Insurer conflict of interest: insurer: appointed counsel removed from the case, replaced by insured’s choice of counsel at insurer’s expense.
Hoang v. Vincentini, 2015 ONCA 780, per Laskin, J.A.
I. FACTS AND ISSUES
The Insured Can Hoang had dropped off his six year old son Christopher Hoang in downtown Toronto. The boy’s hat blew off and he chased it into an intersection, where he was hit by a car driven by the Defendant Vincentini. The son Christopher brought an action against his father and Vincentini (and Ford Credit Canada as Vincentini’s lessor) with respect to injuries.
The father Can Hoang was insured by The Personal, which had him sign a non-waiver agreement, then appointed Flaherty McCarthy to defend as defence counsel. The insurer Personal did not add itself as a third party by order to the action or seek an early determination of the coverage issue, as it could have done.
After a trial by judge and jury, the father was found 100 percent liable. The son was awarded $835,000.00 ($150,000.00 for generals plus $684,228.22 for future care costs). The jury found the insured father liable, particularizing the negligence. All but one of the particulars related to the father’s negligent parental supervision of his son. The father was also found liable for “unsuitable choice of loading area.”
The parties agreed that the claims against the insured father with respect to negligent parental supervision were not covered by the auto policy.
The insurer now faced two actions, one brought by its insured, the father Can Hoang for indemnification, and the other by his Plaintiff son Christopher Hoang for direct payment per s. 258(1) of the Insurance Act, R.S.O. 1980, c. I8. In both claims, the Plaintiffs relied on the jury’s finding of “unsuitable choice of loading area.”
The Plaintiffs appealed the trial decision, asking that liability be apportioned equally between Vincentini and Ford Credit (on one hand) and the insured father (on the other), plus they asked for an increase in the damage award.
Flaherty McCarthy filed a Notice of Cross-Appeal on behalf of the insured father, asking the Court to set aside all particulars of negligence against the insured father and to dismiss the action against him. One of the particulars that it sought to set aside was the jury’s finding of “unsuitable choice of unloading area.”
The insured father and Plaintiff son argued that the jury’s finding of “unsuitable choice of unloading area” put the insurer in a conflict of interest with its insured father or created a reasonable apprehension of conflict. It applied to have Flaherty McCarthy (in the individual defence counsel in that firm) removed as defence counsel for the insured father, to be replaced by counsel of the insured’s choice, at the expense of the insurer.
II. HELD: For the insured father and Plaintiff son; applications granted; insurer-appointed defence counsel to be replaced by new counsel at the insurer’s expense.
1. The Court found three principles apply on the question of insurer-insured conflict of interest:
 In his oral argument, Mr. Adair, counsel for the appellants, set out three principles which he says, and I accept, are relevant on these
motions. They are:
(1) Where a lawyer is appointed by an insurer to defend its insured, the lawyer’s primary duty is to the insured. That is so even though the lawyer is paid by the insurer and the insurer may eventually have to pay the claim against its insured. Deschênes J.A. discussed this principle in Pembridge Insurance Company v. Parlee, 2005 NBCA 49, 253 D.L.R. (4th) 182, at para. 17:
It is now beyond dispute that a lawyer appointed and paid for by an insurer to defend its insured in compliance with the insurer’s contractual duty to defend owes a duty to fully represent and protect the interest of the insured. By doing so, the lawyer, of course, is also acting in the insurer’s interest in the sense that the plaintiff’s claim (a claim that the insurer may eventually have to pay) is being challenged. But, first and foremost, once appointed, the lawyer must represent and act on behalf of the defendant insured with the utmost loyalty and only in the latter’s best interest. No one seriously contends that the lawyer is or should be allowed to take a position contrary to the interests of the insured defendant which he has been appointed to represent. [Citations omitted by the Court].
See also Mallory v. Werkmann Estate, 2015 ONCA 71, 330 O.A.C. 337, at para. 29.
(2) An insurer may be required to relinquish control of the defence and pay for independent counsel retained by its insured only if there is “in the circumstances of the particular case, a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer”: Brockton (Municipality) v. Frank Cowan Co. (2002), 57 O.R. (3d) 447 (C.A.), at para. 43.
(3) Where the insurer has insisted on a reservation of rights or its insured has signed a non-waiver agreement, then a conflict of interest may arise if coverage under the policy turns on the insured’s conduct in the accident giving rise to the litigation. Goudge J.A. discussed this principle in Brockton, at para. 42:
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.
2. The Court held that the potential for conflict between insured and insurer “is exacerbated when the insurer insists on a reservation of rights or when the insured signs a non-waiver agreement, putting in question coverage under the policy” (paragraph 15). It was held that the potential in this case was “especially acute… because coverage under [the insured’s] insurance policy may depend on this court’s view of his conduct at the time of the accident, and because he is the father of the appellant Christopher Hoang.”
3. It was held that “[n]ot every potential conflict between the interest of the insurer and its insured requires the insured to yield the right to control the defence” and that to “require the insurer to yield control, the insured must meet the reasonable apprehension of conflict of interest test.” It was held that in this case the “reasonable apprehension is readily apparently” because “a reasonable bystander might think counsel appointed by the insurer would focus on overturning the one finding for which the insurer could be liable to indemnify the insured and downplay or focus less on the jury’s findings of negligent parental supervision for which the insurer has no obligation to indemnify.”