The Difference Between an Insurer’s Duty to Defend and the Duty to Indemnify

A recent decision of the Ontario Superior Court of Justice, MacFarlane v. Canadian Universities Reciprocal Insurance Exchange, 2019, 2019 ONSC 4631, answered the question of whether a university’s insurer had a duty to defend a professor accused of defaming a former colleague in relation to statements about unproven allegations of sexual misconduct.

The decision turned on whether the professor accused of certain defamatory acts was acting on behalf of the university at the time of the alleged acts, and thus falling under the definition of an “Additional Insured” as defined by the policy.

This decision was also a good reminder that a duty to defend can be easily triggered by pleadings as it is a much broader duty than an insurer’s duty to indemnify.

Nonetheless, this case may make the rounds and be used to bolster arguments that, by extension, the university too must defend a professor accused of defamation while acting in the course of their employment and also take ultimate financial responsibility for any damages that may be awarded against the professor. However, citing this case for such a proposition would not be appropriate, as the Court itself states in a footnote in the judgment: “Both sides agree that [the duty to defend] is a broader and different duty than the duty to indemnify, which is not being decided at this time”.

Background

Dr. M is employed at the University of Windsor. Prof. C was terminated from the University and found employment elsewhere. The termination was subject to a Non-Disclosure Agreement (the “NDA”) between Prof. C and the University. Following the termination, Dr. M made various allegedly defamatory statements against Prof. C to three contexts, including to Prof. C’s new employer, warning them that Prof. C was a sexual predator (the “Warning Statements”). The Warning Statements related to unproven allegations of sexual misconduct/harassment involving students at the University of Windsor. Prof. C brought a defamation action against Dr. M for the Warning Statements (the “Defamation Action”).

The University’s insurer, Canadian Universities Reciprocal Insurance Exchange (“CURIE”), provides coverage – defence and indemnification – to employees of the University facing defamation claims but the insurance policy excludes coverage where claimed acts were performed outside of the employment capacity. It was on this basis that CURIE denied it had a duty to defend Dr. M in the Defamation Action.

The Key Coverage Issues

The first issue before the court was whether Dr. M was acting within her employment capacity when she made the Warning Statements and, specifically, whether she was acting in her capacity as a professor employed by the University of Windsor on the University’s behalf (the “Employment Capacity”). If so, then Dr. M was an “Additional Insured” under the CURIE policy and entitled to coverage. Also at issue was whether the pleadings triggered CURIE’s duty to defend Dr. M if she fell under the definition of “Additional Insured”.

The Court’s Analysis

In considering whether Dr. M had acted in her Employment Capacity, the Court noted, among other things, that in making the Warning Statements, Dr. M identified herself as a Professor of Law at Windsor Law; used her University of Windsor email address; and made the Warning Statements to Prof. C’s current employers about his employment and conduct towards students while he was at the University, in her capacity as a professor at the institution from which Prof. C’s employment had been terminated.

The Court dismissed CURIE’s argument that the NDA foreclosed the possibility that Dr. M was acting in her Employment Capacity. At paragraph 43 to 45, the Court wrote,

After determining that Dr. M was an “Additional Insured”, the court went on to find that the duty to defend had been triggered by the pleadings. The threshold to trigger a duty to defend is low: the insured must prove that, assuming the facts plead in the originating lawsuit are true, there is a “mere possibility” that the claim falls within coverage, giving the “widest latitude” to the plaintiff’s originating pleadings (Bacon v. McBride, 1984, I.L.R. para. 1-1776, Co-operators General Insurance Company v. Kane, 2017 BCSC 1720 at para 20). In this case, the pleadings satisfied the well-established test. The court concluded there was at least a mere possibility that a claim had been asserted in the Defamation Action against Dr. M. Consequently, CURIE had a duty to defend Dr. M in the Defamation Action.

It is important to note that the Defamation Action also involved alleged defamatory comments made by Dr. M about Prof. C in two other contexts: comments to the Canadian Broadcast Corporation and to a law firm that Prof. C had formerly been affiliated with. With the finding that Dr. M was an “Additional Insured” and that the duty to defend triggered, the Court did not need to consider whether Dr. M was acting in her Employment Capacity when making these statements, but the Court did mention (again in a footnote) that:

“It is my observation that [Dr. M] would have a more difficult time establishing that she was acting in her capacity as a professor on behalf of the University of Windsor in respect of the statements that she made to the KPA law firm and the CBC.”

Take away

Liability policies generally impose a duty to defend an insured in actions seeking compensatory damages arising from bodily injury or property damage. The duty to defend generally co-exists with the duty to indemnify, however, the scope of the duty to defend is much broader and may exist even where the insurer is not ultimately required to indemnify the insured. The threshold to trigger a duty to defend is low: there must be a “mere possibility” that a claim falls within the policy. Contractual interpretation of the policy is necessary to determine whether the alleged acts are covered.

This decision provides a good summary of the law applicable to an insurer’s duty to defend an insured.

For more on defences to defamation lawsuits in the context of warning others of alleged sexual misconduct and/or for assistance with employment, post-secondary or insurance coverage matters, please contact a member of Clark Wilson’s Employment & Labour, Higher Learning or Insurance Groups.