June 2002

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 lawsuit.

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 insured's rights.

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.

JGN