A recent decision by the Court of Appeal is a cautionary tale, for both insurers and counsel they appoint to defend a policyholder. The Court of Appeal's recent decision in Reeb v. The Guarantee Company of North America1 is an application of the test for reasonable apprehension of a conflict of interest in the context of insurer appointed defence counsel. It demonstrates what can happen where instructions given to defence counsel by an insurer conflict with the best interests of the insured.
The underlying action involved a fact scenario reminiscent of the classic holiday movie "A Christmas Story". The action involved a claim brought by James Riley ("Riley"), a 14-year-old boy who lost his eye, against Ryan Reeb ("Reeb"). Riley and Reeb were playing with pellet guns when Reeb shot Riley in the eye. Reeb was insured through his mother's homeowner's policy with Royal & Sun Alliance Insurance Company of Canada ("RSA"). The homeowner's policy had a $1 million third party liability limit. James Riley's claim was for $1.5 million.
RSA defended Reeb under a non-waiver and reservation of rights agreement. The defence counsel appointed by RSA to defend Reeb, then brought an application for a declaration that Reeb was insured under two additional insurance policies (one policy issued to his father and one to his step-mother). This was done at the direction of RSA. The other insurers conceded that Reeb was insured under both policies, but relied on the intentional act exclusion to deny coverage for the injuries sustained by Riley. This was also an exclusion RSA apparently reserved its rights on in the non-waiver agreement.
Of particular note is that fact that prior to the hearing of the appeal, the plaintiff made a settlement offer under the policy limits of $1 million dollars under the mother's homeowner's policy. Acceptance of this offer would in effect result in no benefit to the insured from proceeding with the application since RSA had not denied coverage under the mother's homeowner's policy.
The Court of Appeal raised the issue of whether there was an apparent conflict of interest in this case. Obviously, there was a significant financial benefit to RSA if the application was determined and the intentional act exclusion was found to apply under the two additional insurance policies. That finding would result in Reeb not having coverage under any of the insurance policies, including the RSA policy. Therefore, if the appeal failed, Reeb would likely have no insurance coverage whatsoever.
When an insurer appoints counsel to represent the interest of its insured, a conflict of interest may arise where the interests of an insured and the interests of an insurance company are not aligned. The insured's right to full and fair representation may be compromised. The case law requires a "degree of divergence" before a court can require an insurer to surrender control of the defence.
The Court of Appeal applied the test as established in its recent decision of Hoang v. Vicentini2 to determine whether there was a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer:
The question is whether counsel's mandate from the insurer can reasonably be said to conflict with his mandate to defend the insured in the civil action. Until that point is reached, the insured's right to a defence and the insurer's right to control that defence can satisfactorily co-exist.3
The Court of Appeal held that in this case, there was a reasonable apprehension of a conflict between the interests of Reeb and RSA, which precluded the Court from ruling on the merits of the appeal. The Court directed that Reeb ought to have independent counsel or amicus curiae appointed to advise him of the suitability of bringing the application for a declaration in the face of the plaintiff's settlement offer.
Essentially, the Court of Appeal recognized that Reeb would be better off accepting the plaintiff's settlement offer under the $1 million limit of his mother's home owner's policy, than continuing to pursue the application to determine if there was any coverage in excess of the limit, under the two additional insurance policies. RSA would either (i) provide coverage and pay the settlement amount or (ii) deny coverage on the basis of the intentional acts exclusion under the non-waiver and reservation of rights agreement.
By bringing the underlying application, the insurer was essentially instructing defence counsel to take steps that were in conflict with the best interests of the insured. These were instructions that should never have been given and if given should have caused defence counsel to identify and flag the conflict. This is why the Court of Appeal directed that an independent counsel or amicus curiae should be appointed to assist the court with determining what future steps should be taken in the proceedings, and appointed amicus curiae in the interim.
Footnotes
1 2017 ONCA 771 ["Reeb"].
2 2016 ONCA 723 ["Hoang"].
3 Reeb at paragraph 14, citing Hoang at paragraph 74.
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