An insurer’s duty to defend claims is broader than its duty to indemnify. It is well established law in Canada that the determination of a duty to defend should be based upon a consideration of the pleadings and the policy language. A duty to defend arises when there is the possibility of liability under a policy if facts alleged in a statement of claim are proven true.
As the Honourable Justices Armstrong, Weiler and Rouleau of the Ontario Court of Appeal recently affirmed in General Electric Canada Co. v. Aviva Canada Inc.:
Although in most cases the “pleadings rule” applies to a statement of claim or similar pleading, it can apply to a letter that asserts liability for damages against an insured.
However, where the Ministry of Environment sent a letter requesting that a delineation of the source of environment contamination be conducted, voluntary compliance was found to give rise to compliance costs not defence costs.
In this example, the appeal court rejected an attempt to argue that the real substance of the Ministry’s letter was much more than it appeared to be, and was in a practical sense an allegation that operations had resulted in a plume of contamination that had flowed onto a neighbour’s property. It was held that a list of costs that was presented, which were argued to be or resemble defence costs, had no bearing on whether the letter triggered a duty to defend. The letter and the policy wording did not trigger such a duty.
It is important to remember however, that the question of whether there is a duty to indemnify is a different issue. From a practical perspective, insurers may want to carefully consider getting involved earlier rather than later upon learning of possible environmental problems. In my view, doing so may help to control their risk and better their chances of successful subrogation of losses. Often, weighing the costs of clean-up versus the costs of dealing with contamination that may have the potential to cause damage to third parties will be a consideration.