This article examines prevalent issues stemming from the “tripartite” relationship, which often arises when an insurer retains legal counsel to defend a court action against its insured or to pursue a subrogated action. Generally speaking, the “tripartite” relationship refers to the relationship among an insurer, its insured and legal counsel retained by the insurer. As all experienced legal counsel know, too often, the tripartite relationship presents confusion and, more importantly, may be characterized by conflicts among the parties. These conflicts can be actual, potential or a matter of perception. These issues are examined in this article through the lens of recent jurisprudence.
Control Issues
The Ontario Superior Court of Justice recently examined the issue of who controls “the defence” in a tripartite relationship. In Simply Kids Ltd. v. Vertigo Investments et al., 2013 ONSC 2731 [Vertigo], the defendant (Vertigo) brought a motion for a determination of whether its insurer had a duty to defend it in the court action. It also sought a declaration compelling its insurer to retain independent legal counsel to conduct its defence in the court action. At paragraph 46 of the decision, the Court reviewed the general principle that, pursuant to the insurance contract, the insurer usually conducts the defence (including the appointment of defence counsel); however, this general principle is not absolute. If a conflict of interest arises between an insurer and insured, it can give rise to an “appearance of impropriety” requiring the appointment of counsel for the insured. See Brockton (Municipality) v. Frank Cowan Co., (2002), 57 O.R. (3d) 447 (C.A.) at paras. 31-33 and Zurich of Canada v. Renaud & Jacob, [1996] R.J.Q. 2160 (Que. C.A.).
Determining the “degree of conflict” necessary to trigger the requirement of independent counsel for the insured is an intellectual exercise. Often there is no clear answer, but the court will attempt a balancing act. It will weigh the insured’s right to a full and fair defence of the civil action against the insurer’s right to control that defence, given the potential it faces of an ultimate obligation to indemnify. The balance will tip in favour of the insured when counsel’s mandate (from the insurer) can reasonably be said to conflict with his ability to fully defend the insured in the civil action: Brockton, supra. The court will not indulge an insured’s request for separate legal counsel if the insured is being “abundantly cautious”: Theriault v. ING Insurance Company of Canada, 2006 NBQB 407, recently followed in Brocke Estate v. Crowell, 2014 NSSC 269 at para. 77.
In Vertigo, the Court noted that there were allegations of intentional misconduct against Vertigo, which would impact the insurer’s obligation to indemnity Vertigo. Nevertheless, it was not convinced that there was a sufficient “degree of conflict,” because legal counsel (appointed by the insurer) would owe a duty of a good faith to defend the action. There was no persuasive evidence that legal counsel would not adhere to this duty, or that this duty would conflict with the instructions provided by the insurer to legal counsel.
It may be possible to discern key differences between Vertigo and Graham v. Coakley, 2009 CanLII 22549 (Ont. S.C.) [Coakley], where the Court did order an insurer to fund separate legal counsel for the insured. See also Glassford v. TD Home and Auto Insurance Co., [2009] O.J. No. 1011 (S.C.J.). In Coakley, a coverage issue arose concerning allegations of intentional conduct by the insured, as opposed to negligence. The Court held there was a sufficient degree of conflict between the parties, because the insured was reasonable in his perceived concern that the insurer would steer the defence in a direction that would exclude the insured from coverage: Coakley, supra at para. 33. This conclusion appears to flow from the fact that the allegation (intentional acts) raised a distinct risk of prejudice to the insured, which is not the case with negligence allegations.
Calling the Shots
Who maintains control over the defence and in effect, “calls the shots” is also influenced by the possibility or existence of an uninsured loss on the part of the insured. This issue was recently examined by the Supreme Court of Newfoundland and Labrador in Raso v. Home Depot of Canada Inc., 2013 NLTD(G) 153 [Raso]. In Raso, the insurer paid a claim to the insureds concerning the installation of a roof by the defendant, Home Depot. Relying on its contractual rights under the insurance contract, the insurer commenced a subrogated claim against Home Depot. The insureds also commenced a separate claim against Home Deposit, seeking compensation for losses that were not covered under their insurance contract. The insureds and insurer had separate legal counsel.
Upon discovering the separate claim by the insureds, the insurer sought to consolidate the actions and thereafter, maintain control over the consolidated action. The insureds consented to consolidation, but contested the insurer’s position that it should have control of the action. The court noted that the general rule at common law is that: “if an insured is not fully indemnified under a policy of insurance he is entitled to commence action to recover the uninsured loss and have control of the litigation subject to his duty to act in good faith as regards the recovery of the insured portion”: Raso, supra at para. 10.
Crucially, this general principle was modified by the insurance contract between the insureds and the insurer; it provided a right of assignment from the insured to the insurer, and moreover, imposed a contractual duty on the insureds to account for any other monies recovered. The court held that the insurer was entitled to control over the consolidated action, because it “exhibited a spirit of co-operation” that would “best protect all parties in the agreed consolidated action”: Raso, supra at para. 15.
The circumstances in Raso can be contrasted with those in Durling v. Sunrise Propane Energy Group Inc., 2012 ONSC 6328 [Durling]. In Durling, a class action had been certified, stemming from a series of explosions that had occurred in 2008 at a propane facility in Toronto. In addition to a class action, which was controlled by the insurer, several insureds had commenced separate actions. The insurer sought to stay these separate actions, arguing that the insurance contract provided control of the litigation to the insurer, regardless of whether it had paid the insured for all insured and uninsured losses. Akin to Raso, the Court noted that the starting point is that “the insured controls the litigation until the insured has been fully indemnified for his or her insured and uninsured losses”: Durling, supra at para. 45. Next, the Court examined the issue of whether there was plain language in the insurance contract (especially the subrogation clause), which altered the insured’s right to control the litigation. In Durling, there was no express provision, which the case law requires, so control remained with the insureds. See also Zurich Insurance Co. v. Ison T.H. Auto Sales Inc., 2011 ONSC 1870, aff’d 2011 ONCA 663 at paras. 34-36.
Getting into Hot Water
In addition to issues already discussed, the tripartite relationship is tricky, because it creates an environment where the insured or counsel can find themselves in “hot water”. Most recently in Dervisholli v. Cervenak, 2012 ONSC 7137 [Dervisholli], an insurer retained two lawyers from the same law firm to represent two insureds, which were adverse parties to one another. The insureds were in a motor vehicle accident and by happenstance, they were both insured by the same insurer. Instead of sending one insured to legal counsel at a different law firm, two lawyers from the same firm were retained to represent the two insureds. The law firm made “no pretence of erecting a ‘Chinese wall’ or maintaining a ‘code of silence’ between its files” and ultimately, the court held that there was a clearly a conflict of interest, and the law firm was removed: Dervisholli, supra at para. 12.
The recent decision in Pope & Talbot Ltd. (Re), 2011 BCSC 548 [Pope] is also noteworthy. In Pope, the insurer had afforded coverage to the insured, but on the basis of a reservation of rights. The insurer also sought to participate in the underlying litigation against the insured. The Court stated that “[b]y the very nature of its relationship in defending the insured, defence counsel, whose fees are being paid for by the insurer, will come into possession of privileged information that may impact on coverage issues…Defence counsel is in conflict if it engages in the role of providing coverage advice or passing along confidential information that may be used by the insurer to deny coverage”: Pope, supra at para. 9. After reviewing the relevant case law, the Court noted that “where defence counsel is appointed and paid for by the insurer, defence counsel must act as if it had been personally retained by the insured”: Pope, supra at para. 14. It likely comes as no surprise that ultimately, the Court held that counsel defending the insured must do so without regard to the coverage issues.
In closing, this article examines some of the prevalent issues that may arise in the context of the infamous tripartite relationship. The case law demonstrates that these issues continue to surface, despite the time-honoured origins of insurance law and its well-established principles. These cases serve to remind legal counsel that when they find themselves in a tripartite relationship, they should be alive to competing interests over control of the litigation, and the reality that conflicts of interest may arise as a result of the confidential information entrusted to them by the insured.