DATE: 20001003
DOCKET: C33357

COURT OF APPEAL FOR ONTARIO

CATZMAN, ABELLA and ROSENBERG JJ.A.

BETWEEN:                                                 

DEBORAH LONGO and                                    )           John Bruggeman,

FRANK LONGO                                                 )           for the appellant

                                                                              )

                                      Plaintiffs                         )

                                                                              )

–and–                                                                    )

                                                                              )          

ANDREZEL MACIOROWSKI                          )           Audrey Ramsay,

                                                                              )           for the respondent

                                      Defendant                       )

                                      (Appellant)                     )

                                                                              )

–and–                                                                    )

                                                                              )

ECONOMICAL INSURANCE GROUP           )

                                                                              )

                                      Defendant                       )

                                                                              )           Heard: September 5, 2000

–and–                                                                    )

                                                                              )

LIBERTY MUTUAL INSURANCE                   )

COMPANY, added by Order pursuant to          )

section 258(14) and (5) of the Insurance        )

Act, R.S.O. 1990, c. I.8 as amended                   )

                  )

                                      Third Party                      )

                                      (Respondent)                  )

 

On appeal from the order of Madam Justice Frances P. Kiteley dated November 16, 1999.

CATZMAN J.A.:

The appeal

[1]               The appellant is the defendant in an action for damages arising out of a collision between his vehicle  and another vehicle.  The appellant’s insurance company has alleged that, at and after the time of the collision, he was in breach of a number of policy and statutory conditions.  It has had itself added as a third party in the action under the provisions of the Insurance Act.

[2]               The appellant moved for an order compelling his insurance company to provide and pay for the defence of the action on his behalf.  Kiteley J. dismissed his motion.  This is an appeal from her order.

The background

[3]               In April, 1997, the appellant was involved in a motor vehicle accident with another car.  He was charged with, and pleaded guilty to, operating a motor vehicle while impaired and operating a motor vehicle with a blood alcohol level over 80 milligrams.

[4]               The appellant was insured with the respondent insurance company pursuant to a standard owner’s automobile policy, OAP No. 1, with liability limits of $200,000. At the time of the accident, he believed that the occupants of the other car were not injured and that the accident had caused only property damage to both vehicles.  He did not report the accident to the respondent.

[5]               In November, 1998, the occupants of the other car issued a statement of claim against him. In it, they alleged that they had suffered serious and permanent personal injuries in the accident, and claimed damages totaling $2,600,000. 

[6]               The statement of claim was served on the appellant in February, 1999.  He forwarded a copy to the respondent.  In March, 1999, the respondent advised the appellant that it was denying coverage with respect to the claim against him, alleging that he had breached a number of policy and statutory conditions. 

[7]               In April, 1999, the respondent moved and obtained an order adding it as a statutory third party to the action under sec. 258(14) of the Insurance Act, R.S.O. 1990, c. I.8 (“the Act”).  With the order, it delivered a third party statement of defence contesting the liability of the insured and the amount claimed for damages. In August, 1999, the appellant delivered a statement of defence asserting the same position in language similar, and frequently identical, to that in the third party statement of defence.

[8]               The appellant then moved for an order for the following relief:

            (a)       a declaration that the respondent afford him a full defence of the action

                        at its expense;

 

(b)              an order permitting him to appoint totally independent solicitors of his own choosing to represent him in the action;

 

(c)              an order directing that the respondent be responsible for the payment of all

legal fees and disbursements incurred by him to date;

 

(d)              an order directing that the respondent be responsible for the payment of all reasonable legal expenses and disbursements of the solicitors appointed by him, subject to assessment; and

 

(e)              an order directing that his solicitors shall not be obliged to report to the

respondent with respect to any matter bearing on the issues of his liability,

although the solicitors may, if so advised, report on the issues touching upon the potential liability of the plaintiffs, and must give full reports to

the respondent on all issues touching on damages.

[9]               In support, the appellant filed an affidavit deposing that he could not afford to hire his own lawyers and that he did not trust the respondent to defend him because it had denied coverage.

[10]          Kiteley J. dismissed his motion.  Her reasons are reported at (1999), 46 O.R. (3d) 405.

The reasons of Kiteley J.

[11]          Kiteley J. observed that the authorities cited to her fell into two categories.  The first involved insurers of motor vehicles that had been added or sought to be added as statutory third parties and that defended the main action on behalf of the insured.  The second involved insurers in other situations where there was no statutory regime that enabled the insurer to be added as a party to the action.  In her view, the first category was the line of authority determinative of the motion before her.

[12]          Within that first category, she found two cases which, in her view, were relevant.  One, Veillieux et al. v. Chambers; Co-Operators General Insurance Company, Third Party (1995), 25 O.R. (3d) 538 (Gen. Div.), dismissed a motion made by an insured person similar to that made by the appellant in the present case;  the other, Griffen v. Hopey Estate (1998), 41 O.R. (3d) 216 (Gen. Div.), granted such a motion.

[13]          Kiteley J. disagreed with Griffen and chose to follow Veillieux.  She noted that a third case, Minassian et al. v. Tonnen et al. (1987), 61 O.R. (2d) 765 (S.C.O.), recognized that once an insurer pursued its right to proceed by order under s.258(14) of the Act, the issue of duty to defend did not arise.  She said, at p. 410:

Unlike other contracts of insurance, the motor vehicle insurer is required by statute to respond even if the insured is in breach of policy or statutory conditions such as are involved in this case. It is for that reason that the Insurance Act permits the insurer to defend the claim as against the victim by obtaining an order pursuant to s. 258(14) while maintaining the right to claim over as against the insured if judgment is granted in favour of the victim. Accordingly, I prefer the reasons in Veillieux  and in Minassian. The motion is dismissed.

The duty to defend: generally

[14]          Generally speaking, where there is a question of coverage under an insurance policy but no question of a breach of condition by an insured, the insurer’s duty to defend is triggered by allegations made in the statement of claim that, if proven, would fall within the scope of coverage provided by the policy: Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801 at 811; Cummings v. Budget Car Rentals Toronto Ltd. (1996), 29 O.R. (3d) 1 (C.A.) at 19.  However, although the duty to defend is broader than the duty to indemnify, the insurer is not obliged to defend where the policy contains an exclusion that pertains to the acts that give rise to the claims against the insured: Nichols, at 812;  Cummings, at 12.   The threshold condition – that the allegations fall within the policy coverage – is satisfied where the action claims damages which might be payable under the policy and, where it is unclear whether the insurance policy affords coverage, the insurer is obliged to defend: Slough Estates v. Federal Pioneer Ltd. (1994), 20 O.R. (3d) 429 (Gen. Div.) at 441.

The duty to defend: where breach of condition is alleged

[15]          In the present case, unlike as in Nichols, Cummings or Slough Estates, the insurer takes the position that the insured was in breach of a condition in the insurance policy.  The significance of that distinction is that, where a breach of a policy condition is unchallenged by the insured and there are no grounds for raising estoppel or relief from forfeiture, the insured is disentitled both to indemnity under the policy and to the costs of a defence: Brown and Menezes, Insurance Law in Canada, 2nd ed. (1991), para. 12:5:5. at p. 252.

[16]          Reported appellate decisions in the breach of condition context are not uniform. Manitoba and British Columbia have held that, where the duty to defend arises in the context of a breach of condition, the insurer is not obliged to defend on behalf of the insured; Nova Scotia has held to the contrary.

[17]          In Agassiz Enterprises (1980) Ltd. v. General Accident Assurance Co. of Canada (1988), 49 D.L.R. (4th) 415, the Manitoba Court of Appeal set aside an order declaring that a liability insurer was liable to defend a slip and fall action against the operator of a ski club that, in alleged breach of a notice provision in the policy, gave no notice of the accident until two years after it took place.  Huband J.A. said at p. 425:

But we are dealing with a case where the issue relates to a breach of a condition rather than a question of coverage. The insurer contends that because of the alleged breach the insured is entitled to neither a defence nor indemnity. Unless estoppel were to apply, or relief from forfeiture be granted, once a breach of a nature which would justify the insurer's position is found, it would relieve the insurer from both the obligation to defend and to indemnify. In this very case counsel for the insured conceded that if the appeal were dismissed, and the insurer's obligation to defend upheld, counsel would rely on res judicata in any subsequent proceedings in which the insurer might attempt to escape the obligation to indemnify. In other words, the circumstances of this case are such that the obligation to defend and indemnify are linked together, and a decision with respect to one is also a determination of the other.

[18]          Similarly, in Carter v. Kerr (1990), 69 D.L.R. (4th) 542, the British Columbia Court of Appeal set aside an order declaring that an automobile insurer was liable to defend an action arising out of a motor vehicle accident against the owner of a motor vehicle operated, at the time of the accident, by a person whose ability to drive was allegedly impaired in breach of a condition of the policy.

[19]          However, in Dominion of Canada General Insurance Co. v. MacCulloch (1991), 78 D.L.R. (4th) 593, the Appeal Division of the Nova Scotia Supreme Court affirmed an order that an insurer under a composite mercantile insurance policy[1] was obliged to defend an action brought against its insured despite the insurer’s allegation that the insured was in breach of the term of the policy requiring prompt notice of the accident for which damages were claimed. 

[20]          In fairness, both Agassiz Enterprises and Carter were decided before, whereas MacCulloch was decided after, the Supreme Court of Canada’s decision in Nichols.  All three appellate decisions were discussed by this court in Cummings in which, as has been noted, there was no allegation by the insurer of a breach of condition of the policy: see p. 13.  Rosenberg J.A., speaking for the court, said at pp. 15-16:

The terms of the insurance policy and particularly s. 235 of the Insurance Act may justify an exception to the Nichols principle and entitle the insurer to have the breach of policy issue determined before being required to expend moneys in defence of the claim. In my view, that exception cannot apply here where the issue is coverage, not breach. Moreover, I would point out that appellate courts are not unanimous in adopting a breach of condition exception to the Nichols rule. In Dominion of Canada General Insurance Co. v. MacCulloch (1991), 78 D.L.R. (4th) 593 (N.S.C.A.), a case similar to Agassiz in that the insurer alleged a breach of the condition to promptly notify the insurer of any accident, Freeman J.A. held that the duty to defend was separate from the right to indemnity and that the policy itself "does not contemplate that the insurer may be relieved of the duty to defend because it considers the insured in breach of a term of the policy" (at p. 597). He therefore applied the rule from Nichols, holding at p. 598 that "the allegations of liability against the insured in the statement of claim are within the coverage of the policy and trigger the duty to defend, whether or not a breach of terms of the contract may later be raised by the insurer to support a refusal to indemnify".

 

The motor vehicle insurer as statutory third party: section 258 of the Insurance Act 

[21]          Under the Act, a motor vehicle insurer that denies liability to an insured against whom an action has been brought may apply to be added as a statutory third party in the action.  The right to bring such an application and the rights that accrue to an insurer once it becomes a third party are set out in subs.258(14) and 258(15):

Section 258

...

Insurer may be made third party

(14) Where an insurer denies liability under a contract evidenced by a motor vehicle liability policy, it shall, upon application to the court, be made a third party in any action to which the insured is a party and in which a claim is made against the insured by any party to the action in which it is or might be asserted that indemnity is provided by the contract, whether or not the insured enters an appearance or defence in the action.

                        Rights of insurer

(15)     Upon being made a third party, the insurer may,

            (a)       contest the liability of the insured to any party claiming against the insured;

            (b)       contest the amount of any claim made against the insured;

(c)       deliver any pleadings in respect of the claim of any party claiming against the insured;

(d)       have production and discovery from any party adverse in interest; and

(e)                   examine and cross-examine witnesses at the trial,

to the same extent as if it were a defendant in the action.

 

[22]          The insurer’s right to apply to be made a third party was first introduced into the Act in 1935: S.O. 1935, c.29, s.36(2).  The rights accruing to an insurer upon being made a third party were first delineated in 1944: S.O. 1944, c.58, s.6(3).  The purpose of these provisions was described by W.D. Griffiths, later a distinguished member of this court, in the Special Lectures of the Law Society of Upper Canada (1962) on Claims under Insurance Policies in these words, at pp. 72-73:

The purpose of this subsection is to enable the insurer, which denies liability under the policy, to add itself as a “third party” to the action and thus participate in the defence of the action against the insured, to the extent outlined in the section, without in any way prejudicing any defence it may have against the insured or the third party or any right which the insurer may have to recover against the insured.

The duty to defend: where a motor vehicle insurer has been  added as a statutory third party

 

[23]          Both Cummings and MacCulloch considered the insurer’s duty to defend in a context unrelated to the statutory third party provisions of the Act.  In this province, the cases decided in that context since the decision of the Supreme Court of Canada in Nichols go both ways.  Most have held that, once an insurer that alleges breach of condition has been made a third party pursuant to the Act, the duty to defend is suspended: Featherstone v. Zurich Insurance Co. (1991), 6 O.R. (3d) 639 (Gen. Div.); Laughlin v. Sharon High Voltage Inc. (1993), 12 O.R. (3d) 101 (Gen. Div.); Veillieux  v. Chambers (1995), 25 O.R. (3d) 538 (Gen. Div.); and Colitti v. Popp (1998), 3 C.C.L.I. (3d) 161 (Gen. Div.).  One case has held to the contrary: Griffen v. Hopey Estate (1998), 41 O.R. (3d) 216 (Gen. Div.).

[24]          In Featherstone v. Zurich Insurance Co., the alleged breach of condition was the act of the insured in granting permission to drive the vehicle to a person under the age of sixteen.  McWilliam J. ordered that the injured parties’ action against the insured be stayed pending the disposition of a third party proceeding to resolve the issue of breach of condition.  He said, at 644:

The central question is where such a breach of condition is alleged, ought the insurer to defend before a determination is made which, if established, would vitiate the insurer’s obligation. ...  [T]he insured has the benefit of being defended where coverage only or contractual interpretation is the  dispute.  Why should she have comparable guarantees when her own conduct is in dispute as to possible impairment, failure to give timely notice, or even fraud?

 

[25]          He ordered that the third party action proceed on an expedited basis to resolve the issue of breach of condition and that the injured parties’ action be stayed for a reasonable time to permit that resolution.

[26]          In Laughlin v. Sharon High Voltage Inc., the alleged breach of condition was the act of the insured in granting permission to drive the vehicle to a person whose licence was not specially endorsed to drive a vehicle equipped with air brakes.  Jennings J. dismissed motions for orders giving the insureds’ solicitors conduct of the defence and requiring the insurer to pay their fees.  He noted the important distinction between the case before him and Nichols, and cases that preceded it, at 104:

I have been referred to and I have read the authorities culminating with Nichols v. American Home Assurance Co., ... which make it clear that the duty to defend is governed by the pleadings and is separate from the insurer’s duty to indemnify.  Those cases, however, appear to me to deal with situations where there are doubts that the claim falls within the coverage provided by the policy.  None of those cases deal with the situation which confronts me where the insurer raises the breach of a statutory condition.

 

[27]          He concluded, at 110, that the insurer could take the position that it owed no duty to defend because of the insured’s alleged breach of a term of the contract.  While he endorsed the procedure suggested in Featherstone – that the third party action should proceed on an expedited basis to resolve the issue of breach of condition and the plaintiff’s action should be stayed for a reasonable time to permit this to be done – he made no order to that effect because the question of procedure had not been argued before him.

[28]          In Veillieux v. Chambers, the case followed by Kiteley J., the alleged breach of condition was the act of the insured in carrying explosives in his vehicle at the time of the accident.  Kozak J. dismissed a motion by the insured for an order that he was entitled to be paid the costs of his defence by his insurer.  He distinguished the cases, like Nichols, that did not involve an allegation of breach of condition, reviewed many of the cases noted earlier in these reasons, including Featherstone and Laughlin, and stated his conclusion, at 547:

The Ontario cases make it clear that once the insurer alleges breach of contract then the insurer owes no duty to defend pending a determination of the alleged breach of condition by the insured.   ...  So long as the insurer has been made a third party pursuant to s.258(14) of the Insurance Act and has alleged breach of condition, that would appear to be sufficient

to suspend the duty to defend.

 

[29]          The breach of condition alleged in Colitti v. Popp was not described in the reported reasons for judgment[2].  Forestell J. granted the insurer’s motion to be added as a statutory third party.  He reviewed several of the authorities, concluding with Featherstone, Laughlin and Viellieux, and said, at 166:

I am satisfied and adopt the reasoning in these last three cases. An order shall go that the third party action in this matter shall proceed and resolve the breach of condition ….

The third party action shall proceed and be expedited and the plaintiff’s action shall be stayed pending the decision of the third party action or further order of the court.

 

 

[30]          In Griffen v. Hopey Estate, the alleged breach of condition was the act of the insured in granting permission to drive the vehicle to an unlicensed driver.  LaForme J. granted a motion by the insured to appoint counsel of his choice to represent him in the action and to conduct his own defence, at the expense of the insurer.  In reaching that conclusion, he cited Nichols and continued, at 219-220:

[The insurer] submits that there is a further exception to the above             principles (the Nichols rule), namely: where the insurer alleges a breach of the policy, or breach of condition (i.e., allowed an unlicensed driver to operate the vehicle), the duty to defend may be suspended.  Indeed, there is case law which supports this position: for example, see Veillieux  v. Chambers and Carter v. Kerr; however, there are also cases which conclude the opposite:  see Dominion of Canada General Insurance Co. v. MacCulloch.

Some of the breach of condition cases were examined by the court in Cummings but it did not decide the issue of whether in those circumstances the duty to defend is suspended.  What is clear in the Cummings examination on this point is the court’s conclusion that appellate courts are divided on whether or not a breach of condition case can suspend the Nichols rule.  On my review of the authorities I conclude that it does not.  That is, I adopt the holding in the MacCulloch decision (at p. 598):

... [if] the allegations of liability against the insured in the statement of claim are within the coverage of the policy [they] trigger the duty to defend, whether or not a breach of terms of the contract may later be raised by the insurer to support a refusal to indemnify.

 

[31]          I make two observations about Griffen.  First, although LaForme J. cited Veillieux, he made no reference to Featherstone or Laughlin, both of which Veillieux  followed, or to Colitti, which followed all three cases.  Second, LaForme J. also failed to note that Nichols and Cummings, on which he placed some reliance, were cases in which no breach of condition by the insured was alleged by the insurer. 

The need for flexibility

[32]          It is apparent that the preponderance of authority is consistent with the order made by Kiteley J. in the present case.  As the division of judicial opinion makes clear, however, different fact situations raise different policy considerations that must be examined in order to determine whether, in any particular case, the insurer should be compelled to furnish, or excused from furnishing, a separate and independent defence for its insured.  For that reason, I have reservations about the wisdom of establishing any hard and fast rule on the subject.

[33]          Suppose, for example, that the rule would be that the insurer is never obliged to defend in any case upon the mere allegation of breach of condition.  Assume, as well, an insured person who is without income and without assets. It cannot be of much comfort to that insured to be told that, while his insurer cannot be compelled to defend him and that he must provide and finance his own defence, he can – if the alleged breach of condition is not proven or if estoppel is established or relief from forfeiture is granted – sue his insurer later to recoup the costs of his defence and perhaps damages for breach of his insurer's obligation to him. 

[34]          Suppose, conversely, that the rule would be that the insurer is always obliged to defend, notwithstanding its allegation of breach of condition, so long as the plaintiff's claim falls within the policy coverage.  Assume, again, an impecunious insured.  It cannot be of much comfort to the insurer to be told that, while it is obliged to provide its insured with a defence, it can – if the alleged breach of condition is proven and if estoppel is rejected and relief from forfeiture is denied – sue its insured later to recover the costs of that defence. 

[35]          With respect, I do not place much confidence in the solution suggested in Featherstone, endorsed in Laughlin and followed in Colitti, that the tort action should be put on hold while the breach of condition issue is decided "on an expedited basis".   That solution may be practical where the issue admits of summary disposition: where the breach of condition is clear and the case for estoppel or relief from forfeiture unmeritorious or, conversely, where the breach of condition is technical or insubstantial and the case for estoppel or relief from forfeiture overwhelming.  But in the many cases that are not clear – where the alleged breach of condition, the basis of the alleged estoppel or the grounds for relief from forfeiture are in serious dispute and require the testimony of witnesses and the resolution of conflicting evidence – there seems to me to be no justification for compelling the trial of the plaintiff's tort action to await the final disposition of the breach of condition issue.

[36]          Thus, rather than establishing an immutable legal principle, I would suggest that the question should be determined upon consideration of the circumstances of each case, including the relative strength of the positions asserted by the insurer and the insured and the necessity and urgency to furnish the insured with a separate defence. 

[37]          In the present case, I consider that consideration of the circumstances clearly favours the order made by Kiteley J., particularly having regard to the following: 

Ÿ                     the insurer has made allegations of clear and uncontested breaches of condition on the part of the insured;

Ÿ                     the insured has put forward no material to support a claim for estoppel or relief from forfeiture;

Ÿ                     the insurer has invoked the statutory mechanism to be added as a third party in the action; and

Ÿ                     as statutory third party,  the insurer has contested both the liability of the insured and the amount of the claim made against him in language that not only is congruent with the interests of the insured but that has been adopted by him almost verbatim in the preparation of his own statement of defence.

 

Disposition

[38]          I would dismiss the appeal with costs.

 

Released: OCT 03 2000                               Signed: “M.A. Catzman J.A.”

MAC                                                                             “I agree   R.S. Abella J.A.”

                                                                                      “I agree   M. Rosenberg J.A.”