In a decision rendered on October 29, 2009 in the case Hôtels Fairmont Inc. v. Schecter,i the Quebec Court of Appeal was presented once again with the opportunity to specify the limits of an insurer’s duty to defend, in the context of a lawsuit set against an unusual factual background in some respects.

The Facts

An American tourist, Ms. Karen Schecter, was away on vacation for a couple of days at a well-known resort in the Charlevoix region of Quebec, when she decided to participate in a horseback-riding activity that had been suggested to her by the resort. During her ride, she fell from her horse and hurt her back. She claims that the resort, as well as the owner of the horse’s stable, a certain Mr. Kevin Coutts, should be held responsible for the accident. She alleges that the accident was caused when the horse she was riding bucked and threw her to the ground.

She also contends that the horse’s behaviour was caused by the presence of a helicopter in which the owner of the stable was flying. Indeed, one of his horses had become lost and he had asked a local helicopter pilot to take him aboard so that they could search for the missing horse by flying over the resort property. Based on his instructions, the helicopter would thus have flown at a low altitude over the trail upon which the Plaintiff Ms. Schecter was riding, thereby throwing the animal into a panic.

In support of her claim, the Plaintiff relied upon two distinct sources of liability; first, liability flowing from injury caused by an animal, and second, liability resulting from the presence of the helicopter in which Mr. Coutts was flying in search of the lost animal.
The liability insurers of the stable owner refused to take up his defence, claiming that a clause in their insurance policy excluded coverage for “liability resulting…from the use…by or for the Insured…of an aircraft.”ii

The Trial Judgment

On November 11, 2007, the Superior Court of Quebec allowed the Plaintiff’s action. The Court found that the owner of the stable had been negligent in giving instructions to the helicopter pilot to fly at a low altitude close to a group of beginner horseback-riders, given that he knew or could not have been unaware that flying as close as they did would possibly excite the horses.

In the opinion of the Court, the presumption of liability of the owner of the animal provided for at article 1466 of the Civil Code of Quebec was inapplicable given that it was not the act of the animal per se which caused the damages, but rather the flight of the helicopter and what followed from it.

In light of the denial of coverage by the liability insurers, the owner of the stable also instituted an action in warranty against them in which he asked that his defence costs be reimbursed, and that he be indemnified for any order of damages that might be made against him.

As regards the duty to indemnify, the Court accepted the arguments of the liability insurers of the stable owner without reservation. Indeed, according to the Court, the exclusion clause was clear: the insured was deprived of the benefit of the insurance when his liability resulted from the use by or for him of an aircraft. The fact that the owner of the stable was not the person flying the helicopter was irrelevant, since the helicopter was clearly being used for his benefit.

Turning to the duty to defend, the Superior Court came to a different conclusion. First, the Court reiterated that the duty of the insurer to defend the insured was distinct from the duty to indemnify the victim. Thus, according to the Court, the “position taken by the insured as to the merits of the claim cannot influence the determination of whether or not there is an obligation to defend the insured.”iii

The Court continued its analysis by emphasizing that the facts alleged in the Plaintiff’s claim gave rise to two bases of liability, the first related to the use of an aircraft, which basis was excluded by the insurance coverage, and the second related to the liability flowing from the act of the animal. According to the Superior Court, the owner of the stable should have been defended by his insurers since the second source of liability alleged was not covered by an exclusion clause. Thus, the insurers were ordered to reimburse the insured’s entire defence fees, despite the Court finding categorically that the exclusion applied in relation to the duty to indemnify.

The Judgment of the Court of Appeal

The resort, the owner of the stable and his liability insurers appealed the decision.
In the recently rendered decision, the Court of Appeal concluded that the resort and the owner of the stable were jointly liable. According to it, the owner of the stable, as a temporary client of the helicopter pilot, had engaged his own contractual liability, as well as that of the resort with which he had contracted to offer his services for horseback-riding activities, for the injury suffered by Ms. Schecter,.

Regarding the insurance coverage, the Court of Appeal was of the opinion that the exclusion clause relating to the use of an aircraft was clear and necessarily applied to the situation. The Court found that even if the owner of the stable was not himself the pilot, it was clear that he had given instructions to the pilot concerning the flight path and had asked him to fly over an area in which a horseback-riding activity was likely to be taking place. The Court of Appeal thus saw no reason to interfere with the decision of the Superior Court as regards the duty to indemnify.

As far as the duty to defend was concerned, the Court of Appeal also adopted the Superior Court’s position to the effect that the liability insurers of the stable owner should have taken up his defence, since Ms. Schecter’s claim was based, at least in part, in the presumption of liability of the owner of an animal set out at article 1466 of the Civil Code of Quebec. In that respect, before the Court of Appeal, the owner of the stable maintained that his insurers should have defended him not only in Superior Court but also on appeal. The Court of Appeal, however, saw things in a different light. According to it, the situation on appeal was quite different in that “the contention that the act of the animal or of its users was the cause of the damage [became] not only secondary, but indeed insignificant to the point of being untenable, having regard to the whole of the evidence.

Commentary

The Court of Appeal’s refusal to have the stable owner’s liability insurers assume his defence costs is surprising. Granted, there exists little jurisprudence on the duty to defend at the appeal level. The reason is undoubtedly quite simple. It is now well-established that as soon as the allegations of the claim could possibly give rise to the benefit of the insurance in favour of the insured, the insurer must take up his defence. It is also well-established that the duty to defend is wider in scope that the duty to indemnify. Until an appeal court has decided on the merits of the case, the allegations of the claim remain, regardless of the findings of the judgment in first instance being appealed from. For instance, in this very case of Hôtels Fairmont inc. v. Schecter, the Court of Appeal could in theory have disagreed with the trial judge on the issue of the stable owner’s liability based on the negligent use of the helicopter, but have found him liable nonetheless as the owner of the horse. In such a case, would it have been possible to take the position that the stable owner was not entitled to his defence costs on appeal? With respect, it appears that by refusing reimbursement of the stable owner’s defence costs on appeal, the Court decided the question of the duty to defend on the basis of the decision arrived at regarding the duty to indemnify. By so doing, it ignored the allegations of the claim, the merits of which can only be determined once the appeal process is complete.

Such was the position adopted by the Superior Court when deciding a similar question in Sweibel v. Fonds d’assurance responsabilité professionnelle du Barreau du Québec.iv In that case, the Court indicated that before determining whether or not a duty to defend existed, it was necessary “to give to the facts alleged in the proceeding, not only in first instance but also on appeal, a liberal interpretation.”v

However, two years later, the Superior Court saw things differently in Bédard Dodge Chrysler Ltée v. Compagnie d’assurance M.O.A.C. (C.N.A.),vi in which it concluded that although the allegations of the claim had given rise to a duty to defend in first instance, the reasons of the trial judgment justified the insurer’s decision not to assume the defence of the insured on appeal.

Conclusion

The reasons for judgment of the Court of Appeal in Hôtels Fairmont Inc. v. Schecter reveal that the duty to defend on appeal was not the principal issue before the Court of Appeal, probably owing to its limited financial implications. Nor was it the object of a detailed analysis by the Court of Appeal, which devoted the bulk of its reasons to addressing the question of the liability of the stable owner and the resort towards the victim, as well as the duty of the liability insurers to indemnify the victim on behalf of its insured. For our part, we do not believe that the issue is settled.

It remains to be seen whether or not the decision of the Court of Appeal will mark the beginning of a new line of jurisprudence that will redefine the limits of the duty to defend at the appeal level.

Eric Hardy

i.2009 QCCA 2053
ii. Unofficial translation. In the original French version, the exclusion clause was worded as follows : “responsabilité découlant …de l’utilisation …par ou pour un Assuré d’un aéronef.”
iii. Unofficial translation. The original French version reads as follows : “position adoptée par l’assureur quant à la validité ou l’invalidité de la demande ne peut influencer le sort de l’obligation de défendre l’assuré.”
iv. Jugdment rendered on September 24, 2003, AZ-50193910.
v. Unofficial translation. The original French version reads as follows : “donner aux faits contenus dans la procédure, non seulement en première instance mais aussi en appel, une interprétation large.”
vi. Jugdment rendered on December 21, 2005, AZ-50352849.