An Insurer has a duty to defend an Insured if there is a possibility that the allegations in the Statement of Claim permit a judgment against an Insured within the terms of the policy of insurance. Whether there was any merit to the alleged claim, or whether the alleged claim could be proven at trial, is irrelevant. Furthermore, it is inappropriate to rely upon the Statement of Defence and third party pleadings when determining whether a duty to defend existed.

Wi-Lan Inc. v. St. Paul Guarantee Insurance Co., [2005] A.J. No. 1416, Alberta Court of Appeal

St. Paul Guarantee Insurance. Co. (“St. Paul”) issued liability insurance that provided coverage to Mr. Zaghloul only when he was acting solely as a director or officer of Wi-Lan Inc. The policy specifically excluded coverage for actions arising from Mr. Zaghloul activities arising from his relationship with any company but Wi-Lan Inc.

Mr. Zaghloul, Wi-Lan Inc., and several other companies, were sued by a Plaintiff over a real estate transaction. The Statement of Claim alleged that there was a breach of contract by Mr. Zaghloul for failing to convey some property to the Plaintiffs that they had contracted for. St. Paul refused to provide coverage to Mr. Zaghloul and Wi-Lan Inc. on the basis that the allegations appeared to be solely against Mr. Zaghloul, or in the alternative that they arose from Mr. Zaghloul’s activities with uninsured companies, and that the allegations were therefore not covered by the policy of insurance. Mr. Zaghloul and Wi-Lan Inc. filed a Statement of Defence. Wi-Lan Inc. pled that it had no involvement in any of the matters relating to the proceedings.

Mr. Zaghloul and Wi-Lan Inc. commenced an action against St. Paul for a declaration that they were entitled to a defence under their policy of insurance. The Chambers judge reviewed both the Statement of Claim and the Statement of Defence filed by Wi-Lan Inc. and determined that there was no entitlement to a defence under the policy of insurance.

The matter was appealed to the Alberta Court of Appeal. In examining the pleadings, the Court of Appeal noted that the Statement of Claim contained allegations which had the potential for the following results, depending on the evidence at the future trial:

No defendants performed any of the acts alleged against them;

Defendants other than Mr. Zaghloul and Wi-Lan Inc. performed the allegations alleged;

Mr. Zaghloul performed the allegations alleged against him, while acting in his own capacity;

Mr. Zaghloul performed the actions alleged against him in his capacity as a director of Wi-Lan Inc. and additional companies; and

Mr. Zaghloul performed actions alleged against him solely acting in his capacity as a director of Wi-Lan Inc.

The Court of Appeal noted that there was a possibility, based upon the pleadings contained in the Statement of Claim, that Mr. Zaghloul and Wi-Lan Inc. would be entitled to coverage under the policy of insurance that they had with St. Paul.

The Court of Appeal was critical of the Chambers Judge’s reliance upon the Statement of Defence filed by Wi-Lan Inc. in determining whether a duty to defend the allegations existed. The Court of Appeal noted that the underlying principle is that the Insurer should defend any claim by the Plaintiff which could possibly lead to a judgment which the Insurer would have to pay. Asking what is the “true claim” or “real nature of the suit” departs from that basic principle. Such a question invites either looking at ‘outside’ evidence of liability and guessing who will win the later trial, or speculating as to what evidence the Plaintiff would call at trial. The duty to defend should depend upon the nature of the claim made, not upon the judgment which later results. Therefore, the Court of Appeal noted that it was wrong in principle to examine the Statement of Defence in determining whether a duty to defend existed.

The Court of Appeal put no weight on the Statement of Defence that had been filed by Wi-Lan Inc. in coming to its conclusion that St. Paul owed a duty to defend to Mr. Zaghloul and Wi-Lan Inc. The appeal was allowed.

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