It is a well-known principle that the duty to defend is broader than the duty to indemnify. The duty to defend is triggered by the allegations in the statement of claim notwithstanding that they may lack merit. The insurer will be required to defend unless it is clear from a plain reading of the pleadings that there is no coverage available having regard to the terms of the policy. The state of the law has created an incentive for plaintiff's counsel to create innovative allegations in order to trigger the duty to defend. The target remains the deep pocket of the insurer.
In the leading case of the Supreme Court of Canada in Non-Marine Underwriters, Lloyds of London v. Scalera[2000] 1 S.C.R. 551, Justice Frank Iacobucci identified a three-step process in determining whether an insurer has a duty to defend. The test is set out as follows:
- Are the plaintiff's allegations properly pleaded? In making that determination, the court must look beyond the labels and examine the substance of the allegations.
- If the allegations are properly pleaded, are any of the claim's allegations entirely derivative in nature? A duty to defend will not be triggered simply because a claim can be cast in the terms of both negligence and intentional tort. If the alleged negligence is based on the same harm as the intentional tort, it will not allow the insured to avoid the exclusion clause for intentionally caused injuries.
- If the claims are properly pleaded, and not derivative, did the claims potentially trigger the insurer's duty to defend?
The Scalera test has been further refined in the years since its release. The Ontario Court of Appeal in Godonoaga (Litigation Guardian of) v. Khatambakhsh [2000] O.J. No. 2172 stated that the Scalera decision should not be interpreted as stating that different tort actions cannot arise out of the same occurrence. Rather, it means only that a plaintiff cannot convert an assault and battery into an negligence action solely to ensure that the defendant insurer will provide the necessary deep pocket to make a judgment recoverable. In the context of a sexual assault claim, the goal for plaintiff's counsel is to raise unique allegations separate and apart from the sexual assault in order to avoid a defence argument that the intentional tort has been "dressed up" as a negligence claim in order to avoid a potential coverage problem (D.C. v. Royal v. SunAlliance Insurance [2004] O.J. No. 4587).
This issue is raised in a recent decision of the Ontario Superior Court of Justice in Sommerfield v. Lombard Insurance Group [2005] O.J. No. 1131. In this case, the four applicants were all employed as teachers at Upper Canada College. It is alleged in the statement of claim that each of the applicants, independent of one another, sexually abused the plaintiff while he was a student during a four-year period. The plaintiff not only pleaded sexual battery but also pleaded that each of the four teachers was professionally negligent in not reporting the sexual assaults of the other applicants. The exclusion contained in the insurance policy excluded bodily injury caused by or at the direction of the insured. Lombard had taken the position that it had no obligation to defend in the circumstances. The court disagreed and reviewed the current state of thelaw in respect of the obligation to defend.
Justice John McMahon found that whether or not a teacher sexually assaulted the plaintiff, there would still be a duty owed to the plaintiff by the teacher to protect him from the abuse of others. The claims were found not to be derivative in that it would be open for the trier of fact to find any one of the teachers not liable for the intentional tort of sexual battery, but however could find him liable in failing to report the sexual abuse of the other teachers. Justice McMahon found that the allegations of negligence and failure to report were separate causes of action and not derivative. As a result, the insurer's duty to defend was triggered.
The corresponding issue of costs was also explored. As a general principle, courts have refused to allocate defence costs for trial or settlement where multiple theories of liability are advanced (Daher v. Economical Mutual Insurance Company [1996] O.J. No. 4394 (C.A.)).
Justice McMahon acknowledged that in cases where some of the claims fall within coverage and some do not, it is possible and appropriate to apportion defence costs. On these facts, Justice McMahon was prepared to find that a reasonable apportionment for the defence of the negligence claim was 20% of the cost of the defence. The rationale for the apportionment of costs was based on the view that most of the defence efforts would be spent on defending the allegations of sexual abuse and not the discreet issue of whether the teachers knew or ought to have known of the alleged abuse committed by the other teachers.
In the context of a sexual abuse claim, the duty to report as a discreet cause of action may or may not be applicable on the facts of each case. There is little doubt that creating viable allegations that are distinct from those of the assault will be easier in circumstances involving the assaults of children, where the obligation in law is more clear. The issue often arises in relation to the reactions of the employer of the perpetrator after it had knowledge of the assaults, and the steps taken vis-à-vis the plaintiff after disclosure is made.
Due to the significance of having insurance monies available to respond to these claims, there will remain an incentive on counsel on both sides of the issue to take a hard look in determining whether or not the claims being advanced are truly derivative.
Stacey Cronyn practises in the area of insurance defence and personal injury litigation at Nelligan O'Brien Payne LLP in Ottawa.
[This article is reprinted with permission and first appeared in the October 2005 issue of The Lawyers Weekly.]
