Usually when a legal article sports a double-barreled subtitle like the one above, it means that there is some question about what the law “is.” Not so here. This article presents a choice of law. In asking ourselves how the choice should be made, we think about the problem the law addresses. Here, insurers are called upon to defend innocent family members for claims arise from other family members’ intentional or criminal acts. When law suits are brought for alleged harm to others the law is called upon to respond to real failures which have occasionally beset the modern family. Quite often, they arise in the contexts of incest or family abuse and of juvenile delinquency. Insurance companies are brought in as third parties, to defend and indemnify the innocent or negligent family member.

In a paradigm incest or abuse case, an adult “survivor” of alleged child abuse sues both the perpetrator (usually the father or stepfather) the negligent bystander (usually the mother). It is not uncommon for the perpetrator and the bystander to have separated or divorced by the time the suit is advanced. (Meaning: the perpetrator does not stand to gain from a successful defence or indemnity of the negligent but innocent bystander.) No matter what the truth may be of the allegations, it is hard to see the justice in tarring the bystander defendant with the same brush as the alleged perpetrator. Some believe these cases arose from false memories inspired by New Age philosophies and therapists. If the abuse was true, in reality it is more likely than not that the bystander is also a victim of abuse.

G.P. v. D.J., [2001] O.J. No. 313, and W.-V.(T.) v. W. (K.R.J.) (1996), O.R. (3d) 277, followed the above pattern of lawsuits against parents. Both decisions were at the motion court level. In each case, the prevailing view was that a homeowner’s policy containing an exclusion for the intentional or criminal acts of “an insured” or “any insured” excludes a duty to defend the innocent parent against whom allegations of negligence have been made. The distinction was also made that the wording “the insured” limits the exclusion to the perpetrator, and there is a duty to defend the innocent if negligent parent. The court in G.P. v. D.J. contrasted the wording, “any person insured by this policy” with the phrase, “caused intentionally by or at your direction or resulting from your criminal acts or omissions,” found in the Ontario Court of Appeal decision in Godonoaga (Lit. Guar.) v. Khatambakhsh (2000), 49 O.R. (3d) 22.

The Godonoaga court contended with a horrific case of schoolyard bullying resulting in serious injuries. The violence escalated when the mother instigated further beatings and when the father callously but not intentionally obstructed the calling of an ambulance. The use of the word “your,” to describe the excluded acts, in a “plain-language” homeowner’s policy, had the effect of failing to exclude only the intentional or criminal tortfeasors (the assailant and his mother). Despite the ruling against the insurer on the point, Mr. Justice Finlayson, an adherent of the “black letter of the law,” essentially employed the reasoning of the majority in the seminal case of Scott v. Wawanesa Mutual Insurance Co., [1989] 1 S.C.R. 1445. There, the Supreme Court of Canada contended with the duty to indemnify homeowners whose son had deliberately set fire to the house. By a narrow majority of four to three, Canada’s top court held that particular wording employed in the policy prevailed over any general principle of insurance. There, the policy excluded coverage for “loss or damage caused by a criminal or willful act or omission of the Insured or of any person whose property is insured hereunder.” The case turned on the insurable interest of the son in the rebuilding of the house.

The dissent in Scott essentially took the “modern” view that the exclusion was arbitrary and went against the reasonable expectations of the policyholder:

“Clearly, an insurer might choose to contract on the basis that its indemnification obligation joint with regard to both the named insured and other insured. But in offering to contract on such terms, it would be incumbent on an insurer to manifest this intention in the very clearest of language. This is because a person entering such a contract would be agreeing to assume vicarious liability for the criminal conduct of another. This, it is fair to say, is fundamentally at odds with the expectation of the reasonable person when buying insurance. He or she insures on the assumption that his or her undivided interest is protected. That is the whole point of taking out insurance.” (emphasis added)

Without commenting on a preference for the majority or the dissent in Scott, the existence of a strong dissent (i.e. capable of swaying a sizeable minority calling its approach “modern”) suggests that the dissent has a fair chance of prevailing the next time the issue reaches the Supreme Court.

One aspect of these cases which does not appear to have been successfully argued is the fact that these exclusion clauses almost invariably require the element of causation, by intentional or criminal means. It is clear from the line of cases originating in Non-Marine Underwriters, Lloyd’s of London v. Scalera (2000), 185 D.L.R. (4th) (S.C.C.), that the absence of jeopardy for a non-intentional tort, such as an allegation of sexual assault, will completely oust any duty to defend on a personal-line insurance policy. However, if the defence of the alleged perpetrator is successful, then the “derivative claim” for negligence against the innocent parent disappears. There would be no personal injury caused by an intentional or criminal act, and thus the exclusion would not apply! It would be countered that, subject to debates regarding “extrinsic evidence,” the law is settled that the pleadings govern the duty to defend. If there is no cause of action disclosed on the pleadings, according to the traditional analysis, there is no duty to defend. The impossibility of a finding of negligence in the absence of a finding of guilt on the part of the perpetrator would tend to fall into such a category. However, the standard liability policy wording calls for a defence of a suit against an insured alleging bodily injury “even if such suit is groundless, false or fraudulent,” as was the wording in W.-V.(T.) v. W. (K.R.J.). It is also important always to remember that the “derivative” negligence action against the innocent spouse is not based on “vicarious” liability for the perpetrator’s acts. Thus, it seems right that if the perpetrator’s defence is successful, there would have been a duty to defend the innocent spouse. If unsuccessful, there is no duty to defend. This is not a paradox, at least not in law. The duty to defend exists in a limbic zone of facts which remain unproven—allegations, what in civil procedure we refer to as pleadings. According to this reasoning, the duty to defend is excluded by an “an insured” or “any insured” type of clause if the criminal or intentional act in fact did occur. In the parlance of the law regarding the duty to defend, if the pleadings disclose a cause of action against the innocent spouse which might not be excluded (or, to put it more bluntly, and as a matter of justice, warrants a defence), the insurer must defend.

In the event that the case is proven against the perpetrator, the duty to defend the innocent spouse vanishes. Then, according to the case law, the insurer can seek back the defence costs from the innocent spouse. (In most cases, an empty remedy.)

Why hasn’t anyone argued the point successfully? It is possible that it has never been raised, or that it has been raised and rejected without comment. Ultimately, if the point is accepted by a court, it will probably be because it is an easier way to achieve the result embraced by the dissent in Scott than going behind the literal interpretation of the policy document. The latter approach would call upon the court to determine whether the “true intent” of the parties to the insurance contract included, in essence, imposition of vicarious liability on the innocent or negligent family member.

As the law stands presently, claims managers have little choice on the issue of providing a defence: the particular (some might say, arbitrary) phrasing of each policy will govern. Whether a duty to defend the innocent family member exists depends entirely on the use of a definite article, “the,” or indefinite article “a” or “any” to describe the insured whose intentional or criminal conduct gives rise to the exclusion. The one is a liability policy embracing a theory of individual responsibility, and the other one of a parochial family unit. In reality, whether there are or were such competing underwriting theories, truly becomes blurred when it comes to the use of “you” and “your” in plain-language policies, as seen in the Godonoaga example. It is hardly a distinction which the court will accept as being within the competence of the average policyholder to understand. For this reason alone, there will be pressure on the courts to choose the dissent in Scott.

The Court of Appeal for Ontario’s decision in Snaak v. Dominion of Canada General Insurance Company (C36897, April 19, 2002) is a recent and interesting illustration of this pressure. It considered an exclusion clause similar to the one in Scott, but that Supreme Court decision was not referred to in the unanimous decision of MacPherson J.A. In fact, the decision largely rejected the position of the majority in Scott: “Judicial distinctions between the single words ‘any’ and ‘the’, and different results flowing from such distinctions, strike me as overly refined and, potentially, unfair in a matter as important as insurance coverage.” The court in Snaak chose not to make a policy decision, however, as in the dissent in Scott, but found the word “any” to be ambiguous:

“28. On the one hand, the word “any” in the exclusion clause can be interpreted in the manner advanced by Dominion. The intentional act of any one insured will exclude coverage for all insureds. Under this interpretation, if there are twenty (20) individuals insured under the policy, the intentional act of one insured will exclude coverage for the nineteen (19) others, even if the other nineteen (19) others [sic] did not commit the intentional act.

“29. On the other had, the word “any” in the exclusion clause can be interpreted differently. The word “any” simply recognizes the fact that the insurance policy provides coverage to many individuals, and if any one of these individuals commits an intentional act, coverage will be denied, but only for that individual. Under this interpretation, if there are twenty (20) individuals insured under the policy, the intentional act of any one of the twenty (20) individuals will exclude coverage, but only for that individual, and not for the nineteen (19) others who have not committed the intentional act.”

This seems to be an unsatisfying method of dealing with the issue. Arguably, it has sidestepped it, although some of the policy considerations were the same as in the dissent in Scott. Because the court did not consider, or were not referred to, the decision in Scott, it is unknown what the court would have done had it the advantage of the Scott decision. The conflicting decisions, the earlier from a higher court, will present claims managers and their counsel with a challenging task of policy interpretation.

CONCLUDING REMARKS
Because the law relating to the duty to defend involves pleadings and not proven facts, it is semi-substantive and semi-procedural. It is terribly academic, and this will give some people comfort and make others cringe. Where theory and practice merge in terms of real-life risk management decisions is in evaluating the exposure to defence costs and for damages. The thinking must get past the formulaic interpretation of the policy in accordance with the case law. It goes beyond, for example, choosing to defend where no duty to defend exists. Although the use of a non-waiver agreement is critical in cases where one seeks to avoid an implied waiver of the exclusion clause, the derivative nature of the action adds a few twists to the usual problem. The following permutations are designed to provide food for thought, and are by no means definitive or all-inclusive:

Scenario A. If There Is a Duty to Defend
If there is no valid exclusion to the duty to defend the innocent spouse, the choice has been made for the claims manager and the case does not differ from any other third-party personal injury suit. However, there are some very challenging tactical decisions to be made:

1) The innocent spouse could defend on the basis that the abuse never occurred.
2) The innocent spouse could defend on the basis that the perpetrator was so abusive as to nullify the capacity of the innocent spouse to protect the child (one cannot be negligent under duress).
3) The innocent spouse could defend on the basis that the perpetrator concealed the abuse, again to nullify the capacity of the innocent spouse to protect the child.
4) The innocent spouse could defend on the basis that she did what she could to protect the child from abuse, and traverse the blame to a child protection or law enforcement agency.

Scenario B. If The Duty to Defend Is Found after Trial
If the alleged perpetrator succeeds in showing that the abuse never occurred, the insurer of the innocent spouse is exposed to the defence costs because it will have been proven that the causal event giving rise to the policy exclusion never occurred. The suit becomes just another groundless law suit, which the liability carrier is required to pay for the defence. These costs can be substantial and, because of the stigmatic nature of the allegations, may often overtake the actual monetary exposure of the parties. Because most tort defences are handled by insurance defence counsel, such costs may be substantially lessened by choosing to defend and appoint counsel from the outset, instead of expecting a general practitioner to mount an efficient and effective defence.

Scenario C. If There Is No Duty to Defend
If the perpetrator is found guilty of the abuse, and if there is a valid exclusion to the duty to defend the innocent spouse, the insurer’s exposure is limited to the cost of the third party coverage action or application. As was the successful approach in many of the reported cases, the costs of being a third party to on-going personal injury litigation may be curtailed by bringing a timely motion for summary judgment or stated case. This approach remains valid unless the majority in Scott is overturned by the Supreme Court of Canada.

2002 © R. Lee Akazaki received his B.A. and LL.B. from the University of Toronto, and practices law with Gilbertson Davis Emerson LLP, Barristers and Solicitors. He is certified by the Law Society of Upper Canada as a Specialist in Civil Litigation.

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