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Costs Consequences of Wrongful Denial of Coverage by Insurer

In its recent decision in Williams v. Canales 2016 BCSC 1811, the BC Supreme Court held that the costs payable by an insurer who wrongfully denies coverage to its insured are on a special costs basis. In that case, the insurer, Intact, denied coverage to the insured who were defendants in a personal injury action. The insured commenced third party proceedings against Intact and the insurance brokers. The insured obtained judgment against Intact on the coverage issue on a summary trial application and subsequently made an application for special costs.

The law with respect to this question had not been established in BC prior to this case. Citing appellate decisions from Ontario, New Brunswick, and Newfoundland, the insured successfully argued that modern jurisprudence was in favour of awarding special costs in favour of insured who are successful in coverage actions.

The court rejected the proposition that special costs were limited to cases involving reprehensible conduct by the unsuccessful party. After referring to two exceptions to the “usual rule” regarding special costs, the court effectively created an additional exception for cases of unlawful denial of coverage by an insurer. The decision does not contain a detailed discussion of the reason for creating such an exception, but it indicates that the basis for entitlement to solicitor-and-client costs is contractual, flowing from the “unique nature of the insurance contract which entails a duty to defend at no expense to the insured.”

The court awarded special costs in favour of the insured for both the third party proceedings and defence expenses in the personal injury action already incurred by the insured. The court also awarded party and party costs in favour of the brokers for the third party proceedings.

Clearly this decision has significant implications for insurers. When a denial decision is made, it is advisable for insurers to consider taking proactive steps at the outset, including coverage petitions.

Case summary by Nazanin Aram