A duty to defend is a contractual right/obligation. An insured does not have a prima facie right to a defence under his or her insurance policy.

The Court dismissed the applications of the Insured Company and its two principal shareholders for declaratory relief and an Order that the Third and Fourth Excess Insurers be required to pay defence costs incurred in Third Party actions and proceedings brought against the Company.  A duty to defend is entirely contractual and a party may not be entitled to defence costs if the insurance contract does not clearly specify such coverage.  In such instances, a claim for defence costs could be premature and may need to be resolved after litigation is complete.

Hollinger Inc. v. American Home Assurance Co., [2007] O.J. No. 4424, Ontario Superior Court of Justice, C.L. Campbell J., March 22, 2007

The Third and Fourth Excess Insurers provided coverage to the Insured Company under policies that are part of what is known as a “ladder” scheme. The Primary Policy and the First and Second Excess policies were exhausted as a result of the settlement of an action initiated in the State of Delaware against the Insured Company.  The Third and Fourth Excess insurance policies provided coverage of the kind generally known as “follow form”. In other words, the Insurers agree to provide insurance coverage excess of the underlying policies “in accordance with and subject to the same warranties, terms, conditions, exclusions and limitations as are contained in or as may be added to the Primary Policy. The Third and Fourth Excess Insurers took the position that there was either no coverage available to the Insured Company, or there were exclusions applicable with respect to the claims for which the Insured Company sought indemnification by virtue of the terms of the policies of insurance.

The coverage provided by the policies included “Organization Insurance” for loss of any Organization insured pursuant to the policies arising from a) a Securities Claim; b) an Oppressive Conduct Claim; or c) a Canadian pollution claim made against such Organization for any Wrongful Act. It was not disputed that the Insured Company came within the definition of the word “Organization”. The Court considered the relevant definitions in the policies, including “Securities Claim”, “Oppressive Conduct Claim” and “Wrongful Act”, and accepted the Insurers’ submission that there had been no finding of oppressive conduct on the part of the Insured Company for which indemnity under the policies would be available. Accordingly, the Court found that “sufficient doubt” had been raised that defence costs should not be required to be paid by the Insurers, at least at the time of the hearing of this application.

The Court further held that even if the coverage issue were certain, it was unclear whether defence costs would be payable since the policies in issue did not contain a duty to defend clause and only spoke to indemnity.  The Court accepted the proposition that Canadian law is clear that the duty to defend is entirely contractual; i.e. there is no duty to defend unless the policy provides that there is one. However, this matter was left open since there was “at least the potential for a different conclusion if oppression was ever established.”

The Court also declined to grant the relief sought on the basis that the claim for defence costs was premature.

This case was originally summarized by Shanti Davies and edited by David W. Pilley.

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