Despite Potential Conflict, Insurer Retained Right to Appoint Counsel in a Derivative Claim

The court considered the law of derivative claims in ordering an insurer to defend an insured where there were allegations of both wilful and negligent conduct. Despite potential conflict, the insurer retained the right to appoint and instruct counsel in the defence of the action.

2091533 Ontario Ltd. v. Vertigo Investments Ltd., [2013] O.J. No. 2698, June 10, 2013, Ontario Superior Court of Justice, L.C. Leitch J.

The plaintiff purchased a building from the insured which contained asbestos material. Prior to the sale, the insured did not disclose the existence of the asbestos. The plaintiff claimed against the insured for breach of contract, breach of collateral warranty, breach of an express and/or implied warranty, negligence, fraudulent misrepresentation, and negligent misrepresentation. The specific allegations against the insured included wilfully concealing the asbestos, and/or that the insured had or ought to have had knowledge of the asbestos.

The insurance policy provided coverage for compensatory damages caused by “property damage” caused by an “occurrence”.

The insurer claimed all of the facts pleaded related to wilful acts and none of the facts pleaded supported a finding of negligence. Hence, there was no possibility of indemnity under the policy and no duty to defend. The insured argued coverage under the policy was a possibility and so the insurer’s duty to defend was a certainty. The court agreed with the insured. After reviewing the law on derivative claims, the court held the claim for negligence was not derivative. The underlying elements of the negligence and the intentional tort were sufficiently disparate to render the two claims unrelated.

The insurer indicated that if it did owe a duty to defend, it would appoint new counsel to defend the action. The court appreciated that if wilful conduct was found as a fact at trial, it would impact the insurer’s obligation to indemnify. However, the court held there was no evidence that counsel would not adhere to the duty of good faith owed by the insurer to the insured and the insurer was entitled to retain and instruct counsel in the defence of the action.

This case was originally summarized by Djuna M. Field and originally edited by David W. Pilley of Harper Grey LLP.

To stay current with the new case law and emerging legal issues in this area, subscribe here.