Where the conduct of the insureds was in issue in the underlying actions and with respect to coverage under the policy, policy limits covered only 5% of a multi-million dollar claim and an acrimonious relationship existed between the insureds and the insurer, the Court directed that the insureds had the right to control the defence, with counsel of their choice, funded by the insurers.
Temple Insurance Company v. Sazwan, 2018 ABQB 156, per Belzil, J. 
FACTS AND ISSUES:
The insureds Sazwans were being sued in two actions for which they claim insurance coverage. They were sued by Tiger Calcium Services Inc. with respect to the sale of shares in a company the Sazwans owned 100% of the share in (Smokey Creek Ranch Ltd.), which was also a named defendant. It was alleged that the insured has misrepresented material facts engaged in fraud. They are alleged “to have intentionally breached agreements, conducting themselves dishonestly and fraudulently, conspired to interfere with contractual relations and acted deceitfully” (paragraph 34).
The insured reported the Underlying Action to their insurance broker in February 2017. By that point in time, approximately $500,000 had been incurred in legal fees and disbursements for the defence of the Sazwans and Smoky Creek. The second action (the Warranty Action) was commenced against the insureds and Smoky Creek in July 2017, with respect to the same matters.
The insureds had coverage from the Respondent insurers which provided for 10 million dollars in limits, with a sub limit of two million dollars for defence costs.
The insurers issued a Reservation of Rights letter, and an Amended Reservation of Rights letter, indicating that the policy did not provide coverage for Smoky Creek (other than for defence costs) and that there was coverage available for some, but not all, of the claims in the Underlying and Warranty Actions. The amount of the claims was in excess of 136 million dollars, which was approximately 5% of the amount claimed in the Underlying and Warranty Actions.
The insurers brought an Originating Application seeking a declaration that the right and duty to defend the insureds in the Underlying and Warranty Actions rested with the insurers, that the insureds must relinquish their defence of same, and that the insurers would not be responsible for legal expenses incurred by the insureds to that date. The insureds brought a Cross Application seeking a declaration that they be entitled to take over the control of the defence of the Actions with counsel of their choosing at the insurer's expense, arguing that there was a conflict of interest between the insureds and the insurers.
At some point, the insurers proposed a compromise whereby both the insureds and the insurers would agree on independent counsel to be jointly instructed by both sides. This was rejected by the insureds. The insureds made a counterproposal that the act should be defended by way of co-counsel with the insureds counsel and the insurer’s counsel participating. This was rejected by the insurance.
The insureds filed an Affidavit indicating that they did not feel that they would be best served by the insurers controlling the defence “after such an acrimonious start to [their] working relationship”
By agreement, this decision dealt only with the issue of who should control the defence, with both sides reserving the right to present further argument on the issue of responsibility for defence costs to date and on payment of defence costs.
HELD: For the Insureds; Declaration issued that the insureds were entitled to control the defence through their choice of counsel at the insurers’ expense.
Court held that in some circumstances where there is a conflict of interest between the insurer and the insured, the court may rewrite the policy to permit the insured to assume responsibility for the defence at the expense of the insurer.
a. The Court held as follows:
 In the jurisprudence, it is recognized that in circumstances, wherein there is a divergence of interests between the insurer and the insured, the court may in effect rewrite the terms of the policy to permit the insured to assume responsibility for the defence of the action, at the expense of the insurer.
 In Reeb v The Guarantee Company of North America, 2017 ONCA 771 (CanLII), the following appears at para 13:
13 When a lawyer is retained by an insurance company to represent its insured, a conflict of interest may arise where the interests of the insurance company and the insured are not in alignment. In her text, Understanding Lawyers' Ethics in Canada, 2d ed. (Markham: LexisNexis Canada Inc., 2016), at para. 6.87, p. 272, Alice Woolley concisely frames the conflict of interest question in the context of the tension between the insurance company's contractual rights and the insured's interests to full and fair representation, as follows:
While courts have generally been deferential to the contractual rights of insurance companies in this respect, courts have also held that a lawyer "owes a duty to fully represent and protect the interest of the insured" and have required that the insured has obtained independent counsel where there is "a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer".
b. The Court held that in such issues, the Court is to “strike a balance between a legitimate interest in both the insured and the insurer”: PCL Constructors Canada v. Lumbermans Casualty Company, 2009 CanLII 32915 (ONSC); Zurich of Canada v. Renaud & Jacob, 1996 CanLII 5801 (QCCA); Brockton (Municipality) v. Frank Cowan Co., 2002 CanLII 7392 (ONCA) (at paragraphs 28 – 3).
c. The Court held that finding an apprehension of a conflict of interest between the insurer and the insured “does not equate to impugning the integrity of counsel chosen by the insurer” because the test has to do with “a reasonable apprehension of a conflict of interest” and not an actual conflict: Hoang v. Vincentini, 2015 ONCA 780 (paragraph 31).
d. The Court emphasized that the mere fact that an insurer issues a Reservation of Rights letter is insufficient, in and of itself, to support the necessary conflict of interest between an insurer and the insured so as to require the insurer to pay for the insured to control the defence at the insurer’s expense:
 This reasoning was adopted by the Ontario Court of Appeal in Brockton (Municipality) v Frank Cowan Co, 2002 CanLII 7392 (ON CA), 2002 OJ No 20, wherein the following passages appear at paras 41-43:
 LeBel J.A. [in Zurich] concluded that the potential tension which inheres in the relationship between the insurer and the insured and which is manifested by the reservation of rights by the insurer is not per se sufficient to require the insurer to surrender control of the defence. It would too quickly cost the insurer the right it contracted for. Rather, the focus must be on the mandate given by the insurer to the counsel it appoints to conduct the defence. Do the circumstances of the particular case create a reasonable apprehension of conflict of interest if that counsel were to act for both the insurer and the insured in defending the action? If the insurer puts counsel in a position of having conflicting mandates it must surrender control of the defence to an insured who wishes to retain its own counsel paid for by the insurer.
 In coming to this conclusion, LeBel J.A. noted that American jurisprudence had moved towards a similar position and away from the broader basis for shifting control of the defence to the insured that was articulated in Cumis. For example, after Cumis, in Foremost Insurance Co. v. Wilks, 253 Cal. Rptr. 596, (1988), the California Court of Appeal made clear that not every case where the insurer elects to defend the insured under a reservation of rights creates a conflict of interest requiring the insurer to furnish independent counsel. If the reservation of rights arises because of coverage questions which depend upon an aspect of the insured's own conduct that is in issue in the underlying litigation, a conflict exists. On the other hand, where the reservation of rights is based on coverage disputes which have nothing to do with the issues being litigated in the underlying action, there is no conflict of interest requiring independent counsel paid for by the insurer.
 I agree with the approach taken in Zurich and Foremost. The issue is the degree of divergence of interest that must exist before the insurer can be required to surrender control of the defence and pay for counsel retained by the insured. The balance is between the insured's right to a full and fair defence of the civil action against it and the insurer's right to control that defence because of its potential ultimate obligation to indemnify. In my view, that balance is appropriately struck by requiring that there be, in the circumstances of the particular case, a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer before the insured is entitled to independent counsel at the insurer's expense. The question is whether counsel's mandate from the insurer can reasonably be said to conflict with his mandate to defend the insured in the civil action. Until that point is reached, the insured's right to a defence and the insurer's right to control that defence can satisfactorily co-exist.
e. The Court concluded by indicating that “the focus of the inquiry is whether the Insureds' own conduct is an issue in the actions being advanced against them” (paragraph 32).
The Court concluded that there was a reasonable apprehension of conflict of interest between insurers and insureds, so as to allow the insureds to control the defence through their own counsel at the expense of the insurers.
a. The Court held that “[i]t is uncontroverted, that the conduct of the Sazwans is squarely an issue in both the Underlying and Warranty Actions" and was “at the core of many of the allegations”:
 I have concluded that in the circumstances of the Underlying and Warranty actions, there is a reasonable apprehension of conflict of interest between the Insurers request to take over the defence and the request by the Sazwans to conduct their own defence at the expense of the Insurers.
 I have reached this conclusion for three reasons.
 Firstly, the conduct of the Sazwans is squarely in issue in the pleadings in both actions and thus squarely in issue in terms of what claims are entitled to indemnity under the policy and which are not.
 Secondly, the claims being advanced are grossly in excess of the policy limits, leaving the Sazwans exposed personally to enormous claims.
 Thirdly, on the evidentiary record before me, the relationship between the Insurers and the Sazwans is at best extremely strained and at worst, irretrievably broken. At this point there is no reasonable prospect that the Insurers and the Sazwans will ever trust each other. This is a formula for more conflict in the future which is not in the best interests of the Insurers, the Sazwans or the administration of justice.
 In reaching this conclusion, I am not blaming any individual or entity for the breakdown of the relationship. Rather, I am merely identifying the reality of the dispute before me which has developed since the commencement of the Underlying action on December 1, 2016.
 I have no hesitation in concluding that all parties involved, including insurance company personnel, the Sazwans and counsel have acted honestly and in good faith.