In a recent decision, Desjardins Assurances Générales c. Arseneault Toitures Inc. et Compagnie d’assurance AIG du Canada, 2024 QCCS 4894, the Court granted a Wellington motion and allowed the insured to select its defence counsel, contrary to the general rule providing that the choice of counsel lies with the insurer where the duty to defend is triggered.
This matter is a good example of the conflicts that can arise between an insurer’s coverage position and the defence of its insured. It also demonstrates the importance for the insurer of not raising an exclusion or formal warranty too early, as doing so may, in certain circumstances, result in the loss of its right to appoint its preferred counsel.
The Facts
On July 9, 2020, a fire occurred in a building insured by Desjardins General Insurance Inc. (“Desjardins”) during roof renovation work. After it indemnified its insured, Desjardins instituted subrogation proceedings against Arseneault Toitures inc (“Arseneault“), the roofing contractor who performed the work. It was alleged that the fire resulted from Arseneault’s negligence, which was covered under a civil liability insurance policy issued by AIG Insurance Company of Canada (“AIG“). AIG was also sued by Desjardins as a co-defendant.
AIG initially took up Arseneault’s defence. However, further to the pre-trial examination of an Arseneault employee and the filing of the local Fire Department’s intervention report, AIG advised Arseneault that it would not continue to take up its defence because it had not complied with the conditions set out in Endorsement No. 8 concerning the performance of the roofing work. Simultaneously, AIG filed a statement of defence in which it argued that it could not be held liable considering the application of Endorsement No. 8.
Arseneault therefore filed a Wellington motion to compel AIG to take up its defence. In addition, Arseneault asked that it be allowed to select counsel of its choice at the expense of AIG considering its about-face on the duty to defend.
The Analysis
The Court’s analysis focused on two distinct questions: (1) Does AIG have a duty to defend Arseneault? and (2) In the affirmative, can Arseneault select its preferred counsel to represent it at AIG’s expense?
a) The Duty to Defend
The principles applicable to the duty to defend are well established. This duty is triggered when proceedings give rise to a mere possibility that the claim may eventually result in a judgment covered by the insurance policy. Any ambiguity or doubt in this respect will be sufficient to trigger the duty to defend. The analysis must be based on the allegations of the originating proceeding and the exhibits appended thereto.
In this case, the Court concluded that the proceedings against Arseneault fell within the scope of the policy’s insuring agreement, which was implicitly acknowledged by AIG when it first agreed to take up the defence. Since this condition was met, AIG had the burden to demonstrate that an exclusion clause clearly and unambiguously applied to the claim, such that there was no possibility of indemnity under the insurance policy.
AIG relied on Endorsement No. 8 applicable to roofing work, which notably stipulated as follows: “during membrane installation work by hot air welding, […] a competent person must remain on site at the end of the work […] for a period of at least sixty (60) minutes further to the last application of heat at all locations where hot air welding wastaking place, with a hand-held infrared thermometer designed for this purpose to detect areas of excessive heat on the roof” [our translation of the original French].
AIG’s position was based on the pre-trial examination of an Arseneault employee, who could not remember whether a propane torch had been used, whether he had remained on site for one hour after the work was completed, and if the required temperature readings had been taken in accordance with Endorsement No. 8. In a letter dated May 22, 2024, AIG denied coverage based on this pre-trial examination, arguing that “the conditions of endorsement no. 8 were not complied with, which now renders the coverage null and void, despite the occurrence of the loss” [our translation of the original French].
The Court concluded that AIG’s position was premature as it was based on the lack of recollection of the Arseneault employee during his pre-trial examination. The employee did not confirm that there had been a lack of supervision or compliance with the conditions set out in Endorsement No. 8 but rather indicated that he had no recollection thereof. The probative value of this testimony remains to be assessed by the Court further to a full trial based on the evidence presented by both parties.
In view of the foregoing, the Court found that AIG failed to demonstrate that Endorsement No. 8 applied in a clear and unambiguous manner. The Wellington motion filed by Arseneault was therefore granted.
b) The Selection of Counsel
The second issue raised by this matter is more complex. In most cases, the insurer obliged to defend can choose counsel who will defend the insured. Nonetheless, Arseneault argued that the relationship of trust was broken with the lawyer initially chosen by AIG and that it was therefore entitled to choose its own counsel.
The Court referred to an exhaustive review of the case law on the selection of counsel taken from the decision Aviva Insurance Company of Canada v. Construction et pavage Dujour ltée (“Dujour”).[1] To benefit from the right to select counsel, it is insufficient for the insured to argue that the insurer relied on incorrect grounds to deny the duty to defend. Rather, the insured must prove that it can no longer trust the defence strategy of the counsel selected by the insurer based on the circumstances. The circumstances where the insured was allowed to select counsel include, but are not limited to: doubts arising from the conduct of the counsel selected by the insurer, the confusion of the roles between defence counsel and coverage counsel, the incompatibility of the mandate or instructions received from the insurer and the interests of the insured, or the premature refusal of the insurer to take up the defence of the insured based on intentional fault.
In the Dujour decision, for instance, the insurer denied coverage based on its investigation of the insured for several months before the lawsuit was filed. The Court’s reasoning in that case is helpful: the insurer did not tell the insured “We are denying coverage because what is alleged against you appears to be excluded from the policy” [our translation of the original French]. It rather said “We are denying coverage because, having investigated this matter, we have found that the damages incurred are excluded” [our translation of the original French]. The Court therefore allowed the insured to select its defence counsel after it found that the duty to defend was triggered.
The Court applied the reasons of the Dujour decision to the Arseneault matter. It found that AIG’s refusal to take up the defence of the insured did not result from an incorrect interpretation of the allegations of the proceedings or the exhibits in support thereof. Instead, AIG revised its coverage position after partial evidence was provided through the pre-trial examination of the Arseneault employee and after AIG drew conclusions on the probative value of this testimony.
Further, the Court highlighted that AIG had filed a statement of defence asserting the fault and negligence of Arsenault because it failed to comply with the conditions of Endorsement No. 8.
Therefore, the Court concluded that the fears and breach of trust between Arseneault and the counsel selected and paid by AIG were well founded. In those circumstances, the Court allowed Arseneault to retain its own counsel at AIG’s expense.
Takeaway
This matter gave rise to an interesting decision as to the specific circumstances where an insured may select defence counsel even though the insurer’s duty to defend is triggered.
It must be stressed, however, that the choice of counsel typically remains with the insurer when the duty to defend is triggered. This principle applies even when the refusal to take up the defence of the insured results from an erroneous review of the pleadings or an incorrect interpretation of the insurance policy.
In this case, the insurer’s decisions to review its initial position based on partial evidence and to file a statement of defence contrary to the insured’s interests were decisive.
[1] 2015 QCCS 4173
