Full Decision
Duty to defend and indemnify after 10 months of representation and no new material facts coming to light.
This was a decision out of the Ontario Court of Appeal. The responding party, Campbell, was involved in a dirt bike accident. He collided with an ATV, injuring the ATV driver. Campbell was sued for negligence. The dirt bike was owned by Campbell’s employer and was required to be registered with the Ministry of Transportation.
Campbell’s auto insurer, the Guarantee Company, denied coverage after sending Campbell a non-waiver agreement and reservation of rights letter.
Campbell’s home insurer, Commonwell, appointed a lawyer to defend the claim against him. Pleadings were exchanged. Nine months after the accident, plaintiff’s counsel asked Campbell’s lawyer if there were any coverage issues. Two months later Commonwell advised Campbell in writing that they were denying coverage.
The basis of the denial was two-fold:
- The policy does not cover a motor vehicle when the insured is not the owner and the vehicle must be registered with a government authority.
- The policy does not cover the insured when he is operating a motor vehicle without consent of the owner.
Commonwell brought an application seeking a declaration that it had no duty to defend or indemnify Campbell. The application was dismissed. The motions judge held that Commonwell was estopped from denying coverage and from refusing to defend Campbell. Alternatively, Commonwell waived its right to take those positions. The insurer appealed.
The Court of Appeal addressed only the issue of estoppel and found that the motions judge made no error of law or in the application of the law.
The Court of Appeal does not address the elements of estoppel, but they are as follows:
- The insurer took some action (made a promise or representation) intending the insured to rely upon that action.
- The insured relied upon that action and changed his course of conduct based on that action (i.e. detrimental reliance).
Commonwell obviously made a promise or representation about coverage. It took that position at a time when it knew all the facts necessary to deny coverage and refuse to defend Campbell. The only issue was whether or not there was detrimental reliance.
The motions judge found as a fact that the litigation was “well advanced” and therefore inferred prejudice (i.e. detrimental reliance), relying upon the decision of Rosenblood Estate v. Law Society of Upper Canada (1989) 37 C.CL.I. 142 (Ont. H.C.J.), which was affirmed by the Court of Appeal. Commonwell argued the litigation was not well advanced and so prejudice cannot be inferred.
According to the Court of Appeal, the motions judge was entitled to find that the litigation was “well advanced” allowing prejudice to be inferred. Commonwell appointed a lawyer who acted for Campbell for ten months and served and filed a detailed defence. It proceeded to the discovery process as the plaintiff’s lawyer was asking for information about coverage.
In any event, there was evidence of prejudice (i.e. a change in the insured’s course of conduct). Campbell properly assumed his interests were being taken care of for ten months. As a result, he did nothing to secure his own lawyer or second guess the decisions of the Commonwell lawyer. Further, he did nothing to require his auto insurer, the Guarantee Company, to defend and cover him after Guarantee denied coverage (as he may well have done if Commonwell denied coverage and sent its reservation of rights letter earlier). Campbell allowed Commonwell to prosecute his defence without taking charge himself. The Court of Appeal ruled that it was unrealistic and unnecessary for Campbell to show any missteps by the insurer at this stage of the litigation. In other words, it was unrealistic and unnecessary to require Campbell to show actual prejudice or decisions by his insurer that led to actual prejudice at such an early stage in the action.
Commonwell was estopped from relying upon the unowned registrable vehicles exemption and the consent exemption because of the doctrine of estoppel. Estoppel applied both to disputing the duty to defend and the duty to indemnify.
What’s interesting is that detrimental reliance is not “prejudice” as we would probably typically understand the word “prejudice”. In this case, it was about the insurer taking a position that led its insured down one path of decisions as opposed to another that may or may not have caused harm or actual prejudice. Harm is being inferred or assumed.
What else is interesting is that the Court of Appeal ruled that the Judge was entitled to find the litigation is well advanced to infer prejudice and yet also seemed to suggest that it was too early in the litigation to expect Campbell to show actual prejudice. That seems tough to reconcile. It may be that an action can be well-enough advanced, but still early enough too.
