Insurer's Duty to Defend: Supreme Court of Canada
Revisits the 'Extrinsic Evidence and Pleadings Rule'
It is now accepted that that the duty to defend is
broader than, and independent of, the duty to indemnify, except
that there is no duty to defend where there is necessarily no duty
to indemnify. This proposition is usually more difficult to apply
than it is to state.
The duty to defend arises where there is the possibility
that the claim, as contained in the pleadings, alleges acts or omissions
falling within the policy coverage, while the duty to indemnify
arises only where such allegations are proven at trial. The question
arises whether the court is limited to the pleadings in deciding
what it is that is alleged, or can go outside of the pleadings for
extrinsic evidence, in order to make this decision.
In Bacon v. McBride (1984), 5 C.C.L.I. 146
(B.C.S.C.), the court stated that "the pleadings govern the
duty to defend - not the insurer's view of the validity or nature
of the claim or by the possible outcome of the litigation".
As the jurisprudence developed in this country, courts felt compelled
to strictly adhere to the pleadings rule. In Jon Picken Ltd.
v. Guardian Insurance Co. of Canada,  I.L.R. 1-2973 (Ont.
C.A.) the Ontario Court of Appeal, in holding that the insurer had
a duty to defend, refused to consider findings of dishonest or fraudulent
acts made by the same court in the underlying action. which acts
would have been excluded by the policy. Courts ruled that one cannot
go outside the four corners of the pleadings and consider "underlying
facts" in deciding on the duty to defend.
More recently, the Supreme Court of Canada has opened
up the Pleadings Rule in two ways. First, the court can look beyond
the particular words used in the pleadings to determine the "true
nature" and substance of the claim. In Non-Marine Underwriters,
Lloyds of London v. Scalera (2000), 185 D.L.R. (4th) 1 (S.C.C.),
the Supreme Court of Canada held that the court is not limited by
the literal words of the pleadings; that is, the plaintiff's choice
of terminology. Instead, the court must look at the substance of
the claim which is asserted. The court held that the claim for sexual
battery was not capable of being pleaded in negligence. Therefore,
there was no duty to defend a claim for negligent sexual battery
under the circumstances where the policy excluded intentional acts.
The court stated that the bare assertions advanced
in a statement of claim are not necessarily determinative. If so,
the parties to an insurance contract would always be at the mercy
of a third-party pleader. What really matters is not the labels
used by the plaintiff, but the true nature of the claim. Courts
have been encouraged to look behind the literal terms of the pleadings
in order to assess which of the legal claims put forward by the
pleader could be supported by the factual allegations. This analysis
is undertaken with a view to discerning the true "substance"
of the allegations.
Secondly, the court can consider extrinsic evidence
which has been referred to in the pleadings. In Monenco Ltd.
v. Commonwealth Insurance Co.,  S.C.C. 49, the Supreme
Court of Canada was asked to decide whether an insurer had a duty
to defend a claim against a firm of engineers who provided engineering
services to the claimant. The insurer declined to defend on the
ground that the "turnkey exclusion" of the CGL policy
applied to the claim. The exclusion provided that the insurer is
not liable for claims arising out of projects for which professional
architectural and/or engineering services were performed by the
insured or by any legal entity owned by the insured. Monenco argued
that it did not in fact provide any such services pursuant to a
joint venture agreement with the claimant. The Statement of Claim
alleged that Monenco had provided engineering services on the project,
and referred to the joint venture agreement. The court observed
that the proper basis for determining whether a duty to defend exists
in any given situation requires an assessment of the pleadings to
ascertain the "substance" and "true nature"
of the claims. More specifically, the factual allegations set out
therein must be considered in their entirety to determine whether
they could possibly support the plaintiff's legal claims.
Mr. Justice Iacobucci stated: "I am of the view
that extrinsic evidence that has been explicitly referred to within
the pleadings may be considered to determine the substance and true
nature of the allegations, and thus, to appreciate the nature and
scope of an insurer's duty to defend." The conclusion was that
the insurer had no duty to defend because the exclusion applied
to the pleadings which alleged that Monenco provided the services.
In addition, the exclusion applied to the terms of the joint venture
contract wherein a corporation that was owned and controlled by
Monenco had undertaken to provide these services. It is therefore
important when analyzing the insurer's duty to defend to scrutinize
the allegations within the Statement of Claim. It should be examined
in its entirety to arrive at the true nature and substance of the
claim. The mere use of typical "trigger" words such as
"negligence" or "damage" may no longer be sufficient
to give rise to a duty to defend, if a reasonable reading of the
claim indicates an absence of factual or legal bases for these allegations.
If the allegations refer to some extrinsic material, the material
itself should be examined, as it may be admissible and relevant
to defining the nature of the claim.
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