Insurer's Obligation To Defend -- Control of Defence
-- Conflict of Interest
An "appearance of impropriety" in the eyes
of an insured does not constitute a proper basis for requiring an
insurer to surrender control of a defence and to pay for counsel
that is retained by the insured. This is only required where there
is a true conflict of interest. A conflict of interest will exist
only where the insurer puts defence counsel in a position where
his mandate from the insurer can reasonably be said to conflict
with his mandate to defend the insured in the civil action.
In The Corporation of the Municipality of Brockton
v. Frank Cowan Company Limited et al, the insured Municipality
suffered a catastrophic bacterial infection of its water supply
which gave rise to investigations and the launching of a class action
The Municipality was insured. Its insurer appointed
a law firm to defend it but the Municipality was not satisfied with
the legal representation which it received. In particular, it disagreed
with advice to follow a certain strategy in defending the action.
The Court found that the advice from the law firm was its best view
how to immunize the Municipality's liability in the actions against
it and, therefore, to minimize the indemnity obligation of its insurer.
It did not reflect a mandate from the insurer that conflicted with
the defence obligation.
The Court of Appeal cited the following from "Conflict
Between Insured and Insurer: An Analysis of Recent Canadian Cases":
It is important to recognize what the two parties
have not agreed to. They have not agreed, unless the policy says
so, that the insurer will provide free counsel to the insured to
protect his separate interest whether to defend himself against
uninsured claims, or to consider his position with respect to claims
in excess of limits, or to protect his interest in any dispute with
the insurer. Conversely, they have not agreed that the insurer will
be able to instruct defence counsel to act to the prejudice of the
Although the insurer had issued a reservation of rights
letter, the Court found that it was not, per sé, sufficient
to require it to surrender control of the defence in this case.
The reservation of rights was based on the monetary limits of the
policy and an exclusion for punitive and exemplary damages. It was
not based on any conduct of the insured that was an issue in the
underlying litigation. The defence counsel, therefore, was under
no mandate to show that the insured had acted in any way which would
remove the insurer's indemnity obligation.
Moreover, the insurer had appointed separate coverage
counsel thereby removing any possible conflict that could have arisen
from the reservation of rights letter in the case.
This case illustrates the natural "tensions"
that exists between an insured and an insurer defending a liability
action. It is likely, although not clear from the decision, that
the insured had non-legal (political) concerns that influenced its
thinking about how to defend the action. The Court of Appeal has
reaffirmed that, notwithstanding the perspective of the insured,
if it takes steps to retain its own counsel to adopt a "preferred
strategy" in the defence of the action, it likely does so at
its own expense. As long as it can be shown that counsel appointed
by the insured to defend the action was not under any set of contradictory
mandates, absent any specific policy wording, the insurer does not
surrender its right to control a defence of an action and is not
obliged to pay for independent counsel retained by the insured.
This newsletter is published to keep our clients and friends informed
of new and important legal developments. It is intended for information
purposes only and does not constitute legal advice. You should not
act or fail to act on anything based on any of the material contained
herein without first consulting with a lawyer. The reading, sending
or receiving of information from or via the newsletter does not
create a lawyer-client relationship. Unless otherwise noted, all
content on this newsletter (the "Content") including images,
illustrations, designs, icons, photographs, and written and other
materials are copyrights, trade-marks and/or other intellectual
properties owned, controlled or licensed by Fernandes Hearn LLP.
The Content may not be otherwise used, reproduced, broadcast, published,or
retransmitted without the prior written permission of Fernandes