In this issue:
1. Firm News
2. Jurisdiction Clause Upheld
3. Waiver of Subrogation Enforced
4. Limits on Reasonable Foreseeability
5. Duty to Defend and Choice of Counsel
1. Firm News
- Rui Fernandes and Gordon Hearn have both been included
in the 2007-2008 Best Lawyers In Canada listing in the area of
- Kim Stoll will be speaking at the Canadian
Transport Lawyers Association Annual meeting in Quebec City on
September 26th, 2008. Gordon Hearn will be moderating the panel
on which Kim is speaking titled "Getting to the Bottom of
It: Official Investigations and Data Recorded Evidence"
2. River Rafting Regulations
In the recent Federal Court of Appeal decision in Mitsui O.S.K. Lines Ltd. v. Mazda Canada Inc. 2008 FCA 219,
the Court had occasion to consider application of a jurisdiction
clause in a bill of lading. We see a further watering down of s.
46 of the Marine Liability Act which allows a claimant to sue in
Canada despite a jurisdiction clause requiring suit in another jurisdiction.
This civil action for damages arose out of the loss
of 4,813 Mazda automobiles and 110 Isuzu trucks and salvage costs
when THE COUGAR ACE, the ship carrying them from Japan to New Westminster,
B.C., Tacoma, Washington and Port Hueneme, California, took on a
severe list of 60 degrees on July 24, 2006 while engaged in a routine
ballasting operation on the high seas. Mazda Canada Inc., eventually
lost 1563 automobiles that it had purchased, and Mazda Motors of
America Inc. (Mazda USA) lost the rest of the Mazda vehicles
The ship, owned by MOB Cougar (PTE) Ltd., and chartered
to MITSUI O.S.K. Lines Ltd. (Mitsui), was eventually towed to Portland,
Oregon where the damaged vehicles were unloaded, inspected and later
Mazda Canada instituted the action in the Federal
Court. Mitsui then sued in Japan, seeking a declaration of non-liability
for the accident. It alleged that the loss was caused by an error
of management of the ship which operates as a complete defence under
the Hague-Visby Rules. It denied that the ship was not seaworthy
and that the crew was not properly trained, as alleged by Mazda
Canada in the Canadian action.
The bill of lading contained the following clause:
28. LAW AND JURISDICTION
The contract evidenced by or contained in this Bill of Lading
shall be governed by Japanese law except as may be otherwise provided
for herein. Unless otherwise agreed, any action against the Carrier
thereunder must be brought exclusively before the Tokyo District
Court in Japan. Any action by the Carrier to enforce any provision
of this Bill of Lading may be brought before any court of competent
jurisdiction at the option of the Carrier.
The Federal Court of Appeal did recognize that the
Marine Liability Act had changed the law in Canada with respect
to jurisdiction clauses. It stated:
It is clear that subsection 46(1) of the Maritime
Liability Act S.S. 2001, c.6 eclipses the former Canadian
law in cases where parties by contract choose the jurisdiction
in which the case will be tried. Such a clause in a contract of
carriage is no longer controlling in Canada, but it may be considered
as one of the factors to consider in deciding whether an allegation
of forum non conveniens is made out ((OT Africa Line
Ltd. v. Magic Sportswear Corp., 2006 FCA 284).
However, the Federal Court of Appeal further dilutes
s. 46 by stating:
This provision in subsection 46(1) merely opens
the door for Canadian plaintiffs, allowing an action to be instituted.
However, the Court may still decline the jurisdiction on the basis
of forum non conveniens. (OT Africa, supra). Section 46(1)
applies here because the intended port of discharge of the vehicles
was New Westminster, B.C. The Plaintiff may therefore institute
proceedings here, but forum non conveniens arguments remain
available to the Defendants.
The Federal Court of Appeal went on to find that the
trial judge correctly understood these principles and sought to
apply them, taking into account the established law governing the
issue of forum non conveniens. The court listed the factors
that a judge must take into consideration when deciding a forum:
a) the parties' residence, and that of witnesses and
b) the location of the material evidence;
c) the place where the contract was negotiated and executed;
d) the existence of proceedings pending between the parties in another
e) the location of the defendants' assets;
f) the applicable law;
g) advantages conferred upon the plaintiff by its choice of forum,
h) the interests of justice;
i) the interests of the parties;
j) the need to have the judgment recognized in another jurisdiction.
The Federal Court of Appeal reiterated the law that
to stay an action because of forum non conveniens in Canada,
it must be established that another forum is clearly more appropriate.
The Federal Court of Appeal, however, found that the
trial judge had erred, stating:
Having considered the analysis of the Trial Judge,
I have concluded that his discretion was, in all the circumstances,
not properly exercised and must be reversed. He made errors of
law requiring this Court to reassess his reasoning. He undervalued
some factors (a), d), f)) to which he should have given greater
weight. He placed weight on some factors which he should not have
placed weight on. Also, there are important new facts in relation
to factor a) that arose following his decision so that he was
unable to take them into account. In short, Japan, not Canada,
is clearly the most appropriate forum for this litigation.
The most significant factor that affects this Court's
decision is the ongoing proceedings between the parties in Japan,
item d) on the list, which was largely ignored by the Trial Judge.
First, an action has been launched by the appellant in Japan for
a declaration of non-liability which includes as parties Mazda
Canada, as well as Mazda U.S.A. That this action was started after
the Canadian one, in my view, is not of any importance. Second,
there is a civil action being pursued by Mazda U.S.A. in Japan
for its losses, which has now been consolidated with the declaration
The action in Canada was stayed. This is the second
time the Federal Court of Appeal has bowed to proceedings being
commenced in another court in foreign jurisdiction. If the first
decision (OT Africa) was the opening wedge, this Mitsui decision
is the big foot in the door. Leave to appeal to the Supreme Court
of Canada is being sought.
3. Waiver of Subrogation Enforced
Federal Court Enforces "Waiver
Timberwest Forest Corp. v. Pacific Link Ocean Services Corporation
(2008 F.C. 801)
Timberwest Forest Corp. ("Timberwest") sells
logs to various customers from a British Columbia origin point.
Timberwest entered into a contract with a California based customer,
Harwood, for the supply of a shipment of logs, which was to travel
loaded onto the deck of a barge pulled by a tug along the coast.
By the terms of sale, Harwood was responsible for arranging and
paying for the transportation. However, Timberwest retained title
of the goods and risk over the same until they were delivered and
paid for by Harwood. Thus, while the obligations concerning the
appointment of a carrier made this look like an "FOB"
contract, in substance, this was a "Delivered ex Ship"
contract. This set up an interesting series of issues in this lawsuit.
As it had risk over the course of the voyage, Timberwest
arranged for insurance over the logs. Largely as an incident of
history, Timberwest obtained an insurance policy which contained
a "waiver of subrogation" clause whereby its cargo insurer
agreed that it would not commence subrogation against the carrier
should misfortune fall on the shipment while enroute, for which
the carrier might be liable.
In accordance with the above, Harwood contracted Pacific
Link Ocean Services Corporation ("Pacific Link") who had
a tug and barge under charter to carry the logs. Pacific Link entered
into a contract of carriage with Harwood, unaware of the fact that
Timberwest had arranged insurance coverage over the cargo for the
voyage featuring the above referred to "waiver of subrogation".
While enroute, the logs, which were carried on deck
(a necessity given that this was a barge movement), were swept off
of the barge and were lost.
Litigation ensued, giving rise to a host of marine
insurance issues. Pacific Link was named as a defendant, as the
"contracting carrier", as well as the owners of the tug
and barge, the master of the tug and employees who were involved
in the loading of the logs onto the barge. The litigation was commenced
by St. Paul Insurance, in subrogation, that insurer having indemnified
Timberwest for the loss. The major issues arising were as follows:
1. Could the waiver of subrogation apply in
favour of Pacific Link, as the "carrier", despite the
fact that, as the plaintiff asserted, this being international
carriage, that the Hague-Visby Rules governed? (It may be recalled
that the Hague-Visby Rules provide, at Article III(8) that "any
clause (in a contract of carriage) relieving or lessening the
liability of the carrier or ship, other than provided by these
Rules, is null and void and of no effect". In essence,
was the waiver of subrogation a "benefit of insurance clause"
that should be treated as null and void?
2. How about the other defendants, in the owners
of the tug and barge and the master and crewmembers who were involved?
To the extent that Pacific Link, as carrier, could rely on the
protection of the waiver of subrogation clause and be considered
as "additional insured", were these other entities likewise
entitled to this protection as "third party beneficiaries"
or additional insureds?
The subrogating insurer, suing in the name of the
plaintiff Timberwest, wanted a recovery from the carrier or failing
that (in the event that the waiver of subrogation clause applied)
from the other named defendants. To this end, the plaintiff accepted
that it was bound by the terms of the contract of carriage between
Harwood and Pacific Link. (Case law has long had it that an "FOB
Seller" who retains risk over goods during the course of the
transportation is an undisclosed principal vis-à-vis the
shipper/receiver of the goods who booked the carrier. In other words,
it stands to reason that Harwood, acting as shipper, was acting
as the agent for Timberwest as concerns the transportation of the
product). Notwithstanding that Pacific Link had no knowledge
of Timberwest's involvement or interest in this shipment (let alone
the existence of the insurance policy) Pacific Link was able to
hold Timberwest to the terms of the contract of carriage and Timberwest
However, Timberwest argued that the contract of carriage,
being international in scope from a Canadian port, was governed
by the Hague-Visby Rules and as a result of the aforementioned Article
III(8), the waiver of subrogation clause was null and void and did
not apply to the benefit of Pacific Link as carrier. There was a
factual wrinkle: a bill of lading was not issued for the voyage;
however, it was conceded by all parties that the voyage was to be
"covered" by a bill of lading as it was contemplated that
one would be issued. The carrier argued, in favour of the application
of the waiver of subrogation, that the Hague-Visby Rules and Article
III(8) were not "offended" because in fact the Rules did
not apply to this shipment. (It should be recalled that the Hague-Visby
Rules apply, as a compulsory matter of law, to shipments from Canadian
ports, if covered by a bill of lading, unless the goods in question
are live animals or the goods are cargo which is to be carried on
deck with the fact of the "on-deck carriage" stated on
the face of the bill of lading or contract of carriage). Thus,
the interesting debate as to what the bill of lading, if issued,
would have disclosed. If the bill of lading would not have disclosed
the on-deck carriage then the Hague-Visby Rules would have applied
potentially giving rise to the plaintiff's argument that Article
III(8), was "offended" or contravened by the waiver of
In addition to arguing that the Hague-Visby Rules
did not apply, the defendant asserted that a waiver of subrogation
and insurance policy is different than a benefit of insurance provision
incorporated into the contract of carriage. That is, there was nothing
in the contract of carriage offending Article III(8) - the insurance
policy being a separate document negotiated between Timberwest and
its insurer. The defendant also asserted that the other named defendants,
being either employees of Pacific Link or its subcontractors, were
to get the benefit as being additional unnamed insureds under the
subject cargo insurance policy on the basis that they were intended
"third party beneficiaries" to same: Pacific Link, merely
being a corporate entity, necessarily required the involvement of
the other defendants to perform its contractual mandate which involvement
(1) was foreseen and known to Timberwest and Harwood and (2) the
functions performed by the defendants in fact fell squarely within
their contemplated involvement in carrying out the contract of carriage.
Thus, on the basis of established Canadian jurisprudence (London
Drugs Ltd. v. Kuehne & Nagel International Ltd.  3
S.C.R. 299) the carrier argued that the remaining defendants were
"third party beneficiaries" to take the benefit of the
waiver of subrogation contained in the insurance policy.
The court held that the Hague-Visby Rules did not
apply to the shipment, finding that the bill of lading, if issued,
would have stated that the entire shipment was being carried on
deck. Thus, the application of the Rules would have been exempted
and there was therefore no concern that Article III(8) of the Hague-Visby
Rules were offended. There was no reason not to enforce the waiver
of subrogation clause in the insurance policy as it was clearly
intended for the benefit of Pacific Link acting as carrier.
The court also ruled that the other remaining defendants
were also unnamed third party beneficiaries or additional unnamed
insureds on the basis of London Drugs and the later case
law following same on the rationale that the actual performance
of Pacific Links' carriage mandate fell to these other defendants
to be performed. Therefore, as the "carrier" was to be
so protected, so too would be the carrier's employees or subcontractors
actually performing the carriage.
Accordingly, the court ruled that the waiver of subrogation
clause applied in favour of all of the defendants as a result of
which St. Paul Insurance could not subrogate for which it had indemnified
4. Limitation on "Reasonable Foreseeability"
The case of Donoghue v. Stevenson is often cited as one of the most important cases regarding the
law of negligence as it created the neighbour principle and, thereby,
extended the duty of care to apply to those parties who may not
have had a direct relationship with the person who suffered harm.
The case arose because a consumer found a snail in the bottom of
a bottle of ginger beer, which the consumer had just consumed, and
suffered harm as a result of the incident. The question the court
had to determine was whether the manufacturer could be liable for
any harm that befell the consumer as a result of consuming this
contaminated ginger beer. The court found that one must not injure
his/her neighbour and went on to define neighbour as being
persons who are so closely and directly affected
by my act that I ought reasonably to have them in contemplation
as being so affected when I am directing my mind to the acts or
omissions which are called in question.
In the end, the court concluded that the manufacturer
of a consumable good owes a duty of care to the ultimate consumer
of that good.
It is only fitting that now when the court is looking
to expand the reach of negligence once again that the case they
are examining is based on remarkably similar facts.
Mustapha v. Culligan of Canada Ltd. arose after
Mr. Mustapha and his wife discovered two dead and partially dismembered
flies in a bottle of water. They had intended to place the water
bottle on the dispenser to replace the empty one, but before they
were able to do so, while cleaning the bottle off, they noticed
the flies inside the bottle. It should be noted that Mr. Mustapha
and his wife maintained a spotless home and had a phobia of germs.
As a result of this incident, Mr. Mustapha alleged that Culligan's
negligence in failing to ensure that the water was not contaminated
led him to suffer psychiatric harm.
The Supreme Court examined what a plaintiff is required
to show to have a successful action in negligence. It stated that
the plaintiff must demonstrate "(1) that the defendant owed
him a duty of care; (2) that the defendant's behaviour breached
the standard of care; (3) that the plaintiff sustained damages;
and (4) that the damages were caused, in fact and in law, by the
The Supreme Court disposed of the first two steps
rather swiftly. As stated above, Donoghue v. Stevenson clearly
shows that a manufacturer owes a duty of care to a consumer. The
court then stated that Culligan breached the standard of care because
a manufacturer of a consumable product has an obligation to take
reasonable care to ensure that the consumable product is not contaminated
by foreign elements.
The third step was a question of fact and the trial
judge at the spent three quarters of his lengthy judgment summarizing
the testimonies of different expert witnesses to determine whether
Mr. Mustapha indeed suffered psychiatric harm. The Court, accepting
the testimony of the plaintiff's experts, stated that the impact
of the incident on Mr. Mustapha included, but was not limited to,
an inability to shower, drink water and nightmares about the incident.
The Supreme Court had no issue with the findings of the trial judge
On the findings of the trial judge, supported by
medical evidence, Mr. Mustapha developed a major depressive disorder
with associated phobia and anxiety. The psychiatric illness was
debilitating and had significant impact on his life; it qualifies
as a personal injury at law. It follows that Mr. Mustapha has
established that he sustained damage.
The final question the Supreme Court examined was
whether the plaintiff's damages were caused by the defendant's breach.
Quite clearly, the trial judge found that the defendant's breach
of its duty of care caused the plaintiff's psychiatric harm; however,
the remaining question was whether the plaintiff suffered damages
in law or whether the damages were too remote from the defendant's
breach to warrant recovery.
In reaching its conclusion, the Supreme Court provided
the ordinary fortitude doctrine and stated that the plaintiff "must
show that it was foreseeable that a person of ordinary fortitude
would suffer serious injury from seeing the flies in the bottle
of water he was about to install." In this case, the Court
concluded that Mr. Mustapha only showed what his own reactions were
and he did not show how a person with ordinary fortitude would have
reacted to the flies similarly. Therefore, it was not reasonably
foreseeable for Culligan to know that its negligence would cause
harm to the plaintiff because a person of an ordinary fortitude
would not likely have suffered this harm (or at least the plaintiff
did not show that a person of ordinary fortitude would suffer this
In conclusion, the Supreme Court in Mustapha v.
Culligan of Canada Ltd. put a limit on negligence by not limiting
the scope of who is considered a neighbour, but by conceding that
the harm suffered by the plaintiff must be reasonable in so far
as that a person of an ordinary fortitude could be susceptible to
the breach. This limitation allows the alleged wrongdoer a reasonable
opportunity, prior to an incident, to know that its actions/inactions
could cause harm to another person and to take measures to protect
this person from harm. That said, the question remains, would Mr.
Mustapha been awarded damages had he drank the water?
5. Insurer's Duty to Defend and Choice of Counsel Revisited and
Case Comment on Appin Realty Corp. Ltd v. Economical Mutual Insurance
Co. 89 O.R. (3d) 654 (Ontario Court of Appeal February 12, 2008)
There are always attempts by parties
and their counsel to push and extend the law, but the case needs
the right facts and policy wordings. The Appin case reviewed below
failed in both of its attempts.
DUTY TO DEFEND OVERVIEW
It has long been held that the "Pleadings
Rule" principle applies when examining whether or not an insurer
has a duty to defend claims against its insured. Traditionally (and
tritely) the duty to defend is broader than the duty to indemnify
and the two are examined independently. Nichols v. American Home
Assurance Co. (1990) 1 S.C.R. 801 provided that a duty to defend
was much broader than a duty to indemnify and that "the mere
possibility that a claim within the policy might succeed suffices".
The insurer's duty to defend under any
policy arises where the statement of claim "alleges" acts
or omissions that are covered by that policy. However, the duty
to indemnify only arises where such allegations are proven to fall
within that coverage.
The basic rule is simply that if the
claims that are alleged in the statement of claim would, if proven,
fall within coverage then there is a duty to defend and the insurer
must supply counsel. It may of course be determined that there none
of those claim are actually proven and therefore there will be no
This area though has received some clarification.
The Ontario Court of Appeal in 1993 held in Jon Picken Ltd. v.
Guardian Insurance Co. of Canada,  I.L.R. 1-2973, that
the insurer cannot go outside the four corners of the pleadings
to consider "underlying facts" when deciding whether it
has a duty to defend even if such acts would have been excluded
by the policy.
In 2000, the Supreme Court of Canada
in Non-Marine Underwriters, Lloyds of London v. Scalera (2000),
185 D.L.R. (4th) 1, reviewed the Pleadings Rule.
The SCC determined that the court (and
the insurer) can, in fact, look beyond the particular words used
in the pleadings to determine the true meaning of the claim and
held that the nature of the pleadings may be tested to consider
whether the claims were properly pleaded. (In Scalera, the
court held that there was no duty to defend a claim for negligent
sexual battery as sexual battery could not be pleaded in negligence
and such intentional acts were excluded under the policy.) An attempt
by plaintiff's counsel to be creative in a bald attempt to attach
a deep pocket failed since a bare allegation may not be enough.
The label put on the claim could be examined for its true nature
and the examination of all allegations was granted legitimacy by
the court to look behind the words to locate the substance of the
The SCC in Monenco Ltd. v. Commonwealth
Insurance Co. 2001 SCC 49 allowed review of extrinsic evidence
referred to in pleadings such as the joint venture agreement referred
to in that set of pleadings. In Monenco, the insurer declined
to provide a duty to defend where its insured provided architectural/engineering
services to the claimant. The claim alleged that Monenco had done
so that Monenco denied doing and referred to the joint venture agreement.
The SCC confirmed that a review of the
"true nature" of the pleadings was permitted including
the factual allegations cited in the pleading and whether such allegations
could support such a claim or claims. Therefore, if exclusion applies
on its face based on the pleadings, then there will be no duty to
defend. In Monenco, the pleadings alleged that the services had
been provided and the terms of the joint venture arrangement also
attracted the exclusion.
And so the Scalera/ Monenco approach
has continued to today.
It was recently reviewed again by Allen
J. in Russell Metals Inc. v. Ball Construction Inc. 
O.J. No. 4673(See case comment in our January 2008 newsletter).
Regarding the duty to defend, Justice
Allen applied the test from Nichols v. American Home Assurance
Co., supra and then went on to hold that the case at bar was
not one in which to review extrinsic evidence to determine whether
there was a duty to defend as had been permitted in Monenco because examination of evidence referred to the in the pleadings
(including any review of associated reports in that regard) would
require factual findings and included contentious issues. As Justice
Iacobucci had stated in Monenco, "... we cannot advocate an
approach that will cause the duty to defend application to become
a "trial within a trial." In that connection a court considering
such an application may not look to "premature" evidence,
that is, evidence which, if considered would require findings to
be made before trial that would affect the underlying action."
But where are we now? Well, where we
Appin Realty Corp. Ltd v. Economical
Mutual Insurance Co. 89 O.R. (3d) 654 (Ontario Court of Appeal
February 12, 2008)
The Appin case required a review of the
pleadings and also the insurance policy and included an attempt
to change a fundamental principle.
The Appin case reviewed the obligation
of an insurer's duty to defend recently in a Judgment by Kershman
J. in the Ontario Superior Court in August of 2007. Justice Kershman
found that the insurer was required to defend the action on behalf
of its insured to a claim brought by the plaintiff involving damages
for bodily injury caused by bacteria and mould. The insurer had
denied on the basis that its policy exclusions stated that there
was no coverage for actual, "alleged" or threatened exposure
to mould. (emphasis added). While claims regarding bacteria were
covered, the insurer took the position that the claim for mould
fell within the exclusion clause and that there was no duty to defend
any claim, which included such allegation pursuant to its concurrent
exclusion clause that stated:
This exclusion applies regardless of the cause of
the loss or damage, other causes of injury, damage, expense or
costs or whether other causes acted concurrently or in any sequence
to produce injury, damage, expenses or costs.
The insurer appealed.
Counsel for the insurer on appeal submitted that the
use of the word "alleged" in the exclusion 7(a) was to
absolve the insurer of the duty to defend in any case where the
bodily injury from mould was alleged regardless of whether it was
combined with covered claim such as those related to bacteria.
This position alone is unusual given that coverage
was afforded for claims involving injury from bacteria. In fact,
the insurer agreed in submissions to the Ontario Court of Appeal
that indemnity would be provided where there was a successful claim
for damages arising out of such a covered peril, but submitted that
a defence was not owed.
The insurer's position was that the duty to defend
in this case was narrower than the duty to indemnify. Surprising
to say the very least.
Needless to say the Ontario Court of Appeal did not
agree stating that the insurer would have to use clear and unambiguous
language to convey such a departure from the long held principles
in Nichols, supra, and also, it is submitted here, from Scalera
and Monenco as well. The court stated on page 657 at paragraph 5:
We disagree with the insurer's position. The language
in 7(a) is both unclear and ambiguous in its effect. A plain reading
of the provision does not support the insurer's position. Indeed
the clause is worded in such a fashion that would leave most people
guessing as to its meaning. For example, on another possible interpretation,
the clause could be taken to mean that wherever injury from mould
is alleged in a claim even it if it ultimately establishes that
the injury arouse solely from a covered peril such as bacteria,
the claim would exclude both the duty to defend and the duty to
indemnify and this would effectively extend the exclusion to otherwise
non-excluded perils. (and at paragraph 6)
The insurer's position stands on its head the general
proposition that the duty to defend is broader than the duty to
If as the insurer submits, the clause is was meant
to convey that the insurer's duty to defend is narrower than its
duty to indemnify, clear and unambiguous language was required.
The language used falls well short of the mark.
Frankly, while acknowledging that the insurer could
provide such language in its policy to require a narrower duty to
defend, it seems difficult to envisage such language that would
attempt to extend exclusions to non-excluded perils being employed
by insurers in their policies and also ultimate success before the
courts in this regard.
CHOICE OF COUNSEL OVERVIEW
There are a few situations where the insured will
be permitted to select its counsel (typically when the insured is
self insured for a significant layer) although most insurance policies
provide the insurer with the right to choose counsel. This is only
reasonable given that indemnity ultimately comes from the insurer.
The courts will, however, interfere if there is an apprehension
of bias. Any doubts as to potential conflict should be resolved
in favour of the insured. (See New Brunswick Court of Appeal reasons
in Morrison v. Cooperators 2004 NBCA 62 at paragraph 24):
In my opinion, the conflict in this matter lies
in the position of the parties and potential conflict at the trial
of this matter. The Applicant and the (insurer's) respective interests
do not necessarily coincide on all material aspects and in particular
on the issue of liability. I am of the view that this presents
at least the potential for conflict and any doubts in this regard
should be resolved in favour of the insured: Laurencine v.
Jardine (1988), 64 O.R. (2d) 336 (H.C.J.).
There is no absolute right to control the defence
of an action. In situations where there are coverage issues in the
middle of litigation, the insured must consent to the continuation
of representation of the insured by the insurer-appointed counsel.
Otherwise, counsel acting on the defence, at that time, must step
down and cannot act for either the insured or the insurer given
the appearance of conflict and impropriety. (See Brockton (Municipality)
v Frank Cowan Co.,  O.J. No. 20 (C.A.))
Appin Realty Corp. Ltd v. Economical Mutual Insurance
Co. 89 O.R. (3d) 654 (Ontario Court of Appeal February 12, 2008)
In Appin Realty Corp. Ltd v. Economical Mutual
Insurance Co., supra, the Court of Appeal also dealt with the
issue of whether the insured was required to accept the insurer's
choice of counsel after the battle over the duty to defend as indicated
above. The insured was concerned that there would be an attempt
by insurer's choice of counsel to steer the evidence to a mould
or "non-covered" peril. The insurer was concerned that
insured's choice would do likewise toward a covered peril and preferred
independent counsel. The Court of Appeal found that the insured's
choice of counsel would continue given that counsel's record and
that he was aware of the challenge of ensuring a fair approach.
Insurers will lose this battle almost every time if
there is any indication of potential bias that goes both ways. In
this case, even with the reasonable approach of suggesting "independent"
counsel, the insurer did not prevail.
One wonders just how much this determination to allow
the insured's counsel to continue arose out of an attempt to capsize
the long held principles discussed above without clear and unambiguous
language in the policy to support such a discombobulating argument.
Kim E. Stoll
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