Lloyd’s Underwriters v. Blue Mountain Log Sales Ltd., 2016 BCCA 352
When does an insurer's duty to defend arise? More specifically, does it arise before the insurer is given notice of the claim? That is the fundamental question addressed by this case.
The factual background is as follows. Certain members of the Clarke Group of companies, manufacturers of goods in Canada and the United States, were sued in Washington State by the Global Group. In August, 2013, the Clarke Group tendered its defence to its American insurer, which defended under a reservation of rights. Several months later, the Global Group added claims against Canadian members of the Clarke Group, however, the latter did not initially realize that this would trigger coverage with Lloyd's Underwriters, insurers of the Canadian members. As a result, it was not until April, 2014, that Lloyd's was asked to defend. Lloyd's assumed the defence, retaining counsel already acting for the Clarke Group. While it had no objection to any steps already taken in defence of the action, Lloyd's refused to reimburse the Clarke Group for defence costs of $588,000 incurred prior to April, 2014. Lloyd's sought declaratory relief on this point.
The chambers judge held that Lloyd's was liable to reimburse the insured's pre-tender defence costs, concluding that because Lloyd's suffered no prejudice, the insured should be granted relief from forfeiture with regards to any late notice.
On appeal, the Court described the Lloyd's policies as "standard general liability policies". In particular, three specific clauses were considered: the "Notice Clause", the "Cooperation Clause", and the "Voluntary Payment Clause". The Notice Clause required the insured to give notice "as soon as practicable" of any accident or occurrence which may give rise to a claim. The Voluntary Payment Clause provided that the insured "shall not, except at its own cost, voluntarily make any payment, assume any obligation or incur any expenses". According to Lloyd's, the policy created an "essential bargain" whereby the insurer undertakes to pay for the defence of potentially covered claims, and the insured agrees to allow the insurer to control the defence. Furthermore, Lloyd's right to control the defence is reinforced by the three referenced clauses. As for the Notice Clause, while it was not a true condition precedent, such that late notice would defeat coverage, the required notice was a "logical or practical" precondition in the sense that an insurer "cannot defend or control a claim it does not know about". The insured, on the other hand, argued that the duty to defend arises from the date when the premium is paid. According to the Court, Canadian authorities offered little assistance, and American cases lacked cohesion.
In the end, the appeal was allowed, and Lloyd's was not required to pay for any of the insured's pre-tender defence costs. According to the Court, the policy created a duty to defend certain claims, and "a reciprocal right to control that defence". The duty to defend arises for claims that potentially fall with the scope of the policy. "Implicit in this principle is that notice is a necessary and logical trigger to activation of the duty and right to defend as an insurer cannot ascertain whether the claims fall within the policy until it is aware of them". The insured's suggestion that the duty to defend arises upon payment of the premium was found to be "somewhat ephemeral and too broad", and ignores situations where the insured elects to defend itself.
Finally, the Court held that relief from forfeiture did not apply. While the insured had breached the Notice Clause, Lloyd's declined to rely on this breach and deny coverage. Instead, it stepped in and defended the action. As a result, there was no forfeiture against which to provide any relief. As for the denial of the pre-tender defence costs, this did not constitute forfeiture of any coverage since the duty to defend did not arise until the insured gave notice of the claim.
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The Duty to Defend Does Not Arise Until Notice of the Claim is Given