I came across an interesting coverage decision, which is worth a quick read for its practical implication in grey area (RoR) cases…
The duty to appoint and instruct defence counsel is an important component of a liability insurer’s risk and cost management strategy. In Mori-Vines Inc. et al v. Northbridge General Insurance Corporation, 2017 ONSC 5718, Koehnen J. observed that, in circumstances were a liability insurer litigates its duty to defend, the insured may perceive that its interests are no longer best served if that same insurer has control of its defence (“The plaintiffs say the insurer has already decided that there is no duty to defend and no duty to indemnify. That creates the risk that the insurer could direct the defence to ensure that any finding of liability is one that falls outside the scope of the insurer's duty to indemnify.”). To illustrate the issue, the Court explained:
“In the present case, the insurer and its counsel have taken firm positions and have devoted a fair degree of energy and analysis to their positions. It is difficult for anyone in those circumstances to reverse course and advance vigorously, a contrary position. If it were determined that [the liability insurer] did have a duty to defend the [underlying proceedings], [the insured’s representatives] would, in my view, have a reasonable apprehension that personnel who have been involved to date on behalf of [the liability insurer] would find it difficult to approach the matter with a completely open mind and that there would be a real risk that the insurer could steer the defence or witnesses towards a theory that characterized the conduct of the insureds as falling within an exclusion. This is in no way to impugn the character or good faith of the people involved. It simply reflects the human difficulty in advancing a position that is contrary to the position one has advanced before. While lawyers may be used to doing so. They usually do so on behalf of different clients and in the face of different facts.”
Koehnen J. ultimately decided there was no duty to defend in this particular case (i.e. the operation of an exclusion withdrew coverage). Notwithstanding, his further comments reflect that the initial coverage conflict need not automatically deprive the insurer of its right to appoint and instruct counsel, first explaining “ …there are steps that can be taken to guard against those risks while at the same time maintaining the policy's character as a duty to defend policy.” If coverage was ultimately confirmed (i.e. on appeal … and it wasn’t), he proposed the following steps to protect the insured’s interests:
1. The Insurer would continue to have the right to appoint and instruct counsel to defend the Insureds.
2. Only defence counsel who had not acted for the Insurer and the Insured in the last five years could be appointed.
3. The adjuster with carriage of the defence should be different from the adjuster who had carriage of the coverage issue (i.e. splitting the file).
4. The new defence counsel should not have any discussions with the coverage counsel, the coverage adjuster, or other of the liability insurer’s personnel involved in the coverage issues.
5. The insurer’s defence file should be purged of all documents dealing with the prior coverage issue prior to being assigned to the new defence adjuster and new defence counsel.
6. New claims staff within the liability insurer’s office should be appointed (i.e. who had nothing to do with the claim prior to the Court’s resolution of the coverage dispute), who would have no communication with anyone who had dealings with the coverage issue.
7. New defence counsel would report to both insurer and insured about all steps taken in defence the proceedings. Both insurer and the insured would be in a position to monitor the defence effectively and address concerns as they arose.
I typically make the same recommendations in “grey area” cases”, for instance, where a liability insurer acknowledges its duty to defend (i.e. based on the pleadings), but identifies a reasonable possibility there will ultimately be no indemnity obligation (i.e. based on early investigative/extrinsic evidence).