Facts
This appeal arose from a decision which held that the Dominion of Canada General Insurance Company (“Dominion”) has a duty to defend Larry and Lona Hannam and their teenage son Jordan in an action relating to an all-terrain vehicle (“ATV”) accident.

The pleadings allege that Jordan Hannam was operating Larry Hannam’s ATV with his consent. Jordan is alleged to have loaned the ATV to his friend, Kayla Squires. Kayla is alleged to have allowed her friend, Tanya Pender, to ride as a passenger. Kayla lost control of the ATV and crashed, resulting in serious personal injuries to Tanya.

The ATV was not insured under the Hannam’s motor vehicle insurance coverage but Larry Hannam had a broad-form homeowner’s insurance policy (the “Policy”) from Dominion that covered the Hannam household.

The Policy states that it:

…does not apply to… the ownership, use or operation, by you or on your behalf, of motorized vehicles except as provided for in special conditions 3 and 4.

Dominion argued that it does not have a duty to defend based on this exclusion in the Policy.

Analysis
The Supreme Court of Canada recently summarized the law pertaining to an insurer’s duty to defend in Progressive Homes Ltd. v. Lombard General Insurance Company of Canada, [2010] SCJ No 33, which states:

An insurer is required to defend a claim where the facts alleged in   the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim.

The applications judge found that the use or operation of the ATV was not alleged in the pleadings to have been by Larry Hannam or on his behalf. The Statement of Claim alleged “negligent supervision” on the part of the Hannam’s.

The appeal judge held that the allegation of negligent supervision or entrustment of the ATV, and their son’s negligent entrustment or permission to operate to another inexperienced operator, is inextricably linked to the use or operation of the ATV.

Having found that the exclusion applies, the court turned its attention to special condition 4 of the Policy which states:

You are insured against claims arising out of your use or operation of any motorized land vehicle… which you do not own provided that it is designed for use principally off public roads…

Dominion argued that the words “you” and “your” are to be interpreted collectively to include all Hannams in the household. The Policy defined “you” as including an insured’s spouse and/or children.

The court held that there is no uncertainty with respect to the coverage issue as it pertains to Larry Hannam. As owner of the ATV, there is no possibility of coverage under the exclusion and special condition 4. However, the language of special condition 4 gives rise to the possibility of coverage for Jordan and Lona Hannam, therefore Dominion has a duty to defend both Jordan and Lona Hannam.

Costs
At the Court of Appeal, the court ordered that Dominion pay the costs of the application for all defendants at the lower court level and the Court of Appeal. Lona and Larry Hannam were represented by one counsel who, for the most part, made submissions that treat the Hannams as a unit. Accordingly, costs were awarded against Dominion regardless of the determination that it does not have a duty to defend Larry Hannam.

Implications of this Decision
This case exemplifies how low the threshold is to invoke the duty to defend. All that is required is the “mere possibility that a claim falls within the insurance policy”. Where there is any ambiguity or doubt, the duty to defend is to be resolved in favour of the insured party.

In this case, the court determined that there is a possibility that the word “you” could be defined differently in separate parts of the Policy. Therefore, this mere possibility gave rise to Dominion’s duty to defend the two Hannams who are not unequivocally excluded as owners of the ATV.