Special costs in coverage litigation

The British Columbia Supreme Court’s recent decision in Williams v. Canales, 2016 BCSC 1811, has set precedent in British Columbia by finding for the first time in this Province that, on a successful coverage application, the insured is entitled to special costs against the insurer on a solicitor-client basis.  While this has been the law in other provinces, this is the first time the B.C. Court has accepted the claim for special costs in this jurisdiction.

In the coverage action, the Court granted judgment in favour of the defendants against the third party Intact Insurance Company (“Intact”), declaring that Intact was obliged to defend the insureds in the personal injury action and requiring Intact to reimburse the insureds for defence costs already incurred. The matter came back before the Court when the insureds sought special costs against Intact.

The court confirmed that in B.C., special costs are not limited to cases involving reprehensible conduct by an unsuccessful party that is deserving of reproof or rebuke, although it is perhaps the most common basis. An example of two exceptions to this general use are cases involving exceptional matters of public importance and cases involving certain types of estate and trust litigation.

The court cited the Ontario Court of Appeal, concluding that the Court of Appeal saw coverage cases as an additional exception to the “usual rule” that special costs will not be awarded in the absence of unusual circumstances.

The Court, referring to the Ontario Court of Appeal decision of E.M. v. Reed (2003), 49 C.C.L.I. 57, 171 O.A.C. 145, stated:

“As for the law in other jurisdictions, in Reed the Ontario Court of Appeal noted that English and American law also favoured full indemnity costs for successful insureds in coverage cases. The court said:

[23] I note that English jurisprudence also appears to support the award of solicitor-and-client costs in such situations. See R. Merkin, Colinvaux’s Law of Insurance, 7th ed. (London: Sweet & Maxwell, 1997) at 405:

The assured is entitled to any costs reasonably incurred by him in resisting a claim, by way of damages, where the insurers wrongfully repudiate liability on the policy, and the insurers will face liability for any costs incurred by the assured in forcing the insurers to admit liability under the policy.

[24] The American case law similarly favours the view that where an insurer breaches its duty to defend and the insured is required to bring a declaratory action to establish the duty, the insured should be reimbursed for those costs that are attributable to establishing the duty.”

[Emphasis added in Reed.]

Given the high costs of litigation, insurers will now have to factor in the penalty associated with a special costs award when considering coverage disputes.