Newsletter > October 2001
Insurer’s Duty to Defend: Supreme Court of Canada Revisits the ‘Extrinsic Evidence and Pleadings Rule’
It is now accepted that that the duty to defend is broader than, and independent of, the duty to indemnify, except that there is no duty to defend where there is necessarily no duty to indemnify. This proposition is usually more difficult to apply than it is to state.
The duty to defend arises where there is the possibility that the claim, as contained in the pleadings, alleges acts or omissions falling within the policy coverage, while the duty to indemnify arises only where such allegations are proven at trial. The question arises whether the court is limited to the pleadings in deciding what it is that is alleged, or can go outside of the pleadings for extrinsic evidence, in order to make this decision.
In Bacon v. McBride (1984), 5 C.C.L.I. 146 (B.C.S.C.), the court stated that “the pleadings govern the duty to defend – not the insurer’s view of the validity or nature of the claim or by the possible outcome of the litigation”. As the jurisprudence developed in this country, courts felt compelled to strictly adhere to the pleadings rule. In Jon Picken Ltd. v. Guardian Insurance Co. of Canada,  I.L.R. 1-2973 (Ont. C.A.) the Ontario Court of Appeal, in holding that the insurer had a duty to defend, refused to consider findings of dishonest or fraudulent acts made by the same court in the underlying action. which acts would have been excluded by the policy. Courts ruled that one cannot go outside the four corners of the pleadings and consider “underlying facts” in deciding on the duty to defend.
More recently, the Supreme Court of Canada has opened up the Pleadings Rule in two ways. First, the court can look beyond the particular words used in the pleadings to determine the “true nature” and substance of the claim. In Non-Marine Underwriters, Lloyds of London v. Scalera (2000), 185 D.L.R. (4th) 1 (S.C.C.), the Supreme Court of Canada held that the court is not limited by the literal words of the pleadings; that is, the plaintiff’s choice of terminology. Instead, the court must look at the substance of the claim which is asserted. The court held that the claim for sexual battery was not capable of being pleaded in negligence. Therefore, there was no duty to defend a claim for negligent sexual battery under the circumstances where the policy excluded intentional acts.
The court stated that the bare assertions advanced in a statement of claim are not necessarily determinative. If so, the parties to an insurance contract would always be at the mercy of a third-party pleader. What really matters is not the labels used by the plaintiff, but the true nature of the claim. Courts have been encouraged to look behind the literal terms of the pleadings in order to assess which of the legal claims put forward by the pleader could be supported by the factual allegations. This analysis is undertaken with a view to discerning the true “substance” of the allegations.
Secondly, the court can consider extrinsic evidence which has been referred to in the pleadings. In Monenco Ltd. v. Commonwealth Insurance Co.,  S.C.C. 49, the Supreme Court of Canada was asked to decide whether an insurer had a duty to defend a claim against a firm of engineers who provided engineering services to the claimant. The insurer declined to defend on the ground that the “turnkey exclusion” of the CGL policy applied to the claim. The exclusion provided that the insurer is not liable for claims arising out of projects for which professional architectural and/or engineering services were performed by the insured or by any legal entity owned by the insured. Monenco argued that it did not in fact provide any such services pursuant to a joint venture agreement with the claimant. The Statement of Claim alleged that Monenco had provided engineering services on the project, and referred to the joint venture agreement. The court observed that the proper basis for determining whether a duty to defend exists in any given situation requires an assessment of the pleadings to ascertain the “substance” and “true nature” of the claims. More specifically, the factual allegations set out therein must be considered in their entirety to determine whether they could possibly support the plaintiff’s legal claims.
Mr. Justice Iacobucci stated: “I am of the view that extrinsic evidence that has been explicitly referred to within the pleadings may be considered to determine the substance and true nature of the allegations, and thus, to appreciate the nature and scope of an insurer’s duty to defend.” The conclusion was that the insurer had no duty to defend because the exclusion applied to the pleadings which alleged that Monenco provided the services. In addition, the exclusion applied to the terms of the joint venture contract wherein a corporation that was owned and controlled by Monenco had undertaken to provide these services. It is therefore important when analyzing the insurer’s duty to defend to scrutinize the allegations within the Statement of Claim. It should be examined in its entirety to arrive at the true nature and substance of the claim. The mere use of typical “trigger” words such as “negligence” or “damage” may no longer be sufficient to give rise to a duty to defend, if a reasonable reading of the claim indicates an absence of factual or legal bases for these allegations. If the allegations refer to some extrinsic material, the material itself should be examined, as it may be admissible and relevant to defining the nature of the claim.
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