Judge Rules Auto Insurer Must Defend Policyholders Even After Paying Policy Limits

A recent Ontario Superior Court ruling has created some confusion regarding an insurer's responsibility to defend a policyholder in an action.  The confusion is the result of language used in the Insurance Act and the standard Ontario Automobile Policy (OAP 1).

Section 245 of the Insurance Act states:

Every contract evidenced by a motor vehicle liability policy shall provide that, where a person insured by the contract is involved in an accident resulting from the ownership, or directly or indirectly from the use or operation of an automobile in respect of which insurance is provided under the contract and resulting in loss or damage to persons or property, the insurer shall,

(a)  upon receipt of notice of loss or damage caused to persons or property, make such investigations, conduct such negotiations with the claimant and effect such settlement of any resulting claims as are deemed expedient by the insurer

(b)  defend in the name and on behalf of the insured and at the cost of the insurer any civil action that is at any time brought against the insured on account of loss or damage to persons or property;

(c)  pay all costs assess against the insured in an civil action defended by the insurer and any interest accruing after entry of judgment upon that part of the judgment that is within the limits of the insurer’s liability;

(d)  where the injury is to a person, reimburse the insured for outlay for such medical aid as is immediately necessary at the time.

The OAP 1 which is intended to provide a plain-language description of the law states:

3.3.1  If Someone Sues You

By accepting this policy you and other insured persons irrevocably appoint us to act on your or their behalf in any lawsuit against you or them in Canada, the United States of America or any other jurisdiction designated in the Statutory Accident Benefits Schedule arising out of the ownership, use or operation of the automobile.

If someone sues you or other insured persons insured by this Section for losses suffered in an automobile incident, we will provide a defence and cover the costs of that defence, including investigation costs. We will pay all legal costs the court assesses against you and other insured persons in the lawsuit we have defended.

If there is a judgment against you or other insured persons, we will pay any post-judgment interest owed on that part of the amount the court orders that falls within the liability limits of your policy.

We reserve the right to investigate, negotiate and settle any claim out of court if we choose.

If you are sued for more than the limits of your policy, you may wish to hire, at your cost, your own lawyer to protect yourself against the additional risk.

The Judge noted that the Insurance Act provides no qualifications with regards to defending a policyholder who has been sued while the OAP 1 indicates that the policyholder is expected to hire a lawyers if sued for more than the policy limits.  Since the Act takes precedence over the policy language, the insurer was held to be fully responsible to defend the policyholder in this case. 

 In this particular case Jevco Insurance has written an auto insurance policy for Vishal Malaviya, who was sued as a result of an auto accident in October 2005. In 2008, after hiring a lawyer who filed a statement of defence for Malaviya, Jevco offered to pay $200,000, which was the limit of Malaviya's policy, to the party suing Malaviya.

The action against Malaviya was still proceeding, so Jevco applied to the court to get a declaration it has "has no continuing duty to indemnify or defend" Malaviya, who argued that the policy "requires a full defense ... until it is tried on the merits or a final settlement is reached."