and Gas.
Authors Lichty and Snowden (supra) make
the following observation:
"Essentially, the wording used in the IBC's Commercial General
Liability policy is the same as that used in the
Judgments from other jurisdictions may therefore
be considered as persuasive, though non-binding, authority in
II. Theorical
basis of allocation
As indicated above, it is generally accepted that
a liability insurer's duty to defend, either in terms of appointing counsel and
assuming defence costs in an ongoing litigation, or reimbursing an insured for
defence costs assumed by it in a suit which as been settled or where judgment
has been rendered, is restricted to those claims which are or may be payable
under the terms of the governing policy.
Liability policies typically include wording in
the Insuring Agreement such as "to pay on behalf of the Insured all sums
which the Insured shall become legally obligated to pay as damages because of
any act or omission of the Insured…".
Likewise, the defence and settlement provisions
of a liability policy commonly refer to the undertaking of the insurer to
"defend any suit against the Insured alleging such act or omission and
seeking damages which are or may be payable under the terms of this policy,
even if any of the allegations of the suit are groundless, false or
fraudulent".
Such provisions, when read together and in the
context of a liability insurance policy (art. 1426 C.C.Q.) provide the
contractual basis of the obligation of a liability insurer to assume the
defence of its insured, where coverage is triggered, and to the associated
premise that such an obligation is limited to those claims or damages,
depending on the policy wording, which may or are within the scope of the
insuring agreements.
The second source of the obligation of a
liability insurer in the
In our view, an insured could not successfully
argue that where the terms of the liability policy set out the obligation of
the insurer to defend "any suit", those or similar terms should be
construed as obligating the insurer to defend the entire suit and not
just those portions thereof that may give rise to coverage. Stated otherwise,
there would be no merit to an insured's argument that the words "any
suit" denote that all costs of the entire suit most be borne for had the
intention of the insurer to restrict its obligation to defend to only those
actions or claims which are or may be payable under the policy, it would or
should employ wording such as "defend that part of any suit against
the insured alleging such act or omission and seeking damages which are or may
be payable under the terms of this policy…".
This type of argument was considered and rejected
by the Quebec Court of Appeal in Boréal Assurances Inc. v. Réno-Dépôt
Inc., [1996] R.J.Q. 46 (C.A.). In this judgment, which arose from the
lengthy urea-formaldehyde foam insulation saga, the Court held that the liability
insurer's duty to defend is not an absolute one and indisputably applies to only
those claims which are or may be covered. It stated:
"Le fait que
l'article 2604 C.C. [now art. 2503 C.C.Q.] ne réfère pas expressément aux
«allégations d'actes ou omissions» (alleging such act or omission) est sans
importance." (page 62).
The Court also held that the principles
enunciated in the above-mentioned Nichols case (supra), including
the notion that only those claims which are or may be payable under the policy
trigger the duty to defend, may be applied in Quebec civil law (ibid.).
These considerations would similarly preclude an
insured from contending that, at the very least, there is an ambiguity or
contradiction between the phrase "any suit" and other provisions in
the policy containing more restrictive language such as "such act or
omission", and that on the basis of the contra proferentum rule of interpretation (art. 1432 C.C.Q.), any
doubt should be resolved in favour of the insured.
The insured could thus not be heard to say it had
a "reasonable expectation" that the insurer would be obliged to
defend even those portions of a suit which clearly fell outside the purview of
the coverage afforded under the policy.
III. General
considerations
In this section we will identify and discuss the
principal legal and practical issues which have a bearing on the determination
of what portion of the defence costs, inclusive of fees and disbursements, are
to be assumed by an insurer and which portions are to be incurred by the
insured. As will be seen below, the process is not always an easy task to
fulfil and in some instances, it may be difficult or impractical to allot the
portions to be assumed by each party to the insurance contract with any precision.
The following three general considerations would
apply to most, if not all, allocation analyses:
1) At
what point in the proceeding does one allocate the defence costs?
2) Who
bears the burden of proof?
3) What
are the criteria to be applied or against what standards are the fees and
disbursements to be measured?
There are no legislative provisions governing the
allocation of defence costs between covered and non-covered claims in any of
the jurisdictions we have examined. For the most part, the allocation process
has been left to counsel for the insurer and the insured, subject to any
unresolved dispute being submitted to the Court at a later date for
adjudication. There have been some judicial pronouncements which provide
limited guidance to the parties but, in most cases, they are left to their own
wits to dissect the fees and disbursements which had already been incurred and
to determine the parameters of those that are to be incurred in the future.
We have previously stated that caution must be
exercised in reviewing the case law in jurisdictions other than
1) Timing of the analysis
There are essentially three choices as to when
the allocation analysis is to be undertaken, depending on when the issue first
arises.
When a claim is either anticipated or actually
made against an insured, liability insurers typically seek coverage opinions in
advance of any subsequent suit. Coverage counsel may not always have full or sufficient
factual information to allow them to issue a definitive opinion on whether all
or only part of the claim is or may be covered. Although the initial concern of
liability insurers at that stage of a claim is principally whether there may be
a duty to defend and, ultimately, a duty to indemnify in practice, the
allocation issue would not commonly be addressed in any detail.
Even where the insureds are advised of the
position taken by the insurers on the claim, it is rare in practice for the
parties to engage in a detailed discussion of the impact of the position on any
future defence costs. Instead, the parties' respective preoccupations are to
either solidify their analysis of coverage or obtain additional information to
persuade the other side of the merits of their respective positions.
Although it is often said that from the
perspective of the insured the duty to defend is as important, if not more
important than the duty to indemnify, we would suggest that the primary focus
of insureds prior to the inception of the proceedings would not normally be on
the impending defence costs but rather on the payment of any condemnation.
The issue of allocation may also arise at the
outset of an action where either the insurer or the insured seeks a ruling from
the Court on a dispute over whether coverage is available and if so, that what
extent, and the corresponding duty to defend the insured in the proceeding. The
procedural vehicle varies from jurisdiction to jurisdiction but may typically
be in the form of a motion for summary judgment, a declaratory judgment or, in
the case of
Once the Court determines that there is a duty to
defend at least part of the action, the parties may wish to consider whether it
is possible or even practical to have an immediate allocation of the defence
costs prior to the fees and disbursements actually being incurred (e.g., Parizeau
v. Fonds d'Assurance Responsabilité Professionnelle du Barreau du Québec,
[1997] R.J.Q. 2184 (C.A.)).
This latter consideration is at the crux of the
allocation issue. It is evidently easier to apportion the defence costs when
they have actually been incurred and a description thereof has been provided by
defence counsel, whether the latter has been retained by the insurer or the
insured or, in less frequent situations, by separate attorneys being appointed
by each of the insurer and the insured.
As will be seen below, in some jurisdictions the Courts
have taken the practical approach that the allocation process should only be
done retrospectively once all the defence costs have been tabulated.
In certain jurisdictions, particularly the United
States, the Courts have imposed an obligation on the insurers to assume all
defence costs from the outset of the litigation to the extent that there is any
portion thereof which may give rise to coverage. In those cases, the insurers
proceed either under a non-waiver agreement with respect to the non-covered
claim or they issue an aptly-worded reservation of rights letter to protect
their interests and to preclude an issue of estoppel from being raised in
respect of the costs reasonably attributed to the non-covered claims. In other
instances, these Courts have simply recognized the entitlement of the insurer
to seek reimbursement of the costs for the non-covered claims after the
proceedings have been completed. Examples of the foregoing will be discussed
below.
From the insured's perspective, in those
jurisdictions where the insurer is obliged to take up the entire defence subject
to its right to be reimbursed for that portion of the costs for non-covered
claims, there is a definitive advantage in that the financing of the defence of
the suit is assumed by the insurer alone. The insured is thus not exposed to an
immediate financial burden which it may not have anticipated or budgeted for.
On the other hand, there nevertheless exists a level of uncertainty as to what
costs may ultimately have to be borne by the insured.
It has to be recognized, however, that an
immediate allocation of the anticipated defence costs if necessarily a more
difficult exercise for all concerned and can only be based on the information
then available to the parties.There is often an evolution in the way a case proceeds
through to trial and amendments may be made throughout the course of the
proceedings to the legal and factual foundations underlying the suit against
the insured. In those circumstances, it is not inconceivable that a
re-allocation of the costs may have to be done at some time or even from time
to time. This is clearly not a desirable consequence and one would expect that
the parties would prefer to devote their energies to the defence of the claim
rather than being distracted by ongoing peripheral issues such as the division
of the defence costs, important as they may be.
There is thus a trade-off between the benefits of
some a degree of certainty as to the allocation of the costs and the admitted
difficulty of forecasting how the procedures and the proof will eventually be
played out. A prospective analysis is evidently more difficult and one may even
question whether a prospective apportionment should necessarily contain a
reserve for the parties to have a final allocation only once the full defence
costs have been incurred.
Another practical consideration which may arise
should an allocation be required early on in the proceedings is how any counsel
directly appointed by the insured is to account for the time and disbursements
to be incurred.
Particularly in recent years, insurers have adopted
and implemented guidelines and litigation manuals or litigation management
programs which set out in varying degrees of detail, among other matters, how
time entries are to be made, how often accounts can be issued and what types of
fees and services are or may be approved by the insurer. The question that may
be raised is whether the insured's attorney may be obligated to comply with the
insurer's guidelines. This issue will be discussed later on and is of more
particular importance to the issue of whether the insured can recuperate
defence costs incurred by its appointed attorney when such do not comply with
the insurer's directives or guidelines.
The third moment when allocation may take place
is after final judgment or the case is settled. As will be seen below, this is
the approach that has been most often adopted by the Quebec Courts and has been
favourably considered by Courts of other jurisdictions.
2) Burden of proof
It is generally held that the insurer bears the
burden of proving what portions of the defence costs should be borne by it and
those by the insured. This is consistent with the principle that the insurer
must establish any exceptions or exclusions to coverage. It may be said that apportionment
of defence costs is a corollary to that general rule and thus the insurer
ultimately has the onus of identifying the excluded costs.
However, one may question whether this should be
an immutable rule. Since an insured has the initial burden to establish on a prima
facie basis that any claim or suit comes within the coverage provided by
the liability policy, one may argue that to the extent that the insured fails
to fulfil its burden that all of the claim or suit is indeed covered, it, and
not the insurer, should have the further obligation to identify which portion
of the defence costs, both those already incurred and to be incurred, can
reasonably be allocated to those claims or part of the suit that triggered the
duty to defend.
Should the insured fulfil its initial burden of
establishing that the entire claim or a suit is covered, the onus then shifts
to the insurer to disprove that contention or establish that one or more
exclusions apply or that some other valid ground of defence negates or reduces
any duty to defend. In this latter scenario, it follows that the insurer would
bear the burden of establishing what portion of the defence costs would be
linked with the exception or ground of defence it invoked.
This suggestion that that burden of proof on the
allocation of defence costs between covered and non-covered claims is attached
to and follows the shifting general burden of proof has its attractions as it
is consistent with the general rules of evidence in the
On the other hand, we cannot disregard the fact
that in many instances the
While there is no similar legislative rule for
casting the burden on the insurer with respect to allocation issues, the Courts
may well consider that the exceptional nature of a dispute over defence costs
should, for policy reasons, require the insurer to bear the ultimate burden,
regardless of which party seeks a ruling from the court on coverage matters.
This would also provide certainty to both parties.
Although the language found in some of the
jurisprudence suggests that the burden is a heavy one for the insurers, there
is no substantive law provision applicable in
3) What criteria apply?
Once a Court establishes or the parties agree
that part of the defence costs have to be allocated, the issue arises as to the
criteria which should apply to the exercise.
As will be discussed below, in certain
jurisdictions where it is "impossible" or impractical to allocate the
defence costs between covered and non-covered claims, the insurer is obliged to
pay all of the defence costs.
Where the defence costs can be readily
apportioned, the courts have held that the insurer must reimburse the insured
for any "reasonable" fees and disbursements it has paid for in the
past and may occur in the future.
In some Common Law, jurisdictions the Courts have
held that when an insurer's denial of coverage is determined to be unreasonable,
the sanction for its fundamental breach of contract is the obligation to assume
all defence costs, even those for non-covered claims.
A common principle found in various jurisdictions
we have canvassed is that a determination that an insurer must pay for the
defence costs is not equivalent to giving the insured a "blank cheque".
An insurer should only be bound to pay the "reasonable" fees and
disbursements incurred in the defence of a claim or suit. This latter principle
was stated, for example, in the decision of Mr. Justice André Rochon of the
Quebec Superior Court (as he then was) in the matter of Parizeau v. Fonds
d'Assurance Responsabilité Professionnelle du Barreau du Québec, (supra,
page 2190):
"L'assurance, en cas
de refus injustifié de défendre, est tenue au paiement des frais et honoraires
raisonnables assumes par l'assurée. Les conclusions recherchées, en ce qui a
trait aux frais à venir dans le dossier d'appel, constituent ni plus ni moins
qu'un chèque en blanc donné aux procureurs de Me Parizeau sans que l'assureur
puisse vérifier la raisonnabilité de pareils honoraires. Il est plus approprié,
dans les circonstances, de réserver les droits de Me Parizeau quant à la quotité raisonnable de ses frais et honoraires
pour le dossier en appel."
The Quebec Courts in particular have also added
the notion of "relevance" to the criteria of
"reasonableness". In the decision of Madam Justice Lise Matheau of
the Quebec Superior Court in the matter of CGU Compagnie d'assurance du
Canada v. Équipements Pierre Champigny Inc., [2003] R.R.A. 1298
(S.C.; conf'd 2005 Q.C.C.A. 301; March 22, 2005), the insurer brought a
declaratory motion seeking a ruling that it had no obligation to defend its
insureds in litigation taking place before the Courts of the State of Georgia.
The insurers sought a subsidiary conclusion that in the event that the Court
determined that part or all of the American law suit had to be defended, the Court
issue directives as to what portion it had to assume. In this case, the Court
determined that the insurer had to assume the defence of its insured, save and
except for allegations made against the latter in respect of RICO violations
and the claim for punitive damages.
No proof was lead as to the actual fees and
disbursements incurred. The
Court commented as follows at page 1313:
"[79] En effet, aucune preuve n'a été présentée
sur la nature et le montant même afférent aux services rendus, de sorte que CGU
n'a pu en vérifier la pertinence ni même la "raisonnabilité". Ainsi,
conclure immédiatement à ce que l'assureur assume les frais déjà encourus par
les intimés et ceux qu'ils auront à encourir selon les proportions qu'a
estimées Me Purcell constituerait, comme l'a si bien dit le Juge Rochon dans
l'affaire Parizeau déjà citée, «ni
plus ni moins qu'un chèque en blanc donné aux procureurs des intimés.
[80] Le Tribunal est donc d'avis qu'il est plus
approprié, dans les circonstances de réserver les droits et recours des parties
quant au quantum de ses frais."
It is particularly in respect of the notions of
reasonableness and relevance that there is notable dearth of judicial
pronouncements and doctrinal commentaries. The following discussion shall set
out our modest proposals for guidelines and principles that may be of
assistance to the insurance practitioners who are called upon to determine the
appropriate allocation of defence costs.
We would suggest that by way of a preliminary
review prior to examining the defence costs in detail, one should determine
whether in the particular circumstances of the claim under review an argument could
be made that all or part of the defence costs are either prescribed or are
otherwise not recoverable under the governing policy due to the lateness of the
notice to the insurer.
It is now well-established in
The first reported decision to clearly recognize
that a distinct prescription period applies to the duty to defend was the
Quebec Superior Court decision in the matter of Bradley v. Moriarty,
[1999] J.Q. 5487, S.C.M., 500-05-012168-876. Briefly, the relevant facts are as
follows. In late 1987 an attorney was sued by his former client for
misadministration of property entrusted to the lawyer's care. In early January
1988, the attorney gave notice of the action to his professional liability
insurers which appointed attorneys to represent him. The attorney appointed by
the insurers noted that the appearance was subject to the ongoing investigation
by the professional liability insurers. In March 1988 the plaintiff was
examined on discovery and his testimony led the professional liability insurers
to conclude that the claim did not in fact come within the coverage provisions of
the policy and accordingly instructed their attorneys to withdraw from the
file. From that point onwards the attorney was represented by his personal
lawyers. The lawyers appointed for the insurers withdrew from the file in
August 1990. For reasons not explained in the judgment the defendant attorney
only sued the Quebec Bar's Professional Liability Insurance program for defence
costs some eight (8) years later. The defendant insurers invoked prescription
of the duty to defend.
The attorney argued that his right of action
against the insurer both in respect of the duty to defend and the duty to
indemnify would only arise once the final judgment had been rendered. The
attorney argued in the alternative that the duty to defend is one in which the
contract is performed successively and therefore only the defence costs which
had been incurred more than three (3) years prior to the institution of the
action against the Professional Liability Insurer would be time-barred. The
Court maintained the position of the Professional Liability Insurers.
In his judgment, Mr. Justice Pierre Boudreault
commented as follows at para. 73:
"73. Dans de telles circonstances, il est
logique que chacune des deux (2) obligations de l'assureur ait pour point de
départ des moments différents. Comme l'obligation de défendre dépend de la
nature de la réclamation tel qu'apparaissant à la déclaration principale, cette
obligation naît alors et l'assuré peu dès lors en recherche l'exécution,
puisque c'est à ce moment que les conditions juridiques du droit de poursuivre
à cet égard se rencontrent. Il n'a pas à attendre le jugement sur l'action
principale car celui-ci n'est pas la causa causans de l'obligation de défendre
mais seulement de l'obligation d'indemniser, laquelle a un fondement juridique
différent de l'obligation de défendre (…)."
The Court accordingly held that the insured's
entitlement to defence costs was prescribed because it did not seek to enforce
them within three (3) years from the decision of the Professional Liability
Insurer to withdraw from the file.
The reasoning of Mr. Justice Boudreault was
referred to and implicitly approved in the decision of the Quebec Court of
Appeal in the case of Axa Boréal Assurances Inc. v. Université de
Laval, [2003] R.R.A. 355 (C.A.). In this case, the University was sued by a
student but failed to give notice to its insurer, Axa, until the day that the
judgment was rendered and which happened to dismiss the student's action.
The student first sent a demand letter to the
University in December 1992. In January 1993 he instituted an action against
the University. The judgment was rendered in January 1997. In June 1997, after
receiving notice Axa denied coverage. In the interim, the student had appealed
the decision and in December 1997 the Court of Appeal confirmed the dismissal
of the student's claim. In May 1998, the Supreme Court of Canada declined leave
to appeal. The University sued Axa in July 1998 claiming the defence fees and
disbursements that it incurred in first instance and in the appeal process.
While the case was decided strictly speaking on
an issue of late notice, the Court considered that it was important to discuss
the issue of the alleged prescription of the claim of the University for its
defence costs. Thus, while one who would have to acknowledge that the comments
of the Court of Appeal are obiter dicta (comments upon a point
not necessarily involved in the determination of the cause), the statements of
the Court must nevertheless be construed as representing the Court's viewpoint
on the state of the law and are accordingly binding. In fact, subsequent
inferior Courts have referred to this decision as a precedent-setting judgment.
The Court of Appeal referred to the distinction
between the duty to defend and the duty to indemnify and noted that the two
obligations have a distinct starting point.
In the Court's view, it followed that:
"[44] Les principes énoncés ci-haut m'amènent à
conclure que le point qui marque le départ de la prescription du recours, qui
sanctionne l'obligation de défendre de l'appelante, coïncide avec la date de
signification de l'action de Laurendeau, en janvier 1993. La prescription était
donc acquise à l'expiration d'une période de trois ans, en janvier 1996." (ibid.,
361)
Another argument may be raised in the insurer's
favour arises from the standard "cooperation" clause that is found in
most policies, usually in a "General Conditions" section. The usual
wording provides that an insured shall not voluntarily incur any expenses
except at its own cost without the consent of the insurer. In our view, this
provision can be applied to defence costs incurred by an insured prior to it
giving notice to the insurer of a claim or lawsuit. The basic argument is that
all costs incurred by the insured prior to giving notice, including defence
costs, must be borne alone by the insured. This is a separate argument from that of
prescription and differs from the latter in that it is a bar only for those
costs incurred prior to notice and does not apply for post-notice costs.
Lichty & Snowden (supra) refer to the
defence costs incurred prior to notice as "pre-tender defence costs".
They note that the cooperation clause is intended to protect the interests of
the insurers. The insurers moreover expect that they will have the advantage of
appointing their attorneys and experts, based on the rates usually quoted for
insurers and the latter are also entitled to have control over the manner in
which the defence is conducted (ibid., pages 37-20 to 37-24).
The further argument in this respect is that the
obligation to pay defence costs, whether in pending or matters which have been
terminated through judgment, settlement or withdrawal of the action, would not
be owed until and unless the defence obligation is triggered. Since the duty to
defend commences upon the receipt of a notice from the insured of a claim or
lawsuit, there is no obligation to make any payments to defend the interests of
insured prior to that time (ibid., page 37-22).
In the Ontario case of Brockton (Municipality)
v. Frank Cowen Company Ltd. et al, (2002), 57 O.R. (3d) 447 (C.A.), the
Ontario Court of Appeal held that where a municipality had retained its own
defence counsel on the basis of a purported conflict of interest of the
attorney appointed by the insurance companies, without the consent of the
insurers, the municipality was not entitled to reimbursement of such costs.
In the Superior Court decision in Université
Laval v. Axa Boréal Assurance Inc., S.C.Q. 200-05-009695-987; [2001]
R.J.Q. No. 3380), the trial judge specifically referred to a cooperation clause
in the Axa policy and concluded that the fees and disbursements incurred by the
University prior to notifying Axa of the student lawsuit had to be fully
assumed by the University and that the insurer had no obligation to reimburse
them.
Mr. Justice Yves Alain made the following
comments on this issue at para. 54:
"54. Le Tribunal est d'avis que l'Université ne
peut réclamer de son assureur le paiement des frais encourus avant la
dénonciation puisque d'une part, ces frais n'ont pas été autorisés par
l'assureur et que d'autre part, l'assureur n'avait aucun contrôle sur la
défense de l'Université. Il y a eu préjudice pour l'assureur au sens de
l'avenant concernant cette portion de la réclamation. Il ne faut pas confondre
l'obligation de payer des honoraires par suite du refus de l'assureur d'assumer
son obligation de défense et ceux encourus volontairement sans aviser
l'assureur qui pourrait alors avoir agi autrement."
In the aforementioned Quebec Court of Appeal
decision in the Axa v. Université Laval matter (supra), it
was decided that the duty to defend is not a contract of "successive"
performance, even though the duty continues over several years. The
significance of this determination is that one could not argue that only those
defence costs which were incurred more than three years prior to the action
against the insurer being taken would be prescribed and that any costs incurred
in the three years prior to the action would fall outside the prescription
period. A finding of prescription thus results in a complete bar to any claim,
whether for past, current or future defence costs.
In determining whether the defence costs claimed
by the insured were necessary and reasonable, an objective test should be
applied. In terms of the various procedures, investigation and research expenses
for which a claim is made, the standard would be what the reasonably competent
attorney would have done in the circumstances.
By way of illustration, if the insured's attorney
undertook an exhaustive research on a simple point of law which the average
defence counsel would know, the expense associated with such
"unnecessary" research may not be considered justified and thus should
be assumed by the insured.
As for the "reasonableness" of the fees
sought, we would suggest that a Quebec Court may, by analogy, refer to section 8
of the
"3.08.01
The advocate must charge and accept fair and reasonable fees."
Article 3.08.02 sets out some of the criteria
against which the assessment is to be made:
"3.08.02 The
fees are fair and reasonable if they are warranted by the circumstances and
correspond to the professional services rendered. In determining his fees, the
advocate must in particular take the following factors into account:
(a) experience;
(b) the time devoted to the
matter;
(c) the difficulty of the
question involved;
(d) the responsibility
assumed;
(e) the
performance of unusual professional services or professional services requiring
exceptional competence or celerity;
(g) the result obtained;
(h) the judicial and
extrajudicial fees fixed in the tariffs."
As mentioned above, the insurance industry in
Once the Court determines that the insurer must
assume the defence costs for the covered portions of a claim or a suit, the
question may therefore arise whether the insurer would be entitled after-the-fact
to impose upon the insured's counsel hourly rates and similar prescriptions if
they are lower than what the insured's counsel had charged to its client.
One could reasonably argue that for any prospective
services performed at the cost of the insurer the latter's guidelines should be
enforced. In other words, any counsel acting for the insured's whose fees are
being paid by the insurer should not have a blank cheque to do what he pleases
at the expense of the insurer. However, the Courts would not likely
retroactively impose a different fee structure on the insured's attorney if the
insurer has initially denied coverage. The insurer cannot refute coverage and
at the same time invoke policy conditions or contractual terms found in other
services-related agreements such as guidelines.
Another principle which appears to have general
application across the jurisdictions is that when the disputed defence costs
can reasonably be determined to be attributable to both the covered claims and to
those which are not covered, the insurer must nevertheless assume the sole
responsibility for such costs, even though it may be said that the insured
would thereby benefit from a "windfall".
It is settled law in the
With respect to disbursements, one must also
determine whether they can be reasonably attributed to the covered or
non-covered items. For example, one can imagine the situation of the defence
counsel undertaking research and incurring costs in respect thereof both in the
terms of hourly rates, fees for obtaining judgments from online services and
photocopy costs. We would expect a Court to apply the same reasoning to these
expenditures as they would to fees, namely, unless the fees can be demonstrated
to be solely for the benefit of the non-covered claims, the insurer alone would
in all likelihood be held responsible for all such costs. Again, the burden of
proof would lie with the insurer to make evidence thereon according to standard
of the balance of probabilities
a) Canadian Common Law decisions
While there have been a number of judgments
rendered by Courts of first instance and appellate Courts pertaining to the
general allocation issues discussed above, we have selected representative
decisions to illustrate these points.
An oft-cited case is that of Modern Livestock
v. Kansa General Insurance Co., (1994) 18 C.C.L.I. (2d) Alta Q.B.; aff'd
(1995) 24 C.C.L.I. (2d) (C.A)). In 1984
Modern Livestock auctioned hogs belonging to its client to a third party. Five
days after the purchase, a stop payment was made because of an outbreak of a
disease in the purchaser's herd which he attributed to the hogs purchased.
Modern Livestock sued the purchaser for the purchase price and the latter
counter-claimed for damages. In 1990 judgment was rendered in favour of the
purchaser against Modern Livestock. Modern Livestock then commenced an action
against its Insurer Kansa. The latter contended that its Insured's claim was
not within the policy coverage, that it had no duty to defend and that moreover
the action was barred by a limitation period. It further argued that in the
event that a duty to defend was owed, only those allegations respecting
negligence and not those concerning breach of contract would attract coverage
and hence duty to defend.
The following are the key passages from the
judgment in first instance:
"… once the third party advances one or more causes of action
against the insured, which are potentially within the coverage and other causes
of action which are clearly outside the coverage, the insurer, if it refuses to
defend, should not be heard to deny responsibility for any of the costs of
defending. To hold otherwise would encourage insurers to refuse to defend where
one or more of the third party's causes of action fall clearly outside the
coverage even though one or more of the causes of action fall within coverage.
An insured has a reasonable expectation that in such a situation the insurer
will defend the action in all respects until it confines (if it can do so) the
possibility of recovery to claims outside the coverage of the policy." (ibid.,
ages 279-280)
(…)
"While my view is, as expressed previously, that in such a
situation, where the insurer refuses to defend, it must bear the entire costs
of the defence, if I am wrong the insurer should be able to escape paying some costs
of the defence only where it brings forth clear evidence of the allocability of
specific expenses to steps taken in respect of matters not within the coverage.
No such evidence is found here." (ibid., page 281)
The harsh consequence imposed upon the insurer
for its fundamental breach of contract has not been uniformly accepted in the
other Common Law jurisdictions. One of the leading cases which considered the
foregoing principle is the judgment of the British Columbia Court of Appeal in
the matter of Continental Insurance Co. v. Dia Met Minerals Ltd.,
(1996) (36 C.C.L.I.) (2d) 72 (B.C.C.A.). An action was taken against the
directors of a corporation and the corporation itself in respect of a share
transaction. It was alleged that the defendants had purportedly acted
deceitfully and in breach of their fiduciary duties. A dispute arose as to
whether the insureds were entitled to be represented by counsel of their choice
and eventually the lower Court held that the insurer had the right to take over
the conduct of defence but ultimately found that the insureds had retained
their rights to control the defence.
The key issue before the Court of Appeal was
whether the insurer's obligation to indemnify its insureds for defence costs
must be determined only from the pleadings and if any aspects of the claim were
covered, should the insurer pay the entire costs of the defence (ibid., page
79).
The B.C. Court of Appeal reviewed certain
American jurisprudence which held that the insurer must bear the entire costs
of defence where there was no reasonable means of prorating the costs of
defence between the covered and the non-covered items.
It suggested that the obligation to assume the
entire defence may be imposed where there is a "practical impossibility of
segregating defence costs" (ibid., page 80). The following passage
contains the key portion of the judgment:
"In my view, the Court's suggestion that unlike the
duty to defend, the obligation to indemnify in respect of defence costs should
be "assessed retrospectively" offers the solution to the almost
insurmountable difficulty of apportioning defence costs, on the basis of
pleadings alone, before or even after trial. No reason in principle has been
offered to us as to why the pleadings alone should govern and in my view there
are strong reasons why they should not. It seems both illogical and inequitable
to require an insurer who has not sought to shirk its obligations, to bear the
entire cost of defending a mixed claim in the face of clear terms that require
it to pay the cost of defending only claims relating to the insureds' offices
as directors and officers of Dia Met, and that exclude losses arising from
dishonest acts or the making of personal profits. If the Court were to require
ENCON to pay the entire defence costs of the insured, it would provide them
with a windfall merely because one or more allegations that were covered by the
Policy were advanced among several that are not covered. The only cases cited
to us that would support such a result were cases in which insurers refused to
honour their obligation to defend and were held liable for the full costs of
defending as a measure of damages for their breach of contract. (…) Clearly
this is not such a case." (ibid., page 92)
It is highly doubtful in our view that a Quebec
Court would sanction any unfounded denial of the duty to defend by requiring
the insurer to assume all the defence costs, even those for non-covered
matters. Even if such a denial were abusive or otherwise made in bad faith, the
measure of the damages of the insured would not necessarily be identical to or
commensurate with the cost of defending the non-covered claims.
A recent decision by the Ontario Superior Court
of Justice in the matter of Hanis v. University of Western Ontario,
2005-Can LII 47727 (ON S.C.), 2005-12-22, provides a very good overview of the
issues arising from difficulties in allocating defence costs in the context of
mixed allegations. In this matter, the defendant insurer had denied owing a
duty to defend to its insured, the University. The latter had been defended by its
own counsel because of the refusal to acknowledge any duty to defend. The Court was called upon to decide whether
the insurer was entitled to an allocation of legal defence costs and if so what
was the proper allocation between covered and non-covered claims. It was
further asked to decide the proper quantum of the insured's legal defence
costs.
In the underlying action, the insured University
had been sued for a variety of claims, including wrongful dismissal, unlawful
conspiracy, intentional interference with contractual relations, malicious
prosecution and defamation, among others.
After determining that the defendant insurer had
a duty to assume the defence of the University in the underlying action, the
Court ordered that a trial take place on the issue of allocation and defence
costs.
The insured took the position that the insurer was
not entitled to any allocation whatsoever with respect to the defence costs
even though many of the claims in the underlying action were not claims for
which the insurance policy triggers a duty to defend.
After reviewing the submissions of the parties
and referring to a number of Canadian Common Law decisions, Power J. summarized
the prevailing principles on the issue of allocation of defence costs at para.
193:
"193. (a) The insurer, as the wrongdoer, is not
relieved from its obligation to compensate the insured for its losses simply
because it is impossible to measure its damages with mathematical accuracy. On
the other hand, the insured, as the innocent party, must furnish such
assistance to the court by proof of relevant facts as it may, under the
circumstances, reasonably be expected to afford. The test is: what is
reasonable having regard to all the relevant circumstances? The focus must be
on the temporal aspects - i.e., what was reasonable in the insured's state of
mind when the expenses were incurred?
(b) The burden is on the
insurer, as the defaulting party (i.e., the party responsible for a breach of a
special contract, one which places the insured in a vulnerable position) to
clearly demonstrate what work and disbursements performed and incurred by the
solicitors, or the insured itself, clearly do not relate to covered claims.
This burden is a heavy one, but not an impossible one. It is a burden that
requires the insurer to propose a consistent and rational basis for a just
allocation of the defence costs;
(c) Where costs are incurred
for both covered or uncovered claims (mixed claims), or where there is no practical
means of readily distinguishing the costs of defence between the covered and
not covered claims, or where it is impossible to do so, it is not appropriate
to attempt to allocate defence costs and, therefore, the insurer should absorb
them. This consequence does not flow from a situation where allocation is
simply a difficult task but from situations in which there is a finding that it
is not practical or is impossible to do so. Where it is simply a difficult
process, the usual burden remains on an injured party to prove its damages, but
the burden must be balanced or tempered by the difficulty that is attributable
to the insured's denial of its duty to defend;
(d) Notwithstanding that it
may be impractical or impossible to apportion the costs of defence, the court
may refuse to order the insurer to pay all costs in relation to the ambiguous
claims where the insured admits that there should be some apportionment or
allocation;
(e) The insurer, of course,
is responsible only for the payment of defence costs that are reasonable. The
usual rules regarding the duty to mitigate apply;
(f) The insurer has no
liability to reimburse the insured for any defence costs which can be
identified by reliable evidence as relating solely to uncovered claims;
(g) Where there is any
ambiguity regarding whether a claim is within coverage, the ambiguity must be
resolved in favour of the insured;
(h) The insured, where there
has been a denial of the duty to defend, should ensure, as far as is reasonably
possible, that it and its counsel maintain appropriate records of the time and
expenses incurred by them in the defence of the claims against the insured.
This obligation should not be one of perfection;
(i) Where the duty to
defend an insured is denied and no preliminary ruling is sought from a court
with respect to allocation, and where no agreement is reached between the
insurer and the insured regarding allocation, the insurer, at an early date,
would be well advised to apply to a court for directions on the allocation issue;
and
(j) The court should not,
after-the-fact, attempt to fashion some sort of equitable formula based on some
undefined perception of fairness;"
The Court then proceeded to consider the issues
of burden of proof, the type of proof required in the circumstances of the case
and proceeded to rule upon the allocation issue at paras. 194 and following:
"[194] In my view, contrary
to Mr. Adair's submission, there is an established body of precedent applicable
to the issues in this case. On the other hand, I am uncomfortable with the
harshness of the rule as expounded by Mr. Scott where, as here, both Messrs.
Jarrett and Ortved and Mr. Scott himself in his final submissions, conceded
that there might be some work that was performed that related only to uncovered
causes of action.
[195] I pause here to note that
I would have reached the same conclusions even if I had found that malicious
prosecution was the only covered claim. In other words, the University's
approach to its defence would have been the same.
[196] Mr. Adair's plea that I
should sit back and take a look at the entire case and then conclude that
common sense dictates that Guardian should not, in this mixed claim situation,
be required to pay all defence costs is, at first blush, attractive. However,
on reflection, I am compelled to conclude that his position is contrary to the
established legal principles upon which the University relies. As stated above,
he is correct in his argument that the onus placed on Guardian by the
established authorities is a high and difficult one. However, this reality does
not convince me that in cases such as this, the onus on the insurer is
unreasonable. While I made no finding of bad faith against Guardian, its
refusal to defend the University and its employees is the proximate cause of
the recent difficulties in determining damages in this third party proceeding.
[197] In the circumstances of
this rather peculiar case, I agree with the Defendants' submission that
Guardian, having breached its contractual duty to defend, is liable for the
overwhelming bulk of the legal expenses that were incurred. This finding is
despite that the claim of Dr. Hanis related to both covered and uncovered
claims and despite that there might have been damages incurred that cannot be
traced directly and exclusively to covered claims.
[198] As noted earlier, in his submissions
to me, Mr. Adair suggested a methodology for the determination of the
apportionment or allocation. The proposal is not a simple formulaic one that is
easy to apply to the relevant facts. The methodology or proposal is vague and
of necessity will lead to a vague and uncertain result. However, this does not
mean that Guardian has failed to propose a methodology. The problem with which
I am here faced is that the evidence warrants a finding that not all of the
work for which legal fees were billed relates only to covered or mixed claims.
The insurer, therefore, it seems to me, is entitled to some consideration
because of this. A formula or methodology that forecloses such consideration is
simply too harsh and does not do justice between the parties in a case where
there is no bad faith on the insurer's part. Therefore, I conclude that, even
though the task is a difficult one, I must attempt to apportion some of the
damages or expenses to the University's side of the ledger. While the result I
have reached is unscientific, I have tried to do justice between the parties. I
conclude that Guardian should be required to pay damages equal to 95 percent of
the claim for fees and disbursements set forth in paragraph 5 hereof together
with interest at the rate of 8 percent and for the period previously mentioned.
In other words, I assess the damages, exclusive of interest, at 42,178,813.22.
Five per cent is my attempt at a reasonable assessment of the portion of all
the covered claims. I have not been persuaded that, with respect to the mixed
claims, there is a "body of factual evidence, documents and admissions of
witnesses in cross-examinations" that warrant apportionment. I find that
the "body of evidence" dictates, insofar as the mixed claims are
concerned, a ratio of 100 percent to 0 percent in favour of the University or,
put another way, consistent and rational basis for some allocation of defence
costs. It has elicited evidence, partly through cross-examination, and made
submissions that some of the preparatory work of counsel for the University,
i.e., the pleadings, the examinations for discovery, and the legal research
relate solely to non-covered claims."
b) American jurisprudence
In the context of this paper we do not purport to
provide a comprehensive summary of all relevant American decisions on
allocation. Instead, we will discuss those cases where the Courts comment on
how an insurer may avoid the consequence of being condemned to assume the
entire costs of an action, even for those non-covered claims, where the denial
of coverage is ultimately held to be unfounded.
To get around the potentially serious
consequences of having a denial of coverage determined to be unfounded or abusive,
in several jurisdictions American insurers have adopted a practice of either
having a non-waiver agreement signed with their insureds or issuing a letter of
reservation of rights and then proceeding to defend the entire claim, subject
to the right of the insurer to later seek reimbursement for the non-covered
items.
This approach is intended to deal with the
insurers' "dilemma" of how to defend an action without being held to
have waived its claim of non-coverage under the policy.
The distinction between a non-waiver agreement
and a reservation of rights letter is explained in the judgment of the Court of
Appeal of California in the matter of Val's Painting and Drywall Inc. v.
Allstate Insurance Company, 53 Cal. App. 3d 576; 126 Cal. Rptr. 267;
1975 Cal. App. LEXIS 1590. Allstate issued a reservation of rights letter to
its insured and subsequently settled the case. The insurer took the position
that the money it voluntarily paid out to the third party was in effect that of
its insured and that Allstate should be reimbursed for amounts paid out on its
insured's behalf, assuming that the policy did not cover the claims.
The Court of Appeal stated as follows with
respect to the two types of precautionary measures available to insurers
(footnotes omitted):
"The distinction between a nonwaiver agreement and a reservation of
rights has been stated as follows: "… A nonwaiver agreement is a bilateral
contract, normally in writing, entered into by the assured and the insurer
after the accident, providing that the insurer will defend the tort suit while
reserving its right to assert nonliability under the policy at a later date
(…) A reservation of rights is very
similar to a nonwaiver agreement, (…) and it is subject to the same limitations
and restrictions. If differs in being less formal than the nonwaiver and less
tied to strict contract principles. The insurer need only notify, or attempt to
notify, the assured that it is conducting the investigation and defense of the
tort claim under a reservation of the right to assert policy defenses at a
later time, and the assured's silence will usually be deemed acquiescence.
Courts have in general been fairly liberal in implying reservations."
The authorities (…) are split on the circumstances in which a unilateral
reservation of rights will preserve the rights of the insurer. (…) Thus, it has
been said that courts are liberal in implying a reservation of rights deeming
the insured's acceptance of the defense to be acquiescence. (…) On the other
hand, it has been said that if the insured expressly refuses to consent to a
reservation of rights, a unilateral reservation is ineffective; the insurer
must make an election whether to defend or refuse to defend.
In
The Court of Appeal held that in the circumstances of this case, the
Insurer was not permitted to seek reimbursement for the settlement unless it
had had secured specific authority to do so by the insured or had notified the
insured of a reasonable offer by the claimant and gave the insured an
opportunity to assume its defence.
The principle that an insurer must defend the entire action if any part
thereof may give rise to coverage was considered in the decision of the Supreme
Court of California in the matter of Robert v. Hogan v. Midland
National Insurance Company, 3 Cal. 3d 553; 476 P. 2d 825; 91 Cal. Rptr.
153; 1970 Cal. LEXIS 229. The insurer refused to defend on the ground that the
claims were not covered but ultimately it was determined that at least some of
the underlying action triggered the coverage provisions, including the duty to
defend. The Judge did not accept the insurer's argument that the duty to defend
was limited to those items of damage as to which there was coverage under the
policy and that the liability of the insurer for reimbursement of the insured's
defence costs should be prorated in the ratio that the amount to the damages
found to be covered by the policy bears to the total damages.
The Court stated that:
"The
rule is settled that an insurer is under a duty to defend a claim whenever the
allegations of a complaint would support a recovery upon a risk covered by the
policy. In these cases, however, various theories of recovery were asserted by
the plaintiff, only one or more of which were within the coverage of the
policy. The circumstances of the present case differ somewhat in that the
complaint alleges facts bringing the action with the policy's coverage but the
proof at the trial indicates that the insurer was not liable for some of the
damages suffered by the plaintiff.
The
cases which have considered apportionment of attorneys' fees upon the wrongful
refusal of an insurer to defend an action against its insured generally have
held that the insurer is liable for the total amount of the fees despite the
fact that some of the damages recovered in the action against the insured were
outside the coverage of the policy.
In
its pragmatic aspect, any precise allocation of expenses in this context would
be extremely difficult and, if ever feasible, could be made only if the insurer
produces undeniable evidence of the allocability of specific expenses; the
insurer having breached its contract to defend should be charged with a heavy
burden of proof of even partial freedom from liability for harm to the insured
which ostensibly flowed from the breach.
Diehl sought to absolved itself of any liability for kaufman's damages,
regardless of whether or not such damages were covered by the policy. Midlland
does not suggest how a determinable portion of the attorneys' fees expended by
Diehl in this effort could be allocated to the damages suffered by Kaufman as a
result of accident."
Contrary to the situation in
An executed non-waiver agreement or aptly-worded reservation of rights
letter allows an insurer to not only seek reimbursement of those costs
reasonably associated with non-covered claims, but can also substantiate a
claim for the reimbursement of the entire defence costs where it is determined
that the insurer had no duty to defend the third party action against its
insured.
In the case of Harry Gossard v. Ohio Casualty Group of
Insurance Companies, 39
The Supreme Court of California examined the legal basis for an
insurer's right to reimbursement of defence costs which are not covered in the
matter Jerry H. Buss v. The Superior Court of Los Angeles County and
Transamerica Insurance Company, 16
The Supreme Court of California held, inter alia, that:
1) An insurer has a right
of reimbursement of defence costs that is implied in law as quasi-contractual
as to claims that are not potentially covered; and
2) In actions involving
"mixed" claims, the insurer carries the burden of proof to establish
that defence costs can be allocated solely to the claims that are not
potentially covered.
On these issues it stated, in part:
"Under
the policy, the insurer has a duty to defend the insured as to claims that are at
least potentially covered. With regard to defence costs for these claims, the
insurer has been paid premiums by the insured. It bargained to bear these costs.
To attempt to shift them would upset the arrangement. This would not be the
case if the policy itself provided for reimbursement: such a policy would
qualify itself. It would also not be the case if there were a separate contract
supported by separate consideration: such a contract would supersede the policy
pro tanto. Otherwise, however, the insurer may not seek reimbursement. Surely,
it does not have a right to reimbursement implied in fact in the policy, having
bargained to bear the costs in question. Neither does it have such a right
implied in law. Under the law of restitution, a right of this sort runs against
the person who benefits from "unjust enrichment" and in favour of the
person who suffers loss thereby. Any "enrichment" of the insured by
the insurer through the insurer's bearing of bargained-for defense costs is
consistent with the insurer's obligation under the policy and therefore cannot
be deemed "unjust". It follows a fortiori that the insurer may not
proceed by means of a "reservation" of its rights of reimbursement.
It simply has no such "right" to "reserve". That is true
even if the insured agrees to the "reservation". The creation of a
right of reimbursement would amount to a pro tanto supersession of the policy
-- which would require a separate contract supported by separate consideration.
As
to the claims that are not even potentially covered, however, the insurer may
indeed seek reimbursement for defense costs. Apparently, all the decisional law
considering such claims in and of themselves so assumes.
Not
only is it good law that the insurer may seek reimbursement for defense costs
as to the claims that are not even potentially covered, but it also makes good
sense. Without a right of reimbursement, an insurer might be tempted to refuse
to defend an action in any part -- especially an action with many claims that
are not even potentially covered and only a few that are -- lest the insurer
give, and the insured get, more than they agreed. With such a right, the
insurer would not be so tempted, knowing that, if defense of the claims are not
even potentially covered should necessitate any additional costs, it would be able
to seek reimbursement.
The
second question, which follows from the first, is this: In a "mixed"
action, for what specific defense costs may the insurer obtain reimbursement
from the Insured?
The
answer is: Defense costs that can be allocated solely to the claims that are
not even potentially covered.
The
reason is this. It is as to defense costs that can be allocated solely to the
claims that are not even potentially covered that the insurer has not been paid
premiums by the insured. By contrast, the insurer has in fact been paid as to
costs that can be allocated solely to the claims that are at least potentially
covered. So too as to costs that can be allocated jointly to the claims that
are at least potentially covered and to those that are not -- by definition, these costs are fully
attributable to the former as well as the latter."
Finally, the Court considered the nature of the burden of proof that the
insurer bears in order to obtain reimbursement of the defence costs. It held
that the burden is one of balance of probabilities or preponderance of the
evidence.
c)
As mentioned above, the decision of the Quebec of Appeal in the matter
of Boréal Assurance v. Réno-Dépôt Inc. (supra) held that
duty to the defend does not automatically entail the unconditional payment of
all costs and fees incurred on behalf the insured's defence.
In Bétonnière St-Rémi Inc. v. Saint-Rémi (Ville), [1998]
J.Q. no. 4973 (S.C.; 28/09/1998), Madam Justice Carole Julien was seized with a
warranty action by an insured against its insurers. The insurers denied
coverage on the basis of the alleged fraud of the insured and that the claim
arose after the lapse of the governing policy.
The Court came to the conclusion that at least part of the action triggered
coverage in favour of the insured City, including the duty to defend, and that
other claims fell outside the coverage provisions.
After considering, among other cases, the aforementioned decision in Continental
Insurance Co. v. Dia Met Minerals Ltd. (supra), Madam Justice
Julien held that if the allocation of defence costs between covered and
non-covered items could not be clearly established, the insurer would bear
costs of the entire action. The Court stated as follows at paras. 193 and
following:
"193 Dans notre dossier, le Tribunal est confronté à une situation de
dénégation de couverture. L'assureur a refusé d'assumer les frais de défense.
L'assurée demande d'être indemnisée des frais encourus en raison de cette
dénégation. Le Tribunal est d'avis qu'il peut utiliser la position privilégiée
qui est la sienne, en raison du procès sur les actions principales et en
garantie, pour disposer de cette obligation d'indemniser les frais de défense à
la lumière de la preuve recueillie.
194 La
Cour d'Appel conclut que l'obligation de défendre sera partagée s'il est
possible de faire le tri entre les frais engagés dans le cadre des parties
couvertes ou non couvertes. Dans le cas contraire, l'obligation de défendre
sera entière.
In the decision of the Quebec Court of Appeal in the matter of Le
procureur général du Québec v. Benoît Girard (AZ-50285853; J.E.
2005-182, December 16, 2004) it was determined that the insurer was obliged to
assume the defence of only part of the claims alleged in the underlying class
action. The Court of Appeal referred to and approved the reasoning adopted by
Madam Justice Carole Julien in the above-discussed case of Bétonnière
St-Rémi in the following terms at para. 14:
"[14] Quant à l'obligation de défense, le juge de première instance a
commis une erreur en condamnant l'appelante à payer à l'intimée l'ensemble des
sommes déboursées pour assumer sa défense. En effet, l'obligation de
l'appelante se limitait à la question reliée au préjudice découlant de la
présence des rats. Ainsi, si l'appelante avait rempli son obligation, elle
aurait dû défendre l'intimée sur la question de la responsabilité et aussi sur
celle de dommages résultant de la présence de raits, mais n'avait aucune
obligation quant au reste des chefs de dommages eu égard à l'exclusion claire
dans la police du préjudice causé par le risque de pollution. Dans l'affaire
Bétonnière St-Rémi Inc. c. St-Rémi (Ville), la juge Carole Julien conclut que
les frais d'un procès doivent être partagés lorsqu'il est possible «de faire le
tri entre les frais engagés dans le cadre des parties couvertes et non
couvertes». Cette détermination est conforme aux principes généraux du droit de
la responsabilité suivant lesquels l'indemnisation est proportionnelle à
l'obligation. Dans les circonstances, vu l'ampleur de la preuve reliée à la
couverture d'assurance, l'appelante ne doit être tenue de payer que 50% des
frais déboursés par l'intimée pour ses frais de défense."
One of the rare reported cases which dealt with the issue of a disputed
allocation of the defence costs is that of Bionaire Inc. v. Calvert
Insurance Company, [1994] R.J.Q. 1290 (S.C.). The corporate Plaintiff had
obtained directors and officers liability insurance on its behalf and that of
its directors and officers. A suit was brought against the insureds in
connection with a commercial transaction. The defendant insurer denied coverage
on the basis of allegations of fraudulent acts against the directors. The
corporate Plaintiff was condemned in the underlying action but some of its
officers were held not liable for the damages. The corporate insured sought
reimbursement of the costs it had incurred to defend its innocent directors and
officers.
Proof was lead at trial concerning the accounts of the attorneys acting
on behalf of the corporation and the directors and officers. The Court noted
that there was some difficulty in evaluating the amounts that could be
reasonably attributable to the defence of the covered items.
After citing American case law which held that allocations are often
only approximations and are to be based on the responsibility according to the
relative exposure of the respective parties, the judge used her
"discretion" and "arbitrarily", in her words, allocated 30%
of the overall legal fees and disbursements to non-covered claims and then
deducted from the balance certain amounts attributable to errors in the
computation of the fees.
In appeal (Calvert Insurance Company v. Bionaire Inc.
[1998] R.R.A. 682 (C.A.)), the Court of Appeal modified, in part, the lower
Court's decision and substituted its approximation for the allocation between
the covered and the non-covered claims. It held that the trial judge had erred
in her allocation of the defence costs between the corporate plaintiff and its
administrators. However, the Court of Appeal did not explain in any detail on
what legal basis that revision was made, for example, whether it was an
unreasonable exercise of the lower Court's discretion or whether allocation is
to be considered either a pure question of law or a mixed question of facts and
law and thus subject to intervention by the appellate Court.
In the
Proof of the defence costs was lead principally through the evidence of
the attorney who had represented the insured in the underlying action.
Mr. Justice Joel A. Silcoff held that the insurer was not liable to
reimburse its insured the extrajudicial fees and disbursements paid in
connection with the warranty action based on prevailing Quebec law (e.g., Tamper
Corporation v. Kansa General Insurance Company, [1998] R.J.Q. 405
(C.A.)). Of the overall fees claimed, counsel for the insured proposed that 10%
of the fees related to the warranty action against the defendant insurer and
acknowledge that those fees could not be recuperated. No proof, however, was
made with respect to what percentage of the disbursements was attributable to
the warranty action.
The Court held that it was not possible or appropriate in the
circumstances to revise with any degree of accuracy which portion of fees and
disbursements in the statements of account were attributable to the warranty
action. It simply accepted the 10% allocation proposed by the insured.
With respect to disbursements, the Court assumed that substantially all
of the disbursements were attributable to the principal action or that those in
relation to the warranty action were inconsequential. In the circumstances, the
Court held that the disbursements attributable to the warranty action would
have been minimal at best and declined to make any allocation of such
disbursements.
Proof was lead by the insurer of the fees charged by its counsel for the
type of case in which the insured Plaintiff was involved. Although the
insurance industry rates were somewhat lower (up to $50.00 per hour) than that
of counsel retained by the insured, the Court observed that it had no basis to
question the reasonableness or propriety of the hourly rate charged by counsel
retained by the insured (para. 40) and accordingly held the amounts to be
"reasonable".
The Court also condemned the defendant insurer to pay for expert costs
assumed by the insured as well as premiums paid for letters of guarantee issued
in favour of the insured by a financial institution which the Court determined
would have normally been paid for by the defendant insurer. The letter of
credit was issued as a result of a judgment of the Court of Appeal requiring
security to be posted as a condition of the Appeal going forward.
IV. Conclusions
We have seen that compared to the Canadian Common Law jurisdictions and
the selected American decisions discussed above, there is relatively little
Quebec case law which provides any useful guidance to the Quebec practitioner
on the admittedly difficult issue of allocation of defence costs between
covered and non-covered claims.
It would not be surprising, therefore, were counsel for insureds to
invite Quebec Courts to adopt the standards and principles established in the
other jurisdictions in the absence of "Quebec-made" principles.
Before any such principles could be adopted, the Quebec Courts would have to be
satisfied that the legal principles are consistent with
We are particularly hesitant to concede that the principle that an
insurer which wrongfully denies coverage is bound to assume the entire costs of
the defence, even for non-covered items. This is a concept that is foreign to
Since most major insurers are doing business in the province of Quebec
have operations elsewhere in Canada and, to a certain extent, in the United
States, we would anticipate that the future will see more insurers open to the
practice of defending an entire suit under a non-waiver agreement or
reservation of rights where their entitlement to deny coverage is far from
clear. It may be the best practical solution for insurers to protect themselves
from the severe sanctions available to insured where denial of coverage is held
to be unwarranted or unreasonable.