In West Van Holding Ltd. v. Economical Mutual Insurance Company, 2019 BCCA 110, the Court of Appeal clarified the factors relevant to assessing costs when an insured succeeds in an action against its insurer to enforce a duty to defend.
In that case, the Court of Appeal overturned the Chambers judge’s order, finding that the appellant insurers did not have a duty to defend their insureds in an underlying action for environmental contamination. In doing so, the Appeals Court not only overturned the costs award which had been made against the insurers but also chose to address the costs issue on its merits and provide guidance on how to approach the costs issue in such cases.
The Decision Below
In a summary trial decision, the Chambers judge found that the defendant insurers owed the plaintiffs a duty to defend them and awarded them costs on a full indemnity basis. In deciding to award special costs against the defendant insurers, the Supreme Court relied on Co-operators General Insurance Company v. Kane, 2017 BCSC 1720 (“Kane”), which cited two other British Columbia cases, as well as additional authorities from across Canada.
The Chambers judge found that she was bound by judicial comity to follow Kane, which set out the principle at para. 89, that:
“…where the policy intended full indemnity in relation to defence costs, it follows that any expenditure by the insured in enforcing that objective would, if successful, be followed by a costs award that similarly achieved that objective.”
Notably, the Supreme Court found that the insurers had not engaged in reprehensible conduct, but that it was not necessary for them to have done so for the plaintiffs to be entitled to special costs.
The Court of Appeal noted the distinction between special costs and full indemnity costs. While the Rules allow for special costs, there is no provision for full indemnity or solicitor-and-own-client costs. It found that Kane did not set out a principled basis upon which to levy an award for full indemnity costs. The Court then looked at jurisprudence from other provinces to determine whether there was a principled basis for awarding special costs, or even full indemnity, against an insurer where there has not also been conduct deserving of rebuke. One such basis, which has been relied upon in Ontario and Newfoundland, is that the very nature of a contract of insurance containing a duty to defend obliges the insurer to pay full indemnity costs if it is unsuccessful in resisting a claim for a defence under the policy.
However, the Court of Appeal declined to find that the mere existence of an insurance contract requires an insurer to fully indemnify an insured who successfully enforces coverage. Instead, it turned to the specific policy language at issue. Neither of the appellants’ policies included an express provision on payment of costs in an action to enforce coverage. The Court of Appeal concluded that the policy terms were meticulously drafted, and that such an implied term was not required to give business efficacy to the insurance contracts. As a result, the Court of Appeal concluded that there was no contractual basis upon which to find a term, express or implied, that the insurers would pay special costs if they were unsuccessful in resisting a claim under the policies.
The Court of Appeal also rejected a premises adopted in other provinces: that a special costs regime is triggered by the unique relationship between the parties, in particular, the duty of overriding good faith owed by an insurer to an insured. The Appeals Court instead concluded that where there is a dispute in which an insurer wrongly denies a duty to defend, the insurer should not be treated any differently than any other defendant which finds itself on the wrong end of a breach of contract claim. Absent reprehensible conduct, such as a breach of the duty of good faith, there is no principled basis for additional sanctions against that insurer.
This case should come as welcome news to insurers who, when faced with a challenging decision as to whether a duty to defend arises, are no longer automatically facing an award of special costs / full indemnity costs if the Court finds against them. It also highlights the importance to insurers of having clear policy language that cannot be interpreted to provide special costs or full indemnity for legal fees and expenses that an insured incurs while seeking to enforce a duty to defend against its insurer.