In Reeb v The Guarantee Company of North America,1 the Ontario Court of Appeal provided guidance on when an insurer must appoint independent counsel to defend an insured to deal with any conflicts of interest between the insurer and its insured.
A boy and his friend were playing with pellet guns. The boy shot his friend who lost an eye. The friend brought a claim against the boy for damages of $1.5 million. The boy’s mother had a homeowner’s policy with a third-party liability limit of $1 million. This insurer appointed counsel to defend the claim under a reservation of rights while it investigated coverage.
The counsel appointed by the insurer brought an application on the boy’s behalf seeking a declaration that the boy was covered by homeowner’s policies issued to the boy’s father and stepmother by two other insurers, presumably to deal with the fact the boy was faced with a claim in excess of the policy limits. The application judge found that the boy was not covered under the additional homeowner’s policies because his conduct fell within the “intentional act” exclusion in each of the policies. The boy appealed.
The Ontario Court of Appeal
Before turning to the merits of the appeal, the Court of Appeal considered whether the boy’s counsel was in such a conflict of interest that the insurer should have provided the boy with independent counsel.
The court recognized that if it upheld the application judge's decision and found that there was no coverage because of an “intentional act” exclusion in the additional homeowner’s policies, the likely practical impact would be that the insurer would also deny coverage on the same grounds under the mother’s homeowner’s policy. The court accordingly saw a potential conflict of interest in the fact the insurer was paying for and instructing the boy’s counsel in circumstances where the insurer would potentially benefit financially if the boy’s application was unsuccessful.
The court set out the following guidelines for considering whether the insurer needed to appoint independent counsel in these circumstances:
The court must balance the insured’s right to a full and fair defence with the insurer’s right to control that defence because of its potential ultimate obligation to indemnify the insured.
The court can strike the appropriate balance by requiring that there be a reasonable apprehension of a conflict of interest on the part of counsel appointed by the insurer before the insured is entitled to independent counsel at the insurer’s expense.
The question is whether counsel’s mandate from the insurer can reasonably be said to conflict with counsel’s mandate to defend the insured. Until that point is reached, the insured’s right to a defence and the insurer’s right to control the defence can satisfactorily co-exist.
Applying these principles, the court found that there was a reasonable apprehension of a conflict of interest between the boy and the insurer. The insurer should have prevented this conflict in the first instance by providing the boy with independent counsel who did not report to or take instructions from the insurer to advise him on the advisability of bringing the application. It appears the court was at last partially motivated by the fact the plaintiff in the underlying action had made a settlement offer within policy limits, which meant it may not have been necessary for the boy to bring the application in the first place.
In the circumstances, the court decided it could not consider the case on the merits and set aside the application judge’s decision on the basis there was no way of knowing how things would have unfolded if the boy had been given independent counsel. The court was less sure about what to do moving forward with the file. The court ordered the insurer to appoint independent counsel for the boy and asked the parties to provide submissions on the next steps in the proceeding. To that end, the court indicated it intended to appoint an amicus curiae to assist the court on these issues.
In Reeb, the Ontario Court of Appeal signalled that coverage consequences – even theoretical ones – may be relevant when assessing a potential conflict of interest between an insurer and an insured. While insurers should not readily give up their right to defend claims, they should be mindful of the constellation of interests in insurance litigation and be on the lookout for possible conflict issues where matters of coverage and defence intersect.
1 2017 ONCA 771.