Liability insurance contracts provide insureds with protection against claims made by third parties. Generally, liability insurance policies provide that the insurer will indemnify the insured for successful claims against the insured (the duty to indemnify), and that the insurer will defend claims made against the insured (the duty to defend).
Where the duty to defend is included in liability insurance policies, generally the insurer will bear the costs associated with defending claims against the insured, whether or not those claims are successful. However, even under such policies circumstances may arise where the insured will have to share in the costs of litigation. This article identifies some of those circumstances and, in particular, considers when insurers may be required to bear the costs of defending the entire case against the insured even though it is clear at the outset that the insurer is not obliged to indemnify the insured for all of the claims or losses the insured may be liable for.
The term “mixed” was used by the British Columbia Court of Appeal to describe the claim in Continental Insurance Co. v. Dia Met Minerals Ltd. (1996), 20 B.C.L.R. (3d) 331 (C.A.) [Dia Met Minerals]. That case involved a claim against directors of a corporation. The insurance policy covering the director’s acts was limited to acts and omissions arising in the discharge of their duties as directors and officers, and excluded claims brought about or contributed to by the dishonesty of the Directors and Officers.
The British Columbia Court of Appeal explained that the claim against the directors was “mixed” in the sense that it alleged wrongful acts by the insureds, some of which were committed in their capacity as directors (and so were covered by the policy) and acts which were not committed in their capacity as directors (and so were not covered by the policy).
The Court referred to the case of Ins. Co. of N. Amer. v. Forty-Eight Insulations Inc., 633 F. 2d 1212 (1980) [Forty-Eight Insulations], and described it as being a “mixed” case of a different variety. In Forty-Eight Insulations a manufacturer of asbestos products was sued by persons who had been exposed to asbestos and had developed asbestosis. The manufacturer had been insured by several insurers over the years during which the plaintiffs' asbestosis had developed. Therefore, the claim in Forty-Eight Insulations was mixed in the sense that although the claims were of a nature covered by the policy, the harm may have occurred at a time when the particular insured was not “on risk”.
Thus, mixed claims may occur in a number of circumstances, including:
1. When the plaintiff alleges wrongs, some of which are covered by the policy and some of which are not.
2. When the plaintiff alleged a wrong occurring over a long period of time in circumstances where
o the insured was not insured for the whole of the loss period;
o exclusions related to the loss were added to the insurance policy part way through the loss period; or
o where the insured switched insurers part way through the loss period.
A common feature of mixed claims is that the insurer will only be liable for some of the claims made in the pleadings, or for some of the losses flowing from those claims.
Caution: each contract turns on its own wording
The liability of the insurer to bear costs depends on the terms of the insurance contract. This point cannot be overemphasized; all of the comments made in this article relate to typical terms found in most, but not all, liability insurance contracts. In every case the terms of the particular insurance contract must be carefully examined.
Basic rules regarding the duty to defend
The duty to defend is determined by the pleadings: Continental Insurance Co. v. Dia Met Minerals Ltd., (1996), 20 B.C.L.R. (3d) 331 at para. 13 (C.A.), Nichols v. American Home Assurance Co.,  1 S.C.R. 801. Thus, the duty to defend can be established at the outset of the litigation.
In insurance contracts that specify duties to indemnify defend, the duty to defend is broader than the duty to indemnify: St Andrew’s Service Co v. McCubbin (1987), 22 B.C.L.R. (2d) 38(S.C.), Nichols v. American Home Assurance Co.,  1 S.C.R. 801.
An insurer cannot refuse to defend on the basis that the claim is a mixed one in the sense that some of the claims, if proven, will not be within coverage: Continental Insurance Co. v. Dia Met Minerals Ltd., (1996), 20 B.C.L.R. (3d) 331 at para. 13 (C.A.), Sansalone v. The Wawanesa Mutual Insurance Co., (1997), 29 B.C.L.R. (3d) 297 at para. 8 (S.C.)
However, when some of the allegations against the insured are within the insurer’s obligation to indemnify, while others are outside the insurer’s obligation to indemnify, the insurer is only obliged to defend against the allegations which may give rise to the obligation to indemnify: St Andrew’s Service Co v. McCubbin (1987), 22 B.C.L.R. (2d) 38(S.C.).
General comments on the liability of the insurer to bear litigation costs
The liability of the insurer to bear litigation costs depends on the terms of the insurance contract, but generally in liability insurance contracts, the duty to bear the litigation costs is a separate and distinct obligation on the insurer than the duty to indemnify. See for example St Andrew’s Service Co v. McCubbin (1987), 22 B.C.L.R. (2d) 38(S.C.), Bacon (Guardian ad litem of) v. McBride (1984), 51 B.C.L.R. 228 (S.C.).
However, the insurer is only liable for the costs incurred in defending those allegations which, if proven, would fall within the insurer’s obligation to indemnify: St Andrew’s Service Co v. McCubbin (1988), 29 B.C.L.R. (2d) 305(S.C.).
Apportioning costs between the insurer and the insured
When a single action involves both insured and uninsured claims, apportioning defence costs between the insured claim and the uninsured claim is very difficult. Where there is no means of readily distinguishing between costs incurred in defending insured claims as opposed to uninsured claims, the full amount of those costs should be borne by the insurer: St Andrew’s Service Co v. McCubbin (1988), 29 B.C.L.R. (2d) 305(S.C.) [McCubbin].
In McCubbin, the claims against the insured accountant were for negligence and fraud. The accountant was insured for negligence, but not for fraud. The insurer refused to defend the claims. The insured successfully defended all claims against it, and then sought to recover the costs of defending itself from the insurer. It was clear that 10% of the costs were incurred in defending the claim of negligence alone (the insured claim) and that 10% of the costs were incurred in defending the claim of fraud alone (the uninsured claim). The remaining 80% of costs were incurred in defending the matter generally and could not be ascribed to a particular claim against the insured. The court held that the insurer was required to bear 90% of the costs of defending the claim.
The court in McCubbin seemed to approve of, but distinguished, the case of Forty-Eight Insulations mentioned above. As noted, in Forty-Eight Insulations a manufacturer of asbestos products was sued by persons exposed to asbestos. The manufacturer had been insured by several insurers over several years during which the plaintiffs' asbestosis had developed. The United States Court of Appeal, Sixth Circuit, confirmed the rule that where it is unclear what proportion of costs were incurred in defending insured as opposed to uninsured claims, the insurer should bear all costs:
An insurer must bear the entire cost of defense when "there is no reasonable means of prorating the costs of defense between the covered and the not-covered items". . . . Thus, in the typical situation, suit will be brought as the result of a single accident, but only some of the damages sought will be covered under the insurance policy. In such cases, apportioning defense costs between the insured claim and the uninsured claim is very difficult. As a result, courts impose the full cost of defense on the insurer.
(Forty-Eight Insulations at 1224)
However, the court said that where defence costs can be readily apportioned the insurer and the insured should each pay their fair share. In that case the manufacturer was liable to bear pro rata costs of defending this suit as it was considered an insurer for those periods of time that it had no insurance coverage:
An insurer contracts to pay the entire cost of defending a claim which has arisen within the policy period. The insurer has not contracted to pay defence costs for occurrences which took place outside the policy period. Where the distinction can be readily made, the insured must pay their share for the defence of the non-covered risk.
(Forty-Eight Insulations at 1224, cited with approval in Budd Co. v. Travelers Indemnity Co., 820 F.2d 787 (6th Cir., 1987) at 790).
Forty-Eight Insulations was considered by the British Columbia Court of Appeal in Dia Met Minerals, supra. The British Columbia Court of Appeal explained at para. 16 that the rule of making the insurer bear the full costs where apportionment cannot readily be made is not a rule based on principle, but a policy decision made in circumstances where it is practically impossible to segregate defence costs.
The British Columbia Court of Appeal said that although the duty to defend is determined on the pleadings, the duty to bear the costs of defending are not determined solely on the pleadings:
In my view, the Court's suggestion that unlike the duty to defend, the obligation to indemnify in respect of defence costs should be “assessed retrospectively” offers the solution to the almost insurmountable difficulty of apportioning defence costs, on the basis of pleadings alone, before or even after trial. No reason in principle has been offered to us as to why the pleadings alone should govern and in my view there are strong reasons why they should not. It seems both illogical and inequitable to require an insurer who has not sought to shirk its obligations, to bear the entire cost of defending a mixed claim in the face of clear terms that require it to pay the cost of defending only [insured] claims…If the Court were to require [the insurer] to pay the entire defence costs of the insured, it would provide them with a windfall merely because one or more allegations that were covered by the Policy were advanced among several that are not covered. The only cases cited to us that would support such a result were cases in which insurers refused to honour their obligation to defend and were held liable for the full costs of defending as a measure of damages for their breach of contract.
(Dia Met Minerals at para. 18)
Thus, allocation of defence costs is determined retrospectively i.e. after trial. See also Axa Pacific Insurance Co. Ltd. v. Guildford Marquis Towers Ltd., 2000 BCSC 197, 74 B.C.L.R. (3d) 194.
In HMTQ v. The Board of School Trustees of School District No. 36 (Surrey), 2003 BCSC 1646 at para. 40, Brown J. summarized the law of apportionment of costs between insurers and insureds as follows:
[W]here defence costs can be readily apportioned between those claims covered by the policy and those claims which are not, the insurer is only required to pay the legal fees and costs for covered claims; the insurer is required to pay all fees and costs which relate to any extent to defending insured claims; where there is no reasonable means of pro-rating the costs of defence, the insurer must bear the entire cost; only costs of defence which are clearly not referable to a covered claim are to be borne by the insured; and where an insurer breaches the policy and improperly refuses to defend, the insured is entitled to be put in the position it would have been in had the insurer properly defended. The British Columbia courts have not adopted the position taken by Alberta courts that an insurer which improperly fails to defend must bear the entire cost of the defence of all claims, whether or not covered by the policy.
The liability of an insurer to bear costs depends on the terms of the insurance contract. However, the following will generally be true:
1. If the costs of defending insured and uninsured claims can be readily apportioned, that should be done and the insured is required to bear the costs of defending the uninsured claims.
2. If the costs of defending insured and uninsured claims can not be readily distinguished, the insurer is required to pay all of the litigation costs.