Don’t “waive” goodbye to your right to deny coverage

In a recent decision, Bradfield¹, the Ontario Court of Appeal held that a liability (motor vehicle) insurer was entitled to deny coverage to an insured mid-defence based on newly discovered facts. The doctrines of waiver and promissory estoppel were not barriers to the insurer’s denial of coverage.

Background

D held an M2 driver’s license that prohibited him from driving with any alcohol in his bloodstream.

B, C, D and L were involved in a motor vehicle accident. D was killed and C was badly injured.

C filed a claim against B, D (through D’s estate) and L.

D was defended by his motor vehicle insurer (the Insurer). However, more than three years after the accident and more than one year after C filed his claim, L testified in a discovery that D and B were drinking alcohol shortly before the accident.

The Insurer then withdrew D’s coverage.

C’s claim proceeded to trial and a judgment was awarded against both B and D. Most of the fault (90%) was apportioned to D. The trial judge also granted a cross-claim by B against D.

B then brought a separate action against the Insurer to challenge the Insurer’s denial of coverage to D. That action was brought by B to ensure that D and the Insurer would pay as much of C’s judgment as possible, thus reducing B’s exposure.

The trial judge ruled that the Insurer took an off-coverage position too late and waived its right to deny coverage to D. The Insurer was thus responsible to fund C’s judgment against B and D up to $1 million.

The Insurer appealed successfully.

Ontario Court of Appeal

A unanimous three-member panel of the Ontario Court of Appeal held that neither waiver nor the related doctrine of promissory estoppel were made out against the Insurer in the circumstances.

Waiver and promissory estoppel are both underpinned by knowledge. Neither doctrine may be engaged against an insurer unless the factual basis of the insured’s policy breach is known to the insurer. Further, there is no obligation on an insurer to proactively investigate every possibility that a policy was breached.

In this case, the Insurer did not have any knowledge of D’s alcohol consumption until that fact was disclosed by L mid-discovery. The Insurer denied coverage to D promptly afterwards. There was therefore no waiver of the Insurer’s right to deny coverage to D and the doctrine of promissory estoppel was not engaged.

The Insurer was within its rights to maintain an off-coverage position, thereby limiting its exposure to C’s judgment.

Take-away

Bradfield establishes that an insurer’s right to deny coverage is not lost, immediately and forever, when an insurer agrees to defend an insured and then takes control of the defence. To the contrary, an insurer’s right to deny coverage based on newly discovered facts is not time limited and, at least conceivably, may even arise from facts that are only discovered by the insurer at the insured’s trial.

An insurer should promptly retain coverage counsel if any potentially coverage-disqualifying facts are discovered mid-defence, lest the insurer inadvertently trigger the doctrines of waiver and estoppel by not acting with sufficient urgency.

Bradford involved a policy of motor vehicle insurance, however, the court’s reasoning applies equally to all policies of liability insurance, including CGL, professional liability and D&O policies.

The author wishes to thank law student Preston Brasch for his help in preparing this legal update.