Insurers Have to Explain the Basis For Denial of Coverage; But What About Privilege?

Article by Sudevi Mukherjee-Gothi

Torkin Manes LLP

In the July 29th, 2015 decision in Lica v. Dhaliwal, Price J ordered that State Farm, the insurer of the Defendants provide the reasons and basis for the denial of coverage. State Farm insured the Defendants in this action. However, State Farm denied coverage and added itself as a statutory third party in the action. However, State Farm did not provide detailed reasons for the denial of coverage. The Court was to determine the following issues:

  1. Are the Plaintiff’s questions to State Farm relevant to the action
  2. Is State Farm required to answer the Plaintiff’s questions
  3. Is State Farm required to deliver an affidavit of documents

The Plaintiff brought a motion stating he required State Farm’s reasons for denial:

  1. To enable him to claim underinsurance coverage from his own insurer Intact Insurance Company pursuant to the OPCF 44R endorsement to his insurance policy from Intact
  2. For Intact to assess its potential liability and make an informed decision re: reserves in relation to this action

The Plaintiff had asked questions via written interrogatories regarding the denial of coverage by State Farm, which State Farm refused to answer.

The Plaintiff was involved in a motor vehicle accident on March 7th, 2011 and alleges that the Defendants’ vehicle T-boned his vehicle. The Defendants did not defend the action and were noted in default.

State Farm denied coverage for the following reasons:

  1. A material representation
  2. Lack of cooperation by the Defendants

When State Farm was added as a Statutory Third Party, the coverage applicable was reduced to $200,000.00, the statutory minimum. When State Farm denied coverage, the Plaintiff amended the Statement of Claim to add his own insurer Intact. Intact’s position was that it would be liable only if the Plaintiff’s claim exceed State Farm’s policy limits. Intact sent a letter to State Farm’s lawyer confirming that the underinsured coverage would not be triggered until there was a legal determination confirming State Farm’s denial of coverage and reduced policy limits.

The examination for discovery of State Farm was scheduled but the State Farm representative did not attend. State Farm refused to answer the written interrogatories that dealt with the denial of coverage to its insured. State Farm relied on the 2010 decision in Ahmed v. Maharaj. Which stated:

“as a general rule, issues of liability and insurance coverage therefore are to be kept separate (see:Gordon v. Pendleton, O.J. No. 3664) ….[a]ccordingly, an insurer added as a statutory third party should not be required to define or explain its position regarding any coverage issues in examination for discovery by other parties to the proceedings.”

Price J then examined the applicable rules in the Rules of Civil Procedure

Rule 31.06 (4) and (5) govern the scope of examination of a party in relation to an insurance policy. Those sub-rules provide:

31.06 (4) A party may on an examination for discovery obtain disclosure of,

(a) the existence and contents of any insurance policy under which an insurer may be liable to satisfy all or part of a judgment in the action or to indemnify or reimburse a party for money paid in satisfaction of all or part of the judgment; and

(b) the amount of money available under the policy, and any conditions affecting its availability.

(5) No information concerning the insurance policy is admissible in evidence unless it is relevant to an issue in the action.[14]

Price J held that

Mr. Lica can access his insurance coverage under his OPCF 44R endorsement only if it is determined that State Farm was legally justified in denying coverage to its insured. State Farm’s refusal to answer the questions it was asked in this regard prevents the court from making this determination, and may affect Mr. Lica’s ability to be fully compensated for the losses he says he has suffered.

Most of the questions that State Farm has refused to answer are based on documents that it listed in Schedule “A” of its draft affidavit of documents. By listing these documents in Schedule “A”, State Farm acknowledges that the documents, and the subject matter to which they pertain, are relevant to the action.

Price J. then considered the Court of Appeal’s decision from 2011 in Maccaroni v. Kelly.

The Court of Appeal in Maccaroni held that it is not sufficient for a statutory third party to allege a breach of the conditions of its policy to reduce the limits of coverage available to pay third party claimants. That is, the court requires more than the statutory third party’s “say-so” to determine whether the limits of its liability are “reduced by operation of law”. [20] The court held that the words “by operation of law” in the OPCF 44R endorsement must have some meaning beyond a liability insurer merely denying coverage and settling on this basis. The third party liability coverage is intended as first-loss insurance, and the OPCF 44R as excess coverage. There must, therefore, be a legal determination that the third party liability coverage has been limited before the OPCF 44R excess coverage becomes available.[

Furthermore, based on Maccaroni, it was determined that since State Farm is a party to the action, it must be assumed that a statutory third party is required to answer relevant question as to its denial of coverage.

Price J further held that

Based on the foregoing, I conclude that where coverage has been denied, the court should determine whether an insurer must disclose the information and documents relating to its decision on a case by case basis, having regard to whether the documents are relevant, whether their disclosure at this time would cause prejudice, whether they are protected by litigation privilege and whether that privilege, if it exists, has been waived.

Information as to “material misrepresentation and lack of cooperation” may or may not affect Mr. Lica’s third party claim, and may or may not prejudice Mr. Dhaliwal and Mr. Nur in their defence, or involve litigation privilege. If State Farm has concerns in these respects, it is incumbent on it to submit an answer-by-answer analysis, so that the court can determine the relevance of the evidence for Mr. Lica and Intact against, the potential prejudice to Mr. Dhaliwal and Mr. Nur, and any claims of privilege. A hypothetical prejudice to State Farm’s insured does not justify a wholesale refusal by State Farm to answer the questions put to it.

In his order, Price J did state that if State Farm was of the opinion that the answers to the interrogatories may prejudice the defence of the Defendants or raise an issue of prejudice, then it may seal its answers and tender them to the Court for review, with a letter outlining specific concerns. Accordingly, the relief sought was granted.

Price J recognized the issue of privilege and provided a way to protect any allegations of privilege. However, simply asserting privilege is not going to allow an insurer “an out” to explain the basis for its denial of coverage in this context.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

B.C. judge rules insurance company must pay out owner for marijuana grow-op destroyed by arson

By Cam Fortems, Kamloops This Week


KAMLOOPS, B.C.  – An insurance company must pay a homeowner for the loss of a house and its contents in an arson following an RCMP raid of a marijuana grow operation, a judge has ruled.

Wawanesa Insurance Co. denied benefits to Steven Davidson, arguing he knew about the grow-op in the basement of his house.

However, B.C. Supreme Court Justice Shelley Fitzpatrick ordered Wawanesa to pay Davidson, who represented himself at the trial, $215,000.

The remaining amount of $211,000 for the loss was paid to a bank that had a mortgage on the house.

During the raid, in April 2010, police found more than 600 plants, property they believed was stolen, and illegal firearms.

The next day, the house was destroyed in an arson.

At the time, Davidson was working as a contractor setting up illegal grow operations near 100 Mile House.

Court heard he has a dated criminal record for forgery and possession of stolen property.

Davidson was on bail for assaulting his wife, though charges were later dropped, and banned as part of a court order from being within 100 metres of his house, where she lived.

He argued that since he was working away from Kamloops, and banned from being at the home, he did not know about the grow-op.

While Davidson did make a visit to his house anyway, he testified that he did not notice a basement door drywalled shut and painted over.

“This is a case close to the line,” Fitzpatrick said in her ruling.

“But, I accept the evidence of Mr. Davidson and find, as a fact, that he did not know of the grow operation or even the other activities relating to potentially stolen property or potentially illegal firearms over the relevant period of time leading up to the fire.”

Wawanesa originally argued Davidson was responsible for the arson, but later dropped that contention.

The insurance company relied in part on its policy, which voids coverage in the event of marijuana production, whether or not the insured even knows about it.

However, Fitzpatrick said there is no evidence the arson had any connection to the grow-op, despite the suspicious timing.

The insurer also obtained video shot in March 2010 and shown in court, of Davidson discussing a visit to his home.

“Are you telling me she hasn’t got the basement fired up again?” an unidentified male asked Davidson in the video.

“Not very well,” he replied, adding what he’d seen ‘down there “was ” very pathetic.”

“I told her at the end of May that should be enough time to get her program finished, you know, get it up and running and finished,” he said, adding he would then sell the house.

Davidson argued “her program” referred to Boucher’s psychiatric program. (Kamloops This Week)


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The Co-operators acquires Carleton Insurance Brokers Ltd.

GUELPH, ON, Aug. 13, 2015 /CNW/ – Co-operators General Insurance Company announced today that its wholly-owned subsidiary has purchased Carleton Insurance Brokers Ltd. in Ottawa. The brokerage’s portfolio includes personal and commercial insurance policies.

Current clients of the brokerage will be notified of the change in ownership and their existing insurance coverage will remain in effect with no changes to their premiums or coverage for the current term of their policies. As current policies expire, clients will be offered comparable policies from The Co-operators.

“We’re pleased to be strengthening our presence and growing our agency distribution system in Ottawa and across the country, which is part of our growth strategy,” said Kathy Bardswick, president and CEO of The Co-operators. “Our new clients will benefit from the wide range of insurance and financial products, as well as the expertise, offered by Co-operators advisors.”

Clients will enjoy the exemplary service of a leading national insurance co-operative and have access to a full suite of insurance products including home, auto, life, travel, commercial and farm insurance.

About The Co-operators:
The Co-operators Group Limited is a Canadian-owned co-operative with more than $40 billion in assets under administration. Through its group of companies it offers home, auto, life, group, travel, commercial and farm insurance, as well as investment products. The Co-operators is well known for its community involvement and its commitment to sustainability. The Co-operators is listed among the 50 Best Employers in Canada by Aon Hewitt; Corporate Knights’ Best 50 Corporate Citizens in Canada; and the Top 50 Socially Responsible Corporations in Canada by Sustainalytics and Maclean’s magazine. For more information please visit

SOURCE The Co-operators

Leonard Sharman, The Co-operators, 519-767-3937

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