Seeking Protection from Your Insurance Policy > Duty to Defend Evaluated
When should an insurance company respond to protect their insured?
If a company is asked to produce extensive records to the Ministry of Environment regarding land they formerly owned – which would cost millions of dollars to search and provide those records – can this company seek the protection of their insurance company for these costs?
What if the company complies willingly with the MOE request? Does that make a difference as to whether they are protected by their insurance policy?
Companies or individuals are sometimes the recipients of letters from third parties, such as governmental agencies, requesting that the company or individual take certain actions.
The issue which arises is whether or not the costs of complying with these request letters is compensable from an insurance policy under its “duty to defend or investigate”?
Why This Matters
This is an illustration of one insured’s rights and responsibilities under their policy of insurance
Qualifying for protection under your insurance policy is a common issue which companies often face in their normal course of business
As seen in the General Electric v. Aviva case below the court will review the letter or request in order to determine whether it is a “claim” which triggers the duty to defend. In doing so, it will rely upon the “pleadings rule”.
If the request letter is not defined by the court to be a “claim” then the costs incurred by the company or individual will seen as compliance costs and not defence costs which would be paid by an insurer.
It appears that one of the key facts, which in this case led to the Court of Appeal’s categorization of the costs as “compliance” was that GE had not opposed the MOE’s request and was fully cooperative with the MOE from the outset. This raises the question of whether the outcome would have been different if GE had refused to carry out the delineation investigation.
In the recent decision of General Electric Canada Company v. Aviva Canada Inc., 2012 ONCA 525 (CanLii), the Ontario Court of Appeal was asked by GE to declare that its insurers had a duty to defend GE in respect of a request by the MOE to provide information relating to contamination of groundwater near a property that was once owned by GE. The Superior Court of Justice had dismissed GE’s application.
In February and April, 2004 the MOE wrote to GE and asking for information regarding the potential contamination and required GE to take action by providing a delineation report to determine the levels of contamination. GE fully cooperated with the MOE and spent $2.1 million for investigation costs, $1.86 for remedial costs and $750,000 for legal costs. GE asked its insurers to pay for these costs.
The application judge reviewed the insurance policies in question and utilized the “pleadings rule”. He concluded that there were 2 questions to be addressed:
1) whether it was possible that the MOE letter amounted to a claim that fell within the policies and thereby triggered the duty to defend; and
2) whether the applicant was seeking a defence to the MOE’s “claim” or rather an indemnity for the cost of compliance with the MOE request.
In rejecting GE’s application, the applications judge stated that “under the pleadings rule, one looks at the “claim” to determine whether it falls within the scope of the coverage afforded by the policy. There is a distinction in the policies between the obligation to investigate/defend and the obligation to indemnify. There is, in my view, also a distinction between the cost of investigation/defence of a claim and the cost of compliance with a claim.” (italics added).
In interpreting the MOE’s letter, the applications judge took note that GE did not “defend” against the MOE’s request nor did it investigate the “claim.” GE had complied with the MOE’s request and performed the work on the basis that it was thought to be in GE’s best interests to do so.
The applications judge concluded that what GE called “defence costs” were not costs of defending against the MOE’s claim but, in fact, the costs of complying with the MOE’s claim.
GE’s ground of appeal to the Court of Appeal, was that the applications judge had erred in restricting his analysis to the literal text of the MOE letter and that he had ignored the reality of what was communicated in the MOE’s letter ie. that there was a substantial potential liability for property damage imposed by the Environmental Protection Act, R.S.O. 1990, c. E.19.
The Court of Appeal reiterated that the duty to defend depends on the “pleadings rule” which states that one must look at the allegations made in the pleadings. If the pleadings allege facts which, if true, would require the insurer to indemnify the insured for the claim, then the insurer is obliged to provide a defence.
Although the pleadings rule usually applied to a statement of claim or similar pleading, it could also apply to a letter that asserted liability for damages. The Court of Appeal noted that the authorities as a general rule established that for a “claim” to be made there must be some form of communication of a demand for compensation or other from of reparation by a third party.
The Court of Appeal agreed with the applications judge’s interpretation of the MOE letter ie. that it the only evidence of a “claim” was its request that GE delineate the source of the contamination. GE did not oppose, defend or investigate that request. The costs were therefore for “compliance” and not “defence” costs. To interpret the MOE letter as potential legal consequences under the EPA would have been to engage in speculation.
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