Does the Insured Person or the Insurance Company Pay For the Costs to Defend a Lawsuit?

An Insurance Company Must Provide and Pay For the Defence of a Liability Lawsuit If the Possibility Exists That the Insurance Company Will Need to Pay the Liability If the Case Is Successful.

A Helpful Guide For How to Determine Whether An Insurer Owes a Duty to Defend a Legal Case On Behalf of An Insured

Insurance Claim Document Fighting a lawsuit can be an expensive proposition in both time and money as well as highly stressful.  In addition to the stress of fighting the case, the stress of possibly losing the case is especially troubling.  Accordingly, an insured person will be concerned for both insurance coverage to protect against the possibly of losing the case as well as concern for the time, costs, and efforts, of defending the case. Generally, where an insurance policy is in place to cover the liability that may arise if the lawsuit is proven, then the insurance is also obligated to providing a defence of the lawsuit.

The Law

Per Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33 (CanLII), [2010] 2 SCR 245, an insurer is under the duty to provide and pay for the defence of an insured person if the coverage provided within the insurance policy would become triggered if the legal case against the insured person results in a successful lawsuit.  This duty to defend was explained by the Supreme Court within Progressive Homes wherein it was stated:

[19]  An insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim (Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801, at pp. 810-11; Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, at para. 28;  Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at paras. 54-55).  It is irrelevant whether the allegations in the pleadings can be proven in evidence.  That is to say, the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify.  What is required is the mere possibility that a claim falls within the insurance policy.  Where it is clear that the claim falls outside the policy, either because it does not come within the initial grant of coverage or is excluded by an exclusion clause, there will be no duty to defend (see Nichols, at p. 810; Monenco, at para. 29).

[20]  In examining the pleadings to determine whether the claims fall within the scope of coverage, the parties to the insurance contract are not bound by the labels selected by the plaintiff (Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, at paras. 79 and 81).  The use or absence of a particular term will not determine whether the duty to defend arises.  What is determinative is the true nature or the substance of the claim (Scalera, at para. 79; Monenco, at para. 35; Nichols, at p. 810).

As said in Progressive Homes as above, and whereas insurance policies will generally provide for negligence coverage while excluding breach of contract, it is necessary to review the context within the wording of a legal claim rather than the precise wording.  For example, whereas a legal claim may use the terminology of 'breach of contract', which is commonly excluded from the coverage in an insurance policy, the context of the legal claim may involve negligence despite the lack of the word negligence.  The allegations may state that, "the Defendant breached the contract by failing to perform in the diligent manner that would be usual to a reasonable person"; and accordingly, whereas the context of such an allegation sounds of negligence, such wording, while lacking the express word "negligence", would be sufficient.

Summary Comment

To determine whether an insurer is required to provide and pay for the defence of a lawsuit on behalf of an insured person, a review of whether the insurance policy in question would be triggered if the lawsuit is successfully proven is required.  If the insurance policy provides coverage that would require the insurer to payout in the event of a liability finding, then the insurer is, generally, required to provide, and pay for, the defence of the lawsuit.


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