A defendant may be entitled to indemnification for legal costs arising from a frivolous claim.
The City of Penticton ("Penticton") was successful in obtaining an order declaring that it was an insured under a policy of insurance issued by AXA Pacific Insurance Co. ("AXA") and that AXA was liable under that policy to indemnify the City against all costs and expenses incurred by the City in defending four actions (the "MVA Claims") arising from a motor vehicle accident which occurred at an intersection under construction.
Penticton (City) v. AXA Pacific Insurance Co., [2009] B.C.J. No. 2021, October 14, 2009, British Columbia Supreme Court, K.M. Ker J.
A MVA occurred at an intersection under construction by Peters Bros. Construction Ltd. (the "Contractor"), an independent contractor hired by the City to undertake repairs to certain roadways in the city. The Contractor was required to purchase a policy of liability insurance naming the City as an additional insured. AXA was the insurer for the policy in issue. The pleadings in the MVA Claims alleged that the MVA occurred as a result of the Contractor's negligence in removing a stop sign at the intersection and replacing it in the wrong location. Ultimately, the MVA Claims were settled and the City was not required to contribute to the settlement. However, the City sought a declaration that AXA was liable to pay the defence costs incurred by the City.
The Court noted that AXA would only have the duty to defend the City if the Statements of Claim in the underlying actions alleged a state of facts that, properly construed, would support an action that could potentially fall within coverage: Non-Marine Underwriters, Lloyds of London v. Scalera, 2000 SCC 24. The policy issued by AXA provided coverage to the City as an additional insured "but only with respect to liability which arises out of the operations of the Insured". The Court noted that each and every claim in the underlying actions flowed back to the movement of the stop sign and the conduct of the Contractor in removing and improperly relocating the sign and therefore was attributable to matters that "arise out of the operation of the insured". The Court concluded that had the Contractor not been working on the construction contract at the particular intersection in issue and had it not removed and relocated the stop sign, there would not have been any claims. Thus, the liability at issue in each of the MVA claims arose "out of the operations of the Contractor". As a result, the Court concluded that all of the claims alleged a state of facts which, if proven, arose out of the operations of the Contractor and, therefore, fell within the coverage afforded by AXA's policy.
The Court rejected AXA's argument that defence costs should be apportioned between covered and non-covered claims. The Court cited from RioCan Real Estate Investment Trust v. Lombard Insurance Co., [2008] O.J. No. 1449 (S.C.J.), where the Court concluded that where there is a duty on an Insurer to defend some, or only one, of the claims against an insured and that claim embodies the true nature of the claim, a duty to defend the entire claim arises. The Court further noted that where the covered and non-covered claims are so intertwined that there is no rational or practical basis for distinguishing costs related to the covered and arguably non-covered claims, an Insurer is obliged to fund the defence of the whole claim relying on the decision in SREIT (Park West Centre) Ltd. v. ING Insurance Co. of Canada, 2008 NSSC 183.
In the result, Penticton was successful in obtaining an Order that AXA indemnify it for all defence costs incurred in defending the MVA Claims.
This case was originally summarized by Jonathan D. Meadows and originally edited by David W. Pilley.
