Where an insurance policy provides indemnification for legal actions commenced against an insured, but is silent about providing indemnification for enforcing the insurer’s duty to defend a claim, the insurer is required to provide the insured with full indemnity for seeking a declaration of entitlement to coverage from the insured, when the insured is successful in obtaining a declaration of entitlement to a defence

Lombard General Insurance Co. of Canada v. Crosbie Industrial Services Ltd., [2006] N.J. No. 276, Newfoundland Court of Appeal

Crosbie Industrial Services Ltd. (“Crosbie”) was insured by Lombard General Insurance Co. of Canada (“Lombard”) under a commercial general liability policy. Crosbie, a cleaning company, was hired as a subcontractor to clean a large fuel oil storage tank. The tank exploded after cleaning and the owner of the tank, Ultramar, sued Crosbie for damages for loss of the tank, cost to dismantle it and other related costs. Crosbie defended the action, claiming the accident was inevitable and made allegations of negligence against Ultramar and another contractor. In addition, Crosbie issued and served a Third Party Notice and a Statement of Claim on Lombard, seeking indemnification if Crosbie was held liable. Lombard denied it had a duty to defend the action because it considered Ultramar’s claim outside the scope of Crosbie’s policy.

On a summary trial application, the Judge concluded that Lombard had a duty to defend on behalf of Crosbie and ordered Lombard to pay Crosbie’s costs of applying for the determination of insurance coverage on a party and party basis. In addition, Lombard was required to provide Crosbie with full indemnification for the defence of the allegations that had been made against it by Ultramar. Crosbie appealed the decision of the summary trial judge on the basis that it was entitled to full indemnification, or solicitor and client costs, for the action it had commenced to compel Lombard to provide coverage.

Crosbie did not make any allegation of bad faith against Lombard, nor did it rely on bad faith conduct as a basis for requesting costs on a solicitor and client basis. The Newfoundland Court of Appeal noted that the summary Judge neglected to consider that the basis for a solicitor and client cost award may be found in the insurance contract itself. The Court noted that this issue was discussed in detail in M.(E.) v. Reed (2003), 171 O.A.C. 145 (ONCA) (leave to appeal refused [2003] S.C.C.A. No. 334):

[22] Entitlement to solicitor-and-client costs in the third party proceeding flows directly from the unique nature of the insurance contract which entails a duty to defend at no expense to the insured. The obligation to save harmless the insured from the costs of defending the action is sufficiently broad to encompass the third party proceedings. It is the contractual basis for the claim to solicitor-and-client costs that justifies the award and therefore constitutes an exception to the usual rule that solicitor-and-client costs will not be awarded except in unusual circumstances.

In the case at bar the insurance contract provides for payment relating to defending an action for damages to property covered by the insurance contract. However, although the language is specific regarding the cost of defending an action covered by the insurance contract, specifically noting that these costs will not reduce the monies available to indemnify the insured under the policy and that the insured is entitled to full indemnification, there is no mention of costs where the duty to defend is disputed by the insurer. The Court concluded that, in the absence of a clear indication to the contrary, the insured is entitled to full indemnity of its costs related to enforcing the insurer’s duty to defend.

The insured’s obligation with respect to costs in this context is broadly stated in the Reed decision. The Newfoundland Court of Appeal noted that it had not been directed to any authority that would lead them to conclude that this case is different from that reached by the Ontario Court of Appeal in Reed. It therefore follows that Crosbie is entitled to full indemnity for expenses incurred in enforcing Lombard’s duty to defend it against Ultramar’s claim.

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