Indemnity Runs Through the Underlying Litigation, Not Around It: A Cautionary Reminder on Timing of Coverage Determinations
The Ontario Superior Court of Justice’s recent decision in Krandel v. CPA Professional Liability Plan Inc., 2026 ONSC 262, provides a practical reminder for insurers: attempts to secure early determination of indemnity obligations may fail where the analysis is intertwined with disputed facts in the underlying litigation.
Background
The action arose from claims against an accountant relating to professional services provided prior to the cessation of his practice. The plaintiff was a Chartered Professional Accountant who held multiple professional liability policies issued by the respondent over several years.
Coverage was sought under two of the professional liability policies. The central issue before the Court was whether indemnity was owed, and if so, which policy and applicable limits would respond. The insurer sought a clarity on coverage at an early stage in the underlying litigation. However, the Court declined to decide the indemnity issue and held that it was premature to do so.
The Court stated that while, in some cases, indemnity obligations may be determined based solely on the pleadings, this was not such a case. Rather, resolving the indemnity inquiry would require finding of facts that overlapped with issues central to the underlying litigation.
In particular, the Court held that proceeding with a coverage determination risked prejudicing the insured’s position in the underlying action. Here, the indemnity determination was not a purely legal exercise. It required an assessment of the nature of the alleged conduct, the timing of the acts or omissions, and other fact-driven considerations that were central to the underlying claim itself.
As such, the Court exercised its discretion to defer the issue until the underlying litigation had been resolved. It was held that deciding issues in the coverage context had the potential to pre-empt findings properly reserved for the trial judge.
Analysis
While indemnity obligations may be clear in some cases based on the pleadings alone, the Court may decline to make a coverage determination in circumstances where the analysis depends on factual findings that remain in dispute.
The decision recognizes that requiring an insured to litigate coverage issues prematurely may compromise their defence in the underlying action. The Court’s refusal to adjudicate indemnity at an early stage of this proceeding demonstrates a broader reluctance to allow coverage disputes to interfere and/or prejudice the defence of the main action. It also affirms the long-standing distinction between the duty to defend and the duty to indemnify. Litigants should anticipate resistance to any collapse of that distinction vis a vis advancing indemnity arguments before the factual record has been established.
Takeaways
This decision serves as a reminder of the important practical and strategic implications of indemnity determinations. Where coverage depends on contested facts, such proceedings are vulnerable to dismissal as premature and may delay, rather than expedite, resolution of any such dispute.
In addition, this decision has implications for claims involving multiple policies or allocation disputes: questions regarding which policy may respond, and in what proportions, are often fact-dependent. Insurers should exercise caution in accounting for this in their reserve practices and be prepared for indemnity issues to potentially remain outstanding for the duration of underlying litigation.
Ultimately, parties should be mindful in advancing early coverage applications unless the issue can be decided on the face of the pleadings. Where that is not possible, the parties should consider monitor the development of the factual matrix, and address indemnity at the appropriate time.