Chroniques Juridiques

The “Procedural” Obligation to Defend Punitive Damages and an Injunction

Introduction

The Court of Appeal[1] upheld the trial level judgment ordering an insurer, pursuant to a Wellington Application, to defend its insured for the complete claim, including an injunction and the punitive damages which were specifically excluded from coverage.

Facts

The third-party claimant initiated a recourse in damages against the insured of Promutuel Vallée du St-Laurent, société mutuelle d’assurance générale (“Promutuel”). According to the allegations, they had cut his trees, changed the topography of his land and erected a supporting wall. The claim included four items: 1) compensatory damages for the trees lost, 2) an amount in moral damages, 3) an amount in punitive damages under the Tree Protection Act and 4) mandatory conclusions to oblige repairing the damage to the land.

Promutuelagreed to defend the claim for thefirst two items: compensatory damages and moral damages, but refused to defend the claim for the injunction and the punitive damages.

Trial Level Judgment

The first judge, Honourable Pierre Nolet, J.S.C., allowed the Wellington Application, as he considered that, at the step of the obligation to defend, the true nature of the allegations would trigger a possibility of coverage.

As far as the injunction was concerned, Mr. Justice Nolet considered that the procedural vehicle did not change the true nature of the claim, that is, the amount of the corrective work, which ended up being, in his view, compensatory damages in another form. Because the allegations on which the possibility of coverage are based must be broadly interpreted, the first judge ruled that it is accordingly not unreasonable to reach the conclusion that the amount of the repair work is compensatory physical damage.[2]

As far as punitive damages are concerned, the judge was of the opinion that the principles of proportionality and the representation by one advocate ad litem were determining in a context in which the portion of punitive damages was negligible. The judge ruled that the issues of fact and of law and the means of proof were the same for all of the damages.

Even if the first judge ordered Promutuel to defend the entire claim, he left in abeyance the possibility for the sharing of the defence costs which could be itemized for the damages claimed which were excluded from the insurance coverage, such as punitive damages were.

Court of Appeal

The Court[3] dismissed Promutuel’s submissions to the effect that the insurance coverage does not apply to an injunction, as it is only the performance “in kind” of the obligation to pay. Promutuel submitted that it was impossible to have any coverage, as an insurer could not be forced to perform corrective work. If the insured, who was ordered to perform the work, did not do so, the insured could not be ordered to pay the amount of the work, as this would be contempt and an intentional fault, which were excluded from coverage.

The interpretation of the allegations involves determining the true nature of the claim while keeping in mind “the only penalty or conclusion sought.”[4] Considering that the prejudice was already sustained (the trees were cut down, the topography of the land was modified and the supporting wall was erected), the insured already have the obligation to indemnify the third-party. This means that the injunction is only the procedural vehicle and not the legal merits of the right being claimed.

The Court based its conclusion on two sets of facts: 1) no distinct evidence of facts is required and 2) the third-party claimant could have had the work performed and claimed the amount as compensatory damages, which were covered.

Regarding punitive damages, the Court of Appeal agreed with the trial judge and with the insurer that the punitive damages were clearly excluded from coverage. However, in ordering the insurer to defend, the Court based its ruling on the principle that representation by one lawyer is the rule. On the other hand, the insurer’s obligation to defend using two lawyers may be an exception when a complex case is involved or when the insured or the insurer have distinct interests, thereby creating a potential conflict of interest for the lawyer ad litem. As an exception to the exception, meaning even faced with a complex case, the Court may impose resort to only one lawyer when there is one set of facts, of issues and means of proof, subject to allocating the defence costs. As a background, the Court of Appeal ruled that the preservation of judicial resources is the best rule of proportionality for the parties.

What We Learn

The Court of Appeal urges us to do away with not only the terms used in the allegations and conclusions, but also to disregard the procedural vehicle chosen by the third-party claimant to determine the true nature of his claim.

Secondly, to the extent that the obligation to defend is triggered for part of the claim, the question arises as to whether the rule of single representation is unreasonable. This examination must be conducted according to the proportionality rule.

To counter the obligation to defend certain items which are not covered or excluded, an insurer has the burden to establish that their defence will require proof involving distinct facts, which are not related or are barely related to what is covered, that it is more than a minor part of the claim, that it will entail significant costs and create a conflict of interest for the sole lawyer.

Because the decision to impose one lawyer ad litem is part of the trial level discretionary power, it must be proven that there is a palpable and overriding error, according to the standard of review, to appeal that decision.[5]

In the end, it is probably preferable that a civil liability insurer retain a lawyer for the complete claim and reach an agreement with the insured about sharing the defence costs.


[1] Promutuel Vallée du St-Laurent, société mutuelle d’assurance générale v. Noyrigat-Gleye, 2024 QCCA 447 (Schrager, Gagné and Moore, sitting.)

[2] 2024 QCCA 447, para. 8.

[3] Reasons by Honorable Benoît Moore.

[4] 2024 QCCA 447, para. 17.

[5] Permission d’appel accordée : Promutuel Vallée du St-Laurent, société mutuelle d’assurance générale c. Noyrigat-Gleye, 2023 QCCA 683.