Insurers Beware: Duty to defend insured can arise even without ongoing duty to indemnify

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We have invited Zohar Levy, a lawyer in our insurance defence practice group, to do a guest blog on a topic we thought might be relevant to some of you.

In the recent decision in Jevco Insurance Company v. Malaviya, Morgan J. held that an insurer must continue to defend its insured even after paying out the policy limits to the plaintiffs. Characterizing the Standard Automobile Policy as taking “muddled and contradictory drafting to a rarefied level”, the court held that there is a fundamental ambiguity in the language of the contract as to whether those defence costs should be covered. The insurer relied on two earlier decisions – Boreal Insurance Inc. v. Lafarge Canada Inc., and Dominion of Canada General Insurance Co. v. Kingsway General Insurance Co. – for the principle that it made no sense for a duty to defend to arise when there is no possibility of indemnification.

The court distinguished both cases on the facts, and its underlying analysis seemed to be coloured by the fact that neither decision was in the context of the duties owed by an insurer to a motor vehicle policyholder. Instead of following those cases, the court interpreted the Standard Automobile Policy in light of public policy concerns and the language of the Insurance Act. The court relied on the language in s. 245(b) of the Act to conclude that the defence costs of a claim are to be borne by the insurer on a mandatory basis to avoid the problem of self-represented litigants in the aftermath of a motor vehicle accident. Even after policy limits are paid out, the duty to defend continues.

In reaching this conclusion, Morgan J. briefly considered the possibility that an insurer who has no duty to indemnify may wish for an earlier settlement of the claim. Counsel was indirectly cautioned not to allow this “counter-incentive for the insurer” to override the obligation to provide the best possible advice to the insured party.