This was the cautionary tale from the Ontario Court of Appeal's recent decision in Commonwell Mutual Insurance Group v Campbell.[1] In the Campbell case, the insured was operating his employer's dirt bike when he collided with an all-terrain vehicle (ATV) and was sued in negligence in connection with the accident. The insured did not have a proper licence for operating a dirt bike. The dirt bike was not registered and it was not clear if the insured had consent to operate the dirt bike. The insurers were aware of these facts, which raised coverage issues relating to the "unowned registrable vehicle exclusion" and the "consent exclusion".

The insured had two insurers: (1) Guarantee Company of North America ("Guarantee"), an automobile insurer, and (2) Commonwell Mutual Insurance Group ("CMIG"), a home and general liability insurer. Guarantee asked the insured to sign a non-waiver agreement and issued a reservation of rights letter. Ultimately, Guarantee denied coverage. CMIG did not immediately raise any concerns of coverage with the insured. Instead, CMIG appointed counsel to represent the insured and engaged with the litigation process on behalf of the insured for ten months before raising concerns of coverage. During this period CMIG had investigated the insured's potential liability, prepared a detailed statement of defence, issued cross claims, made tactical decisions regarding the claim, and the action had proceeded to the discovery stage. The question of coverage only arose when the Plaintiff's counsel asked to confirm whether coverage was at issue. In fact, CMIG conceded that it had the knowledge that it later relied upon to deny coverage at the material time. As such, the application judge found that the litigation was "well advanced" and it would prejudice the insured if CMIG were able to deny its duty to defend or duty to indemnify.

The Ontario Court of Appeal upheld the application judge's decision that CMIG was estopped from denying coverage. The insured relied on CMIG's conduct to his detriment; the insured assumed his interest was taken care of, he did nothing to secure his own counsel.

A key factor in determining that CMIG was estopped from denying coverage was the fact that CMIG had knowledge of the surrounding circumstances at the time CMIG decided to mount a defence. As a result, the Court of Appeal found that if new information became known, which would allow CMIG to deny indemnification beyond the "unowned registrable vehicles" exclusion and "consent" exclusion, then CMIG would be free to rely upon the new exclusions to argue that there was no coverage as per the policy terms.

The Campbell case is a stark reminder that where there is doubt about a duty to defend or where there may be a duty to defend but there may not be a duty to indemnify, the insurer must take steps to bring any coverage concerns to the attention of the insured, by way of a non-waiver agreement or reservation of rights. A failure to do so may leave the insurer on the hook, even if the face of otherwise applicable policy exclusions.

[1] The Commonwell Mutual Insurance Group v Campbell, 2019 ONCA 668 [Campbell]; affirming The Commonwell Mutual Assurance Group v Campbell, 2018 ONSC 5899.