Although an insurer may be required to defend an insured for direct losses, the duty to defend may not extend to consequential losses

Intact Insurance Company was unsuccessful in seeking a declaration that it was required to defend an action for direct damage only, and that it was not obliged to defend or indemnify for damages relating to consequential damage, as the court held that it was not clear whether the loss would be found to be a direct physical loss or damage, or whether the exclusion for liability for consequential damage would apply.

Intact Insurance Co. v. Keith Hart Holdings Ltd., [2010] B.C.J. No. 281, February 18, 2010, British Columbia Supreme Court, G.D. Burnyeat J. In Chambers

South Caribbean Supplies (“South Caribbean”) sued Keith Hart Holdings (“Keith Hart”) for damages to poles that were being transported from New Westminster to the Yukon Territories.  The poles, valued at $18,000 were damaged in an accident to the extent that they were of no value for the purpose they were intended. South Caribbean had to purchase other poles to replace the lost ones.  Keith Hart was not able to transport the new poles, so South Caribbean paid a third party $41,000 to carry the replacement poles and demanded from Keith Hart those costs and the cost of the replacement poles ($20,000). Keith Hart refused to pay either amount.

Keith Hart held a policy with Intact Insurance Company (“Intact”), which stated in part that the policy did not cover liability or expense for delay, loss of market or loss of use or any other indirect or consequential loss of any kind.

Intact sought a declaration that this policy required it to only provide a defence to the action with respect to direct damage and not for any liability for damages relating to consequential damage. Burnyeat J. stated that it was clear that at least some of what was claimed by South Caribbean was covered by the policy and that it was necessary for Intact to defend those claims. However, Intact could not call upon Keith Hart to obtain its own independent counsel with respect to claims that potentially fell outside of the policy.

Keith Hart was not entitled to be represented by separate counsel in court in the action commenced by South Caribbean.  Citing Nicholls v. American Home Assurance Co., [1990] 1 S.C.R. 801, Burnyeat J. noted that while it was not necessary to prove that the obligation to indemnify will in fact arise in order to trigger the duty to defend, there was still a duty on Intact to defend the entire action of South Caribbean.  Parties would be subject to an assessment after the action was concluded with respect to costs which were payable by Intact and costs which were payable by Keith Hart.

Burnyeat J. also stated that it was not clear at this stage whether the costs of transporting replacement poles would be determined as being a direct physical loss, or whether an exclusion for liability or expense or any other indirect or consequential kind of loss would apply. The Judge, citing Black’s Law Dictionary, noted that direct damages are damages that follow immediately upon the act done.  Damages which arise naturally or ordinarily from breach of contract; are damages which, in the ordinary course of human experience, can be expected to result from breach.  Here it may well be that the trier of fact will conclude that additional carriage charges would be incurred whether or not Keith Hart could undertake the carriage of the replacement poles because such costs would be within the reasonable contemplation of South Caribbean and Keith Hart.  This would ultimately be the determination of the trial judge, and as such the petition of Intact Insurance was dismissed.

This case was originally summarized by Neil J. MacDonald and originally edited by David Pilley.

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