Yes—courts can and do order insurance companies to cover litigation costs when insurers improperly control defense without formal authority, then withdraw and leave defendants stranded. In June 2026, Registrar Renaldo Toote ordered CG Atlantic General Insurance Ltd to pay $10,000 in non-party litigation costs to cover wasted legal expenses from the insurer’s excessive involvement in a negligence defense before backing away. The insurer had effectively directed litigation strategy for the defendants in a motor vehicle negligence suit filed by EkralE Ltd.
and Godfrey Bethell against Carl McDonald and Tyrese Chisholm, but when coverage disputes emerged, CG Atlantic abandoned its financial backing, leaving the defendants without coverage. This order reveals a critical tension: insurance companies are expected to defend policyholders when negligence is alleged, but they cannot step in, control the case, incur defense expenses, and then walk away. The court’s decision hinged on finding that CG Atlantic had become the “real party in substance”—the actual decision-maker and cost-bearer—rather than a passive funder in the background. When insurers cross that line, they assume responsibility for the costs they created, regardless of policy language or coverage disputes.
Table of Contents
- When Does an Insurer’s Control Over Defense Create Liability for Litigation Costs?
- The Insurer’s Duty to Defend vs. the Right to Control
- The CG Atlantic Case: How Excessive Involvement Created Cost Liability
- Understanding Defense Costs Coverage and Its Limits
- The Risks of Insurer Withdrawal After Excessive Involvement
- Why Allegations of Negligence Trigger the Duty to Defend
- Coverage Structure and the Real-World Implication for Defendants
- Frequently Asked Questions
When Does an Insurer’s Control Over Defense Create Liability for Litigation Costs?
The legal standard is clear: insurers must not exceed ordinary participation in a defense. Ordinary participation means hiring defense counsel, reviewing pleadings, and ensuring reasonable defense tactics. Excessive participation means directing strategy, making litigation decisions without the policyholder’s independent consent, or functioning as the litigation commander. In the CG Atlantic case, the court found that the insurer had exceeded these bounds by effectively controlling key aspects of the litigation, then withdrawn when coverage issues emerged—leaving a trail of legal expenses with no one obligated to pay. Courts distinguish between insurers who stay in the background (proper) and insurers who take the wheel (improper). Once an insurer becomes the “real party in substance,” it can no longer hide behind a disclaimer that it wasn’t the decision-maker.
It becomes jointly responsible for the consequences of decisions it made or endorsed. This principle protects defendants from abandonment after an insurer has directed them down an expensive litigation path. The financial exposure is real. A mid-sized civil suit can generate defense costs of $50,000 to $200,000 or more. If an insurer controls that defense, incurs those costs, and then withdraws on a coverage technicality, the policyholder faces a catastrophic bill. Courts order insurers to shoulder these costs precisely because the insurer’s conduct, not the policyholder’s choice, created the expense.
The Insurer’s Duty to Defend vs. the Right to Control
The duty to defend and the right to control are not synonymous, but insurers often conflate them. A commercial general liability (CGL) policy requires the insurer to defend the policyholder against any covered claim—and critically, allegations of negligence alone are enough to trigger that duty, regardless of whether the negligence actually occurred. In the underlying suit against Carl McDonald and Tyrese Chisholm, the mere allegation of motor vehicle negligence filed by EkralE Ltd. and Godfrey Bethell was sufficient to activate CG Atlantic’s duty to defend, even before liability was determined. However, the duty to defend does not give the insurer the right to run the defense like a general commanding troops. The insurer can and should set defense strategy within reasonable bounds, control costs, hire counsel, and participate in settlement discussions.
But the policyholder remains the defendant—their name is on the complaint, their freedom and assets are at stake. An insurer that assumes operational control of the litigation without legal authority to do so is effectively taking on the defendant’s risk and responsibility. When the insurer later withdraws, it leaves the defendant without the financial backing the insurer led them to expect. A warning: many policyholders don’t realize when an insurer has crossed from defending them to controlling them. If your insurance company is making litigation decisions without consulting you, directing your lawyers unilaterally, or sending you strategy memos as directives rather than proposals, you may be in this danger zone. The policyholder should ensure that any defense arrangement includes a clear understanding of decision-making authority—who decides whether to settle, whom to hire, and what trial tactics to pursue.
The CG Atlantic Case: How Excessive Involvement Created Cost Liability
EkralE Ltd. and Godfrey Bethell filed a negligence claim against Carl McDonald and Tyrese Chisholm, naming them as defendants. CG Atlantic was their insurer. From the start, CG Atlantic took an active hand: it arranged defense counsel, reviewed pleadings, attended strategy sessions, and made decisions about how the defense would proceed. On the surface, this looks like proper claims handling. But over time, CG Atlantic’s role evolved from supporting the defense to controlling it.
The turning point came when coverage issues emerged. CG Atlantic faced the possibility that the policy might not cover this particular claim—perhaps because of an exclusion, a policy limit issue, or a definition disagreement. Instead of notifying the defendants clearly that coverage was in question and stepping back, CG Atlantic continued to direct the litigation while internally wrestling with whether it would actually pay the bill. When the time came to commit resources, CG Atlantic withdrew, leaving the defendants without financial backing for defense costs that had already been incurred. The Registrar’s order for $10,000 was not punitive—it was compensatory. The court calculated the wasted legal expenses caused by CG Atlantic’s premature or negligent direction of the case, then held the insurer accountable for those specific costs. This approach protects defendants by ensuring that if an insurer chooses to lead the defense, it cannot later abandon the financial consequences of its leadership.
Understanding Defense Costs Coverage and Its Limits
Under most commercial general liability policies, defense costs are covered “outside the policy limits.” This means the insurer must pay for defense—attorney fees, court costs, expert witnesses, depositions—without those payments reducing the policy’s indemnity limit. A $2 million policy with this structure will pay unlimited defense costs and still have the full $2 million available to pay any judgment or settlement. This structure is a significant protection for policyholders, but it comes with a critical condition: the insurer must actually pay. If the insurer disputes coverage—claiming the loss is excluded, that the policy was not in force, or that the claim falls outside the policy’s scope—it can defend under a “reservation of rights,” meaning it defends the policyholder while preserving its right to deny coverage later. This is standard practice.
But the insurer must clearly communicate that it is defending under a reservation of rights, and it must eventually either confirm coverage or formally deny it. The tradeoff is troubling for policyholders. An insurer that defends under reservation of rights is using its control over the defense to monitor the case and gather facts it will later use to deny coverage. The policyholder is being defended by someone whose financial incentive is to find reasons not to pay. This is not illegal, but it creates inherent conflict. In the CG Atlantic case, the court found that the insurer had taken this conflict too far—controlling the defense and then abandoning it when coverage disputes became clear, leaving the defendants without the protection they thought they had purchased.
The Risks of Insurer Withdrawal After Excessive Involvement
Once an insurer has assumed control of a defense and incurred costs on behalf of the policyholder, withdrawal is not costless. The policyholder has relied on the insurer’s financial backing, hired counsel on the assumption that defense costs would be covered, and made litigation decisions based on the insurer’s strategy guidance. If the insurer then denies coverage and walks away, the policyholder is left holding a bill for defense costs that were incurred with the insurer’s participation. Courts have developed rules to prevent this unfair outcome. If an insurer controls litigation and then denies coverage for costs it incurred, courts may order the insurer to pay those specific costs—not as penalty, but as restitution for the policyholder’s reliance on the insurer’s involvement. The $10,000 order in the CG Atlantic case followed this logic.
The court found that CG Atlantic’s control had created wasted legal expenses—work done because of the insurer’s direction that would not have been done if the insurer had stayed out. Those specific expenses were CG Atlantic’s responsibility. A warning for both sides: policyholders should demand that insurers either fully commit to a defense (confirming coverage) or step aside entirely. Half-measures—defending while disputing coverage, controlling the litigation while reserving the right to deny it—create these exact problems. And insurers should understand that taking control of a defense creates legal liability for the consequences. If you are going to run the case, you will be responsible if the case goes sideways due to your decisions.
Why Allegations of Negligence Trigger the Duty to Defend
The trigger for an insurer’s duty to defend is not proof of negligence or a judgment against the policyholder. It is the mere allegation of a covered event. In the EkralE and Bethell suit, the filing of a negligence claim against McDonald and Chisholm was enough. Whether those defendants were actually negligent, whether they would ultimately be found liable—these are irrelevant to the duty to defend.
The insurer must defend based on the allegations in the complaint. This rule protects policyholders because it prevents insurers from waiting on the sidelines until litigation is resolved before deciding whether to defend. If insurers had that option, they would wait, see who was likely to win, and only defend if the policyholder looked like they would lose. The duty to defend “regardless of the truth of the allegations” ensures that the policyholder gets defense coverage from the moment the claim lands.
Coverage Structure and the Real-World Implication for Defendants
In practice, a CGL policy with defense costs outside the policy limits gives a policyholder substantial protection. If the underlying suit seeks $5 million in damages but the policy limit is $2 million, the insurer will still pay for an unlimited defense. An insurer with a $2 million cap on defense costs would be incentivized to settle quickly or defend cheaply. An insurer with unlimited defense costs outside the limit has less financial pressure to minimize the defense—theoretically, this allows for a more vigorous defense.
However, the CG Atlantic case demonstrates that unlimited defense costs are only valuable if the insurer actually pays them. If the insurer controls the defense, incurs costs, and then denies coverage because it reclassifies the claim as excluded or unrelated to the policy, the policyholder’s unlimited coverage evaporates. The policyholder is left arguing that the insurer’s prior control of the case created a legal estoppel—a doctrine that prevents the insurer from now denying what it previously accepted. Courts recognize this principle, as the $10,000 order shows, but the policyholder still faces litigation and delay to collect. The nominal amount ordered in the CG Atlantic case ($10,000) was likely not the full measure of wasted costs; it may have been a negotiated settlement or a conservative calculation by the court.
Frequently Asked Questions
Does an insurer have to defend even if the claim appears meritless?
Yes. The duty to defend is triggered by allegations alone. If the complaint alleges negligence and the policy covers negligence, the insurer must defend before liability is determined.
Can an insurer refuse to defend and later pay only the judgment?
No. The duty to defend is separate from the duty to indemnify. An insurer must defend unless the claim is clearly outside policy scope. Refusing to defend while accepting indemnity liability exposes the insurer to bad faith claims.
What happens if an insurer controls the defense and then denies coverage?
Courts may order the insurer to pay the wasted defense costs if the policyholder relied on the insurer’s control. This is restitution for harm caused by the insurer’s conduct, not policy coverage.
Are defense costs unlimited under a CGL policy?
Typically, yes—defense costs are paid outside the policy limit and do not erode the indemnity limit (usually $1 million to $2 million). But this benefit only exists if the insurer pays. Coverage disputes can eliminate it.
Should I be concerned if my insurer is actively directing my defense?
Some involvement is normal. But if the insurer is making unilateral decisions without consulting you, clearly establish whether it is defending under a reservation of rights and whether coverage is confirmed or disputed.
What should I do if my insurer withdraws coverage mid-litigation?
Document the insurer’s prior involvement and control, notify your defense counsel immediately, and consult a coverage attorney. You may have claims against the insurer for abandonment or bad faith.