THE COURT OF APPEAL FOR SASKATCHEWAN GUARDIAN INSURANCE COMPANY OF CANADA and ROYAL INSURANCE COMPANY OF CANADA and KELLOGG CANADA INC. CORAM: The Honourable Mr. Justice Wakeling The Honourable Mr. Justice Lane The Honourable Madam Justice Jackson COUNSEL: Mr. K. Stevenson, Q.C. for the Appellant Mr. S. Parthev Ms. M. Ouellette for the Respondent Royal Insurance Mr. A. McIntyre for the Respondent Kellogg Canada Inc. DISPOSITION: Appeal Heard: November 10, 1995 Appeal Dismissed: July 9, 1996 Reasons: July 9, 1996 On Appeal From: QB 1418/95 Judicial Centre of Saskatoon Appeal File: 2203 Reasons by: (1) The Honourable Mr. Justice Lane (2) The Honourable Mr. Justice Wakeling The Honourable Madam Justice Jackson LANE J.A. This appeal arises from an application for directions made pursuant to s. 209 of The Saskatchewan Insurance Act ("the Act"), R.S.S. 1978, c.S-26. The appellant, Guardian Insurance Company of Canada, ("Guardian") is the general liability insurer of the respondent Kellogg Canada Inc. ("Kellogg"). The respondent, Royal Insurance Company of Canada, ("Royal") is the primary insurer as the holder of the blanket fleet coverage of Kellogg. Mr. McLeod is an employee of Kellogg. On November 19, 1993, McLeod was involved in a motor vehicle accident. At the time of the accident, McLeod was on company business and was driving his wife's Honda because his company car had a deflated tire. McLeod, Kellogg and McLeod's wife were sued as result of the accident. Royal denied coverage and refused to defend the action in the name and on behalf of the insured on the basis of an exclusionary provision in its policy. Guardian agreed it had an obligation to defend but submitted that Royal also had duty to defend in the name and on behalf of the insured. As result of the differences between the insurers, Guardian made the application for directions to determine whether Royal had an obligation to defend. The application was heard by a Court of Queen's Bench judge in chambers who ruled Royal was not obligated to participate in defending the action "because the Honda involved is not insured by Royal". The two issues to be resolved on appeal are as follows: 1. Whether the chambers judge incorrectly decided the issue of indemnity when he engaged in determination of which insurer is obligated to defend the action; and, 2. Whether the chambers judge erred in his application of the principles of contract interpretation when he decided the Honda was not "temporary substitute automobile" within the terms of the Royal policy. Relevant Legislative Provisions Section 199 of The Saskatchewan Insurance Act: 199 Every contract evidenced by motor vehicle liability policy shall provide that, where person insured by the contract is involved in an accident resulting from the ownership, use or operation of an automobile in respect of which insurance is provided under the contract and resulting in loss or damage to persons or property, the insurer shall: (b) defend in the name and on behalf of the insured and at the cost of the insurer any civil action that is at any time brought against the insured on account of loss or damage to persons or property; 209(1) Where person is insured under more than one contract evidenced by motor vehicle liability policy, whether the insurance is first loss insurance or excess, and question arises under clause 199(b) between an insurer and the insured or between the insurers as to which insurer shall undertake the obligation to defend in the name and on behalf of the insured, whether or not any insurer denies liability under its contract, the insured or any insurer may apply to the court and the court shall give such directions as may appear proper with respect to the performance of the obligation. (2) On an application under subsection (1), the only parties entitled to notice thereof and to be heard thereon are the insured and his insurers, and no material or evidence used or taken upon such an application is admissible upon the trial of an action brought against the insured for loss or damage to persons or property arising out of the use or operation of the automobile in respect of which the insurance is provided. (3) An order under subsection (1) does not affect the rights and obligations of the insurers in respect of payment of any indemnity under their respective policies. Relevant Provisions of the Royal Insurance Policy GENERAL PROVISIONS, DEFINITIONS AND EXCLUSIONS 5. AUTOMOBILE DEFINED In this Policy except where stated to the contrary the words "the automobile" mean: Under Sections (Third Part Liability), (Accident Benefits), (Loss of or Damage to insured Automobile): (a) The Described Automobile an automobile, trailer or semi-trailer specifically described in the Policy or within the description of insured automobiles set forth therein; (b) Newly Acquired Automobile an automobile, ownership of which is acquired by the Insured and, within fourteen days following the date of its delivery to him, notified the Insurer in respect of which the Insured has no other valid insurance, if either it replaces an automobile described in the application or the Insurer insures (in respect of the section or subsection of the Insuring Agreements under which claim is made) all automobiles owned by the Insured at such delivery date and in respect of which the Insured pays any additional premium required; provided however, that insurance hereunder shall not apply if the Insured is engaged in the business of selling automobiles; and under Sections (Third Party Liability), (Accident Benefits) only: (c) Temporary Substitute Automobile an automobile not owned by the Insured, nor by any person or persons residing in the same dwelling premises as the Insured, while temporarily used as the substitute for the described automobile which is not in use by any person insured by this Policy, because of its breakdown, repair, servicing, loss, destruction or sale; (e) If the Insured is corporation, unincorporated association or registered co-partnership, any automobile of the private passenger car, private van, private truck, motorhome or farm truck type, other than the described automobile, while personally driven by the employee or partner for whose regular use the described automobile is furnished, or by his or her spouse if residing in the same dwelling premises as such employee or partner, provided that: (i) neither such employee or partner or his or her spouse is the owner of an automobile of the private passenger car, private van, private truck, motorhome or farm truck type; (ii) neither such employee, partner or spouse is driving the automobile in connection with the business of selling, repairing, maintaining, servicing, storing or parking automobiles; (iii) such other automobile is not owned, hired or leased or regularly or frequently used by the Insured or such employee or by any partner of the Insured of by any persons residing in the same dwelling premises as any of the aforementioned persons; (iv) such other automobile is not used for carrying passengers for compensation or hire or commercial delivery. Positions of the Parties Guardian acknowledges its obligation to defend but contends Royal's policy, as fleet insurer, also provides coverage for the substitute vehicle and therefore Royal has an obligation to defend McLeod in the pending action. Guardian contends the chambers judge erred by misconstruing the judicial function established by s. 209(1) of the Act by deciding the issue of indemnity when s. 209(3) of the Act makes it clear an application under s.209(1) does not affect the rights and obligations of the insurers in respect of the payment of any indemnity under their respective policies. Guardian maintains the chambers judge continued the error by failing to make determination requiring Royal to defend Kellogg. Guardian argues the chambers judge misconstrued and misapplied the standard by which the obligation of Royal to defend Kellogg is determined. Guardian contends the test is merely one that if it can be shown the claim arguably falls within the coverage of the policy the insurer has the duty to defend the claim on behalf of the insured. Guardian maintains the chambers judge determined the policy was ambiguous and any ambiguity in the coverage provision ought to be resolved in favour of the “insured” which Guardian contends is Kellogg. Guardian asserts that once the chambers judge found clause 5(c) of the policy to be ambiguous he ought to have ended his inquiry and ordered Royal to defend. Simply put, Guardian contends it need only raise an arguable point, that is, the Royal policy “might” provide coverage for the Honda in order for Royal's obligation to defend to arise. Royal on the other hand asserts the chambers judge made no error and the appropriate scope of the inquiry is broader than that envisaged by Guardian. Royal maintains the duty to defend arises when claim alleges facts which, if proven, would fall within the coverage of the policy. Thus, the chambers judge was required to embark on an extensive review of the policy. In order to decide whether an insurer has duty to defend, the chambers judge must interpret the policy provisions and determine whether or not the Honda was included in the definition of automobile in clause 5(c). Having engaged in this analysis, the chambers judge did not err. Royal maintains the term “insured” in clause 5(c) clearly refers to McLeod and not Kellogg as Kellogg is corporation and could not have “dwelling premises”. Any other interpretation is absurd. Royal states there is no ambiguity in the term "insured" and the intention of the policy was clearly to exclude such vehicles. Royal suggests Kellogg may have taken out the Guardian policy, at least, in part, because of the Royal exclusions. Royal contends that before it owes duty to defend, Guardian must show Royal's policy would cover the Honda if the plaintiff's allegations are proven. As Guardian has failed to do so, Royal has no duty to defend. Kellogg's Position Kellogg supports Guardian's position and contends it paid for the Royal insurance policy and it ought to be covered. On appeal, and for the first time, Kellogg argued there was no evidence in the affidavits filed before the chambers judge that the McLeods resided together. Therefore, the chambers judge did not have the factual basis before him to support his interpretation of the policy and form his conclusions. Decision The duty to defend arises only when the pleadings disclose claim which, if proven at trial, would be covered by provisions in the insurance policy. When the provisions of the policy are "unambiguous" or "clearly" do not provide coverage for that which is alleged by statement of claim there is no duty to defend. (Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] S.C.R. 801). In the present case, the chambers judge construed the Royal policy and determined the policy did not provide coverage for that which was alleged in the pleadings. Therefore, Royal was under no obligation to defend McLeod in the pending action. Although Guardian strenuously argued the policy was "ambiguous" and should be construed in favour of the insured, the chambers judge rejected this argument and clearly did not find ambiguity in the coverage provided. An examination of the duty to defend in light of the Nichols decision would appear to be beneficial. review of the case law reveals that while several Courts of Appeal, including Ontario, British Columbia, Manitoba and Newfoundland, have confirmed the "would" test as articulated by Madam Justice McLachlin in Nichols this Court of Appeal has not rendered its interpretation of the decision. Furthermore, it appears that on occasion, some lower courts in various jurisdictions have misconstrued Nichols as proposing that the duty to defend arises when policy "might provide coverage". Nichols and the Duty to Defend Neither party takes issue with the proposition that the duty to defend is broader than and independent of the duty to indemnify. Furthermore, any declaration which imposes duty to defend on the insurer is not determinative of the right of an insured to be indemnified under policy. (See Broadhurst and Ball v. American Home Assurance Co. (1990), 1990 CanLII 6981 (ON CA), O.R. (3d) 225 (C.A.); Great West Steel Industries Ltd. v. Simcoe Erie General Insurance Co. (1979), 1979 CanLII 1968 (ON CA), 27 O.R. (2d) 379 (C.A.)). However, the insurer has no duty to defend when its policy does not provide coverage for that which is alleged in the pleadings. The Supreme Court of Canada in Nichols v. American Home Assurance, 1990 CanLII 144 (SCC), [1990] S.C.R. 801 has expressly stated that no duty to defend arises when policy clearly does not provide coverage for that which is alleged in the pleadings. McLachlin J. writing for the court, articulates this position at p. 808 of her judgment as follows: The respondent also relies in this connection on the contention that the duty to defend is broader than and independent of the duty to indemnify. This is so, in the sense that the duty to defend arises where the claim alleges acts or omissions falling within the policy coverage, while the duty to indemnify arises only where such allegations are proven at trial. But is does not follow that the duty to defend is so broad that is arises with respect to allegations which are clearly beyond the scope of the policy. conclude that the duty to defend imposed by the defence clause is unambiguously restricted to claims for damages which fall within the scope of the policy. [Underline mine]. In Nichols, lawyer sought declaration that his liability insurer had an obligation to defend him in an action alleging he had committed fraud. The insurer maintained that it had no duty to defend. In support of its position the insurer relied on an exclusion clause in the policy that denied coverage "to any dishonest, fraudulent, criminal or malicious act or omission of an Insured." As the only cause of action disclosed in the pleadings alleged fraud, the insured asserted that it did not owe duty to defend the action. The Supreme Court agreed with the insurer's position. To determine whether an insurer has duty to defend, one must determine whether the pleadings raise claims that would be covered by the policy. This analysis requires two stage process, first one must examine the causes of action and the material facts alleged in the pleadings. As noted by McLachlin J. in Nichols at p. 812, when examining the statement of claim, "...the widest latitude should be given to the allegations in the pleadings in determining whether they raise claim within the policy". Nichols adopted the conclusion reached by the British Columbia Supreme Court in Bacon v. McBride (1984), 1984 CanLII 692 (BC SC), 51 B.C.L.R. 228, D.L.R. (4th) 96, C.C.L.I. 146. Wallace J, writing for the court concluded the following proposition at p. 232 of his judgment: The pleadings govern the duty to defend not the insurer's view of the validity or nature of the claim or of the possible outcome of the litigation. If the claim alleges state of facts which, if proven, would fall within the coverage of the policy the insurer is obliged to defend the suit regardless of the truth or falsity of such allegations. If the allegations do not come within the policy coverage the insurer has no such obligation... In the present case, the statement of claim specifically refers to "...the vehicle owned by the Defendant, Valerie McLeod, and operated by the Defendant, Ross Lee McLeod...". The pleadings allege this as material fact of the case. The court must determine whether this vehicle was insured under the Royal policy before it can determine whether the insurer is under duty to defend. The second stage of the analysis, which requires judge to determine whether the policy in question provides coverage for that which is alleged in the claim, is articulated in Nichols. At p. 810 of her reasons, McLachlin J. cited Opron Maritimes Construction Ltd. v. Canadian Indemnity Co. (1987) 1986 CanLII 89 (NB CA), 19 C.C.L.I. 168 (N.B.C.A.), for the following proposition: Where it is clear from the pleadings that the suit falls outside the coverage of the policy by reason of an exclusion clause, the duty to defend has been held not to arise:.. In Opron, the New Brunswick Court of Appeal was forced to consider whether an insured was entitled to have its insurer take over and bear the expense of lawsuit brought against it for the improper design and manufacturing of arches used in construction contact. Hoyt J.A. writing for the court made the following observation at p. 173 of his decision, While the insurer's obligation to defend is separate from its duty to indemnify, there is no duty on it to defend an action against its insured if there is clearly no liability to indemnify under the policy. The pleadings must be examined to see if they disclose facts or contain allegations which bring the incident within the terms of the indemnity provisions of the policy. The pleadings must be examined to see if they disclose facts or contain allegations which bring the incident within the terms of the indemnity provisions of the policy. If, of course, the claim against the insured is not related to subject-matter covered by the policy there is no obligation on the insurer to defend. Any doubt as to whether the pleadings bring the incident within the coverage of the policy ought to be resolved in favour of the insured. In determining coverage exclusionary clauses must be considered. Any claim clearly within such clause would not require defence as the insurer must only defend claims which allege loss within the terms of the policy when read as whole. [Emphasis mine] Guardian contends that the mere possibility that claim advanced will fall within the terms of the Royal policy imposes on Royal duty to defend. Guardian relies on the Ontario High Court decision in Re Thames Steel Construction Ltd. and Northern Assurance Co. Ltd. (1987), 1987 CanLII 4371 (ON SC), 59 O.R. (2d) 449 (H.C.) for the proposition that where it is unclear whether an insurance policy provides coverage for claims alleged the insurer is under duty to defend. In Thames, Hollingworth J. writing for the court found as fact that the provision in the policy was ambiguous. He then followed the reasoning of Mahoney J. in the unreported case of Hermanson v. Phoenix Assurance Co. of Canada, June 29, 1982 quoting at p. 453 as follows: ..."... where is unclear whether the insurance policy in question affords coverage, the insured should be entitled to Declaration directing the insurance company to defend". He then goes on: "In case where the insurer could be liable it should defend." (His emphasis.) However, Hollingworth J.'s decision was overturned on appeal. (See: Thames Steel Construction Ltd. v. Northern Assurance Co. (1989), 1988 CanLII 4657 (ON CA), 67 O.R. (2d) 158.) Houlden J.A. writing for the Ontario Court of Appeal concluded at p. 160 that: Although the appellant's obligation to defend is separate form its duty to indemnify, there is no duty to defend an action against an insured if there is clearly no obligation to indemnify: see Opron Maritimes Construction Ltd. v. Canadian Indemnity Co., [supra] [Emphasis mine]. The case law reveals some inconsistencies with respect to the relationship between the duty to defend and the coverage provided by the policy. Where the policy clearly does not provide coverage, the insurer has no duty to defend. (See: Nichols v. American Home Assurance Co., supra; Opron Maritimes Construction Ltd. v. Canadian Indemnity Co., supra; Bacon v. McBride, supra.; Wellington Guarantee v. Evangelical Lutheran Church of Canada [1996] B.C.J. No. 872 (C.A.); Kitchener Silco Inc. v. Cigna Insurance Co. of Canada [1991] O.J. No. 280 (Gen. Div.); Wisebrod v. American Home Assurance Co. 1996 CanLII 8003 (ON SC), [1996] O.J. No. 1896 (Gen. Div.)). Conversely, where the policy does provide coverage for claims, the insurer has duty to defend. (See: Kamco Installation Ltd. v. Chilliwack (District) [1991] B.C.J. No. 2438 (S.C.); Malik v. Ontario Assn. of Architects [1993] O.J. No. 3046 (Gen. Div.); Moncton Wesleyan Church (Trustees of) [1992] N.B.J. No. 497 (Q.B.); Bird Construction Co. v. Allstate Insurance Co. of Canada [1996] M.J. No. 106 (Q.B.)). Furthermore, where policy only provides coverage for some allegations made in statement of claim, the insurer is only obligated to defend those allegations which may trigger the obligation to indemnify. (See: Surrey (District) v. General Accident Assurance Co. of Canada (1994) 1994 CanLII 16683 (BC SC), 92 B.C.L.R. (2d) 115 (S.C.); St. Andrew's Service Co. v. McCubbin (1987), 1987 CanLII 2397 (BC SC), 22 B.C.L.R. (2d) 38 (S.C.); Continental Insurance Co. v. Dia Met Minerals Ltd. 1995] B.C.L.R. (3d) 231 (S.C.); Mercer v. Paradise (Town) [1991] N.J. No. 126 (S.C.)). When policy is ambiguous and an argument may be made the policy provides coverage, some courts appear to have adopted the interpretation as expressed by Hollingworth J. in Thames and have stated the mere possibility that the policy may provide coverage is sufficient to oblige the insurer to defend. (Canada Inc. v. Comco Service Station Construction Maintenance Ltd. (1990), 1990 CanLII 6870 (ON SC), 73 O.R. (2d) 317 (H.C.); Slough Estates Canada Ltd. v. Federal Pioneer Ltd. (1995), 1994 CanLII 7313 (ON SC), 20 O.R. (3d) 429 (Gen. Div); March Elevator Co. v. Canadian General Insurance Co. [1995] O.J. No. 1900 (Gen. Div); T.W. v. K.R.J.W. 1996 CanLII 8005 (ON SC), [1996] O.J. No. 2102 (Gen. Div.); Strata Plan NW3341 Riverwest v. Royal Insurance Co. of Canada [1996] B.C.J. No. 618 (S.C.). However, where true ambiguity is found in these policy's provisions, many of these courts have then engaged in process of contract interpretation to determine whether or not the policy does indeed provide coverage. When the court concludes there is no coverage, the insurer is under no duty to defend. (See: Slough Estates Canada Ltd. v. Federal Pioneer Ltd., supra; March Elevator Co. v. Canadian General Insurance Co., supra; T.W. v. K.R.J.W., supra; Strata Plan NW3341 Riverwest v. Royal Insurance Co. of Canada, supra). In Privest Properties v. Foundation Co. of Canada (1992), C.C.L.I.(2d) (B.C.S.C.), the British Columbia Supreme Court was forced to consider whether an insurer was obliged to defend its insured when it was unclear whether policy would provide coverage for claims advanced against the insured. In Privest, the applicant's argued that the Supreme Court in Nichols had modified the test to be applied when ascertaining the duty to defend from "would fall" to "may be argued to fall". Drost J. concluded that Nichols did not modify the test. Rather he expressed his conclusion at p. 33 as follows: The Supreme Court has expressly approved the test as laid down in Bacon v. McBride and Opron. think it is clear that what Madam Justice McLachlin had in mind when she used the phrases "which may be argued and "there is possibility" was the proof of the claim, not its character. This observation appears most consistent with the majority of the case law and the tenor of the Nichols decision. judge must decide whether the policy before him "would" cover the claim in question. Such an inquiry, of course, necessitates complete analysis of the applicability of any relevant exclusion or definition provision in the insurance policy. Such an analysis was in fact carried out by the chambers judge in the case before us. Policy Interpretation and Final Determination of Indemnity Section 209 of the Act provides no guidelines as to the scope of the inquiry the judge hearing the application for directions may engage in. It does not articulate whether chambers judge is precluded from examining the policy and determining whether it provides coverage for that which is asserted in the pleadings. The chambers judge recognized this but did not define the scope of his inquiry. He simply said in response to Guardian's argument it merely must raise “an arguable point” that the standard suggestion by Guardian was “off target.” In disagreeing with the position of Guardian the chambers judge held, ...this court is in as good position as any court will ever be to interpret the meaning of “insured” in clause 5(c). The fact that the question is arguable should not be conclusive. It would be rare application for directions which contain no arguable point. The difficulty with chambers judge engaging in an extensive inquiry into policy coverage in an application for directions arises when he or she ultimately rules there is no obligation to defend and after the trial, the trial judge concludes that the insurer has an obligation to indemnify the insured. This may put the insurer in the difficult position of having ruling there was no obligation to defend by one judge and an obligation to indemnify being determined by the trial judge without the insurer having appeared at the trial because of the earlier ruling. more restricted inquiry on s.209(1) application could reduce the potential for inconsistent judgments created by the operation ss. 209(1) and 209(3) of the Act. However, s. 209(1) requires court to "...give directions as may appear proper with respect to the performance of the obligation {to defend}". To determine whether an insurer has the obligation to defend an insured, chambers judge must examine the coverage provided by the insurance policy. When policy does not provide coverage for that which is alleged in the pleadings, judge may conclude that there is no duty to defend. If the provisions of the policy are ambiguous, the judge must construe the contract and determine whether coverage is provided. The limits s. 209(3) place on judge's final decision may merely be stating what the court has concluded in Nichols. final determination of whether an insurer will be liable to indemnify insured will depend upon what facts are proven at trial. If several claims are alleged in the pleadings but only one is successful, the court must determine if the policy provides coverage for that claim which is proven. However, this does not preclude judge sitting at the outset from interpreting policy and determining whether the policy would provide any coverage for allegations made in the pleadings. If policy does not provide coverage for alleged claims it cannot provide indemnity for proven claims unless the pleadings are amended during the trial to include facts or causes of action that were not present when the original s. 209(1) application was made. Furthermore, the doctrine of res judicata would prevent trial judge from re-interpreting the policy at the conclusion of the trial and rendering an interpretation inconsistent with the chambers judge’s conclusion. However, the doctrine of res judicata would not estop trial judge from re-examining the coverage provided by the policy if the pleadings were amended during trial to include new claims. It is clear from Nichols, however, no matter the scope of the inquiry the duty to defend does not arise with respect to claims which are clearly beyond the scope of the policy. At p. 808 McLachlin J. states: But it does not follow that the duty to defend is so broad that it arises with respect to allegations which are clearly beyond the scope of the policy. [emphasis added] In my view Guardian misconstrues the chambers judge's comments when it contends he, in fact, found the policy was ambiguous. The chambers judge began his analysis of the policy's clause 5(c) with reference to Guardian's interpretation of the term “insured” in clause 5(c) as Kellogg and not McLeod. He states: “This interpretation causes some strain to the words and to the mind, but Guardian contends any ambiguity must resolve against Royal as draftsman of the clause”. This clearly is not finding of ambiguity. The chambers judge made the following observation about Royal's position: Royal maintains this interpretation is absurd. The plain meaning of the words indicates Kellogg is not the insured. If Kellogg was intended to be the insured, there would be no reference to dwelling. As see it, the major weakness of this simplistic approach is that this standard form of policy could be used for both corporate and individual customers. do not see this statement as acknowledging the provision is ambiguous. He continues: It is apparent that the arguable issue submission is off target. This Court is in as good position as any court will ever be to interpret the meaning of “Insured” in clause 5(c). The fact that the question is arguable should be conclusive. It would be rare application for directions which contain no arguable point. If the construction to be placed on “Insured” clearly favours Royal, there would be no sense in forcing Royal to defend and then recoup its costs in subsequent disposition of the issue. read this comment that there is an arguable point as simply statement of the obvious. It would be rare application for direction which does not contain an arguable point. But this does not mean necessarily there is substance to the argument. He further remarks; The critical question remains whether “Insured” in clause 5(c) includes the employee, or is restricted to Kellogg. Authorities have said consistently that the whole policy must be analysed when searching for the intended meaning of unclear words. Michael Parkinton et al., MacGillivray and Parkington on Insurance Law, 8th ed. (London: Sweet Maxwell, 1988) described the principle as follows at p. 448, para. 1091: Where there is doubt as to the meaning of clause or phrase, the whole of the policy should be examined in order to see what intention the parties appear to have had concerning the matters governed by the words in questions. This is simply statement of the law but is not finding of any ambiguity. The chambers judge then considers other provisions in the policy and in particular clauses 5(d), (e) and Endorsement No. A3 and comes to this conclusion: In the face of clauses 5(d), 5(e) and A3, all excluding coverage for automobiles owned by persons residing in the same dwelling as the insured, it would seem odd if the parties intended to reverse their thinking in clause 5(c). am satisfied the intention remained consistent throughout. This being so, conclude that “Insured” in clause 5(c) is not limited to Kellogg. The opposite construction would be manifestly contrary to the intention of the parties because it would have the effect of insuring, in this clause only, an automobile owned by person residing in the same premises as the insured. [emphasis mine]. Thus having embarked on a wide review of the policy the chambers judge concluded there was no ambiguity in the exclusionary provision. He made no finding of ambiguity and was simply responding in his analysis to Guardian's argument there was, in fact, ambiguity. He clearly came to the conclusion the Honda was not covered by the Royal policy and the duty to defend is not “so broad that it arises with respect to allegations which are clearly beyond the scope of the policy.” (See: Nichols, p. 808.). Guardian's contention the chambers judge erred by deciding the issue of indemnity is not valid. The chambers judge simply determined the Honda was not covered by the Royal policy. The courts have long recognized the commercial reasons for the exclusion of such family owned temporary substitute automobile. For example, the Supreme Court of Canada dealt with such substitute policy in Wawanesa Mutual Insurance Co. v. Bell and Bell, 1957 CanLII 16 (SCC), [1957] S.C.R. 581. The court acknowledged the exception was designed to prevent claims arising from common use of each others cars by members of family. Rand J. at p. 583 stated: In the case before us the reason for the exception of the substituted car where it is owned by person "of the household" of which the insured is member seems to be the tendency of and the opportunity afforded to the members of such group to make common use of their cars and thus limit the insurance taken out. In other ways more or less freedom in the common use of cars tends to be prejudicial to the insurance business, such as by creating favourable conditions for collusion on claims; and the exception against theft clearly regards the special opportunities furnished for that offence. [Emphasis mine]. further example is McBride v. Farmers Ins. Group 42 A.L.R. 4th 1139, decision out of the state of California where the court stated at pp.1143-1144 of its decision; There are compelling policy reasons for excluding from the definition of both "nonowned automobile" and "substitute automobile" car owned by member of the same household, not the least of which is to prevent members of family who own more that one car from using them interchangeably yet insuring only one such vehicle. (See Southern Farm Bur. Cas. Ins. Co. v. Williams (1976) 260 Ark. 659 [543 S.W.2d 467, 470].) Moreover, these exclusions prevent situation which might otherwise provide windfall double coverage to the insured. [Emphasis mine] Finally, Kellogg's argument, first raised on appeal, that there was no evidence before the chambers judge to show the McLeods lived in the same premises is without merit. The affidavit evidence indicates otherwise and the parties do not dispute that the McLeods lived in the same premises. The appeal is therefore dismissed with costs on double Column V. DATED at the City of Regina, in the Province of Saskatchewan, this 9th day of July, A.D. 1996. LANE J.A. WAKELING J.A. have had the opportunity of reading the judgment of my colleague Justice Lane and while agree with much that he has written, conclude the issue in this appeal is better approached from somewhat different angle and have therefore written this judgment. The facts are well outlined in his judgment and are only summarized here to the extent necessary to provide foundation for my comments. Kellogg Canada Inc. (Kellogg) owned fleet of automobiles for use by its employees and insured these automobiles through Royal Insurance Company of Canada (Royal). Kellogg also had general liability insurance policy with Guardian Insurance Company of Canada (Guardian) which provided coverage for Kellogg’s public liability which included liability incurred as result of the operation of any automobile by one of its employees for which coverage was not provided by Royal’s policy. On November 19, 1993 an employee of Kellogg named McLeod intended to drive to work from his home in one of Kellogg’s automobiles, as he would normally do, but found one of its tires was partially deflated. Rather than change the tire he took his wife’s automobile and proceeded to drive away on Kellogg’s business. That same day he was involved in an accident in which pedestrian was seriously injured. As result of the accident, the injured party sued Kellogg, McLeod and McLeod’s wife who was the owner of the automobile involved in the accident. The question that arises is whether the Royal policy provides coverage when McLeod was not driving one of Kelloggs’ automobiles. It is accepted that if there was no coverage under the Royal policy, Guardian’s policy would fill the void and provide that coverage. Guardian is now facing the responsibility of providing the defence to this action because Royal has denied that its policy provides any coverage. As consequence, Guardian has brought this application under the following section of The Saskatchewan Insurance Act, R.S.S. 1978 c. S-26 for ruling that Royal should be directed to provide, or at least participate in, the defence of this action: 209(1) Where person is insured under more than one contract evidenced by motor vehicle liability policy, whether the insurance is first loss insurance or excess, and question arises under clause (b) of section 199 between an insurer and the insured or between the insurers as to which insurer shall undertake the obligation to defend in the name and on behalf of the insured, whether or not any insurer denies liability under its contract, the insured or any insurer may apply to the court and the court shall give such directions as may appear proper with respect to the performance of the obligation. (3) An order under subsection (1) does not affect the rights and obligations of the insurers in respect of payment of any indemnity under their respective policies.. This application was duly considered by Halvorson J. who concluded that Royal’s policy did not provide coverage and dismissed Guardian’s application. Guardian has appealed that decision on several grounds but the basic issues are: (1) Did the chamber judge fail to recognize that Guardian need only show that it was arguable that Royal’s policy provide coverage in order to succeed? (2) Was Royal’s policy correctly interpreted in accordance with that limited or restricted approach to the question of whether coverage was provided by their policy? The obvious problem that arises in an application of this nature is that it seems to almost inevitably reduce itself to judicial interpretation of the policy in question when the ultimate determination of liability under the policy is not what the section is designed to accomplish. Subsection 209(3) makes it clear that the order made by Halvorson J. and subsequently by this Court is not determinative of the rights and obligations of the parties under these policies. The recognition of this anomalous situation does nothing to avoid the need to make detailed analysis of the coverage provided by the Royal policy in order to make an assessment of whether Royal must participate in the defence of this action. The nature of the anomaly have described does however support the necessity of deciding how far the chamber judge should go in determining whether there exists sufficient probability of coverage under policy to warrant requiring an insurer to defend an action. At one end of the spectrum where there is no coverage, an insurer should obviously not be expected to provide defence. At the other end of the spectrum where the policy does provide coverage, an insurer should not be able to avoid defending claim against its insured. The middle ground between these extremes has now been judicially considered frequently enough that there has developed an acceptance of the general concept that the duty to defend is broader than the duty to indemnify. That is, to order an insurer to defend an action chamber judge need be less sure the policy provides coverage than would be the case for an actual determination of liability under the policy. The most recent support for this proposition has been provided by McLachlin J. on behalf of the Court in Nicols v. American Home Assurance Company, [1991] S.C.R. 801 at 810-811: At the same time, it is not necessary to prove that the obligation to indemnify will in fact arise in order to trigger the duty to defend. The mere possibility that claim within the policy may succeed suffices. In this sense, as noted earlier, the duty to defend is broader than the duty to indemnify. O’Sullivan J.A. wrote in Prudential Life Insurance Co. v. Manitoba Public Insurance Corp. (1976), 1976 CanLII 1099 (MB CA), 67 D.L.R. (3d) 521 (Man. C.A.), at p. 524: Furthermore, the duty to indemnify against the costs of an action and to defend does not depend on the judgment obtained in the action. The existence of the duty to defend depends on the nature of the claim made, not on the judgment that results from the claim. The duty to defend is normally much broader than the duty to indemnify against judgment. {Emphasis added.] In the case it was unclear whether the insurer might be liable to indemnify under the policy, so the duty to defend was held to apply. In the court’s view it would have been unjust for the insurers to be able to assert that “the claim is probably groundless, or will probably end up falling outside of the indemnity coverage. Since we have no proof that we own an indemnity in this case, we take the position that we owe no duty to defend”. The Nicols case comes closest to giving instruction on how to deal with this middle ground when it states at p. 812: conclude that considerations related to insurance law and practice, as well as the authorities, overwhelmingly support the view that the duty to defend should, unless the contract of insurance indicates otherwise, be confined to the defence of claims which may be argued to fall under the policy. That said, the widest latitude should be given to the allegations in the pleadings to determining whether they raise claim within the policy. It is this quotation which supports the appellant’s contention that it need only be arguable that the Royal policy provides coverage. While that statement is technically correct, it must be tempered by the practical consideration of the nature and strength of the argument presented, bearing in mind the imagination and ingenuity of counsel can almost always present an argument supporting virtually untenable position. The Nicols case does not indicate how one should decide how strong the argument must be before there will be an obligation to defend, but there is some instruction available from the example that was set. That example starts with the affirmation of the obligation to make determination of whether the pleadings have indicated claim for which coverage has been provided under the policy. It was put in this way by McLachlin J. at p. 811: Other Canadian authority overwhelmingly supports the view that normally the duty to defend arises only with respect to claims, which if proven, could fall within the scope of coverage provided by the policy: see Dobish v. Garies (1985), 1985 CanLII 1338 (AB QB), 15 C.C.L.I. 69 (Alta. Q.B.) Thames Steel Construction Ltd. v. Northern Assurance Co., [1989] I.L.R. l-2399 (Ont. C.A.); Vancouver General Hospital v. Scottish York Insurance Co. (1987), 1987 CanLII 2601 (BC SC), 15 B.C.L.R. (2d) 178 (B.C.S.C.) The Nicols case obviously has different factual foundation which makes it inappropriate to apply it directly to this case. Nonetheless having acknowledged that, it does have application in the sense that it is obvious the Court in the Nicols case was faced with question involving the interpretation of an insurance contract which was sufficiently ambiguous to have been the object of different judicial interpretations. The Supreme Court clearly felt the need and therefore the obligation to conduct review of the terms of the policy to see if it provided coverage for the claim that had been asserted in the pleadings and concluded there was not coverage and consequently no duty to defend. This then leads to the conclusion that there must in this case be review of the Royal policy to assess the strength of the argument that it has provided coverage for the claim that the pleadings allege. Before proceeding to more detailed examination of the Royal policy, it is to be recognized that there is factual element in this question which cannot be addressed on this application. For instance, there might be need to decide whether partially deflated tire constitutes `breakdown’ within the meaning of the policy. If this matter goes to trial, the eventual determination of that issue, if it is considered relevant, will have to made at that time when the availability of more facts will permit more accurate assessment of the situation. In addition, for the purposes of this judgment, am assuming that the automobile McLeod was driving was owned by someone living in the same dwelling premises as Macleod. If that is not an accepted fact, as have assumed it to be, it is matter which will be clarified at trial. now turn to review of the provisions of the Royal policy as starting point, the policy describes the coverage in this way: It is hereby understood and agreed that: (a) The Policy shall provide insurance, except in those Canadian jurisdictions where prohibited by legislation, with respect to all automobiles: (i) Owned by and licensed in the name of the Insured and .... [Emphasis added] The Insured referred to here must mean Kellogg as the purpose of the policy was to provide coverage to Kellogg’s automobiles which would be those licensed in the name of Kellogg. The more specific nature of the coverage is found in portion of Section of the policy which reads as follows: The Insurer agrees to indemnify the Insured and, in the same manner and to the same extent as if named herein as the Insured, every other person who with his consent personally drives the automobile, or personally operates any part thereof, against the liability imposed by law upon the Insured or upon any such other person for loss or damage arising from the ownership, use or operation of the automobile and resulting from ... This extends coverage to liability incurred by others who drove Kellogg’s vehicles with its consent. The pronoun `his’ is used in this paragraph when “its’” should be used as the reference is to Kellogg. find this inaccurate use of the possessive pronoun to be of no consequence. It probably arises through the use of printed standard form and certainly does not support concern that the identity of the entity referred to as Insured has somehow been made uncertain. take it as clear the policy insured Kellogg as the named insured and its employees as the unnamed insured when they drive one of Kellogg’s automobiles with its consent. The Royal policy therefore provided coverage had the employee McLeod been driving one of Kellogg’s automobiles rather than the substitute vehicle owned by his wife. Since McLeod was not driving one of Kellogg’s automobiles, the question then centres on the interpretation of clause 5(c) of the policy under the heading dealing with the coverage provided when temporary substitute vehicle is being utilized. The provision in question is as follows: 5(c) Temporary Substitute Automobile an automobile not owned by the Insured, nor by any person or persons residing in the same dwelling premises as the Insured, while temporarily used as the substitute for the described automobile which is not in use by any person insured by this policy, because of its breakdown, repair, servicing, loss, destruction or sale...” The issue that arises from consideration of paragraph 5(c) involves determination of whether or not the word Insured means Kellogg as the named insured, McLeod as the unnamed insured or both of them. There are only these three alternatives available when deciding on the interpretation to be given this section, given the assumption that Insured has the same meaning in the two places where it is used in this paragraph, an assumption readily make. An analysis of what follows when each of these alternatives is considered is useful. The first alternative would have `Insured’ refer only to Kellogg which would have paragraph 5(c) read as follows: Temporary Substitute Automobile an automobile not owned by Kellogg, nor by any person or persons residing in the same dwelling premises as Kellogg... The absurdity this alternative leads to is obvious and indicates the need to either reject the idea that Insured refers only to Kellogg or to reject the reference to living in the same dwelling house. am reluctant to reject the reference to living in the same dwelling house because that seems to be fairly standard reference in policies of this nature Indeed, another policy with this same reference found its way to the Supreme Court of Canada in The Wawanesa Mutual Insurance Company vs. Bell, 1957 CanLII 16 (SCC), [1957] S.C.R. 581. There is also similar reference to be found in paragraphs 5(d) and (e) of this policy so that one cannot conclude it is meaningless or idle comment which was not intended to have any useful application. Since cannot readily ignore the reference to living in the same dwelling house, must assume Insured in this case does not relate only to Kellogg. am supported in this view by my recognition that if it was intended that Insured refer only to the named insured Kellogg, it would mean that the coverage under 5(c), would not be the same for corporate insured as for personal insured. That difference in coverage would be very hard to justify. Surely the extent of the coverage provided for substitute vehicle should not depend on whether the insured is an individual or corporation. The second alternative would have the Insured refer to both Kellogg as the named insured and McLeod as the unnamed insured. The relevant portion of 5(c) would then read as follows: Temporary Substitute Automobile an automobile not owned by Kellogg or McLeod, nor by any person or persons residing in the same dwelling premises as Kellogg or McLeod. ... Obviously the absurdity which was apparent in the first alterative has been eliminated or at the very least greatly diminished. Firstly, the automobile would not be one owned by Kellogg or there would not be substitute vehicle involved. The automobile must also not be owned by McLeod as otherwise the restriction relating to an auto owned by anyone living in the same dwelling house would be meaningless. If the intention is that anyone an employee lives with cannot rely on the protection this policy provides, then neither can the employee. There is nothing irrational which arises from the assumption the first reference to Insured refers to both Kellogg and McLeod. The second reference to Insured can only apply to McLeod since once again Kellogg cannot be said to live in the same dwelling house with anyone. That is, in my view, minor concern so long as it has reasonable application to either Kellogg or McLeod. The fact this reference to living in the same dwelling house can and does apply to McLeod makes it impossible to suggest it should be viewed as surplusage and of no application at all. As referred to earlier, the inclusion of Kellogg is satisfactorily explained on the basis that this is printed form which was meant to have general application to both corporations and individuals and it does so when both Kellogg as corporate entity and McLeod as an individual are taken to be included in the second reference to Insured. The third alternative would have `Insured’ mean only McLeod as the unnamed insured and in that case, the same relevant portion of s.5(c) would read as follows: Temporary Substitute Automobile an automobile not owned by McLeod nor by any person or persons residing in the same dwelling premises as McLeod... There is no difficulty in reading the provision in this fashion. In that event the provision indicates substitute automobile cannot be owned by McLeod or by anyone living in the same dwelling house as McLeod which indicates the automobile driven by McLeod was not covered by the Royal policy. This alternative is obviously not supported by Guardian and for my part am left to wonder why Insured here would mean only Macleod when there is reference later on in the same paragraph to “any person insured by this policy” which is clearly reference to McLeod. The inconsistency in the terminology is not easily explained. My view of these alternatives causes me to reject the first and third alternatives as leading to unacceptable results either in the nature of an absurdity or to substantial and unacceptable inconsistency. take it to be clear that Royal’s policy intended that if substitute automobile was involved, it would also be insured under this policy so long as it was not owned by an employee or by some one living in the same dwelling house as that employee. What the rationale for that restriction may be am unable to say, but perhaps it is no more complex than statement that if an employee wishes to use his own or family member’s automobile as substitute for the employer’s automobile, that employee must be prepared to rely on the insurance the owner has obtained for that automobile and not on the insurance provided by the employer. Having given the issue this consideration conclude that it is only the first alternative that could support the contention that Royal’s policy provides coverage and cannot accept that it represents strong enough argument to provide basis for the order sought by Guardian. am not prepared to accept that this policy should be interpreted as though the restriction it contains on what automobile can be used as temporary substitute should be ignored. Before concluding, add that am largely in agreement with the view of this matter taken by the chamber judge. would have rested my position on that foundation had not done certain amount of analysis of my own to establish to my satisfaction the nature of the coverage the Royal policy provided. Having done that, it seems useful to add my views as expressed in this judgment. In the result, the appeal is dismissed with costs on double column V. DATED at the City of Regina. in the Province of Saskatchewan, this 9th day of July, A.D. 1996. WAKELING J.A. concur JACKSON J.A.
Guardian was the general liability insurer for Kellogg. Royal was the primary insurer as holder of Kellogg's blanket fleet coverage. Kellogg's employee was involved in a motor vehicle accident while on company business but was driving his wife's vehicle at the time of the accident. Royal denied coverage and refused to defend on the basis of an exclusionary provision regarding the use of substitute automobiles. It was held at trial that Royal was not obligated to participate. HELD: 1)The case law reveals some inconsistencies with respect to the relationship between the duty to defend and the coverage provided by the policy. Where the policy clearly does not provide coverage, the insurer had no duty to defend. Where a policy only provides coverage for some allegations the insurer is only obligated to defend those allegations which may trigger the obligation to indemnify. When a policy is ambiguous some courts have adopted Thames and have stated the mere possibility that the policy may provide coverage is sufficient to oblige the insurer to defend. 2)Section 209 provides no guidelines as to the scope of the inquiry the judge may engage in. The chamber judge did not define the scope of his inquiry and stated that the standard suggestion that Guardian must raise an arguable point was 'off target'. To determine whether an insurer has the obligation to defend a chamber judge must examine the coverage provided by the policy. The judge made no finding of ambiguity in the exclusionary provision. He simply determined the Honda was not covered by the Royal policy and did not decide the issue of indemnity. 3)The affidavit evidence indicated that the parties lived in the same premises thus that argument was without merit. CONCURRING JUDGMENT: The appeal was dismissed for different reasons.  1)There has been an acceptance of the general concept that the duty to defend is broader than the duty to indemnify. To order an insurer to defend a chamber judge need be less sure the policy provides coverage than would be the case for an actual determination of liability under the policy. 2)There was a factual element which could not be determined on this application such as whether a partially deflated tire constitutes a breakdown within the meaning of the policy and whether the automobile the employee was driving was owned by someone living in the same dwelling. 3)The question centered around the words used in clause 5 of the policy and who it referred to. There were inconsistencies in terminology. The policy should not be interpreted as though the restriction it contains on what automobile can be used as a temporary substitute should be ignored.