Is an insurer obliged to defend its insured for all damages claimed, even if certain types of damages are excluded from the policy?

This article appeared in the Fall 2023 issue of the Montréal Association of Insurance Women (MAIW) newsletter.

Introduction

When an insured claims compensation, the mere possibility that the claim falls within the scope of the policy triggers an obligation, on the part of the insurer, to defend the insured in a litigation dispute.¹ However, some claims may involve damages that are not covered, while others are. In this specific case, must the insurer assume the defence costs associated with all claimed items, or can it exclude those incurred for non-covered damages?

Facts

Guy Bélanger (the “Plaintiff”) filed an injunctive action, as well as also seeking compensatory and punitive damages from his neighbours, Nelly Noyrigat-Gleye and Guilhem Labertrande (the “Defendants” or “Insureds”). He alleged that they had cut down trees on his property and built an encroaching retaining wall. He claimed compensatory damages for the loss of the trees and punitive damages under the Tree Protection Act.² He also demanded that the Defendants remove the retaining wall and restore the land to its original condition.

Promutuel Vallée du St-Laurent, société mutuelle d’assurance générale (“Promutuel”), the Defendants’ insurer, is also an impleaded party in the proceedings. Promutuel agreed to assume the Insureds’ defence costs for the compensatory damages, but refused to do so for the punitive damages and permanent injunction on the grounds that they were not covered by the insurance policy (the “Policy”). The Insureds therefore brought a Wellington type motion against Promutuel, seeking to have them assume all the defence costs.

First instance decision³

The Court, in the words of the Honourable Pierre Nolet, J.S.C., began its analysis with a reminder that an insurer is bound to take up the cause of any persons entitled to the benefit of the insurance and to assume their defence in any action brought against them.⁴ It reiterated that the duty to defend is enforceable, regardless of whether the insurer will actually be held to its obligation to indemnify.⁵

Applying the principles of law, the Court assessed the injunctive relief by noting that the Plaintiff was approaching the matter from two angles: (i) by seeking an order to remove the wall and restore the property, or, failing that, (ii) by seeking compensation for the work he would have to carry out himself.⁶ The Court concluded that the claim might be covered, since the injunctive relief had the goal to make the Defendants responsible for the costs of removing the wall. The Plaintiff could simply have chosen the second option, which

would have been covered since it was of a compensatory nature. As for the punitive damages, it is difficult to divide and categorize the time spent by defence counsel on those solely. The Court indicated that if the parties were unable to do so prior to the litigation, they could do so after the investigation on the merits.⁷

The Court therefore allowed the Wellington type motion and ordered Promutuel to take up the cause and assume the defence of its Insureds with respect to all the damages. Moreover, the Court indicated that it would be unreasonable and contrary to the rules of proportionality to require, from the Defendants, to retain a counsel’s services to defend a portion of the claim that turned out to be negligible.⁸

Court of Appeal decision⁹

Promutuel therefore filed an application for permission to appeal the first instance judgment (the “Application”). It argued that said decision departed from the well-known principle that, in insurance law, injunctions cannot be considered as damages, and that it was the first time that a judgment ordered an insurer to assume the defence of its insured for a portion of a claim that is not covered (punitive damages), in accordance with the principle of proportionality¹⁰. The respondents (Insureds) agreed that the judgment constituted a precedent that may raise a question of interest but argued that the principle of proportionality precluded granting the Application¹¹.

The Court of Appeal recognized that the monetary stakes involved may conflict with this principle, but was of the opinion that, in this very specific case, where proportionality is invoked to impose on the insurer the obligation to assume the defence costs for damages that are clearly not covered, it is a question of interest that should be the subject of a decision by the Court panel. Furthermore, the Honourable Benoît Moore pointed out that the Application satisfied the criterion that a judgment granting a Wellington type motion could cause irreparable harm to the insurer¹².

Conclusion

It will be interesting to see the Court of Appeal’s decision in light of the principle that the fact that a claim contains both covered and non-covered allegations does not necessarily entail a sharing of defence costs¹³, in symbiosis with the principle of proportionality.

The case should be heard shortly: stay tuned!

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¹ Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, [2010] 2 SCR 245, para. 34.
² CQLR c. P-37.
³ Bélanger v. Noyrigat-Gleye, 2023 QCCS 856.
⁴ Article 2503, para. 1 of the Civil Code of Québec.
⁵ Ibid. 3, para. 13.
⁶ Ibid. 3, para. 15.
⁷ Ibid. 3, paras. 19–20.
⁸ Ibid. 3, para. 21.
⁹ Promutuel Vallée du St-Laurent, société mutuelle d’assurance générale c. Noyrigat-Gleye, 2023 QCCA 683.
¹⁰ Supra 9, para. 6.
¹¹ Ibid. 9, para. 8.
¹² Ibid. 9, para. 10.
¹³ Société d’assurances générales Northbridge (Lombard General Insurance Company of Canada) v. Cirvek Fund l.l.p., 2015 QCCA 168, par. 17.