Blue Mountain Log Sales Ltd. v. Lloyd’s Underwriters, 2017 BCSC 1872

The duty to defend is not limited by the requisite elements of a cause of action

When deciding whether an insurer owes a duty to defend an action, the courts will take an expansive approach based on the “mere possibility” that a claim falls within an insurance policy. Recently, in Blue Mountain Log Sales Ltd. v. Lloyd’s Underwriters, 2017 BCSC 1872, the British Columbia Supreme Court declared that the petitioners’ insurer owed a duty to defend an action commenced in the Superior Court of Washington State. The Court further declared that the insurer was obligated to indemnify the petitioners for any reasonable post-tender defense costs incurred in the action.

In the underlying Washington action, the plaintiffs—four related companies incorporated in British Columbia to carry on business in Washington State—allege that the petitioners engaged in unfair competition by misappropriating its trade secrets to create a product for treating roofing materials. The plaintiffs further allege the petitioners misrepresented to the public, through advertising, that the product was both proprietary and identical to the plaintiffs’ product, to make money.

As part of a Commercial general liability policy with an advertising liability clause, the insurer agreed to provide coverage to the petitioners for all sums the petitioners became legally obligated to pay as damages flowing from advertising activities. Whether the insurer owed a duty to defend the Washington action became an issue in the proceedings when the precise nature of the claim advanced by the plaintiffs was rendered unclear by an amendment to the pleadings.

At a certain point in the proceedings, the Complaint, which, like a Notice of Civil Claim, sets out the causes of the Washington action, was amended to remove certain allegations relating to false, misleading, or deceptive representations to the public and government regulators. However, the Complaint continued to advance a claim for unfair competition involving disclosure of trade secrets through promotion, advertising, and sales of the misappropriated product. Further, it claimed in damages “all revenue” obtained from the use and disclosure of the plaintiffs’ trade secrets.

After the Complaint was amended, the insurer informed the plaintiffs it had no further duty to defend the claim. It was of the view that coverage could not be invoked because advertising is not an essential part of proving unfair competition under the relevant legislation. The judge disagreed and found that, in the circumstances, the advertising activities were central and not coincidental to the plaintiffs’ claim.

In reaching his conclusions on the duty to defend, the judge reiterated the following principles:

(a)          an insurer’s duty arises from the obligation to provide indemnity for covered claims;

(b)          the duty to defend is related to the scope of coverage afforded under an insuring policy;

(c)          the scope of coverage is determined by comparing the claim as set out in the pleadings with the wording of the coverage policy; and

(d)          the insurer’s view of the nature or merit of the claim does not factor into whether a duty exists.

Based on these principles, he found the claim included allegations that the petitioners engaged in unfair competition first, by stealing the plaintiff’s trade secrets, and second, by endeavouring to make money through its advertising activities. He declared the insurer is obliged to defend the petitioners and awarded the petitioners special costs.

This case makes it clear that the requisite elements of a cause of action do not dictate whether a duty to defend exists; rather, insurers must consider the nature of the claim as alleged in the pleadings and compare that claim with the specific words of the insuring policy. Further, this case suggests that if an insurer wishes to limit coverage to specific causes of action, the policy must be worded accordingly. Ultimately, whether a duty to defend exists will depend on whether there is a mere possibility that coverage exists if the facts, as pleaded, are true.

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