Who Pays For the Cost to Defend a Lawsuit the Insured Person or the Insurance Company?

An Insurance Company Is Required to Provide and Pay For the Legal Defence Where a Liability Lawsuit Will Be Covered By the Insurance Policy If the Case Is Proven At Trial.

Understanding When An Insurer Owes a Duty to Defend Litigation on Behalf of An Insured

Insurance Claim Document Facing a lawsuit is a scary proposition; especially whereas the disruption, stress, time, and cost, involved in responding to a lawsuit may be significant in addition to the risk of losing the lawsuit itself.  Indeed, it is quite possible that the costs involved in defending liability allegations can run into the tens of thousands or even hundreds of thousand of dollars.  Interesting, it is possible that the monetary costs of a defence could run ore than the sum sought in the case.  Of course, when it appears that the cost of defending a lawsuit will be more than the amount sought in the lawsuit, generally, an insurer will perform an analysis of whether it is better to settle or defend the case.  This decision can be frustrating for those who firmly believe that the allegations are unjust and could be successfully defended; however, whereas it is the pocket of the insurer that pays for the defence, it is the insurer that makes that decision and the insured person must co-operate and assist.

The Law

As said in the case of Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33 (CanLII), [2010] 2 SCR 245, the duty to defend an insured is dependent on whether the insurance coverage prescribed by the policy would be triggered if the liability claim brought against the insured person is successfully proven.  Where the policy would respond to provide coverage if the lawsuit is successful, the policy must provide a defence.  This was explicitly stated by the Supreme Court in Progressive Homes where it was said:

[19]  An insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim (Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801, at pp. 810-11; Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, at para. 28;  Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at paras. 54-55).  It is irrelevant whether the allegations in the pleadings can be proven in evidence.  That is to say, the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify.  What is required is the mere possibility that a claim falls within the insurance policy.  Where it is clear that the claim falls outside the policy, either because it does not come within the initial grant of coverage or is excluded by an exclusion clause, there will be no duty to defend (see Nichols, at p. 810; Monenco, at para. 29).

[20]  In examining the pleadings to determine whether the claims fall within the scope of coverage, the parties to the insurance contract are not bound by the labels selected by the plaintiff (Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, at paras. 79 and 81).  The use or absence of a particular term will not determine whether the duty to defend arises.  What is determinative is the true nature or the substance of the claim (Scalera, at para. 79; Monenco, at para. 35; Nichols, at p. 810).

As per Progressive Homes, the duty to defend arises where the litigation brought against the insured may, following a trial, result in a liability that falls within the scope of the liability coverage provided by the insurer.  Thus the duty to defend arises from the mere possibility of such an outcome.  Following the Progressive Homes rationale, this was well stated in Backyard Media Inc. v. HDI Global Specialty SE, 2021 ONSC 2341 where it was said:

[6]  The policy in issue is a “duty to defend” policy. The insurer is required to provide a defence for the insured in the insured litigation if there is a “possibility” that the insurance policy will have to respond to the substantive claims against the insured in that litigation. The Supreme Court of Canada has held that in the context of a duty to defend policy,  if a claim falls within the terms of coverage and is not clearly and unambiguously excluded, then, by definition, there must be a “possibility of coverage”. See: Progressive Homes Ltd. v. Lombard General Insurance Co., 2010 SCC 33, at para. 51.

As said in Progressive Homes as above, and whereas insurance policies will generally provide for negligence coverage while excluding breach of contract, it is necessary to review the context within the wording of a legal claim rather than the precise wording.  For example, whereas a legal claim may use the terminology of 'breach of contract', which is commonly excluded from the coverage in an insurance policy, the context of the legal claim may involve negligence despite the lack of the word negligence.  The allegations may state that, "the Defendant breached the contract by failing to perform in the diligent manner that would be usual to a reasonable person"; and accordingly, whereas the context of such an allegation sounds of negligence, such wording, while lacking the express word "negligence", would be sufficient.

Explanation of the duty to defend was explained with simplification within Davis v. Guardian Insurance Co. of Canada, 1996 CanLII 8232 at page 5 where was stated:

The duty to defend falls to be determined on the basis of the pleadings in the underlined action or actions and the coverage provisions of the policy or policies of insurance. The general principle has been stated as follows:

The duty to defend is broader than the duty to indemnify, and the mere possibility that a claim within the policy coverage provisions will succeed is sufficient to engage the insurer's duty to defend.

(St. Paul Fire & Marine Insurance Co. v. Durabla Canada Ltd. (July 10, 1996) Ontario Court of Appeal [now reported 1996 CanLII 494 (ON CA), 29 O.R. (3d) 737 at p. 739, 137 D.L.R. (4th) 126]; Bacon v. McBride (1984), 1984 CanLII 692 (BC SC), 5 C.C.L.I. 146 at p. 151, 51 B.C.L.R. 228 (S.C.). 

Summary Comment

An insurer owes the duty to defend where an insurance policy provides coverage for the liability that may arise if the legal action brought is successfully proven.

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