Coverage Denial Claims: Special Costs And Second Thoughts
If a policy holder sues its insurer for legal defence coverage and is successful, the Supreme Court of British Columbia has recently ruled that the policy holder is entitled to special costs (actual legal costs), rather than the usual lower tariff costs (a fraction of legal costs). With this new law in place, insurance companies should now be reviewing their approach to, and guidelines for, coverage denials.
Williams v. Canales, 2016 BCSC 1811, involved a personal injury claim by Klaudia Williams against her personal trainer (“Ms. Canales”), Amazing Personal Training Studio (“APT”), APT’s principal (“Mr. Weltman”) and Arbutus Village Holdings, the owner of the training studio premises.
Luckily, APT, Mr. Weltman and Arbutus Village Holdings (the “Insureds”) had purchased liability insurance from Intact Insurance Company (“Intact”), to protect them from the risks of liabilities imposed by lawsuits and similar claims. Like most liability policies, the Insureds had transferred to Intact both the right and the duty to conduct the defence of the Insureds in the event that a claim were to materialize. In other words, if Ms. Williams’ claim fell within the coverage of the policy, Intact would have had a duty to hire and pay for lawyers to defend the Insureds from that claim.
Intact chose to deny coverage based on an exclusion clause in the policy and so declined to defend the Insureds. The Insureds sued Intact by adding it as a third party, seeking a declaration that Intact was obligated to defend the Insureds against Ms. Williams. The Insureds also sought reimbursement for defence costs.
The Insureds were successful in their claims against Intact and they subsequently brought an application for special costs.
Special costs (or solicitor-and-client costs) are meant to provide a successful party in litigation with indemnity for all legal expenses reasonably incurred. Special costs are generally ordered against a party who has engaged in outrageous, scandalous or reprehensible conduct deserving of rebuke from the Court (Garcia v Crestbrook Forest Industries Ltd (1994), 45 BCAC 222, BCJ No 2486, 41 CPC (3d) 298, at para 17). Unlike standard tariff costs (or party-and-party costs), which only compensate the successful party for a fraction of their fees and disbursements, special costs are higher and approximate actual legal fees.
In Williams, the Court noted:
 […] special costs are not limited to cases involving reprehensible conduct by an unsuccessful party that is deserving of reproof or rebuke, although it is perhaps the most common basis. Two obvious exceptions are cases involving exceptional matters of public importance (see Carter v. Canada (Attorney General), 2015 SCC 5,  1 SCR 331) and cases involving certain types of estate and trust litigation. Intact’s generalized submission on this point is therefore incorrect.
The Insureds argued that in other jurisdictions it was settled law that, where an insurer has failed to provide a defence to its insured that requires the insured to bring proceedings to enforce the insurer’s obligations, the court will award the insured a complete indemnity for defence expenses already incurred and the expense of enforcing compliance with the policy terms.
Although the Court found no evidence of reprehensible conduct on the part of Intact, it awarded special costs to the Insureds, relying on the Ontario Court of Appeal in E.M. v. Reed (2003), 49 CCLI (3d) 57, 171 OAC 145, which held:
 Entitlement to solicitor-and-client costs in the third party proceeding flows directly from the unique nature of the insurance contract which entails a duty to defend at no expense to the insured. The obligation to save harmless the insured from the costs of defending the action is sufficiently broad to encompass the third party proceedings. It is the contractual basis for the claim to solicitor-and-client costs that justifies the award and therefore constitutes an exception to the usual rule that solicitor-and-client costs will not be awarded except in unusual circumstances. (Emphasis added.)
Impact on Insurers and Consumers
With this new expectation that insureds who successfully bring denial of coverage claims relating to the defence of a lawsuit will be awarded special costs, the increase in risk may cause insurers to:
- deny fewer claims;
- increase reserves when defending coverage denial claims; and
- charge higher premiums.