Court of Appeal holds that the duty to defend is an ongoing obligation to be applied on a “rolling” basis and insurers cannot contract out of the Limitations Act where policy holders are consumers

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In Reeb v The Guarantee Company of North America, 2019 ONCA 862, the Court of Appeal for Ontario considered two matters regarding the duty of an insurance company to defend. In one of the matters, an insurance company brought an application against two other insurance companies for a declaration that they are obligated to pay for one-third of the ongoing defence costs of the applicant. The applicant was successful and the respondents appealed. In dismissing the appeal and concluding the respondents had a duty to defend and contribute to the applicant’s defence costs, the Court of Appeal considered two limitation period arguments.

First, the respondents argued that as the application was for contribution to defence costs, it is subject to the Limitations Act, 2002. Because the claim for contribution was not brought within two years of the respondents’ refusal to defend, the respondents argued that the claim for contribution was statute-barred. The Court of Appeal rejected this argument, stating that the duty to defend is an ongoing obligation and is applied on a “rolling” basis. The applicant was not seeking contribution toward any potential indemnity; but rather, sought contribution for costs incurred in the future.  Accordingly, as the applicant was seeking contribution on a “going forward basis”, the Court held that the limitation period could not be applied in the manner suggested by the respondents.

Second, the respondents argued that the application exceeded a specific contractual limitation period found in the respondents’ respective insurance policies. The Court of Appeal also rejected this argument on the basis that the insurance policies at issue are not business agreements under s. 22(5) of the Limitations Act. Subsection 22(5) allows parties to vary or exclude limitation periods by an agreement with respect to “business agreements.” However, the Court concluded that as the policy holders are consumers, the insurance policies do not constitute “business agreements” and therefore, the applicable limitation period is governed by the Limitations Act.

Co-authored by Ilan Levy