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Newsletter > September 2002

Liability Insurance, Duty To Defend, Extrinsic Evidence

Cooper v. Farmer’s Mutual Insurance Co., [2002] O.J. No. 3504 (Ont. C.A.) (released May 17, 2002)

The current restatement is the duty to defend arises where there is a mere possibility that the law suit asserts a claim within policy coverage. Put another way, it is sufficient to trigger the duty to defend that the document which sets out the claim (whatever that document is called) alleges a state of facts which, if assumed to be true, falls within the policy coverage. There is no consideration given to the merits of the allegations; that is, assuming the action alleges a valid cause of action, the courts do not embark into any consideration of whether the plaintiff will be able to succeed on the merits.

The Ontario Court of Appeal, in Cooper v. Farmer’s Mutual Insurance Co., affirmed the principle that the policy and the pleadings setting out the claim are all the court is to look at to determine whether the duty to defend exists. Evidence, such as documents, which is “extrinsic” to the documents setting out the claim may be considered only if specifically referred to in the documents. The fact that the evidence is referred to in the pleadings brings it within the ambit of the court’s review.

The Court affirmed motion decision holding that the allegations in the statement of claim triggered the duty to defend. The motions judge refused to consider extrinsic evidence from the insurer offered to support the argument that counsel for the plaintiff had “manipulated” the pleadings so as to allege a claim which might fall within coverage, all the while knowing that the true facts of the case were different than as alleged. The Court said that this evidence, relating to the truth of the facts alleged, was relevant to liability (and so to the duty to indemnify if there was liability)but not to the duty to defend.

Farmer’s Mutual wanted the Court to look at correspondence between the plaintiff and counsel for the insured, and the first statement of claim issued by the plaintiff, in which there was an employment relationship pleaded as between plaintiff and the insured. The first action had been discontinued by plaintiff’s counsel after correspondence with the insured’s counsel and after the insured’s counsel advised plaintiff’s counsel that the action would be barred by workers’ compensation legislation if, in fact, the plaintiff was an employee as alleged. Plaintiff’s counsel then commenced a new action in which there was no mention of any employment relationship.

Subject to one caveat, the result in Cooper v. Farmer’s Mutual Insurance Co. seems to suggest that, absent fraud or some other sort of conduct patently tending to bring the administration of justice into disrepute, claimants and their counsel have carte blanche to make allegations designed to trigger the duty to defend (so as to bring a “deep pocket” into the action) in pleadings, regardless of the truth of the facts in those allegations, with the only control being whatever realistic exposure there is to costs.

The caveat is this. For whatever reason, the Court in paragraph 12 of its reason specifically mentioned that the documents that Farmer’s Mutual wanted the court to review were not part of the pleadings in the new action. That must be understood to mean were not at least referred to in the pleadings. Then, in paragraph 14, it said: “While consideration of extrinsic evidence may be appropriate in a proper case to determining the true nature of a claim, it was neither appropriate nor necessary in this case to assess[the plaintiff’s] claims.” Those statements by the Court suggest, to this writer, that the Court might have said more if the documents had been somehow made part of the pleadings. This may indicate that the Court has left open for the future the problem of what do where it is apparent, in some relevant way, from the pleadings themselves that the claim has been pleaded as it is solely for the purpose of triggering the defendant’s insurance coverage and where ignoring that reality would tend to bring the administration of justice into disrepute. That sort of case might well trigger some sort of inherent jurisdiction decision, since the courts have the inherent jurisdiction to control their own process to prevent this sort of abuse.


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