In two recent decisions of the British Columbia Court of Appeal, the Court has reversed the trend in awarding special costs against an insurer which unsuccessfully contests a duty to defend, choosing to not follow The Ontario and Newfoundland courts of Appeal, setting the stage for forum shopping by litigants in coverage disputes and a potential appeal to Supreme Court of Canada.
The Law in Ontario
For nearly 20 years, Ontario law has consistently held that an insurer unsuccessfully contesting a duty to defend is obliged to pay solicitor and own client costs (referred to in other jurisdictions as indemnity costs or special costs – which are similar but not identical).
The first significant decision in Canada dealing with this issue is Godonoaga (Litigation Guardian Of) v. Khatambakhsh (2000) 50 O.R. (3d) 417 (C.A.), in which he court said:
[4] The appellants were entitled to a defence by their insurer without expense to them. Accordingly, that matter now having been determined in their favour, they should have their costs on a solicitor and his own client scale for the defence of the main action and cross-claims until such time as the respondent insurer serves and files a notice of change of solicitors and takes over the insurers’ defence. Such costs would include the conduct of the third party proceedings and the motion before Pitt J. and this appeal. It would, of course, obviate the necessity of determining their party and party costs of this appeal as ordered by the court.
Most jurisdictions took the position that absent improper conduct during the course of the litigation, the appropriate measure of costs would be a partial indemnity, or what is commonly referred to as party and party costs.
The Ontario Court of Appeal in Godonoaga, as well as in subsequent decisions, made it clear that an award of full indemnity costs is required in a coverage decision regardless of the conduct of the parties. This position was explicitly made by Cumming J. in Markham General insurance Co. (Liquidator of) v. Bennett when he referred to the conduct of the insurers in the litigation as “exemplary” before awarding full indemnity costs against them:
[15] The conduct of the insurers in the case at hand is exemplary, like that seen in Gore Mutual Insurance Co. v. 1443249 Ontario Ltd. There was no breach of the contract by the insurers. I agree that the Application involved a relatively novel issue of importance in respect of the so-called “insured v. insured” exclusion. It was reasonable for the insurers to bring the Application for a determination as to how the policies were to be interpreted as a matter of law. Nevertheless, given the finding that the exclusion was inapplicable, and that the coverage applied to the respondent directors/officers, in my view, costs of the Application relating to the preliminary coverage issue are properly payable on a full indemnity basis. While the policies themselves (apart from the asserted exclusion provision) are not in the evidentiary record, it is not disputed that the insurers contractually agreed to indemnify the respondent director/officers from the cost of their defences up to the policy limits. For this reason, in my view, the insurers are contractually obliged to reimburse Goodman and Hicks on a full indemnity basis.
This line of authority remains the law in Ontario has recently been expanded in a 2017 decision to include a coverage action outside of the scope of a duty to defend.
Other jurisdictions have followed this reasoning including the Newfoundland Court of Appeal and until recently, The British Columbia courts.
The Evolution of the British Columbia position
The B.C. Courts have been slow to adopt the reasoning that a successful coverage claimant should always receive special costs.
In Hwang v. Axa Pacific Insurance Co. the judge, having held that the defendant had a duty to defend the plaintiff, refused to award special costs, noting that such costs require egregious conduct.
In a series of more recent decisions, all of which post-date the initial rulings by the Ontario Court of Appeal, the B.C. courts have declined to award special costs absent egregious or reprehensible conduct.
The first BC case to have followed the Ontario line of authority was Gore Mutual Insurance Company v. Paterson , in which Justice Leask makes reference to the Ontario cases referred to by the insured’s counsel in granting special costs.
In a subsequent decision by Blok J. , the learned chambers judge found that the matter had not been properly considered by the BC Courts, and after reviewing the Ontario and Newfoundland decisions, found that the reasoning supported a departure from the standard rule of reprehensible conduct being a pre-condition to an award of special costs.
West Van Holdings Ltd. v. Economical Mutual Insurance Company
The April 2019 decision by the B.C. Court of Appeal in West Van Holdings Ltd. included an in depth analysis of these issues before ultimately rejecting the Ontario line of authority. Interestingly, since Economical was successful in its appeal of the lower court’s ruling and had no obligation to defend the underlying claim, the analysis was obiter dicta.
Goepel, J.A. traces the leading authorities in coverage law and the rules governing the laws of costs in B.C. He notes that the B.C. rules of court do not even have a category for full indemnity costs (special costs typically awards about 80% of actual costs) and that the recent decisions by the B.C. Supreme Court (and referenced above) effectively create a new category of costs in B.C. that is not supported by the legislation or the jurisprudence (at paragraph 105).
Justice Goepel summarises his analysis by ruling that there is no principled reason to award special (let alone, full indemnity) costs in a coverage action absent improper conduct, and further notes that all of the recent B.C. trial court decisions were wrongly decided:
[109] There is, in my respectful opinion, no principled reason to award costs in a duty to defend case in a manner different than other litigation. There already exist other suitable mechanisms to censure an insurer’s wrongful conduct: Smithies Holdings at para. 134. If the insurer has breached its duty of good faith, or conducts itself in a manner that is worthy of rebuke, it will be sanctioned. If not, an insurer facing a duty to defend claim should be treated no differently than any other litigant who may breach a contract.
[110] With respect, the Supreme Court decisions in Paterson, Williams, Kane and Blue Mountain were all wrongly decided on the cost issue and should not be followed. They are not consistent with the Rules and the principles that have long governed cost awards. I say nothing further about the decision in Tanious, which is presently on reserve in this Court. [emphasis added]
Blue Mountain Log Sales Ltd. v. Lloyd’s Underwriters
The decision in Blue Mountain was argued while the West Van decision was under reserve. When the West Van decision was released the Court took the unusual position of calling on the parties to submit supplementary arguments on the costs issue, despite it not having been raised in the facta or Notice of Appeal.
Dickson J.A., who wrote the June 28, 2019 decision in Blue Mountain on behalf of a unanimous court and was on the panel which unanimously concurred in the decision by Goepel J.A. in West Van, supra, succinctly noted as follows:
[64] Based on the decision in West Van Holdings, I am persuaded that the award of special costs should be varied and replaced by an award of ordinary costs…
While the decision in Blue Mountain leans heavily on the decision in West Van, it is the more important decision from a jurisprudential basis since the issue of the award of special costs was directly decided by the justices and as a result, is binding on the courts below.
Conclusion and Application
B.C.’s sharp break from the law of costs in a claim for coverage can lead to some opportunities for litigants in coverage disputes. Where there is an option to proceeding with an application for coverage in either B.C. or Ontario, the parties can realize significant advantages in pursuing their remedy in one jurisdiction over another.
Further, given that there is now a direct conflict in the law in B.C. on the one hand, and Ontario and Newfoundland on the other, the stage has been set for an application to the Supreme Court of Canada to resolve the dispute and provide guidance on the interpretation of contracts which are usually marketed and sold on a national basis.
For more information on insurance coverage issues, please contact Andrew N. Epstein.