An insurer may not be responsible for defending claims that fall within the scope of coverage, and not allegations that fall outside the scope of the contract.
A resort operator that contracted services for snow removal brought an application for declaration that its Insurer is obliged to defend the entire action brought by the Plaintiff relating to the failure to remove snow, and the resort's negligence in the management and operation of the resort. The insurer refused to provide a separate or additional defence for the resort as it was defending the snow removal contractor and believed that in doing so it is de facto defending the resort as well. Court found that the insurer had a duty to defend the resort in the snow removal portion, but not in the unrelated claims in the action.
Atlific Hotels and Resorts Ltd v. Aviva Insurance Co. of Canada,  O.J. No. 2005, May 19, 2009, Ontario Superior Court of Justice, E.P. Belobaba J.
The Deerhurst resort hired a local contractor to remove snow. Under the terms of the snow removal contract, Deerhurst was named as an additional insured but only with respect to liability arising out of the contractor's operations. A resort guest was injured after slipping on an icy pathway leading back to her hotel room. Her claims can be grouped under three headings:
1. Negligence on the part of all defendants relating to the removal of snow and ice;
2. Negligence on the part of Deerhurst in the operation and management of the hotel, including inadequate lighting and lack of non-slip matting on the walkways, the failure by management to cancel evening's program at the conference centre so that the guests could have stayed in their rooms, the failure to cut the program short, so that the participants could have returned to their lodging sooner and more safely, and the failure to offer the Plaintiff temporary overnight accomodations in the main lodge until the walkways were clear of snow and ice and made safe for use; and
3. Occupier's Liability
Aviva agreed to defend the snow removal contractor but refused to provide separate or additional defence for Deerhurst. Deerhurst brought an application for declaration that Aviva was obliged to defend the entire action - not just the snow and ice removal claims that are covered by the policy, but the two other categories of claims as well.
An Insurer is not obliged to defend a claim that clearly falls outside the coverage provided by the policy. With respect to mixed claims, Ontario Courts have held that an Insurer is obliged to defend only those claims that potentially fall within coverage.
Deerhurst relied on a recent decision of RioCan Real Estate Investment Trust v. Lombard Insurance (2008) 91 O.R. (3d) 63 that appeared to support the position that where there is a duty on an Insurer to defend even one of the claims made by an Insured, and that claim embodies the true nature of the claim, a duty to defend the entire claim arises.
In this case the Court did not find that one of the claims captured the true essence of the action as the claim of negligence in hotel operations and management could stand on its own.
In the result, Aviva was not obliged to defend the entire action, only the snow and ice claims but it is contractually obliged to provide a defence not only to the snow removal contractor but to Deerhurst as well.