Pleadings govern insurer's duty to defend in US infringement action

In Halifax Insurance Company of Canada v Innopex Ltd, the Court of Appeal for Ontario has ruled that the plaintiff insurer had a duty to defend the defendant policy holder in a trademark infringement lawsuit commenced against it by Gucci America Inc in the United States.

Gucci's complaint arose from Innopex Ltd's US sales of alleged knock-off watches. Gucci's complaint included trademark infringement and unfair competition claims, and sought injunctive relief, an accounting of profits, damages and costs. Innopex had taken out an insurance policy with Halifax Insurance Company of Canada, which included a 'personal injury and advertising liability' clause. Innopex argued that Gucci's pleadings imposed a duty upon Halifax to defend the US action. Halifax disagreed and filed summary judgment, seeking a declaration that the policy did not create such a duty.

At first instance, the motion judge of the Superior Court of Justice for Ontario declared that Halifax had no duty, although she did order Halifax to pay Innopex and its employees "all legal costs and disbursements they had incurred" from the commencement of the lawsuit until the time of the motion to determine the duty of the insurance company. Both parties appealed. Halifax argued that it was not liable for these costs, while Innopex appealed against the declaration that Halifax was not under a duty to defend.

The Court of Appeal for Ontario overturned the lower court's decision and ruled that Halifax was under a duty to defend Innopex against the US action. On examination of the specific policy and Gucci's pleadings in the case, the court upheld the rule that it is the "pleadings [that] govern the duty to defend … not the insurer's view of the validity or nature of the claim, or the possible outcome of the litigation". The determination, therefore, is made on the pleadings, even though "the actual facts may differ from the allegations pleaded".

Although the case relates to a specific insurance policy, it underscores (i) the principles behind determining whether an insurer has a duty to defend, and (ii) the necessity for defendants in trademark infringement cases to check if they have insurance to defend and, if so, to put their insurer on notice immediately.

Toni Polson Ashton, Sim Hughes Ashton & McKay, Toronto