An obligation to defend is not triggered by an insured providing notice of an expected claim

The Insurer successfully appealed a decision of the trial court finding that the Insurer had a duty to defend the Insured under a professional liability insurance policy.  The trial judge determined that the insurer had a duty to provide coverage to their insured for a claim, when the insured provided the insurer with notice that they expected a claim to be commenced against them as a result of a power shut down.  The Court of Appeal determined that under the policy an expectation of a claim was not sufficient to trigger coverage under the policy.

MWH International, Inc. v. Lumbermens Mutual Casualty Co., [2007] B.C.J. No. 559, British Columbia Court of Appeal, Ryan, Huddart and Lowry, JJ.A., March 20, 2007

The Insured firm of consulting engineers had obtained a professional liability insurance policy from the Insurer in respect of the design and construction of a power plant project which commenced in early 1999.

In April 2004, a major part of the power plant failed. This failure caused the plant to shut down for some time with a resulting loss that was estimated to be in the range of $50 million. The Insured’s solicitors gave notice of the failure to the Insurer by letter of June 10, 2004 and requested that the Insurer pay solicitors’ fees incurred by the Insured in respect of steps taken to protect the Insured’s interests in the event of a claim. The Insurer declined to pay the solicitors’ accounts, taking the position that there was no obligation to defend under the policy unless and until a claim against the Insured was actually made.

The summary trial judge had granted the Insured’s application for declaratory judgment, holding that the Insurer’s duty to defend was triggered in respect of claims or potential claims arising from the April 2004 failure of the power plant.

The issue for the Court of Appeal was whether or not an insurer’s obligation to defend an insured under the terms of a professional liability policy was triggered by the insured giving notice of an event from which it expected a claim could be made.

The Court of Appeal considered the coverage afforded under the policy and specifically the Insurer’s obligation to defend under section VII. This section provided that the company (Insurer) “shall defend any claim against the Insured seeking damages to which this insurance applies”. The Court noted that “claim” was a defined term in the policy and meant “a demand received by the Insured for money or services, including the service of suit or institution of arbitration proceedings against the Insured”.

In the result, the Court of Appeal agreed with the Insurer, who had argued that the duty to defend could only be triggered once a claim was made. The wording of the policy was not broad enough to encompass all circumstances or events reported during the policy from which the Insured might expect a claim to be made. Moreover, there was no claim in existence in June 2004 since neither the owner of the power plant nor the general contractor was seeking anything from the Insured and were certainly not seeking damages in the form of “a money judgment, award or settlement” to which the policy applied. There was no authority provided by the Insured for the proposition that an insurer will be held liable for defence costs incurred prior to any claim for money actually being made.

The appeal by the Insurer was allowed and the Insured’s claim for declaratory relief dismissed.

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