



COURT OF APPEAL FOR ONTARIO

CITATION: IT Haven Inc. v. Certain
    Underwriters at Lloyds, London, 2022 ONCA 71

DATE: 20220128

DOCKET: C68990

Strathy C.J.O., Zarnett J.A. and
    Wilton-Siegel J. (
ad hoc
)

BETWEEN

IT Haven Inc. and Ryan Hunt

Applicants (Respondents)

and

Certain Underwriters at Lloyds,
    London

Respondent (Appellant)

Jamie Spotswood and Camille Beaudoin,
    for the appellant

Rebecca Huang and Vincent DeMarco, for
    the respondents

Heard: October 19, 2021 by video conference

On appeal from the order of Justice Mark
    L. Edwards of the Superior Court of Justice, dated December 15, 2020, with
    reasons reported at 2020 ONSC 7835.

Strathy C.J.O.:

[1]

This appeal raises the familiar issue of whether
    the appellant, the respondents liability insurer, has a duty to provide the
    respondents with a defence to a lawsuit commenced against them. The issue has a
    twist, however, because the insurer asserts that it is entitled to avoid its
    obligations under the insurance policy as a result of allegedly false representations
    made by the insured in its application for insurance  representations that
    were allegedly made conditions of the policy.

[2]

The motion judge granted the respondents
    application for a declaration that the appellant was required to provide a
    defence against a lawsuit alleging breach of copyright. He declined to consider
    extrinsic evidence proffered by the appellant in support of its allegations of
    misrepresentation and breach of conditions.

[3]

For the reasons that follow, I would dismiss the
    appeal.

A.

Factual Background

The Application
    for Insurance

[4]

The insured, the respondent IT Haven Inc. (IT
    Haven), was incorporated in 2016 and is engaged in the information technology
    business. The respondent Ryan Hunt (Hunt) is the principal and directing mind
    of IT Haven. On September 2, 2016, immediately after its incorporation, IT
    Haven applied for and obtained an errors and omissions and comprehensive liability
    insurance policy from the appellant through its insurance managers, Commercial
    Lines Premier Canada Insurance Managers Limited (Premier Canada).

[5]

IT Haven stated on the application for insurance
    that the company had one employee, that it had no revenue in the previous 12
    months and that its estimated revenue for the next 12 months was $100,000. In
    response to specific questions, IT Haven stated on the application form that
    the company:

·

was engaged in custom software development (10%
    of its services) and as computer consultants (25% of its services);

·

received 100% of its revenue in Canada;

·

did not provide services to the electronic games
    industry;

·

always used written contracts with its clients;

·

had not incorporated any software or product
    designed by others into its designs; and

·

had written procedures to safeguard against the
    infringement of copyright or trademarks of others.

The Insurance Policy

[6]

On September 2, 2016, the same date as the
    application for insurance, the appellant, Certain Underwriters at Lloyds,
    London, issued a policy of liability insurance to IT Haven (the Policy). The Policy
    covered the period to September 2, 2017. It was automatically renewed for one-year
    periods in each of September 2017 and September 2018.

[7]

The Policy, with its various attachments and
    endorsements, was 46 pages long. It provided errors and omissions coverage on a
    claims made basis, in the aggregate of $1 million, inclusive of defence
    costs,
[1]
with a limit of $1 million per claim.
[2]
It covered intellectual property infringement, among other things.

[8]

The Policy applied to any Wrongful Act or
    negligent act committed or alleged to have been committed anywhere in the world,
    and covered any claim brought against the insured in Canada or the United
    States. A Wrongful Act was defined to include any actual or alleged
    unauthorized use or violation by the Insured of any copyright, trademark,
    service mark, trade name, or trade secret in the performance of the Insureds
    professional business as stated on the Proposal form. The Insureds
    Professional business was described as including the development, design,
    installation, modification or maintenance of computers, computer hardware,
    firmware and/or software [and] the provision of computer system consulting.

[9]

The Insuring Clause of the Policy provided as
    follows:

Whereas the company, partnership or firm as
    stated in Item 1 of the Schedule (the Named Insured) has made to Underwriters
    a
Proposal
, which is hereby agreed to be the basis
    of this Policy,
which shall be deemed to be incorporated
    herein
.

We, the Underwriters, in consideration of the
    payment of the Premium stated in the Schedule, agree, subject to all the terms
    and conditions of this Policy, to pay on behalf of the Insured all sums which
    the Insured shall become legally liable to pay as Damages and Claimants costs,
    fees and expenses as a result of any Claim first made against the Insured and
    notified to Underwriters during the Period of Insurance stated in Item 3 of the
    Schedule or during the Extended Reporting Period arising out of any Wrongful
    Act by the Insured or any negligent act, negligent error or negligent omission
    by others for whom the Insured is legally liable, in or about the conduct of
    the Named Insureds professional business
as stated in
    the Proposal
. However, coverage is not afforded to services or
    operations that are not specifically listed in the definition of Insureds
    Professional Business as contained in this Policy. [Emphasis added.]

[10]

The term Proposal, referred to in the Insuring
    Clause, was defined as:

[A] written Proposal made by or on behalf of
    the Insured to the Underwriters for the insurance evidenced by this Policy,
    including any statements, declarations, application forms, warranties or
    information upon which the Underwriters have relied on and, where a special
    form or presentation has been used for the purpose, bearing the date stated in
    item 10 of the Schedule.

It was not disputed that the
    application form signed by IT Haven was the relevant Proposal.

[11]

Clause 4.9 of the Policy was entitled Material
    Information. It contemplated that the Underwriters might be entitled to either
    (a) void the Policy as a result of inaccurate or misleading information
    contained in the Proposal or as a result of the insureds failure to inform the
    Underwriters of a material change in the circumstances described in the Proposal;
    or (b) void only the coverage affected by the misleading information or non-disclosure,
    while maintaining the balance of the policy in full force and effect. The
    clause stated:

In the event of Underwriters being at any time
    entitled to void this Policy by reason of any inaccurate or misleading
    information given by the Insured in the Proposal, the Underwriters may at their
    election, instead of voiding this Policy, give notice in writing to the Insured
    that they regard this Policy as of full force and effect, save there shall be
    excluded from the indemnity afforded hereunder any Claim which has arisen or
    which may arise which is related to such information.

The Insured shall throughout the Period of
    Insurance give notice as soon as reasonably practicable of any material change
    in any fact, activity or circumstance as described in the Proposal bearing the
    date stated in item 10 of the Schedule. In the event of Underwriters being at
    any time entitled to void this Policy by reason of the Insured failing to give
    notice in accordance with this Condition, the Underwriters may at their
    election, instead of voiding this Policy, give notice in writing to the Insured
    that there shall be excluded from the indemnity afforded hereunder any Claim
    which has arisen or may arise which is related to such facts, activities or
    circumstances.

The Renewal of
    the Policy

[12]

When the Policy was automatically renewed in 2018,
    and presumably in the prior year, a Renewal Conditions Endorsement was
    appended to it, stating:

This endorsement attaches to and forms part of
    this policy:

It is understood and agreed that the attached
    Policy Renewal has been granted on the following conditions:



the Insureds Professional Business as described on the current
    Schedule accurately reflects the Insureds Professional Business during this policy
    period;



during this policy period the Insureds annual fee revenue is not
    expected to increase by $50,000 over that of the last Application submitted;



the percentage of US or foreign work has not increased since the
    last questionnaire submitted to Premier; and



the Insured is not aware of any fact, situation, or circumstance,
    that may result in a written demand or civil proceedings for compensatory
    damages.

[13]

The appellant acknowledged in oral argument that
    there is no evidence that the Renewal Conditions Endorsement was ever delivered
    to IT Haven or brought to its attention. In April 2019, the respondents
    insurance agent emailed the appellants insurance manager, updating the
    respondents address and advising, No change in operations at all, just change
    in location.

The Lawsuit
    against IT Haven and Hunt

[14]

On June 14, 2019, Niantic Inc. (Niantic) commenced
    a claim against Hunt and an entity called Global++ in the United States
    District Court for the Northern District of California, seeking damages and
    injunctive relief. Niantic filed an amended complaint on June 24, 2020, adding
    IT Haven and others as defendants.

[15]

Niantic is a producer of computer games played
    on mobile devices such as cell phones. It claims that Global++ is an
    association of computer hackers, led by Hunt, which sold subscriptions for
    unauthorized derivative versions of Niantics games. The core of Niantics
    complaint is that Global++, IT Haven, Hunt and the other defendants infringed
    its copyright in its mobile applications. It alleges that the defendants
    created, distributed, and profited from unauthorized derivative versions of
    Niantics computer applications and, in so doing, incorporated substantial
    portions of Niantics copyrighted computer code.

[16]

Niantics computer games use the Internet to
    obtain names and locations of local characters or features, which are shown on
    the screens of the players mobile devices. Niantic claims that the respondents
    cheating programs permitted users to alter the GPS coordinates of their
    devices to make it appear that they were in other geographic locations,
    allowing them to play the games as if they were actually in those locations.

[17]

Of the fourteen counts in Niantics claim, nine
    allege copyright infringement of one form or another. The remaining counts
    allege violations of the US
Computer Fraud and Abuse Act
, the
    California
Comprehensive Computer Data Access and Fraud Act
, and the
California
    Unfair Competition Law
; breach of contract; and intentional interference
    with contractual relations.

[18]

As expressed in Hunts affidavit, filed in this
    proceeding, Hunt and IT Haven claim that the Global++ software was generic,
    did not incorporate software designed by others, was designed exclusively for
    use on certain Apple iOS devices and was simply an accessory, which allowed a
    user to modify the GPS signal on their mobile device. Hunt claims that [t]here
    were hundreds of applications or industries that could potentially take
    advantage of the spoofing features offered by Global++.

[19]

The appellant refused to defend IT Haven and
    Hunt against Niantics claim, alleging that they had made misrepresentations
    when they applied for the Policy, failed to inform them of material changes in
    IT Havens business, and breached conditions of the Policy.

The Extrinsic Evidence

[20]

Although the appellant argued that Niantics
    claim was excluded from coverage based on the language of the Policy, it sought
    to introduce extrinsic evidence to establish that the claim was excluded based
    on the Material Information clause, arguing that the respondents had
    misrepresented their operations in the application for insurance, and failed to
    correct the misrepresentation during the policy period. The extrinsic evidence
    it sought to introduce included:

·

statements made by Hunt to the appellants
    coverage counsel;

·

a transcript of Hunts cross-examination on his
    affidavit filed in this application and exhibits referred to therein;

·

communications between the respondents
    insurance agent and the appellants insurance manager;

·

an affidavit of a representative of the
    appellant, who deposed that the respondents did not disclose the full nature of
    their activities to the appellant and that the information would have been
    material to the appellant; and

·

an affidavit and expert report from an
    underwriting expert, who deposed that IT Havens US business and its
    involvement in the US gaming industry were material facts that would have
    influenced a prudent insurer in determining whether to issue the policy, the
    nature of the coverage offered and the premium to be charged.

B.

The Application judges reasons

[21]

The application judge allowed the respondents
    application, declaring that the appellant was required to defend the
    respondents in the Niantic proceeding and reimburse them for their legal costs.

[22]

Referring to
Progressive Homes Ltd. v.
    Lombard General Insurance Co. of Canada
, 2010 SCC 33, [2010] 2 S.C.R. 245
    and
Monenco Ltd. v. Commonwealth Insurance Co.
, 2001 SCC 49, [2001] 2
    S.C.R. 699, the application judge summarized the principles applicable to duty
    to defend cases:

·

Insurers owe a duty to defend where there is a
    mere possibility that a claim falls within the insurance policy.

·

In determining a duty to defend, the court
    should consider the allegations made against the insured and the policy
    language.

·

The onus is on the insured to first establish the
    possibility that the pleadings fall within the insurance policy, at which point
    the onus shifts to the insurer to show that an exclusion clearly and
    unambiguously excludes coverage for a claim against an insured.

·

Extrinsic evidence explicitly referred to within
    the pleadings may be considered for the purposes of ascertaining the substance
    and true nature of the claims.

·

However, courts cannot look at premature
    evidence, or evidence which, if considered, would require findings to be made
    before trial that would affect the underlying litigation.

·

Extrinsic evidence not mentioned in the
    underlying action, or not needed for the purpose of ascertaining the nature of
    the claim, should not be considered by the court in the duty to defend
    application.

[23]

The application judge found that there was no
    need to rely on extrinsic evidence to determine the nature of the claim. The
    claim set out in Niantics complaint was for breach of copyright, claiming
    damages for the sale of an allegedly unauthorized derivative version of its
    electronic games. Considering extrinsic evidence would turn what should be a
    relatively simple pleadings type motion into a trial within a trial, he added
    that [t]he fact that Lloyds relies on the evidence of an expert to support
    its position demonstrates why the Supreme Court in
Monenco
cautioned
    that a motion judge should not look to premature evidence ie. evidence which
    if admitted would require findings to be made before trial that could affect
    the underlying litigation.

[24]

Conducting the duty to defend analysis without
    the extrinsic evidence, the application judge concluded that the appellant had
    a duty to defend the respondents. It was undisputed that IT Haven and Hunt met
    the definition of insured. The Niantic proceeding fell within the coverage
    afforded by the Policy because a Wrongful Act, as defined in the Policy,
    included any unauthorized use or violation by the insured of any copyright []
    in the insureds professional business and the definition of the insureds
    professional business included software development. The pleadings alleged that
    the wrongful act occurred in May 2019, which fell within the period covered by
    the Policy. Finally, the motion judge found that no exclusions applied to
    negate the duty to defend the respondents in the Niantic proceeding.

[25]

The application judge observed:

What has happened in this duty to defend
    application is what Iacobucci J. cautioned against in
Monenco
. Lloyds
    may be proven correct with respect to the position it has taken regarding the
    alleged misrepresentations. Once all the evidence is heard at a trial and if
    the misrepresentations are established there will be no indemnity under the
    Policy. The same may also be true with respect to the various exclusions
    emphasized as reasons why Lloyds should not have to provide a defence to the Applicants.

C.

the PARTIES submissions

[26]

The appellant contends that the Policy contained
    an obligation to accurately describe IT Havens business at the time of the
    application for insurance (i.e., the Proposal) and to disclose material
    changes in the business at the time of each annual renewal. It submits that IT
    Haven and Hunt made material misrepresentations about the nature of IT Havens
    business in the application for insurance when they stated that IT Haven: (1)
    did not provide products or services to the electronic games industry; (2)
    derived 100% of its gross revenues from Canada; (3) always used written
    contracts with its clients; and (4) had not incorporated software or products
    designed by others into its work. Relying on Clause 4.9, the appellant also submits
    that the Policy specifically excluded coverage for claims arising from
    undisclosed material changes to any fact, activity or circumstance described in
    the application for insurance.

[27]

The appellant submits that, even without the
    extrinsic evidence, the questions in the application form were material to the
    risk accepted by the underwriters and, based on the pleadings and the Policy
    alone, the claim did not fall within the Policy. It submits that the
    application judge (a) failed to consider the entire Policy, which incorporated
    statements in the application for insurance that the respondents (i) did not
    provide products or services to the electronic games industry, (ii) did not
    incorporate software or products designed by others into their own designs, and
    (iii) did not generate US revenue; and (b) failed to give effect to exclusions
    in the Policy, including the Material Information clause, and to the Renewal Conditions
    Endorsement. The appellant submits that a claim for breach of copyright in
    relation to the electronic games industry in the United States is manifestly
    inconsistent with the respondents description of their business in the application
    for insurance and is plainly excluded from coverage.

[28]

In the alternative, the appellant submits that
    when non-disclosure or misrepresentation is at issue, extrinsic evidence can
    and should be considered by the court in determining whether the insurer has a
    duty to defend. Had the extrinsic evidence been considered, the application
    judge would have found that the respondents misrepresented the nature of their
    business and the Material Information clause would have excluded the insurers liability.
    Ultimately, the appellant submits that the respondents made material
    misrepresentations about their business and it would be commercially unfair to
    require the appellant to defend claims arising from their involvement in the US
    gaming industry when it did not agree to underwrite such risks.

[29]

The respondents submit that the application
    judge correctly identified and applied the pleadings rule and that, even
    assuming this were a proper case in which to admit extrinsic evidence, the
    evidence proffered is contested and does not clearly and unambiguously exclude
    coverage. The mere possibility of coverage is sufficient to trigger the duty to
    defend. In this case, a claim for copyright infringement brought in the United
    States in relation to software development was clearly covered by the Policy
    and, equally clearly, the appellant owed a duty to defend.

D.

analysis

[30]

I agree with the application judges disposition
    and would dismiss the appeal, but for slightly different reasons.

[31]

This is not a classic duty to defend case in
    which the courts apply the pleadings rule. I will explain that shortly, but
    first I turn to the pleadings rule and the reasons for the rule.

[32]

The pleadings rule has been summarized as: [w]hen
    the pleadings allege facts which, if true, would require the insurer to
    indemnify the insured in respect of the claim, the insurer must provide a
    defence: Gordon G. Hilliker,
Liability Insurance Law in Canada
, 7
th
ed. (Toronto: LexisNexis Canada, 2020), at p. 111; see also
Nichols v.
    American Home Assurance Co.
, [1990] 1 S.C.R. 801, at p. 810;
Panasonic
    Eco Solutions Canada Inc. v. XL Specialty Insurance Company
, 2021 ONCA 612,
    at para. 22. The duty to defend is therefore broader than the duty to
    indemnify, because it is triggered by the mere possibility of coverage:
Panasonic
,
    at para. 22, citing
Monenco
, at paras. 28-29.

[33]

In considering whether the facts pleaded fall
    within the policy, the court must consider the substance and true nature of the
    claim:
Non-Marine Underwriters, Lloyds of London v. Scalera
, [2000] 1
    S.C.R. 551, at paras. 50, 79;
Monenco
, at paras. 34-36.

[34]

The pleadings must be interpreted broadly, with
    any doubt being resolved in favour of the insured. Where the claim alleges
    facts that
might
fall within coverage, the duty to
    defend arises:
Panasonic
, at para. 22;
Monenco
, at paras.
    31-33.

[35]

According to the rule, the court may look only
    to the provisions of the insurance policy and to the pleadings in the
    underlying action to determine whether the insurer has a duty to defend the
    insured: Mark G. Lichty & Marcus B. Snowden,
Annotated Commercial
    General Liability Policy
, loose-leaf (2021-Rel. 2) (Toronto: Thomson
    Reuters Canada Ltd., 2021), at §12:22;
Monenco
, at para. 28. In a
    typical duty to defend case, the issue can be addressed by determining whether
    the claim, on the face of the pleadings, falls within the policy coverage or
    is plainly excluded by the policy language.

[36]

The onus is on the insured to establish that the
    allegations made by the plaintiff, if proven, would bring the claim within the
    four corners of the policy. Once that threshold is met, the onus shifts to the
    insurer to show that the claim falls outside the coverage provided by the
    policy, because of an applicable exclusion clause:
Trafalgar Insurance Co.
    of Canada v. Imperial Oil Ltd.
(2001), 57 O.R. (3d) 425 (C.A.), at para.
    18.

[37]

As with many rules, there are exceptions to the
    pleadings rule. One such exception permits the court to consider documents,
    such as contracts, expressly referred to in the pleadings in the underlying
    action: see Hilliker, at p. 114. Another permits the court to give effect to an
    exclusion clause in the policy where it clearly and unambiguously excludes coverage:
Progressive Homes
, at paras. 19, 51;
Monenco
, at para. 29. It
    has also been suggested that the court may consider extrinsic evidence of
    underlying facts where those facts are unrelated to, and not disputed in, the
    underlying action: see Hilliker, at p. 121; Lichty & Snowden, at §12:22; Craig
    Brown
et al.
,
Insurance Law in Canada
, loose-leaf (2021-Rel.
    8) (Toronto: Thomson Reuters Canada Ltd., 2021), at §18:15;
1540039 Ontario
    Limited v. Farmers Mutual Insurance Company (Lindsay)
, 2012 ONCA 210, 110
    O.R. (3d) 116, at paras. 26, 30. This appears to be based on the proposition
    that there can be no prejudice to the insured in so doing.

[38]

Two reasons have been identified for judicial
    reluctance to consider extrinsic evidence to resolve duty to defend
    applications at an early stage. First, as observed by the application judge, the
    use of extrinsic evidence to determine whether the insurer owes the insured a
    duty to defend could require findings of fact or the resolution of live issues
    in the underlying litigation. This could operate to prejudice the insured in the
    underlying litigation and could potentially result in inconsistent findings in
    the underlying litigation on the one hand, and the insurance dispute on the
    other. As well, the findings of fact made on the application could ultimately
    be contrary to the evidence tendered on the full record at trial:
Family
    and Childrens Services of Lanark, Leeds and Grenville v. Co-operators General
    Insurance Company
, 2021 ONCA 159, 457 D.L.R. (4th) 714, at para. 60,
    citing
Monenco
, at paras. 36-37.

[39]

The second reason to exclude extrinsic evidence
    when determining whether the insurer has a duty to defend arises out of the practical
    need for an expeditious determination of the issue:
McLean (Litigation
    Guardian of) v. Jorgenson
(2005), 78 O.R. (3d) 308 (C.A.), at para. 5. It
    reflects a concern for fairness to the insured, who may be left stranded, without
    a defence to the third partys action, while the insurer contests its liability
    under the policy. It has been observed that for this reason a duty to defend
    application should not become a trial within a trial:
Monenco
, at
    para. 37;
Halifax Insurance Co. of Canada v. Innopex Ltd.
(2004), 72
    O.R. (3d) 522, at paras. 1, 39, 55.

[40]

As I have noted above, the appellant would have
    us treat this as a typical duty to defend case, because the Policy incorporates
    the representations made in the application. I do not accept that
    characterization.

[41]

On its face, Niantics claim falls within the
    Policy. It is a claim for the violation of Niantics copyright, committed in
    the performance of the Insureds Professional business, which included the
    development and design of software.

[42]

Unlike a typical duty to defend case, the
    appellants claim here is that the insured made misrepresentations in the
    application for insurance and breached a policy condition that required it to
    inform the insurer of any material change in the information set out in the
    application. Thus, the appellant says that it had no duty to defend, because
    Niantics claim alleges that IT Haven engaged in activities it represented it
    was not engaged in  participating in the computer gaming industry in the
    United States and incorporating the software of others in its product.

[43]

At this stage, however, Niantics claims are
    simply unproven allegations. The existence of misrepresentations or breaches of
    policy conditions are factual issues that cannot be determined simply by
    looking to Niantics pleadings. Moreover, whether the respondents were involved
    in the electronic gaming industry in the US, and violated Niantics copyright
    while doing so, is the
central issue
in Niantics
    lawsuit. The respondents contend that their product was agnostic to its use in
    one industry or another and that they did not violate Niantics intellectual
    property.

[44]

Determining whether IT Haven made
    misrepresentations about its business, or failed to correct its representations
    at the time of renewal, would therefore require a determination of some of the
    very issues at play in the Niantic action.

[45]

Moreover, as the appellant itself points out, to
    enable the insurer to void the policy, the misrepresentation must be
    material, in the sense of affecting the insurers decision whether to
    underwrite the risk, on what conditions and at what premium. While the
    appellant tendered both expert and lay evidence on this issue, it is not
    amenable to summary disposition and will likely require a trial.

[46]

The judgment of this court in
Longo v.
    Maciorowski
(2000), 50 O.R. (3d) 595 (C.A.) is instructive in cases such
    as this. The insured was sued for damages arising out of a motor vehicle
    accident. He had pleaded guilty to impaired driving and operating a motor
    vehicle with a blood alcohol level over 80 milligrams. The insurer denied
    coverage for the third-party claim on the ground that the insured had breached
    a number of policy and statutory conditions and added itself as a statutory
    third party to the action. The motion judge dismissed the insureds motion for
    a declaration that he was entitled to a defence of the action at the insurers
    expense. This court, speaking through Catzman J.A., dismissed the appeal, but
    did not accept the principle articulated by the motion judge that there was an
    automatic suspension of the duty to defend on the insurers allegation of a
    breach of condition and its addition as a statutory third party.

[47]

Catzman J.A. observed that where an insurer
    asserts a breach of condition by the insured, and where that assertion is
    unchallenged by the insured and there are no grounds for raising estoppel
    against the insurer or statutory relief from forfeiture, the insured is
    disentitled both to indemnity under the policy and to the costs of a defence:
    at para. 15, citing Craig Brown & Julio Menezes,
Insurance Law in
    Canada: A Treatise on the Principles of Indemnity Insurance as Applied in the
    Common Law Provinces of Canada
, 2nd ed. (Toronto: Carswell, 1991), at p.
    252. He noted, however, that the reported appellate decisions in Canada had not
    been uniform on the issue of whether the duty to defend arises in the context
    of an alleged breach of condition. He also observed that although there was
    some inconsistency in the case law of this province as to whether a motor
    vehicle insurer added as a statutory third party has a duty to defend, the
    preponderance of authority favoured the approach taken by the motion judge.

[48]

Catzman J.A. concluded that there should be no
    hard and fast rule for determining whether an insurer is required to provide a
    defence where the insurer alleges a breach of condition, but rather the court
    should adopt a flexible approach. Depending on the circumstances, a hard and
    fast rule might be unfair to either the insured or to the insurer. A rule that
    the insurer was never obliged to defend once it alleged breach of condition
    would be unfair to an impecunious insured. Conversely, a rule that
    automatically required the insurer to defend in spite of the breach of
    condition could work to the prejudice of the insurer, which provided a defence
    to an impecunious insured, but was unable to recover the costs from the insured
    after the breach of condition was made out. He concluded, at paras. 35-37:

With respect, I do not place much confidence
    in the solution suggested in [
Featherstone v. Zurich Insurance Co.
(1991), 6 O.R. (3d) 639 (Gen. Div.)], endorsed in [
Laughlin v. Sharon High
    Voltage Inc.
(1993), 12 O.R. (3d) 101 (Gen. Div.)] and followed in [
Colitti
    v. Popp
(1998), 20 C.P.C. (4th) 363 (Ont. Gen. Div.)], that the tort
    action should be put on hold while the breach of condition issue is decided
    "on an expedited basis". That solution may be practical where the
    issue admits of summary disposition: where the breach of condition is clear and
    the case for estoppel or relief from forfeiture unmeritorious or, conversely,
    where the breach of condition is technical or insubstantial and the case for
    estoppel or relief from forfeiture overwhelming. But in the many cases that are
    not clear - where the alleged breach of condition, the basis of the alleged
    estoppel or the grounds for relief from forfeiture are in serious dispute and
    require the testimony of witnesses and the resolution of conflicting evidence -
    there seems to me to be no justification for compelling the trial of the
    plaintiff's tort action to await the final disposition of the breach of
    condition issue.

Thus, rather than establishing an immutable
    legal principle, I would suggest that the question should be determined upon
    consideration of the circumstances of each case, including the relative
    strength of the positions asserted by the insurer and the insured and the
    necessity and urgency to furnish the insured with a separate defence.

[49]

In
Longo
, this court affirmed the motion
    judges order dismissing the insureds motion for an order compelling the
    insurer to defend the action. It did so primarily because the insurer had made
    allegations of clear and
uncontested
breaches of
    condition on the part of the insured (emphasis added), the insured had put
    forward nothing to support a claim for estoppel or relief from forfeiture, and
    the insurer had invoked the statutory remedy to be added as a third party, thereby
    enabling it to contest the liability of the insured in the underlying action.

[50]

The New Brunswick Court of Appeal applied
Longo
in
Drane v. Optimum Frontier Insurance Co.
, 2004 NBCA 52, 272 N.B.R.
    (2d) 241, an automobile accident case. The insurer alleged that Mr. Drane had
    been driving while his ability to drive was impaired by alcohol and had made material
    misrepresentations concerning the operation and ownership of the vehicle when
    he claimed indemnity and a defence from the insurer. The insurer invoked the
    statutory right to be added as a third party and the issue was whether, in this
    circumstance, the insurer could be compelled to provide the insured with a
    defence.

[51]

D
ê
schenes J.A., speaking for the court, identified the distinction in
Longo
between coverage cases, considered in
Nichols
, and cases grounded on
    allegations of a breach of a policy condition and the addition of the insurer
    as a third party. The insurer argued that once it invoked the statutory third
    party right, the duty to defend was suspended and had to be resolved in a
    separate proceeding before the insurer could be required to defend. In
    rejecting this submission, D
ê
schenes
    J.A. found that the insurers position that there was an immediate suspension
    of the defence obligation had been rejected by
Longo
.

[52]

In adopting the flexible approach of
Longo
,
    D
ê
schenes J.A. identified a
    number of factors that could inform the courts discretion. She observed, at
    para. 24:

I would adopt the approach taken by the
    Ontario Court of Appeal in
Longo
. The decision whether to suspend the
    insurer's duty to defend the underlying action against its insured, pending the
    determination of the question of an alleged breach of condition of the policy,
    must be informed by certain considerations which, in turn, depend on the facts
    of each case. In my view, the relevant factors are numerous and, without being
    exhaustive, relate to such questions as:

 Is the breach of condition contested and, if
    so, on what basis? Is the existence of the breach in serious dispute?

 Is it reasonable to expect that the question
    of the breach of the condition can be dealt with summarily, on an expedited
    basis? If so, what are the facts supporting such an expectation?

 Despite a clear breach of statutory
    condition, are there circumstances that militate in favor of relief from
    forfeiture under the
Act
? Are such circumstances in serious dispute?

 If the insured invokes estoppel by reason of
    the insurer's conduct, what are the circumstances being relied upon? Is the
    question of estoppel in serious dispute?

 What is the status of the main action
    against the insured? Has discovery been held? Has a date for trial been
    secured? If not, when is the main action likely to be heard?

 What is the nature of the conflict between
    the insured and the insurer? For example, what are the specific reasons that
    prompted the insurer to deny indemnity and to apply to be added as a third
    party under the
Act
?

 Is the language used in the third party
    defence filed by the insurer congruent with the language of the statement of
    defence filed by the insured on his or her own behalf? (Although I hold the
    view that an insurer is not entitled to file a statutory third party defense
    that is incongruent with its insured's interest, it is not necessary to deal with
    the issue in this case.)

 If the conflict between the insurer and its
    insured is not apparent on the face of the third party defence, is the conflict
    such as to require, in any event, separate and independent counsel to
    adequately represent the interest of the insured? If so, why?

 What is the particular financial position of
    the defendant? Is he or she capable of assuming the costs of independent
    counsel until the issue of the breach of condition is resolved?

[53]

She added, at para. 26:

In my view, when the parties to a dispute such
    as this one appear before the court, they should adduce sufficient evidence to
    allow the judge to make an informed decision. Thus, the position advocated by
    Optimum's counsel and adopted by the application judge to restrict the inquiry
    to a consideration of the statement of claim and the insurance policy to
    resolve the question of the duty to defend was wrong in law. Mr. Drane was
    entitled to adduce evidence, which supported his position, and so was Optimum,
    in order to put the application judge in a position to make an informed
    decision pertaining to the factors just enumerated.

[54]

On the facts before her, D
ê
schenes J.A. upheld the application judges
    decision to recognize the duty to defend and compel the insurer to appoint separate
    and independent counsel to represent the interests of the insured in the third
    party action: the insured contested the insurers allegations of breach of
    policy terms and statutory conditions; there was no evidence concerning whether
    the insurers statutory third party defence in the underlying action was
    congruent with the position taken by the insured in that action; there was a
    clear conflict between the position taken by the insurer and the insured on the
    issue of whether the insured was a passenger in the vehicle (as he alleged) or
    whether he was the driver (as the insurer alleged); the record did not disclose
    any information that the alleged breaches of the policy or statutory conditions
    could be adjudicated summarily; the record did not disclose any information
    allowing one to believe that the insured had sufficient income or assets to
    assume the costs of obtaining counsel until the question of the alleged breach
    of condition was resolved; and there was no evidence as to the status of the
    underlying action.

[55]

In my view, the case at bar is fundamentally a
    misrepresentation case, rather than one of breach of condition, because the
    breach of condition is founded on the existence of a misrepresentation. However,
    the flexible approach of
Longo
is appropriate in determining whether
    the appellant has a duty to defend in this case. In each case, the issue is
    whether the actions of the insured have invalidated coverage that would
    otherwise be applicable on the face of the policy, given the nature of the claim
    in the underlying litigation.

[56]

In considering, among other things, the factors identified
    in
Longo
and
Drane
, I make the following observations:

·

the insurers allegations of misrepresentation
    and breach of condition are hotly contested;

·

there is a manifest risk of inconsistent
    findings of fact and prejudice to the insured if the court were required to
    determine whether IT Havens product is unique to the gaming industry or
    agnostic and whether it incorporated Niantics proprietary information;

·

the resolution of the misrepresentation issue,
    and therefore the issue of whether coverage has been invalidated, will involve
    contested factual matters and expert evidence;

·

there is no information before us concerning the
    state of the underlying litigation in California, but it is unrealistic to
    think that the plaintiff or the court would hold the proceeding in abeyance
    while the defendants and their insurer litigate their dispute;

·

there is no evidence before us concerning IT
    Havens financial position and its ability to finance the defence of the Niantic
    proceedings; and

·

there is no evidence that IT Haven will be
    unable to reimburse its insurers for defence costs, should it ultimately be
    found that it is required to do so.

[57]

Having regard to the foregoing, and applying the
    approach in
Longo
and
Drane
, I conclude that the
    motion judge correctly found that the appellant had a duty to defend the respondents
    against the Niantic claim.

[58]

It may be that at the end of the day the
    appellant will be able to establish its claims of misrepresentation and breach
    of policy conditions, in which case it may be entitled to recover the defence
    costs from the respondents.

E.

disposition

[59]

For these reasons, I would dismiss the appeal,
    with costs to the respondents.

[60]

We did not hear full submissions on costs. If
    costs are not resolved, I would direct the parties to make written submissions.
    The respondents submissions shall be served and filed within fifteen (15) days
    of the release of these reasons and the appellants submissions shall be served
    and filed within fifteen (15) days of receipt of the respondents submissions.
    The submissions shall not exceed five (5) pages, excluding costs outlines.

Released: January 28, 2022  G.R.S.

George R. Strathy C.J.O.

I agree. B. Zarnett J.A.

I agree. Wilton-Siegel J.





[1]
The defence clauses provided: With respect to the coverage
    afforded by this Policy, the Underwriters shall appoint legal counsel or other
    experts to take up the defence of the Insured and pay those Defence Costs.
    Defence Costs are included in the Limit of Liability for each Claim.



[2]
The limit was increased from $250,000 to $1 million effective
    January 23, 2017.


