Additional Insureds: A Practical Guide to Getting Someone Else to Pay for Your Defence

Is the municipality an Additional Insured?

A common requirement of contracts tendered by municipalities is the requirement for the contractor to obtain commercial general liability insurance covering the period of the contract, and naming the municipality as an “additional insured” under the policy. The additional insured endorsement usually includes the limitation that contractor’s insurer is only liable for claims against the municipality “arising out of the operations of the contractor” pursuant to the contract. Thus, the purpose of being named an additional insured is to protect the municipality from liability caused by the contractor’s negligence.

Typical situations where a municipality would be named an additional insured include contracts for winter road or sidewalk maintenance, public facilities maintenance, or construction contracts. When entering into the contract, the municipality will have received a certificate of insurance which evidences the policy of insurance and the fact that the municipality was endorsed as an additional insured under the policy. The municipality rarely obtains a copy of the actual policy wording when the contract is executed, so defence counsel has the task of obtaining the policy when pursuing the duty to defend.

Does the contractor’s insurer have a duty to defend?

An insurer has a duty to defend an insured, including an “additional insured”, where the facts alleged in the Statement of Claim, if taken as true, would require the insurer to indemnify the insured for the damages claimed. It does not matter if the facts can actually be proven in evidence because the mere possibility of an obligation to indemnify is enough to create a duty to defend.[2] The Court ordinarily does not permit extrinsic evidence on an application regarding the duty to defend, and makes the determination based on the applicable policy or policies, the Statement of Claim (and any particulars demanded), and any documents incorporated by reference into the claim.[3] Any doubt about whether there might be a duty to indemnify should be resolved in favour of the additional insured.

It is probably unnecessary to have a copy of the policy wording in order to assess whether to make a demand for a full defence from the contractor’s insurer since the policy wording is fairly standard. However, if you commence an application, the Court’s analysis should be based on the wording of the policy, including the endorsement adding the municipality as an additional insured, if any, not on the wording of the certificate of insurance.[4] Nevertheless, many cases have been decided based on the language of the certificate of insurance alone, presumably because counsel did not advert the Court (or themselves) to the issue, or the policy itself was unavailable.[5]

What if there are covered and non-covered claims?

The flipside of the basic principle of the duty to defend is that an insurer does not have an obligation to defend claims that clearly fall outside coverage or to which an exclusion under the policy applies.[6] In examining the allegations in the claim to determine whether all or some fall within the scope of the contractor’s coverage, the Court must look beyond the Plaintiff’s labels in the Statement of Claim, to ascertain the “substance” and “true nature” of the claims.[7]

The genesis of the “true nature” concept is the recognition that the legal basis for the claim many not be stated properly because the pleadings were poorly drafted, or the pleadings may be manipulated to trigger a duty to defend, such as in the case of Scalera, in which the claim described non-covered intentional acts as “negligence”, which was covered.

As with all simple legal concepts, the application of the concept is messy. Contrast the motions-level decisions in similar slip and fall claims by Hennessy J. in RioCan and Belobaba J. in Atlific. In RioCan, Hennessy J. found that the insurer had a duty to defend of the claims made against an additional insured, including claims against the additional insured for its own negligence and breaches of the Occupiers Liability Act which were outside the scope of the contractor’s coverage, because the true nature of the claim arose from the failure to properly maintain a parking lot, which was covered by the contractor’s policy.[8] In Atlific, Belobaba J. distinguished RioCan, and held that the insurer did not have to defend the entire claim against the additional insured property owner because the claims against the additional insured for negligence in its hotel operations and breach of the Occupiers Liability Act were “formidable and can stand on their own.”[9]

One wonders whether there was something unusual about the claim in Atlific that cause Belobaba J. to see the claim as being more than a negligent winter maintenance case. Interestingly, the claims against the hotel operator/additional insured were identical to the allegations against the contractor, and were boilerplate-type allegations.[10] Thus, it is likely that there is nothing truly distinguishable between the claims in RioCan and Atlific. It is significant that the parties in Atlific did not make the true nature/entire action argument before Belobaba J., and it is likely that the case would have followed RioCan if the argument had been made.[11]

The practical problem with the Atlific-type approach to defense of mixed claims is that it provides no guidance to parties about how to allocate defence costs at the beginning of an action. The Hanis decision addressed the allocation of defence costs after a trial as between an insurer and primary named insured where some of the claims were not covered. The Court of Appeal held:

I would hold that the question of apportionment of costs should be determined by the operative language in the policy. Where there is an unqualified obligation to pay for the defence of claims covered by the policy, as in this case, the insurer is required to pay all reasonable costs associated with the defence of those claims even if those costs further the defence of uncovered claims. The insurer is not obliged to pay costs related solely to the defence of uncovered claims.[12]

The Court of Appeal confirmed the trial decision that the insurer should pay 95% of the defence costs and that only 5% of the defence costs were solely due to the uncovered claims. Although the insured was victorious, there was no penalty against the insurer for failing in its duty to defend at first instance even where there was an acknowledged duty to defend, and forcing the insured to defend himself through to the end of trial. The Hanis decision, and the uncertainty with respect to defence of mixed claims has historically provided little motivation for insurers to concede an obligation to defend additional insureds. Pursuing litigation to enforce the duty to defend can be costly, and causes delay to the underlying action. For example, in another RioCan decision, the insurer had offered to pay 50% of the defence costs of the additional insured, but the additional insured was successful on application in obtaining an order for payment of 75% of its costs, subject to reallocation as the litigation progressed.[13] In that case, instead of the co-defendants uniting in their defence against the claim, and the insurer paying for only one joint defence of both parties, they spent money on an application and permitted a conflict of interest to arise between the insureds that required the insurer to pay for the lion’s share of two defences.

In Carneiro, the Court of Appeal refers favourably to Atlific for the proposition that an insurer does not fulfil its duty to defend an additional insured by defending the contractor, but does not address the conflicting approaches to the “true nature” concept involving mixed claims as represented by the Belobaba J. and Hennessy J. decisions. The Court of Appeal skates past this issue by focussing on the policy language that provides a defence for “any action” seeking damages to which the insurance might apply, not just covered claims.

The Carneiro approach of requiring the insurer to defend the entire claim subject to a right to reallocation of defence costs at the conclusion of the proceeding is the right approach because it remedies the unfairness to the insured of being forced to defend itself for covered claims and expend costs to pursue the insurer to fulfill its duty to defend as in Hanis. In this regard, the Court states:

Fifth, and finally, we disagree with the motion judge’s conclusion that Durham was protected because it would be entitled to recover costs at the end of the litigation if it were not found liable. That misses the point. The duty to defend is a separate contractual obligation. The outcome of the trial is irrelevant to the duty to defend. The duty would be a hollow one if the insurer’s only obligation were to indemnify its insured at the end of the day. That was not the obligation Zurich undertook when it issued a policy naming Durham as an additional insured. It promised to defend Durham and it should have been held to that promise.[14]

The Carniero decision has excited the defence bar because it provides clarity with respect to the allocation of defence costs at the commencement of the proceedings, which will hopefully minimize litigation where there is an acknowledged duty to defend.

Does additional insured have right to appoint its own counsel?

At first instance, the policy of insurance dictates that the insurer’s role is to conduct the defence, including appointing and instructing defence counsel, and the insured’s role is to assist in the insurer’s defence. The insurer’s right to control the defence is the upshot of the obligation to indemnify the insured for covered claims. However, the insurer may lose its right to appoint and instruct defence counsel where there is a reasonable apprehension of conflict of interest on the part of counsel appointed by the insured. The question is whether counsel’s mandate from the insurer conflicts with counsel’s professional obligation to provide a full and competent defence to the insured.[15]

A conflict of interest that would entitle an additional insured to retain and instruct its own counsel at the insurer’s expense may arise from the nature of the coverage dispute, where there is concern that counsel for the insurer might “steer” the case to an outcome that would not require indemnification by the insurer.[16] Where co-defendant insureds have crossclaimed against each other, there will almost always be a conflict of interest that entitles the additional insured to appoint defence counsel and control its own defence.[17]

What are the practical steps to enforce a duty to defend?

1. Obtain copies of the contract and certificate of insurance, and request a copy of the underlying policy.

The municipality’s counsel should request a copy of the policy from the defence counsel, and if the policy is not provided, request it directly from the insurer. We have had very little success in obtaining policies directly from the contractor’s insurance broker, who is often identified on the certificate of insurance. If it is necessary to bring a motion for production of the policy, the conservative approach is to bring the motion for production in the application dealing with the duty to defend, rather than bringing a motion for production of the policy in the underlying action pursuant to Rule 30.02(3). The Court of Appeal has stated:

Rule 30.02(3) is not intended to provide a means to obtain discovery of documents in advance of commencing a separate action relating to coverage or contractual obligations.  The purpose of the Rule is to provide a specific and limited exception to the general rule that only relevant documents need be produced.  It is to assist the making of informed and sensible decisions by parties involved in litigation in circumstances where recourse may be had to any available insurance money.[18]

2. Analyze whether claims are covered.

Applying the “true nature” analysis, is there a possibility that the contractor’s insurer will had a duty to indemnify the municipality? Consider using a demand for particulars to clarify the nature of the plaintiff’s claim.

3. Analyze whether likelihood of duty to indemnify.

There are several possibilities for implementing an insurer’s duty to defend a municipality as an additional insured, but whatever is done, we recommend executing a formal agreement as to the terms of the defence.

At one end of the spectrum is the possibility of the contractor “assuming” the defence of the municipality, meaning that the counsel appointed by the insurer to represent the contractor will go on the record for the municipality and jointly defend the municipality and the contractor. This arrangement is only possible where the co-defendants withdraw their crossclaims against each other, or at least enter into a tolling agreement with respect to the crossclaims. This approach makes sense where it is unlikely that there is any independent negligence arising from non-covered claims on the part of the municipality.

We advise our municipal clients to agree to permit the contractor’s counsel to assume the defence of the municipality only where the insurer admits a duty to indemnify the municipality, in addition to a duty to defend. We have had several experiences where a contractor has assumed the defence of a municipality, but then withdraws from representation of the municipality on the eve of trial due to a conflict of interest. It seems that as the trial approaches, the contractor becomes more motivated to blame the municipality (even though the crossclaims are not being pursued) to avoid liability. If the insurer for the contractor has agreed to indemnify the municipality for any liability, the contractor’s approach is of no consequence to the municipality.

We recommend that our clients enter into an assumption of defence agreement that requires the appointed defence counsel to report to the municipality’s counsel or directly to the municipality on significant developments in the litigation such as motions, examinations and expert reports. We also recommend that the municipality’s approved counsel remain responsible for coordinating the production of the municipality’s documents and witnesses so as to streamline those processes and prevent defence counsel who are not on a municipality’s approved counsel list from gaining knowledge of the municipality’s inner workings. Whether the “watching brief” by the municipality’s counsel should be funded by the insurer is a matter to negotiate, but the municipality often assumes this cost.

On the other end of the spectrum of possible arrangements is the municipality maintaining its own defence with its chosen counsel to be funded by the contractor’s insurer. If we believe that our municipal client has a strong case for the entire defence to be paid for by the insurer, we would seek the insurer to pay 100% of our costs, subject to the insurer’s right to bring an application for reallocation at the termination of the proceedings, or some lesser proportion of our costs, with no right to reallocate at the end of the proceedings. Alternatively, we might have the insurer waive its right to reallocation of defence costs if it assumes a lesser proportion of the municipality’s costs.

In the case where the municipality will be maintaining its own defence at the cost of the contractor’s insurer, we will agree to report to the insurer as long as there is a confidential wall between the examiners for the contractor’s defence and the municipality’s. We include a term in our defence agreement that both parties are at liberty to bring an application with respect to the coverage issues at any time.

4. Make demand on insurer.

Before commencing an application to enforce the duty to defend, we recommend that you make a demand for a full defence in accordance with the Carneiro decision directly to the insurer. Often we or the initial adjuster investigating the file communicates the request to the contractor’s defence counsel, who may or may not be taking instructions from an examiner responsible for coverage issues as opposed to the examiner giving instructions on the underlying claim. We often have more success negotiating the terms of the municipality’s defence as an additional insured once we have the ear of the right person at the insurer.

5. Commence application.

Although it is relatively common for an additional insured to commence a third party claim against the contractor’s insurer where there is a denial of the duty to defend, the appropriate process to enforce the duty to defend is to commence an application for a declaration pursuant to Rule 14.[19] The declaration sought is that the insurer has a duty to defend the municipality with respect to the underlying action, and that the municipality is entitled to appoint its own defence counsel due to a conflict of interest with the contractor. It is not appropriate to seek a declaration that the insurer has a duty to indemnify, which usually cannot be determined until after a trial or summary judgment.

Conclusion

When we pursue a contractor’s insurer to defend our municipal clients, we are often told that the insurer is not willing to assume the municipality’s defence, but will reconsider its position following examinations for discovery. I suspect that the reason for that position is some combination of: i) a stonewalling tactic that often deters the municipality’s counsel from pursuing the issue; ii) a lack of understanding of the coverage issues and the applicable law on the part of defence counsel, who confuse the coverage issue with the question of whether the municipality should be “let out of the action,” which is an issue of the liability assessment that is appropriately made following discoveries; and iii) where allocation of defence costs might be in dispute due to mixed claims against the municipality, the insurer does not want to admit any duty to defend.

For the time being, municipalities are in a good position to demand their defences be paid by a contractor’s insurer following the Carneiro decision, and we vigorously pursue contractor’s insurers to pay for our client’s defence in appropriate cases. Stay tuned for how the insurance industry responds to close these floodgates.

[1] Carneiro v. Durham (Regional Municipality), 2015 ONCA 909
[2] Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33 at ¶19-20
[3] Sinclair v. Town of Markham, 2014 ONSC 1550
[4] See ¶13 of Carneiro, supra
[5] For example, Dufferin Construction v The Dominion of Canada, 2015 ONSC 6311
[6] Nichols v. American Home Assurance Co., [1990] 1 SCR 801, 1990 CanLII 144 (SCC)
[7] Non-Marine Underwriters, Lloyd's of London v. Scalera, [2000] 1 SCR 551, 2000 SCC 24; Monenco Ltd. v. Commonwealth Insurance Co., [2001] 2 SCR 699, 2001 SCC 49
[8] RioCan Real Estate Investment Trust v. Lombard General Insurance Co. (2008), 91 O.R. (3d) 63, 2008 CanLII 16073 (ON SC)
[9] Atlific Hotels and Resorts Ltd. v. Aviva Insurance Company of Canada, 2009 CanLII 24634 (ON SC) at ¶16
[10] See Amended Statement of Claim, 2009 CCLIPleading 54700
[11] Atlific, supra at ¶18
[12] Hanis v. Teevan, 2008 ONCA 678 at¶2
[13] Riocan Property Services Inc. v. Dominion Of Canada General Insurance Co., 2013 ONSC 2474
[14] Carneiro, supra at ¶26
[15] Brockton (Municipality) v. Frank Cowan Co. Ltd., 2002 CanLII 7392 (ON CA) at ¶43
[16] Appin Realty Corporation, Limited v. Economical Mutual Insurance Company, 2008 ONCA 95
[17] E.g. Zhou v. Town of Markham et al., 2014 ONSC 435; Pabla v City of Mississauga, 2015 ONSC 5156
[18] Pye Bros. Fuels Ltd. v. Imperial Oil Limited, 2012 ONCA 153
[19] Zhou, supra, at ¶14