The Defendant (the “Insured”) in a defamation action applied for a Declaration that it was entitled to a defence under the terms of a Directors’ & Officers’ Liability policy (the “Encon Policy”) and a Commercial General Liability policy (the “Co-Operators Policy”), and for a further Declaration that it was entitled to appoint its own counsel. The court held that Co-Operators had a duty to defend because some allegations in the pleadings fell within the realm of its duty to defend. The court further held that the Insured was entitled to appoint its own counsel at the expense of the Insurer.

Conservation Council of New Brunswick Inc. v. Encon Group Inc., [2005] N.B.J. No. 109, New Brunswick Court of Queen’s Bench Trial Division

The Insured was a Defendant in the underlying defamation action. The Insured applied for a declaration that its Insurers (Cooperators and Encon) owed it a duty to defend in the circumstances.

The Co-Operators Policy, the primary policy, excluded coverage for injury arising out of advertising, publishing, broadcasting or telecasting done by or for the Insured. It expressly excluded coverage for injury arising out of oral or written publication of material, if done by or at the direction of the Insured with knowledge of its falsity.

The court referred to the so-called “pleadings rule” and found that it was evident from the pleadings that a large proportion of the allegations made against the Insured appeared to be covered by the Co-Operators Policy. The Court noted that only one allegation, which dealt with material disseminated on a website maintained and controlled by the Insured, appeared to fall within the exclusions. Co-Operators had a duty to defend. Because the claim was seamless as pleaded, it was not possible to distinguish between the Defence costs that might be attributable to the allegations that might be covered by the policy and those that were excluded. As such, the court held that Co-Operators would bear the cost of defending the action.

The court held that even though Co-Operators had appointed separate coverage counsel and defence counsel, the Insured was entitled to appoint its own counsel at the expense of Co-Operators. The court noted that the issue of whether or not there was publication or broadcasting by or on behalf of the Insured may well become an important evidentiary component of the trial. Thus, even though the trial counsel appointed by the Insurer would not be retained to canvass coverage issues, it would be too substantial a conflict to ignore.

To stay current with the new case law and emerging legal issues in this area, subscribe here.