Is there a special duty for an insurer who insures both sides in a spray drift case?

The fact scenario in this case is somewhat complicated.  In the end, the case is about an insurance company that found itself on both ends of a spray drift claim.  The Plaintiffs farm land adjacent to the land farmed by the Defendants.  The Plaintiffs claimed that the Defendants sprayed a herbicide on their land that drifted to the Plaintiffs' land and caused crop damage and subsequent financial loss. 

The Defendants had insurance coverage for that type of loss and turned the claim over to their insurer, SMI, to be dealt with.  There were negotiations, but the claim was not settled. 

Then the Plaintiffs filed an amended claim adding SMI as a second defendant.  As it happened, SMI was also the insurer of the Plaintiffs.  Although the Plaintiffs' policy with SMI did not cover the crop damage loss they sustained, the Plaintiffs pleaded that SMI was duty bound to pay out their claim through the Defendants' insurance.  SMI owed a duty of good faith and fair dealing to the Plaintiffs, they alleged, and so SMI had acted in bad faith in failing to settle the Plaintiffs' claim through the Defendants' insurance.

The judge of the Saskatchewan Court of Queen's Bench hearing the case determined that the Plaintiffs' claim against SMI had no reasonable chance of success or arguable case.  The judge wrote, "To impose a duty on the insurance company to act fairly in resolving the claim would put its insured's [i.e. the Defendants'] financial position at risk.  The insurer's primary obligation arises from its contractual obligations to its insured under the policy being claimed on and not to a third party who may be insured in circumstances unrelated to the action." [emphasis added]

On that basis, the Court did not permit the Plaintiffs' to amend their claim to include SMI as a defendant.

Read the decision at: Sweet v Sweet.