In British Columbia Court of Appeal decision West Van Holdings Ltd. v. Economical Mutual Insurance Company, the Court confirmed the primacy of the pleadings when determining whether an insurer owes a duty to defend, concluding that insurance policies are not special contracts justifying special costs for successful litigants seeking coverage where there is no reprehensible conduct on the part of the insurer deserving of judicial censure.
This case concerned whether the defendant insurers (the “Insurers”) owed a duty to defend the plaintiffs (the “Insureds”), notwithstanding environmental and pollution exclusion clauses (the “Exclusion Clauses”) in their respective insurance policies.
The pleadings in the underlying action relied upon the Environmental Management Act (the “Act”).
The Insurers refused to defend the Insureds on the basis that the underlying action was outside the scope of their policy coverage based on the Exclusion Clauses.
There was no allegation that the Insurers’ conduct in the litigation was reprehensible or that they had breached their duty of good faith.
At the trial level, even though the insurance policies contained Exclusion Clauses, the Court held that the Insurers still had a duty to defend the Insureds against an action arising from soil contamination as the claims in the underlying action fell within the initial grant of coverage and brought the claim within the scope of coverage. The trial judge found the Exclusion Clauses to be ambiguous and found that they did not oust coverage for statutory retroactive property damage liability arising from migration of pollutants which may have been caused by previous landowners or operators, pursuant to the Act.
Further, the trial judge awarded special costs (or full indemnity costs) to the Insureds, relying on prior case law that concluded that insurance policies that include a duty to defend were unique contracts providing coverage for defence costs. As such, an insured should be fully compensated for the costs incurred to obtain the defence.
Court of Appeal
The Court of Appeal, after careful consideration of the pleadings forming the basis of the claim, the policies’ terms, and the law, concluded that the Exclusion Clauses were not ambiguous and excluded coverage for the claims in the underlying action in relation to the migration of pollutants and acts by the Insureds occurring during the respective policy periods.
The Court further concluded that such claims do not fall inside the policies’ initial grant of coverage because the claims would relate to occurrences that took place before the commencement of the policies’ respective policy periods. The pleadings’ inclusion of the Act did not give rise to a claim for the escape of pollutants caused by the acts of predecessor owners or operators of the Insureds’ lands. A review of the pleadings suggested that there was no possibility that the Insureds would be exposed to retroactive liability. As such, there was no duty to defend.
The Court also considered the issue of special costs. British Columbia Rules of Court provide for party and party costs and special costs. Party and party costs are typically awarded in most cases and only provide partial indemnity based upon a tariff scale. Special costs provide greater indemnity but are usually awarded due to reprehensible conduct by a litigant. Special costs in British Columbia, if awarded, involve an assessment of what fees are reasonably necessary, the result of which is that a litigant is not necessarily fully indemnified by such an award.
The Court concluded that, in British Columbia, costs must be awarded in accordance with the Rules of Court, which do not provide for full indemnity costs. Further, special costs are only awarded where there is reprehensible conduct or where the parties have made provisions in a contract for special costs.
Appellate courts in other provinces have concluded that insurance policies containing a duty to defend, despite being silent on the cost issue, still allow for full indemnity costs awards. Lower courts in British Columbia had previously adopted such reasoning.
The Court reviewed the policies in place which did not address the Insureds’ entitlement to costs in the event of a coverage dispute. The Court held that an award for special costs cannot be justified by implying such a term into the policies. To do so would require the following: 1) a particular custom; 2) something incidental to a particular kind of contract; or 3) a term necessary to provide business efficacy to the contract. None of these were found to apply in this case.
The Court held that there was no principled reason to award costs in a duty to defend case in a manner different than other litigation. As such, an insurer facing a duty to defend claim should be treated no differently than any other defendant alleged to have breached a contract.
The impact of this decision on the costs available for insureds in coverage disputes in British Columbia is considerable. This decision has levelled the playing field as both insureds and insurers will be entitled and subject to the same potential costs consequences. Poor conduct during the litigation raises the risk of special costs but either party is only otherwise entitled to partial indemnification.
This decision continues to highlight the importance of having exclusion clauses that are broader in their wording, clear and unambiguous, and specific with respect to both concurrent and retroactive liability.