For the first time in BC, a Court has decided that an insured is entitled to special costs, rather than the lower tariff costs, solely because they were successful in a coverage action against their insurer.
Williams v. Canales, 2016 BCSC 1811 involved a personal injury claim by Klaudia Williams against her personal trainer (Naomi Canales), Amazing Personal Training Studio (“APT”) who provides facilities for personal trainers, APT’s principle (Jeff Weltman) and Arbutus Village Holdings (the owner of the premises). Mr. Weltman, APT and Arbutus Village Holdings (the “Insureds”) brought third party proceedings against their insurer, Intact Insurance Company (“Intact”) seeking a declaration that Intact was obligated to defend the Insureds against Ms. Williams action and seeking reimbursement for defence costs incurred to date. The Insureds also brought third party proceedings against the broker (the “Broker”) because of the denial of coverage from Intact.
Intact had denied coverage to the Insureds and declined to defend them based on an exclusion clause in the policy. The Insureds were successful after a summary trial in their third party proceedings against Intact. The Insureds subsequently brought an application for special costs against Intact and the Broker sought a Sanderson Order against Intact.
Special costs (or solicitor-and-client costs) are significantly higher than tariff costs and more closely approximate actual legal fees charged by a lawyer. Special costs are awarded when an opposing party has engaged in outrageous, scandalous or reprehensible conduct deserving of rebuke from a Court.
In line with appellate decisions from other parts of Canada, a BC Court held that Intact was required to pay special costs to the Insureds despite there being no finding of reprehensible conduct on the part of the Intact.
The Court relied on an Ontario Court of Appeal decision to explain the rationale to the exceptional use of special costs against Intact:
 Entitlement to solicitor-and-client costs in the third party proceeding flows directly from the unique nature of the insurance contract which entails a duty to defend at no expense to the insured. The obligation to save harmless the insured from the costs of defending the action is sufficiently broad to encompass the third party proceedings. It is the contractual basis for the claim to solicitor-and-client costs that justifies the award and therefore constitutes an exception to the usual rule that solicitor-and-client costs will not be awarded except in unusual circumstances.
The result of this decision is that insurers should consider their risk, and increasing their reserves, when investigating and defending coverage denial claims and expect, as a matter of course, successful insureds will seek special costs. In addition to special costs, insurers are also at risk for punitive damages for bad faith where negative conduct may warrant it. See our related article on that topic here.
This decision is also of note because of the Court’s decision to award the Broker costs payable by Intact pursuant to a Sanderson Order without any prior judicial determination of the Broker’s liability. A Sanderson order requires an unsuccessful defendant to pay a successful defendant’s costs directly. The claim against the Broker was moot once Intact was found liable for coverage and was discontinued. However, the Court still assessed the Broker as ‘successful’ in the Action despite the fact that they were not a participant in the summary trial and made the cost award on that basis.