Risk Management Articles

Ontario Court of Appeal Clarifies Insurer’s Duty to Additional Insured

Background Facts

On February 8, 2013, a tragic accident occurred on an icy road in Durham, Ontario. Antonio Carneiro Jr. died after his vehicle slid down a hill into an intersection, where it was struck by two vehicles.

At the time of the accident, the Regional Municipality of Durham (the “Municipality”) contracted out its road maintenance responsibilities to Miller Maintenance Limited (the “Contractor”). Following the accident, Mr. Carneiro’s estate and family members commenced a lawsuit. They sued the Municipality, the Contractor, the Province of Ontario and the two other drivers.

The Plaintiffs alleged that the Contractor and the Municipality were both at fault for negligently maintaining the road. They alleged the Municipality was also at fault for negligent road design.

Under its contract with the Municipality, the Contractor was required to obtain insurance and to name the Municipality as an additional insured. A policy issued by Zurich Insurance (“the “Insurer”) was in effect at the time of the accident. The policy covered the Municipality as an additional insured, but only for liability arising from the Contractor’s operations.

The Parties’ Positions

The Municipality asked the Insurer to cover the costs of its defence. It argued that the true nature of the claim arose out of the Contractor’s operations because it related to road maintenance. Since the interests of the Municipality and the Contractor might conflict, the Municipality demanded that the Insurer provide it with separate counsel.

The Insurer said it had no duty to defend the Municipality because the negligent road design allegations had nothing to do with the Contractor’s operations and therefore fell outside coverage.

The Decision

The Ontario Court of Appeal found that the plaintiffs’ allegations triggered the Insurer’s duty to defend. The true nature of the claim was that the deceased lost control of his car on ice and snow. This related directly to the Contractor’s operations.

While the road design allegations did not relate to the Contractor’s operations, the policy required the Insurer to defend the whole action, not just the covered allegations. This meant paying all reasonable costs of the defence, even if some of those costs related to the road design allegations.

The Court confirmed that the Insurer did not satisfy its duty to the Municipality merely by defending the Contractor. The duty to defend is a separate contractual obligation that is not met simply by permitting the Municipality to recover its costs at the end of the lawsuit.

In the result, the Ontario Court of Appeal ordered the Insurer to provide the Municipality with independent counsel, at the Insurer’s expense, to defend the action. Once the lawsuit was over, the Insurer could seek to recover any defence costs that were unreasonable or related solely to the road design allegations.

Final Thoughts

It is not uncommon for local governments to encounter coverage disputes with the companies that insure their contractors. Invariably in these cases, the plaintiff makes allegations primarily related to the contractor’s operations, but also includes claims specifically against the local government, such as negligent road design. The insurer argues that the local government must appoint its own counsel because there are uncovered claims against it.

While the outcome of each case will depend on the wording of the insurance policy and the allegations in the lawsuit, this decision clarifies that an additional insured has independent rights under a policy of insurance. Though this is an Ontario case, the reasoning will likely be considered persuasive in BC and may help to resolve coverage disputes at an earlier stage. 

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