Recently, the Ontario Court of Appeal in IT Haven Inc. v Certain Underwriters at Lloyd’s, London, 2022 ONCA 71 (IT Haven) re-affirmed that an insurer’s duty to provide its insured with a defence is not automatically suspended by allegations of breaches of policy conditions. This insight analyses the case, the decision and what it means for insurers.
Background
In IT Haven, the insured, which was in the information technology business, held a comprehensive liability insurance policy with the appellant insurers. The policy provided the insured with coverage for, among other things, “wrongful acts”, which included any “unauthorized use or violation by the insured of any copyright […] in the insured’s professional business.”[1] As a part of the application process for obtaining the policy, the insured made certain representations to the insurer, including that it: 1) received 100% of its revenue in Canada; 2) did not provide services to the electronic games industry; and 3) had not incorporated any software or products designed by others into its designs.[2] Finally, the policy included provisions that allowed the insurer to void, or partially void, the coverage if the insured made material misrepresentations.[3]
While the insured’s policy was in force, a third-party games developer commenced a claim against the insured in the United States, seeking damages and injunctive relief. The US claim alleged that the insured had infringed the third party’s copyright for its mobile games. Specifically, it was alleged that the insured created, distributed, and profited from “unauthorized derivative versions” of the third party’s games.[4]
The insurer took the position that the policy obliged the insured to accurately describe its business, and that due to material misrepresentations made by the insured, the insurer had no obligation to defend. The insurer also argued that a claim for breach of copyright in relation to the electronic games industry in the US was manifestly inconsistent with the insured’s description of its own business, and thus, coverage was plainly excluded.[5]
The insured was successful in its application before the ONSC for a declaration that the insurer was required to defend it in the US claim. The insurer appealed.
The decision
The Court of Appeal dismissed the insurer’s appeal. The Court rejected the insurer’s invitation to treat the case as a typical duty to defend case where the court would apply the “pleadings rule”.[6] Instead, the Court found that the central issue in the case were the allegations of breached policy conditions. Citing its own decision in Longo v Maciorowski, [2000] 50 OR (3d) 595 (ONCA) (Longo), the Court rejected the proposition that there was an automatic suspension of the duty to defend where there is an allegation of a breached policy condition.[7]
The Court explained that a hard and fast rule with respect to the effect of alleged breaches of conditions, depending on the circumstances, might be unfair to either the insured or to the insurer.[8] Instead, the Court adopted and applied the flexible approach used in Longo and the cases following Longo.
In its analysis, the Court found that where the allegations of breaches of conditions are clear and uncontested, and where the insured has no basis for claiming estoppel or relief from forfeiture, the duty to defend may be suspended.[9] However, where the allegations of misrepresentation and breach of condition are hotly contested, and where an early determination of the misrepresentation and breach of condition issues create risks of inconsistent findings and prejudice to the insured in the main action –as was the case in IT Haven– the duty to defend may be upheld.[10] In IT Haven, the alleged breaches of conditions were the same issues that would be litigated in the main lawsuit,[11] and as a result the Court did not find it appropriate to decide that issue in advance of the main lawsuit.
Takeaway
IT Haven is instructional for insurance litigants. Notwithstanding allegations, or even evidence of breaches of conditions, an insurer’s duty to defend is not automatically suspended. A determination of the issue will be on a case by case basis, with overarching considerations for fairness between the parties.
If you have any questions about this insight or an insurance litigation matter, please contact Douglas Stewart or Changhai Zhu.
[1] IT Haven at para 8.
[2] Ibid at para 5.
[3] Ibid at para 11.
[4] Ibid at para 15.
[5] Ibid at paras 26-27.
[6] Ibid at paras 31,40.
[7] Ibid at para 46.
[8] Ibid at para 48.
[9] Ibid at para 49.
[10] Ibid at para 56.
[11] Ibid at para 43.
