An insurer has the right to appoint counsel of their choice to defend a claim brought against an insured, unless the insured has a reasonable apprehension that the appointed counsel has a conflict of interest

An application by an insured for an order permitting it to instruct counsel of its choosing at the expense of the insurer and for an order confirming that it had not forfeited coverage.

137328 Canada Inc. (c.o.b. Alliance Security Systems) v. Economical Mutual Insurance Co., [2011] O.J. No. 751, February 22, 2011, Ontario Superior Court of Justice, R.J. Smith J.

The applicant, 137328 Canada Inc., applied for an order with respect to the rights and obligations it had pursuant to a policy of insurance. The applicant was in the business of installing security systems and had liability insurance in the amount of $2,000,000 with the respondent, Economical Mutual Insurance Company (“Economical”).  The applicant had installed a security system at a warehouse and was to provide monitoring services. The roof of the warehouse collapsed as a result of excessive snow load.  The occupant of the warehouse suffered damages alleged to be in excess of $7,000,000.  The occupant of the warehouse commenced an action against the applicant alleging that it contributed to the loss by failing to notify the occupant when the roof collapsed.

Economical had advised the applicant that it would defend the action and provide coverage up to the policy limits. It indicated that there was “always a possibility that some evidence from some party could surface to raise a coverage issue.”  However, Economical did not exercise a reservation of rights.

 

Economical retained counsel to defend the action. The applicant also retained its own independent counsel and requested that Economical pay for those costs. When the Economical refused to pay for such costs the applicant issued a third party notice seeking contribution and indemnity from Economical with respect to the claim and the associated legal expenses.

 

The applicant sought an order permitting it to choose and instruct lead counsel, together with an order confirming that it had not forfeited its insurance coverage by advising counsel appointed by the Economical to cease and desist from defending the action and by commencing third-party proceedings against the respondent.

 

In considering the issue with respect to whether the applicant was permitted to choose and instruct counsel, the Court noted that there are a number of decisions which have held that where the policy states that there is a duty to defend, such as the policy in this case, that means that the insurer has the right to choose, instruct, and pay counsel directly. However, Brockton (Municipality) v. Frank Cowan Co., [2002] O.J. No. 20 (Ont. C.A.) stands for the proposition that this right is not absolute. The issue is whether there is a reasonable apprehension of a conflict of interest if counsel were to act for both the insurer and the insured in defending the action. If the insurer puts counsel in a position of having conflicting mandates it must surrender control of the defence to an insured who wishes to retain its own counsel paid for by the insurer.

 

The Court held that there was no reasonable apprehension of conflict of interest on the part of counsel appointed by the Economical, and that the applicant was not entitled to engage independent counsel at the Economical’s expense. The applicant was entitled to retain its own counsel to represent its interests with regard to the excess claim at its own expense.

 

The Court also held that the applicant had not done anything to date to deprive it of a right to a defence and coverage. However, the applicant's right to a defence and coverage could be reconsidered on a motion if the applicant's third party action against the Economical was not discontinued within 30 days, and if the applicant did not rescind the instructions to counsel appointed by the Economical to cease and desist with any involvement in the defence.

This case was digested by Kim Yee and edited by David W. Pilley of Harper Grey LLP.

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