Court excludes extrinsic evidence when deciding whether insurer has duty to defend in foreign case

An Ontario court has found that an insurer has a duty to defend its policy holder according to the errors and omissions coverage in copyright proceedings pending in a California court, excluding extrinsic evidence provided by the insurer.

In IT Haven v. Certain Underwriters at Lloyd’s, London, 2020 ONSC 7835, applicant Ryan Hunt, an information technology specialist who incorporated applicant IT Haven Inc., applied for errors and omissions insurance on behalf of IT Haven. Respondent Certain Underwriters at Lloyd’s, London issued an E&O policy to IT Haven for the period of Sept. 2, 2016 to Sept. 2, 2017, which was renewed automatically in September 2017 and in September 2018.

Niantic Inc. initiated legal proceedings in the U.S. District Court (North District of California) against the applicants, alleging that IT Haven was a mere instrumentality for Hunt’s business over which he retained sole ownership and control and that Hunt led Global ++, an association of hackers which sold subscriptions for unauthorized derivative versions of Niantic’s mobile device games and which enabled users to cheat at Niantic’s games.

The applicant sought a declaration from the Ontario Superior Court of Justice that the respondent had a duty to defend the applicants in the U.S. proceedings pursuant to the policy, covering the period of Sept. 2, 2018 to Sept. 2, 2019. The Ontario court granted this application and ordered the respondent to defend the applicants in the U.S. proceedings and to reimburse the applicants for the legal costs already incurred in relation to the U.S. proceedings.

In its submissions, the respondent relied on statements made by Hunt to Lloyd’s coverage counsel and on transcripts of Hunt’s cross examination. Such documents could not be directly or impliedly found in the underlying legal proceedings.

The court excluded the extrinsic evidence and opted to instead determine the motion solely on the basis of the insurance policy and the allegations against the applicants in the U.S. proceedings, which essentially boiled down to a claim for copyright breach in which the plaintiff was claiming damages for the sale of unauthorized derivative versions of its products. The court stressed that it did not need to rely on extrinsic evidence to decide on the nature of the claim in the U.S. proceedings.

While the respondent cited McLean v. Jorgenson, 2005 CanLII 45188 (ON CA), to argue that extrinsic evidence could be referenced in a duty to defend application, the court said that the affidavit in that case was not contentious and did not offend the policy reasons for excluding extrinsic evidence in duty to defend applications. The court also reasoned that allowing an insurer to rely on extrinsic evidence like the documents presented by the respondent in this case would turn a relatively simple pleadings type of motion into a trial within a trial and would unnecessarily complicate matters.

The court then found that the policy on its face required the respondent to provide a defence to the applicants because the applicants fell within the definition of insured and because the date stated by the plaintiff in the U.S. proceedings for when the applicants allegedly committed the wrongful act fell within the policy’s coverage period. The court also found that none of the exclusions stated in the policy would negate the insurer’s duty to defend, considering that the respondent mostly relied on the already excluded extrinsic evidence in its claims for exclusions.

Mikel Pearce, an insurance defence and coverage lawyer at Strigberger Brown Armstrong LLP, wrote an article titled “Extrinsic Evidence and the Duty to Defend,” which discussed this case and suggested that insurers keep in mind the principles to be applied in duty to defend applications, as enumerated in Lincoln (Town of) v. AIG Insurance Co. of Canada, 2020 ONSC 1456, and resist the impulse to rely on extrinsic evidence when considering whether they have a duty to defend.

“Strategically, insurers in similar situations may have a better chance of success in bringing an application for a declaration that no coverage is owed to the insured,” wrote Pearce in the article.