Embedded within insurance contracts, and a key aspect of insurance coverage, is the duty to defend. A pivotal obligation that mandates insurers to provide legal representation and financial support when claims are brought against the insured.
In Surrey (City) v. Co-operators General Insurance Company 2023 BCSC 955, the Court confirmed this duty is triggered not by the certainty of coverage, but by the mere possibility that the claim falls within the policy’s purview.
City of Surrey (“Surrey”) brought an action by way of summary trial seeking an order compelling the Co-operators General Insurance Company (“Co-operators”) to defend them in an underlying personal injury action.
The underlying action related to a negligence claim by Mr. Lanki for damages arising out of an incident where he was injured while using a leg press machine at Surrey’s fitness facility. Mr. Lanki alleged that a pin inserted into the leg press machine, which was not designed for that machine, fell out and injured him.
Surrey had service agreements with its contractors (“Elk”) who provided periodic maintenance, repair and preventative maintenance services for Surrey’s fitness facilities. Surrey was an additional named insured in Elk’s commercial general liability insurance policy with Co-operators which contained an exclusion clause for any bodily injury arising out of any act or omission of Surrey or its employees.
Relying on the exclusion clause and its position in the underlying action, Co-operators denied coverage to Surrey. Co-operators brought a separate action for a summary trial dismissal, claiming that it is not liable in the underlying action because the missing pin in the machine was not placed by Elk and therefore must have been the result of actions by Surrey or other third parties.
In opposing Surrey’s application for a defence, Co-operators claimed that if their summary trial application is successful, they would be relieved of their duty to defend Surrey as its insurance coverage does not extend to bodily injury caused by the additional insured (Surrey) or its employees.
Is there a Duty to Defend owed?
The Court reviewed the well-known principles relating to interpretation of insurance policies which apply equally to the duty to defend and exclusion clauses:
- the general purpose of insurance is to protect an insured against losses arising from unforeseen and accidental actions;
- it is necessary to interpret insurance contracts as they would be understood by the average person applying for insurance, and not as they might be perceived by persons versed in the niceties of insurance law;
- courts should interpret a contract of insurance as a whole;
- as contracts of adhesion, courts should prefer interpretations that are consistent with the reasonable expectations of the parties, and avoid interpretations that would give rise to an unrealistic result or that which would not have been in their contemplation at the time of contracting;
- where the policy is ambiguous or unclear, the interpretation should be resolved in favour of the insured;
- an insurer is only required to defend a claim where the facts alleged in the pleadings, if proven, would require the insurer to indemnify the insured (the “pleadings rule”);
- the mere possibility that a claim falls within coverage under the policy based on a review of the pleadings is all that is necessary to trigger the duty to defend;
- where pleadings are not framed with sufficient precision, the duty to defend will be triggered where, on a reasonable reading of the pleading, coverage can be inferred;
- in order for an exclusion clause to oust the duty to defend, it must clearly and unambiguously apply to all of the claims made against the insured; and
- the words “arising out of” should be construed as requiring “an unbroken chain of causation” and a connection that is more than “merely incidental or fortuitous.”
The Court considered the test for triggering the duty to defend based on the pleadings rule and acknowledged that extrinsic evidence may be considered to determine the true nature and scope of the insurer's duty to defend. However, the court emphasized that premature evidence that would require findings affecting the underlying litigation should not be considered as this would inappropriately be advocating an approach that would cause the duty to defend application to become “a trial within a trial.”
The court carefully analyzed the pleadings in the underlying action and determined Co-operators would be bound to defend Surrey based on the allegations by Mr. Lanki of negligence in the maintenance and condition of the leg press. It considered the unbroken chain of causation and the alleged connection between the primary insured (Elk) and the activities leading to the claim against Surrey.
The court further highlighted the significance of exclusion clauses and the need for clear and unambiguous language to oust the duty to defend. If there is any ambiguity, the court resolves it in favor of the insured. In this case, the court concluded that Co-operators has not met its burden of proving that the exclusion clause applied to remove its duty to defend since there was no independent fault of Surrey in the pleadings and the claims against Surrey were not divisible from claims covered by the Co-operators policy.
The burden of proof lies with the insurer to demonstrate that the exclusion clause clearly applies and removes the duty to defend. The court stressed that it would be unjust to require the insured to establish coverage conditions before receiving a defense.
Insurance policies play a crucial role in safeguarding individuals and organizations from potential liabilities. The ruling reinforces that the duty to defend is triggered by the potential for coverage and is not dependent on the final judgment.
Amrit Kalra is a lawyer with Brownlee Law.