Liability insurance lawsuits involving mixed coverage claims – that is, claims with elements inside and outside coverage – typically focus on the insurer’s duty to defend. The related but less examined question is how such claims affect the insurer’s ability to control the insured’s defence. This year, the Ontario Superior Court of Justice twice considered the circumstances under which a mixed coverage claim will force an insurer to yield control.
Liability insurance policies almost invariably reserve to the insurer the right to appoint and instruct the insured’s defence counsel. However, the right is not absolute. The accepted test for denying an insurer’s right to control the defence is whether, in the particular circumstances of a case, there is a reasonable apprehension of a conflict of interest if one lawyer was to act for both the insurer and the insured. In mixed coverage claims, the lawyer has an inherent conflict of interest because the insurer benefits if the claim falls outside coverage and the insured benefits from the opposite result.
Despite this inherent conflict, a mixed coverage claim is not, in itself, sufficient to deny an insurer’s right to control of the defence. Because many claims contain at least some allegations that might fall outside coverage, a “zero tolerance” conflict rule would render illusory the insurer’s general right to control the defence. Instead, the rule is that the conflict must be enough to raise in the insured’s mind a reasonable fear that a lawyer retained and instructed by the insurer would follow a strategy designed to place the loss outside coverage. In Glassford v. TD Home and Auto Insurance Company and Coakley v. Allstate Insurance Company of Canada the Ontario Superior Court of Justice was asked to consider whether the insureds’ fears were reasonable.
In the Glassford case, the insured was sued by a neighbour who claimed the insured physically attacked him during a snow shovelling dispute. The insured’s liability policy contained an “intentional acts” exclusion but the neighbour opened the door to coverage by pleading that his injuries resulted from the insured’s negligence. The insured widened the opening by pleading that he acted in self defence, having used only as much force as was reasonably necessary. The liability insurer, TD Home, investigated the claim under a non-waiver agreement but made no coverage decision. To force coverage, the insured sued TD Home, seeking a declaration that the insurer was obliged to defend the underlying tort claim and an order allowing the insured to select and instruct defence counsel at the insurer’s expense. After ruling that TD Home was obliged to defend the insured in the tort action, Justice Brown considered who had the right to control the defence.
TD Home argued that the circumstances of the case did not raise a sufficiently great apprehension of conflict that would warrant removing control of the defence from the insurer. However, TD Home also argued in the same hearing that the true nature of the tort claims against the insured was intentional assault which was excluded from coverage under the insurance policy. Justice Browne concluded that the insurer’s second argument created a sufficient conflict of interest that the insured was entitled to select and instruct his own defence counsel at the insurer’s cost.
The Coakley case also concerned a physical altercation with the plaintiff alleging assault and the insured defendant claiming self defence. The insured issued a third party claim seeking coverage from his liability insurer, Allstate. In response, Allstate brought a summary judgment motion to dismiss the claim against it. The motion judge ruled Allstate had a duty to defend the insured in the tort action. On a subsequent motion, the insured sought a declaration that he was entitled to retain and instruct defence counsel at Allstate’s cost. Justice Herman heard the second motion. She reviewed past cases in which the presiding judge decided that an insurer’s initial refusal to defend an action coupled with an ongoing coverage dispute would cause a reasonable person to perceive a conflict of interest. Justice Herman concluded she was dealing with a similar situation and so ordered Allstate to pay the legal bills of a defence lawyer selected and instructed by the insured.
The primary lesson of Glassford and Coakley is that insurers dealing with mixed coverage claims should weigh the non-covered claims to determine whether they create a significant conflict of interest for insurer appointed defence counsel. If so, it may be unwise to resist an insured’s demand for control of the defence. Indeed, in some circumstances, it is advisable to insist the insured take control of the defence. For more information in that regard, see Nigel Kent’s paper “Juggling Ethics: Joint Retainers and the Professional Obligations of Defence Counsel” which can be found online here: www.cwilson.com/pubs/insurance/npk18. The second lesson of Glassford and Coakley is that insurers seeking to retain control of the defence should utilize non-waiver agreements or reservation of rights letters but refrain from taking any position or making any arguments against coverage prior to judgment in the underlying action. Of course, insurers must still perform their good faith obligations to warn insureds about the possibility of claims falling outside coverage.
