An insurer was ordered to provide a defence to an insured despite the fact that the plaintiff’s pleadings may have been manipulated in order to trigger insurance coverage. The insurer was also ordered to pay for separate counsel for the insured as a result of a reasonable apprehension of conflict of interest.

Morrison v. Co-operators General Insurance Company, [2004] N.B.J. No. 290, New Brunswick Court of Appeal

This was an appeal by Co-operators General Insurance Company (“Co-op”), from an order requiring it to provide the Respondent, Mr. Morrison, with a defence to the allegations of negligence in the underlying action against him. The underlying action was commenced against Mr. Morrison by several Plaintiffs who alleged that the Defendant drove his vehicle into theirs with such force that their vehicle flipped on its side causing injuries to the occupants. The Plaintiffs also alleged that the Defendant then exited his vehicle and assaulted two of the Plaintiffs.

To protect its interest, Co-op obtained an order adding itself as a Third-Party and filed a Third-Party defence. Mr. Morrison applied for a declaration that Co-op was under a duty to defend.

This appeal dealt mainly with two issues: first, whether the Plaintiff’s pleadings were manipulated in an attempt to trigger insurance coverage; and second, whether an Insured has a right to separate counsel when the insurer appears and defends on behalf of the Insured under a reservation of rights.

The issue of whether the pleadings were manipulated arose because the original pleadings alleged that the actions of the Defendant “were done wilfully and intentionally” and/or constituted “intentional infliction of harm.” The pleadings were amended so that the allegation of intentional infliction of harm was eliminated and an allegation of negligence was added.

Co-op had maintained that Mr. Morrison’s conduct was intentional resulting in his forfeiture of the right to be indemnified under the insurance policy by reason of a violation of the public policy rule in s. 2 of the Insurance Act, R.S.O. 1990, c. I.8. This rule provided that a violation of any criminal or other law does not, ipso facto, render unenforceable a claim for indemnity except where the violation is committed by the Insured with intent to bring about loss or damage.

The applications judge concluded that there was a possibility that the injuries alleged to have been suffered by the Plaintiffs could be attributed to the negligent operation of the Defendant’s vehicle and held that Co-op was therefore under a duty to defend Mr. Morrison.

Mr. Morrison also sought an order allowing him to conduct his own defence with counsel of his choice, paid for by Co-op. Counsel appointed by Co-op to act on behalf of Mr. Morrison in the underlying action was the same counsel who acted for Co-op to obtain the Third-Party order and argued against Mr. Morrison.

The applications judge concluded that there was a potential for conflict in this matter between the interests of Co-op and the Defendant and held that Mr. Morrison was entitled to appoint counsel of his own choosing, to be paid for by Co-op.

On the first issue, the Court of Appeal agreed with the chambers judge’s view that the allegation of negligence in the last Amended Statement of Claim was not derivative of the assault claim because the negligence claim was not based on the same act or conduct as the alleged intentional tort. For this reason, the facts as alleged result in the negligence claim falling within the coverage afforded by the policy. Co-op’s contention that the Plaintiffs amended their Statement of Claim in order to generate insurance coverage was nothing more than conjecture. The Court of Appeal explained that applying the guidelines set out in Non-Marine Underwriters, Lloyd’s of London v. Scalera, [2000] 1 S.C.R. 551 will provide insurers with sufficient protections against manipulative pleadings.

On the second issue, the Court of Appeal agreed with the chambers judge’s finding that Mr. Morrison was entitled to separate counsel because of the conflict of interest between him and Co-op. A potential for conflict existed because if liability were found as a result of the assault and not the allegations of negligence, there would be no coverage. Co-op might therefore conduct the defence in such a way that favours the finding of an intentional tort. The Court of Appeal disagreed with the chambers judge that the test to be applied is whether there exists the potential for conflict and held that the proper test is whether there is a reasonable apprehension of conflict. The Court applied the objective test in Zurich of Canada v. Renaud & Jacob, [1996] R.J.Q. 2160 (C.A.) adopted from MacDonald Estate v. Martin, [1990] 3 S.C.R. 1235. The production of evidence on this point was not necessary because once a lawyer acts on behalf of an insurer on a coverage issue that involves the Insured’s conduct in the underlying action, which may impact on the insurer’s liability to indemnify its insured, a conflict of interest arises.

This was not a case where it was feasible to apportion the costs of defending the covered and non-covered causes of action.

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