This was an automobile insurer’s appeal of a decision ordering it to pay for separate counsel to defend its insured. At issue was whether the insurer, after adding itself as a third party to a civil action against its insured, had the right to take a position incongruent with the interests of the insured Defendant by raising issues relevant to a coverage dispute between the insurer and insured. The Court of Appeal upheld the motions court decision that the insurer and its counsel did not have the right to take a position contrary to its insured, regardless of whether coverage was in dispute.

Parlee v. Pembridge Insurance Co., [2005] N.B.J. No. 174, New Brunswick Court of Appeal

An insured vehicle owner gave her consent to two individuals to use her car. The two men were involved in a single-car accident in which one was severely injured and the other was killed. The injured man said that the deceased was driving at the time of the accident, and commenced an action for damages against the alleged driver and the vehicle owner. The solicitor for the owner’s insurer filed a Statement of Defence denying that the deceased was driving and alleging that the injured man was driving while impaired. The deceased’s parents commenced proceedings against the injured man and the vehicle owner, also alleging that the injured man was driving. The insurer filed a Statement of Defence on behalf of the owner, but denied liability under the policy and refused to defend the injured man on the grounds that he falsely denied being the driver.

The insurer was added as a third party in its own name, under the provisions of the Insurance Act that allow an insurer to appear as a third party and carry on a defence on behalf of the defendant insured, without being estopped from later denying liability under its policy if it is found that there is no coverage. The injured man brought an application claiming that despite the coverage dispute, the insurer had a duty to defend him and, because it had taken a position clearly incompatible with his interests, he should be permitted to appoint his own solicitors at the expense of the insurer. The application was granted and the motions court held that, while the insurer could continue to defend the action as a third party, it could not advance a defence contrary to the interests of the injured man.

The Court of Appeal upheld the decision in its entirety. Deschênes J.A. held that the Act was clear: while a Third Party insurer may participate to the same extent as if it were a defendant in a main action despite the fact that it is denying liability under the policy, the Act is intended to limit the issues to those between the plaintiff and the defendant. Any dispute between the insured and the insurer cannot be an issue. Counsel appointed by the insurer where such issues of coverage are raised cannot represent the insured defendant without “an obvious appearance of impropriety”, and outside counsel must be appointed.

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