In Lloyd’s Underwriters v. Blue Mountain Log Sales Ltd., 2016 BCCA 352, the British Columbia Court of Appeal determined for the first time that legal costs incurred before an insured gives its insurer notice of a claim can fall within a “voluntary payments” clause in an insurance policy.
Lloyd’s insured a group of Canadian affiliated companies and individuals, including Blue Mountain Log Sales Ltd. and Scott Clarke (collectively, the “Clarke Group”), under annual general liability insurance policies. The Clarke Group carried insurance with Evanston Insurance Company in the United States. In June 2012, Washington affiliates of the Clarke Group became engaged in actions in Washington State and tendered their defence to Evanston. Allegations were later made against the Canadian members of the Clarke Group, but notice of the claim was not given to Lloyd’s until April 18, 2014, by which time the insured and Evanston had incurred approximately $558,000 in defence costs.
Once it received notice, Lloyd’s accepted it had a duty to defend and retained the same counsel retained by Evanston. However, Lloyd’s refused to pay defence costs incurred before it received notice of the claim and brought a petition seeking a declaration that it was not required to do so. Our May 29, 2015 blog post summarized the decision in Lloyd’s Underwriters v. Blue Mountain Log Sales Ltd., 2015 BCSC 630. In brief, the British Columbia Supreme Court dismissed Lloyd’s Petition, finding that it could not avoid pre-tender defence costs because it had suffered no prejudice because of the late notice. The analysis was based on the findings that: the duty to defend crystalizes when the cause of action arises; late notice is a breach of imperfect compliance, pursuant to s. 13 of the Insurance Act, R.S.B.C 2012, c. 1; the Clarke Group’s pre-tender defence costs were forfeited insurance, pursuant to s. 13(a)(ii) of the Insurance Act; and Lloyd’s had not been prejudiced by late notice.
On appeal, the British Columbia Court of Appeal took a fundamentally different approach. It held that the duty to defend cannot arise until the insurer has notice of the claim. The “essential bargain” between the parties imposes a duty on an insurer to defend, in exchange for the right to participate in and control the defence; the insurer cannot be responsible for the former until it is in a position to assert its reciprocal right to the latter, which requires that it have notice.
However, the Court of Appeal did not say an insurer would never be responsible for pre-tender defence costs. In reaching its decision, it summarized a line of authority called “repudiation cases” in which the insurer repudiates the contract, asserting that late notice is a breach of the policy, or denying coverage for another reason. In those cases, if the Court finds there has been an improper denial of coverage, there is a breach of the policy resulting in insurance being forfeited and the conditions are met for the Court to consider relieving the insured from forfeiture, applying s. 13 of the Insurance Act. Where the insurer has not suffered prejudice because of the late notice, the Court may, and often does, order the insurer to pay the insured’s pre-tender defence costs as part of the relief granted.
However, those were not the facts before the Court. Upon receiving late notice of the claim, rather than rely on the insured’s imperfect compliance to deny coverage, Lloyd’s forgave the breach, and undertook to defend the Clarke Group affiliates going forward. The Court determined this was in the line of “implementation cases”, requiring that the decision as to whether the insured recovers pre-tender defence costs is grounded in the terms of the policy.
The Court then went on to decide that pre-tender defence costs fit within the voluntary payment clause, which read:
- The Insured shall not, except at his own cost, voluntarily make any payment, assume any obligation or incur any expenses other than for first aid or other medical denial or surgical relief to others at the time of accident.
As a result, the pre-tender defence costs were incurred at the insured’s “own costs” and were not recoverable.
In summary, the Court held that, until the insurer has notice of a claim, pre-tender defence costs can be voluntary payments, incurred at the insured’s “own cost”. On or after notice, if there has been a breach of the policy and resulting loss of insurance, s. 13 of the Insurance Act entitles the Court to decide whether it is appropriate to provide the insured with relief. Included in any relief may be reimbursement of its pre-tender defence costs.
However, where instead of relying on a breach to deny coverage, the insurer forgives the breach, s. 13 of the Insurance Act cannot apply and the interpretation of the policy will govern who is to pay for defence costs incurred before notice.
Perhaps most interesting is the argument which was not addressed, because it was advanced for the first time on appeal. The insured sought to argue that its payment of defence costs was not “voluntary”. Certainly many defendants would agree with this position, but it remains to be seen whether the Court will accept it.