Is An Insurance Company Required to Defend a Liability Lawsuit or Does the Insurance Company Only Pay If the Defendant Loses?

An Insurance Company Must Provide and Pay For the Defence of a Liability Lawsuit If the Possibility Exists That the Insurance Company Will Need to Pay the Liability If the Case Is Successful.

A Helpful Guide For How to Determine Whether An Insurer Owes a Duty to Defend a Legal Case On Behalf of An Insured

Insurance Claim Document Defending against a lawsuit may be quite costly in terms of time, stress, and money, all as in addition to the concern for possibility of losing the case.  Accordingly, concern for insurance coverage to protect both against the possibility of a losing outcome with corresponding liabilities becoming due, the insured person will usually also be quite concerned about coverage to fight the lawsuit.  Generally, where there is insurance in place that would be required to indemnify the insured or required to compensate the third party person bringing the case on behalf of the insured, then the insurance company also has the duty to provide, and pay for, a defence against the lawsuit.

The Law

Per Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33 (CanLII), [2010] 2 SCR 245, an insurer is under the duty to provide and pay for the defence of an insured person if the coverage provided within the insurance policy would become triggered if the legal case against the insured person results in a successful lawsuit.  This duty to defend was explained by the Supreme Court within Progressive Homes wherein it was stated:

[19]  An insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim (Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801, at pp. 810-11; Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, at para. 28;  Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at paras. 54-55).  It is irrelevant whether the allegations in the pleadings can be proven in evidence.  That is to say, the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify.  What is required is the mere possibility that a claim falls within the insurance policy.  Where it is clear that the claim falls outside the policy, either because it does not come within the initial grant of coverage or is excluded by an exclusion clause, there will be no duty to defend (see Nichols, at p. 810; Monenco, at para. 29).

[20]  In examining the pleadings to determine whether the claims fall within the scope of coverage, the parties to the insurance contract are not bound by the labels selected by the plaintiff (Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, at paras. 79 and 81).  The use or absence of a particular term will not determine whether the duty to defend arises.  What is determinative is the true nature or the substance of the claim (Scalera, at para. 79; Monenco, at para. 35; Nichols, at p. 810).

As per Progressive Homes, the duty to defend arises where the litigation brought against the insured may, following a trial, result in a liability that falls within the scope of the liability coverage provided by the insurer.  Thus the duty to defend arises from the mere possibility of such an outcome.  Following the Progressive Homes rationale, this was well stated in Backyard Media Inc. v. HDI Global Specialty SE, 2021 ONSC 2341 where it was said:

[6]  The policy in issue is a “duty to defend” policy. The insurer is required to provide a defence for the insured in the insured litigation if there is a “possibility” that the insurance policy will have to respond to the substantive claims against the insured in that litigation. The Supreme Court of Canada has held that in the context of a duty to defend policy,  if a claim falls within the terms of coverage and is not clearly and unambiguously excluded, then, by definition, there must be a “possibility of coverage”. See: Progressive Homes Ltd. v. Lombard General Insurance Co., 2010 SCC 33, at para. 51.

As stated within Progressive Homes when reviewing whether an insurance policy might be triggered, it is necessary to review the context of the allegations rather than the express words of the allegations.  For example, where allegations may use legal terminologies such as 'breach of contract', which is generally excluded by an insurance policy, the context of the allegations may involve negligence which may be included by an insurance policy even if the word negligence is absent.  For example, the lawsuit may allege that, "the Defendant breached the contract by failing to perform in the diligent manner that would be usual to a reasonable person"; and thereby the allegations sound in negligence.

The duty to defend was also well articulated in the case of Davis v. Guardian Insurance Co. of Canada, 1996 CanLII 8232 at page 5 wherein it was said:

The duty to defend falls to be determined on the basis of the pleadings in the underlined action or actions and the coverage provisions of the policy or policies of insurance. The general principle has been stated as follows:

The duty to defend is broader than the duty to indemnify, and the mere possibility that a claim within the policy coverage provisions will succeed is sufficient to engage the insurer's duty to defend.

(St. Paul Fire & Marine Insurance Co. v. Durabla Canada Ltd. (July 10, 1996) Ontario Court of Appeal [now reported 1996 CanLII 494 (ON CA), 29 O.R. (3d) 737 at p. 739, 137 D.L.R. (4th) 126]; Bacon v. McBride (1984), 1984 CanLII 692 (BC SC), 5 C.C.L.I. 146 at p. 151, 51 B.C.L.R. 228 (S.C.). 

Summary Comment

An insurer owes the duty to defend where an insurance policy provides coverage for the liability that may arise if the legal action brought is successfully proven.


True or False?

An insurance company has the duty to defend a liability case on behalf of the insured person where it is possible that an insurance policy could arguable apply if the liability claim is proven.
Yes / True No / False

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