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University Fails But Gets 95%
Published in the January 2009 issue of Litigation Notes - View Article
The Ontario Court of Appeal recently considered the proper allocation of defence expense in litigation involving some claims that are covered by insurance and others that are not (”mixed claims”)
The Ontario Court of Appeal recently considered the proper allocation of the costs of defending a lawsuit advancing two distinct claims where the defendant has insurance coverage for only one of the claims. In a case where almost all of the defence costs related to both claims, the Court held that the insurer had to pay 95% of the defence costs, leaving the defendant insured responsible for the remaining 5% only.
The University of Western Ontario fired the director of its computing laboratory, Edward Hanis, accusing him of misuse of the computer system. The University reported Hanis to the police and he was charged with, and later acquitted of, the offence. Hanis sued the University for wrongful dismissal, malicious prosecution, and a number of other things. The University had a commercial general liability policy with the Guardian Insurance Co. of Canada (“Guardian”) which provided coverage for malicious prosecution claims, but not for the wrongful dismissal and other claims. Because coverage was disputed, the University retained its own counsel to conduct the defence and added Guardian as a third party. Hanis was unsuccessful at trial, but on appeal was awarded damages for wrongful dismissal. The University’s costs of the defence were $2 million. The trial judge accepted that most of the work done by defence counsel related both to the defence of the malicious prosecution claim, and the defence of the various other claims, including the wrongful dismissal claim. He found that only 5% of the defence costs related exclusively to the wrongful dismissal or other claims. He held Guardian responsible for 95% of the costs of the defence on the basis that those costs related in part to the malicious prosecution claim.
Guardian appealed, complaining that the allocation was unfair in the circumstances. The trial judge's allocation of defence costs was upheld on appeal. The Court of Appeal considered Canadian, U.S. and Commonwealth authorities and found in the jurisprudence two different conceptual approaches taken to this issue. Which was the proper approach had yet to be decided under Ontario law.
Guardian argued that the costs associated with both covered and uncovered claims (“mixed claims”) should be allocated between the University and Guardian on a “fair and equitable” basis, having regard to several factors, including the relative proportion and significance of the covered and uncovered claims. On this basis, Guardian sought to have 80% of the costs allocated to the University.
The court rejected that approach, preferring an allocation based on interpretation of the language used in the insurance policy. In this case, the policy stated that the insurer shall defend “at the cost of the insurer any civil action which at any time may be brought against the insured” on account of a loss covered under the policy. That covenant was unqualified under the policy, and the policy was silent as to what happens in the event of a mixed claim. The court concluded, on the basis of contractual interpretation that Guardian was responsible for all defence costs relating to the malicious prosecution claim regardless of whether the costs also arose from the defence of the other claims. Principles of fairness and equity do not lessen the obligations that Guardian assumed by contract, said the Court. The Court reasoned that requiring Guardian to pay all defence costs relating to a mixed claim would not increase its liability exposure compared to the cost of defending a covered claim in isolation. Neither would it grant the University anything more than what it bargained for.
The onus of proving entitlement to costs remained with the University, but the Court noted that Guardian likely undermined its position by having breached its contractual obligation to provide a defence for the insured. By not being directly involved in the conduct of the defence, Guardian missed the opportunity to examine and refute the university's assertion that virtually all defence costs related to mixed claims.
Hanis v. Teevan, 2008 ONCA 678 (CanLII)