Defence is Duty of Insurer When Allegations Within Legal Action May Trigger Coverage If the Claim Is ProvenPage last modified: January 15 2022
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Is An Insurance Company Required to Defend a Liability Lawsuit or Does the Insurance Company Only Pay If the Defendant Loses?
If It Is Possible That An Insurance Company Will Need to Pay Out Under the Coverage of An Insurance Policy Is a Lawsuit Is Successful, Then the Insurance Company Is Also Required to Provide and Pay For the Legal Defence of the Lawsuit.
Understanding When An Insurer Owes a Duty to Defend Litigation on Behalf of An Insured
Facing a lawsuit is a scary proposition; especially whereas the disruption, stress, time, and cost, involved in responding to a lawsuit may be significant in addition to the risk of losing the lawsuit itself. Indeed, it is quite possible that the costs involved in defending liability allegations can run into the tens of thousands or even hundreds of thousand of dollars. Interesting, it is possible that the monetary costs of a defence could run ore than the sum sought in the case. Of course, when it appears that the cost of defending a lawsuit will be more than the amount sought in the lawsuit, generally, an insurer will perform an analysis of whether it is better to settle or defend the case. This decision can be frustrating for those who firmly believe that the allegations are unjust and could be successfully defended; however, whereas it is the pocket of the insurer that pays for the defence, it is the insurer that makes that decision and the insured person must co-operate and assist.
Per Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33 (CanLII),  2 SCR 245, an insurer is under the duty to provide and pay for the defence of an insured person if the coverage provided within the insurance policy would become triggered if the legal case against the insured person results in a successful lawsuit. This duty to defend was explained by the Supreme Court within Progressive Homes wherein it was stated:
 An insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim (Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC),  1 S.C.R. 801, at pp. 810-11; Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49,  2 S.C.R. 699, at para. 28; Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21,  1 S.C.R. 744, at paras. 54-55). It is irrelevant whether the allegations in the pleadings can be proven in evidence. That is to say, the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify. What is required is the mere possibility that a claim falls within the insurance policy. Where it is clear that the claim falls outside the policy, either because it does not come within the initial grant of coverage or is excluded by an exclusion clause, there will be no duty to defend (see Nichols, at p. 810; Monenco, at para. 29).
 In examining the pleadings to determine whether the claims fall within the scope of coverage, the parties to the insurance contract are not bound by the labels selected by the plaintiff (Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24,  1 S.C.R. 551, at paras. 79 and 81). The use or absence of a particular term will not determine whether the duty to defend arises. What is determinative is the true nature or the substance of the claim (Scalera, at para. 79; Monenco, at para. 35; Nichols, at p. 810).
As per Progressive Homes, the duty to defend arises where the litigation brought against the insured may, following a trial, result in a liability that falls within the scope of the liability coverage provided by the insurer. Thus the duty to defend arises from the mere possibility of such an outcome. Like that stated in Progressive Homes, this measure for the duty to defend was stated in Backyard Media Inc. v. HDI Global Specialty SE, 2021 ONSC 2341 as well as R.C. and J.M. v. Western Assurance Company, 2022 ONSC 100 where in each case it was respectively said:
 The policy in issue is a “duty to defend” policy. The insurer is required to provide a defence for the insured in the insured litigation if there is a “possibility” that the insurance policy will have to respond to the substantive claims against the insured in that litigation. The Supreme Court of Canada has held that in the context of a duty to defend policy, if a claim falls within the terms of coverage and is not clearly and unambiguously excluded, then, by definition, there must be a “possibility of coverage”. See: Progressive Homes Ltd. v. Lombard General Insurance Co., 2010 SCC 33, at para. 51.
 A duty to defend will arise “where the action alleges acts or omissions which might be payable under the policy, and the mere possibility that a claim within the policy will succeed is sufficient”: Uniroyal Chemical Ltd. v. Kansa General Insurance Co. 1996 CanLII 7941 (ON CA),  OJ No. 644 (Ont CA) at para 1.
 Courts must apply the following principles of interpretation when examining insurance policies:
a. The contra proferentem rule;
b. Coverage provisions should be interpreted broadly and exclusions narrowly; and
c. Where the policy is ambiguous, the desirability of giving effect to the reasonable expectations of the parties: Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., 1993 CanLII 150 (SCC),  1 SCR 252 at 37.
As stated within Progressive Homes when reviewing whether an insurance policy might be triggered, it is necessary to review the context of the allegations rather than the express words of the allegations. For example, where allegations may use legal terminologies such as breach of contract, which is generally excluded by an insurance policy, the context of the allegations may involve negligence which may be included by an insurance policy even if the word negligence is absent. For example, the lawsuit may allege that, "the Defendant breached the contract by failing to perform in the diligent manner that would be usual to a reasonable person"; and thereby the allegations sound in negligence.
The requirement that an insurer look to the context of the allegations rather than explicit wording of the allegations was well stated in R.C. and J.M. v. Western Assurance Company, 2022 ONSC 100 where it was said:
 In deciding whether an insurer has a duty to defend, courts are not bound by the “legal labels chosen by the plaintiff” and must “look beyond the choice of labels, and examine the substance of the allegations contained in the pleadings”: Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24 at para 50.
An insurer owes the duty to defend where an insurance policy provides coverage for the liability that may arise if the legal action brought is successfully proven.