Insurers Obligated to Defend Insured Even after Full Payment of Policy Limit

June 14th, 2013 by Meliha Waddell

This blog was written by our law summer student, Michelle Stephenson

The insured in this case had purchased a standard automobile policy (a “SAP”), and had opted for the minimum policy limit of $200,000. Due to his involvement in a motor vehicle accident, he was sued for substantially more than this amount. His insurer retained lawyers to defend him and subsequently paid the maximum of $200,000 to the plaintiffs. The determination of costs in the case was still pending and the action itself was still underway with the liability having not yet been determined, when the insurer sought a declaration that it had no continuing duty to defend him.

The insurer argued that because it had no further liability for the damages to the plaintiff, it had no further duty to defend the insured. The resolution of the case, it was determined, turned on the wording of the insurance contract, the SAP.

Insurers Obligated to Defend Insured Even after Full Payment of Policy LimitAccording to the court, the SAP took “muddled and contradictory drafting to a rarified level”. The policy included contradictory statements indicating that the insurer would cover all costs of the defence in court, but also that if sued for an amount beyond the policy’s coverage, the insured may wish to hire their own lawyer. The general rule of construing ambiguity against the insurer was not applicable in this case, as the contract was not actually drafted by the insurer. However, s. 245 of the Insurance Act (the “Act”) was able to resolve the situation.

The Act states that in every case where someone insured under a motor vehicle liability policy is involved in an accident involving an automobile and resulting in loss or damage, the insurer shall defend on behalf of the insured any civil action brought on account of loss or damage to persons or property. The court found that the Act used unqualified language, distinctly not including any limiting language in s.245.

Taken literally the SAP would appear to contradict the Act; however, the policy should be read as supportive of the Act. The Act aims to provide an efficient system of dealing with all automobile accidents, ensuring that all parties are defended by counsel. Therefore, automobile insurance purchasers “can opt for minimal or extended coverage in terms of their liability, but coverage of legal costs in mandatory.”

The full decision of Jevco Insurance Co. v. Malaviya, is available at: Digital Ontario Reports.

For additional information regarding the Insurance Act, Insurance Defense, Standard Automobile Policies, or the services available from our Insurance Defence Group, kindly contact any of the Toronto insurance defence lawyers at of Devry Smith Frank LLP, listed on our website by clicking on their name.

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