The relationship between an insurer and its policyholder operates on a foundation of utmost good faith, a principle that permeates insurance law across every Canadian jurisdiction. Under a liability policy, when a third party advances a claim against the insured, the insurer typically assumes control of the defence, selecting counsel, directing strategy, and ultimately deciding whether to settle or proceed to trial. This arrangement serves both parties well in most circumstances. The insurer brings expertise, resources, and a sophisticated understanding of litigation, while the insured obtains professional representation without bearing the immediate financial burden. Yet this seemingly harmonious relationship contains an inherent tension that every professional involved in liability claims must understand. The insurer's interests and the insured's interests do not always align, and when they diverge, the question of independent counsel becomes not merely relevant but critical.
The duty to defend stands as one of the most fundamental obligations an insurer owes to its policyholder. This duty, broader than the duty to indemnify, arises whenever the pleadings in a third-party claim allege facts that, if true, would fall within the policy's coverage. Canadian courts have consistently held that this duty is triggered by the mere possibility of coverage, requiring insurers to look at the true nature of the claim rather than its precise legal characterization. The Supreme Court of Canada's jurisprudence establishes that insurers must assess the substance of the allegations, and if there exists any reasonable prospect that the claim engages coverage, the duty to defend crystallizes. However, this duty, while robust, does not eliminate the structural reality that insurers defend claims while simultaneously evaluating whether those same claims attract coverage. This dual role creates what courts and commentators have long recognized as a potential conflict of interest.