Duty of Loyalty Owed By Defence Counsel, Even with Reservation of Rights

February 3, 2015

Mallory v. Werkman Estate 2015 ONCA 71, February 2, 2015

On February 6, 2005, three motorcycle drivers were racing.  One of the drivers, Mr. Werkman, lost control and struck a car seriously injuring the driver, Mr. Mallory.  Mr. Werkman died.  Mr. Mallory sued Mr. Werkman’s Estate, the other two motorcycle drivers (Mr. Nemes and Mr. Mihali), as well as his own insurer (Security National) for underinsured/uninsured coverage. 

Mr. Mihali’s insurer, Royal and Sun Alliance (“RSA”), appointed defence counsel, but reserved their right to limit or dispute coverage.  While RSA appointed separate coverage counsel, RSA was not added as a statutory third party to the proceeding. 

Mr. Mallory reached a settlement with Mr. Mihali, RSA, and Security National.  Under the terms of the settlement a trial was to be conducted to determine if the Mr. Mihali was liable to Mr. Mallory.   If Mr. Mihali was not liable, then Security National was to pay the settlement monies.  If Mr. Mihali was liable, RSA would pay at least $200,000 of the settlement amount, and perhaps the full amount if Mr. Mihali was not in breach of the conditions of his insurance policy. 

In February 2014 the trial judge found that Mr. Mihali was, “engaged in a joint venture” with Mr. Werkman in which they encouraged each other to drive at excessive speeds etc.  Mr. Mihali was found to bear 25% liability.  The trial judge dismissed the action as against Security National on the basis that Mr. Mihali was insured at the time of the accident

Following the trial decision RSA’s coverage counsel wrote to the trial judge and trial counsel and expressed concern about the findings regarding coverage.  Coverage counsel was advised to contact the trial coordinator, but did not do so. 

Mr. Mihali’s counsel, who was still appointed by and paid for by RSA, filed a Notice of Appeal which stated, among other things, the trial judge had erred in addressing the issue of insurance coverage in her trial reasons. 

Security National brought a motion to have defence counsel for Mr. Mihali removed as lawyers of record.  

The Court of Appeal noted defence counsel owed a duty of loyalty to Mr. Mihali.  By including a ground of appeal that was not in Mr. Mihali’s best interest it gave “rise to the inescapable conclusion that defence counsel was acting on the instruction of the insurer.”  If counsel were not removed it would bring the administration of justice into repute.  The Court of Appeal then went even further, and held that Mr. Mihali could appoint counsel of his own choosing, with all reasonable fees and disbursements to be paid by RSA. 


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