Insurer tries to shirk duty

Insurance companies required to defend policyholders regardless if policy limits exhausted

BY ALAN SHANOFF, TORONTO SUN

FIRST POSTED SATURDAY, MARCH 30, 2013 06:40 PM EDT

It’s just amazing the extent to which an insurer may go in an attempt to prevent having to fulfill its obligations to policy holders.

Just ask one Vishal Malaviya, who had the misfortune to have been in a collision on October 14, 2005 and was subsequently sued by the occupant of the other car.

As required by law, Malaviya had purchased car insurance, although he had only purchased the minimum liability limit of $200,000. But with that liability coverage also came a promise to defend lawsuits commenced against him arising out of his ownership, use or operation of his car.

At least that’s what any reasonable person who had taken the time to read his car insurance policy would have thought. It’s right in section 3.3.1 of the policy language, language which has been approved by Ontario’s Superintendent of Financial Services.

That section explicitly states: “If someone sues you or other insured persons insured by this Section for losses suffered in an automobile incident, we will provide a defence and cover the costs of that defence, including investigation costs.” But, this clear language is countered by other language in the policy which Justice E.M. Morgan of the Ontario Superior Court described as “muddled and contradictory,” potentially leaving a loophole for an insurance company or its lawyers to take.

Malaviya’s insurer, Jevco Insurance Company, saw that potential loophole and tried to take advantage of it.

Here’s what they did. Even though there hadn’t been a trial or any determination of liability they decided to pay the plaintiff the full amount of the liability coverage, namely $200,000. Having paid out the policy limits, Jevco took the position that they were no longer required to defend Malaviya’s lawsuit. After all, they no longer had a financial stake in the litigation, having already paid out their maximum policy limit of $200,000.

Too bad for Malaviya, who would now have to retain and pay for his own lawyer to defend the lawsuit and so much for the promise to defend any lawsuits.

Brilliant manoeuvre

It seemed like a brilliant manoeuvre. If the plaintiff recovered more than $200,000 then Malaviya would be on the hook for any excess sum, but if the plaintiff recovered less than $200,000 Jevco could claim back the difference between the $200,000 it had paid and the actual amount recovered by the plaintiff. So what if this fancy footwork would render meaningless the insurer’s duty to defend and put Malaviya on the hook for one huge legal bill.

But, earlier this year, Justice Morgan quickly put the kibosh to this tactic. Relying on the unequivocal language of the insurance legislation he pointed out that the obligation to defend a policyholder’s lawsuit is clear and unqualified. An insurance company is required to defend the policyholder regardless of whether the policy limits have been exhausted. Providing a defence and coverage of defence legal costs is mandatory, even if the wording of the policy is muddled and contradictory.

Any other result would have put all policyholders at the mercy of their insurance companies who could tender their policy limits and avoid having to pay the costs of defending lawsuits. It would have destroyed the peace of mind policyholders are entitled to have knowing that if sued they will be defended by their insurers.

Of course, the result does leave Malaviya in an odd situation. He now faces being defended by an insurance company with no real vested interest in the lawsuit. What’s to stop Jevco from instructing its lawyers to settle quickly or not defend vigorously, leaving Malaviya with a large judgment to pay?

If that were to happen then Malaviya could sue Jevco for bad faith conduct or the lawyer it appointed for negligence.

But then I’d have another column to write.