The Ontario Court of Appeal decision of The Commonwell Mutual Insurance Group v. Campbell, 2019 ONCA 668, is an appeal from an Application brought by a home owner’s insurer, Commonwell Mutual Insurance Group (Commonwell), seeking a declaration that it did not have a duty to defend or indemnify their insured in an action brought against him for an ATV accident..  

The insured’s automobile insurer, The Guarantee Company of North America (Guarantee), had him sign a non-waiver agreement and issued a reservation of rights letter before ultimately denying coverage. But the home owner’s insurer, Commonwell, appointed a lawyer to defend the action against the insured. Pleadings were exchanged, and other steps were taken in the action. Commonwell had not obtained a non-waiver agreement or issued a reservation of rights letter.

The action proceeded to the discovery stage. The plaintiff’s lawyer asked Commonwell’s lawyer if there were any coverage issues. This prompted Commonwell to make its first inquiry into coverage.

Ten months after first appointing counsel, Commonwell advised the insured that it was denying coverage. Commonwell advised that it would be bringing an Application for a declaration that it was not obligated to defend or indemnify.

Commonwell took issue with coverage, where the home owner’s policy required the ATV to be registered. During the Application hearing, Commonwell also argued that the ATV was used without consent.

Commonwell did not deny that it had all the information and knowledge to deny coverage at the outset. Commonwell did not dispute that the insured relied upon Commonwell’s conduct in concluding that his potential liability was covered and that he would be defended.

Justice Calum Macleod heard Commonwell’s Application and dismissed it. Justice Macleod concluded that Commonwell had either waived its right to deny coverage and refuse to defend, and/or that it was estopped from doing so.

Commonwell appealed. The Court of Appeal upheld Justice Macleod’s decision.

Commonwell argued that, where it had identified the coverage issues, there was an inference of prejudice in the Commonwell’s defence of the insured. The Court of Appeal found the opposite, citing evidence that the insured assumed that his interests were being taken care of. The insured did nothing to secure his own, personal lawyer or to second-guess the decisions being made by the lawyer Commonwell retained. The insured allowed Commonwell to prosecute the defence of his case for close to a year without taking charge of his own defence.

The Ontario Court of Appeal cited the Supreme Court of Canada decision of Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, in finding that the obligation to defend is broader than the obligation to indemnify. The duty to defend is based on the possibility rather than the fact of coverage because, as a practical matter, the decision whether to defend has to be made before the duty to indemnify can be finally determined. This functional distinction between the duty to defend and the obligation to indemnify has nothing to do with resolving which provisions of the insurance contract the insurer is entitled to rely upon. 

The Court of Appeal concluded that Justice Macleod’s findings regarding estoppel and waiver were clear. Commonwell was estopped from relying upon the registration exemption and the consent exemption. The finding of estoppel prevented Commonwell’s ability to invoke these exemptions, whether to dispute its duty to defend or to dispute indemnification. Justice Macleod’s comments regarding estoppel and waiver are found at paragraphs 30 to 37 his decision (2018 ONSC 5899 (CanLII)):

It should be noted that an insurer may elect to disregard a policy breach or it may waive reliance on an exclusion. Where a breach has been waived, the insurer cannot later resile from such waiver.  Accordingly, there is a duty on the insurer to be clear about its position and not to leave an insured with a false belief that its interests are protected.

Where a claim clearly falls outside the scope of an insurance policy or falls within an exclusion or exception, the insurer should deny coverage clearly and unequivocally.  In cases where there is doubt about a duty to defend or where there may be a duty to defend but there may not be a duty to indemnify, the insurer must take steps to bring the possibility the claim will be denied to the attention of the insured.  Non-waiver agreements or reservation of rights letters are important tools to ensure an insured clearly understands she or he may be without coverage.

If there is some doubt about coverage and the insurer requires time to investigate, the general practice is to obtain a non-waiver agreement or to reserve rights.  This is precisely what Guarantee did before ultimately denying coverage. An insurer that proceeds to defend an action, or even an insurer which unequivocally states that it will defend an action, may be taken to have waived reliance on the exclusion or it may be estopped from later denying coverage.

As long ago as 1921, the Supreme Court of Canada held that having elected to defend an insured rather than contesting coverage, the insurer could not avoid paying the judgment after it took the matter to trial and obtained an unfavourable result. In the circumstances of that case, the insurer was found to have made an election not to rely on a condition in the policy.

It is not necessary for there to be an adverse judgment. If the facts as pleaded clearly give rise to an exclusion and the insurer ignores it and proceeds to defend the action it may be deemed to have waived its right to rely on the exclusion.

This principle is partially codified in s. 131 (1) (b) of the Insurance Act.  That provision provides that the obligation of an insured to comply with a requirement under a policy of insurance is excused to the extent that the insurer’s conduct reasonably causes the insured to believe that compliance is excused in whole or in part and the insured acts on such belief to his or her detriment.

An insured must not be prejudiced by a false sense of security.  Quite apart from election or waiver, an insurer that provides a defence to the insured without a reservation of rights may be estopped from taking an off coverage position later in the litigation.  In Rosenblood Estate, it was held that by defending a claim without a reservation of rights, the insurer did so at its own risk.  By defending the insured through production, discovery and the start of settlement negotiations, the insurer was estopped from denying coverage.

It has also been held that where the litigation is at an advanced stage, prejudice to the insured is inferred, estoppel applies and in that case there is no need to decide if the actions of the insurer also constitute a waiver.

The Court of Appeal awarded substantial indemnity costs against Commonwell, where an insurance company unsuccessfully sought to avoid its duty to defend.

For further reading on this subject, see: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, [2010] 2 S.C.R. 245; Temple Insurance Co. v. Sazwan, [2018] A.J. No. 376; Reeb v The Guarantee Company of North America, 2017 ONCA 771; Brockton (Municipality) v Frank Cowan Co, [2002] O.J. No. 20; and, Hoang v Vicentini, 2015 ONCA 780.

Meredith Harper is co-chair of the Appellate Advocacy practice group and author of this blog. If you have questions about this decision or a similar file, please contact Meredith at 416-777-5207.