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Insurance - Where Multiple Insurers (2). Loblaw Companies Limited v. Royal & Sun Alliance Insurance Company of Canada
In Loblaw Companies Limited v. Royal & Sun Alliance Insurance Company of Canada (Ont CA, 2024) the Court of Appeal considered an insurer appeal of a complex interlocutory application to declare 'duties to defend' and if so, the allocation of legal expenses between defendants, in five merged opioid class actions against several retailers, each with multiple insurers.
Here, the court considered the payment of defence costs between the several retail defendants (the 'duty to defend' was not contested), which the appeal court found the application judge to have erred on:[16] For the reasons that follow, I would allow the appeals in part. First, the respondents were not each entitled to select only one policy under which there was a duty to defend and to require the selected Primary Insurer to defend the Class Action claims. Having given notice of the claims and having asked each of the Primary Insurers to defend the Class Actions, the proper disposition was a pro rata allocation of defence costs among the Primary Insurers based on their time-on-risk, subject to the exhaustion of applicable SIRs/deductibles.
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[54] Finally, Aviva argues that the application judge misconstrued the caselaw upon which she relied in holding that the Class Action claims were inseparable, including Hanis, Family Insurance Corp., and Markham. Those cases involved insurers who concurrently insured the same risk during the same time period, rather than insurers with successive duties to indemnify or defend claims stretching over multiple policy years. The application judge disregarded principles articulated by this court in Tedford v. TD Insurance Meloche Monnex, 2012 ONCA 429, 112 O.R. (3d) 144 and Goodyear Canada Inc. v. American International Companies, 2013 ONCA 395, 115 O.R. (3d) 728.
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[69] First, the judgment fails to give effect to the express language of the parties’ bargain. The proposed pro rata time-on-risk allocation accords with the contractual time-limited duty to defend which the respondents and the Primary Insurers agreed to.
[70] The relationship between an insurer and its insured is contractual in nature. An inquiry into the nature and scope of the duties an insurer owes to its insured starts with the insurance policy that governs them: Hanis, at para. 22; Family Insurance Corp., at para. 19; and Markham, at para. 44. When interpreting contracts of insurance, the court should give effect to clear language, reading the contract as a whole and applying general rules of contractual construction to resolve any ambiguities: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at paras. 21-24.
[71] Here, the application judge ignored the language found in the policies of each of the Primary Insurers that qualified the duty to defend and linked it to the insurance provided by the policy. The indemnity coverage provided by the Primary Insurers is for the policy period that is in each case described in the declarations that form part of the policies. The policies are all limited to coverage “during the policy period” and the duty to defend in each case is qualified by the words “with respect to such insurance as is afforded by the policy” (or equivalent language). This language clearly links the duty to defend to the coverage for which the parties bargained.
[72] As the Alberta Court of Appeal stated in International Radiography and Inspection Services (1976) Ltd. v. General Accident Assurance Company of Canada (1996), 1996 ABCA 363 (CanLII), 47 Alta. L.R. (3d) 137 (C.A.), at para. 8:The obligation to defend arises only “[a]s respects insurance afforded by this policy”. The duty to defend therefore arises only in circumstances where the claims against the insured would, if proved, require the insurer to provide indemnity under the policy. As McLachlin, J. said in Nichols v. American Home Assurance Co. (1990), 1990 CanLII 144 (SCC), 68 D.L.R. (4th) 321 (S.C.C.), at p. 326, "the duty to defend imposed by the defence clause is unambiguously restricted to claims for damages which fall within the scope of the policy". [73] Unlike in Hanis, where there was only one policy period and no contractual language qualifying the duty to defend in respect of mixed claims, here there is language prescribing the temporal scope of that duty. Claims falling outside that temporal scope would not require a Primary Insurer to provide indemnity under its policy and the insurer’s duty to defend could therefore not be triggered.
[74] The Primary Insurers were not insuring the same risk. Rather, they each agreed to cover risks within certain time parameters. Each insurer covered a successive period of time that captured a different risk profile. No insurer agreed to cover risks falling outside their prescribed time period.
[75] Consistent with the bargain made, the respondents managed their insurance coverage on the basis of successive coverage. They selected different insurers and policies for different time periods, paying the attendant premiums for the years for which they contracted and always ensuring there was no insurance gap.
(ii) The Primary Insurers are not “concurrent” insurers
[76] Second, the application judge erred in extending Family Insurance and Markham to the present case. Both cases dealt with allocation issues as between “coordinate” or concurrent insurers.
[77] Writing for the Supreme Court in Family Insurance, Bastarache J. noted, at para. 14, that where an insured holds more than one policy of insurance that covers the same risk, the insured is entitled to select the policy under which to claim indemnity, subject to any conditions to the contrary. The selected insurer is then entitled to contribution from all other insurers who have covered the same risk. At para. 14, Bastarache J. stated that “[t]his doctrine of equitable contribution among insurers is founded on the general principle that parties under a coordinate liability to make good a loss must share that burden pro rata.” Markham was to the same effect and also involved concurrent obligations by the two insurers providing coverage. The insurers in those cases had insured the same risk and accordingly both had a contractual duty to defend the same claim. Allowing the insured to choose whichever insurer it wanted to defend the claim was entirely consistent with the parties’ bargains.
[78] Here, the application judge erred in concluding that the insurers were concurrent insurers. The Primary Insurers insured discreet risks in successive time periods. They did not agree to indemnify for risks falling outside those time periods and therefore have no duty to defend claims arising entirely from them. To require the Primary Insurers to defend claims outside of their policy periods is inconsistent with the parties’ bargains.
[79] Accordingly, in the absence of concurrent obligations, the application judge further erred in concluding that the selected insurer could then seek equitable contribution from the other insurers.
(iii) Hanis is not applicable to situations involving multiple policy periods
[80] Third, it was an error to apply the principles from Hanis, which focussed on mixed claims giving rise to multiple theories of liability, to a situation involving multiple policy periods. Hanis involved a dispute between the insured and the insurer concerning “mixed claims”. There were multiple causes of action, some of which were covered by the insurance policy (e.g., malicious prosecution) and others to which coverage did not extend (e.g., wrongful dismissal). The issue was how the defence costs should be apportioned between the insurer and the insured at the conclusion of the trial. The trial judge had found that only 5% of the defence costs related exclusively to the defence of uncovered claims. He ordered that the insurer pay the remaining 95% of the costs of the mixed claims: Hanis v. University of Western Ontario (2005), 2005 CanLII 47727 (ON SC), 32 C.C.L.I. (4th) 255 (S.C.), at para. 198.
[81] On appeal, this court affirmed this allocation. In analyzing who should bear the defence costs as between the insured and the insurer, Doherty J.A. favoured a contractual analysis over consideration of equitable principles. He concluded, at para. 22, that the nature and scope of an insurer’s duty to pay defence costs should start with the language of the policy. Based on his interpretation, the insurer was required to pay “all reasonable costs relating to” the defence of the covered claims even if those costs furthered the defence of uncovered claims: at para. 23. He stated that the costs did not increase because they also assisted the insured in the defence of an uncovered claim: at para. 23.
[82] The term of the policy and successive obligations were not in issue; only one policy period was engaged.
[83] Tedford, decided several years after Hanis, also dealt with mixed claims in a single policy period. Like Hanis, Tedford dealt with the issue of allocation of defence costs as between the insured and the insurer. There the insurer submitted that it should not be responsible for 100% of the defence costs, arguing that only about $25,000 of $185,000 claimed in damages related to bodily injury covered by the insurance policy. This court held, at para. 19, that the application judge had erred in requiring the insurer to defend the entire action without making provision for apportionment of defence costs. Hoy J.A. distinguished Hanis on the basis that apportionment of costs in that case was determined following a trial whereas in Tedford, the insured sought to have the insurer assume the conduct of the defence at an earlier stage in the proceedings. Furthermore, in Tedford, the covered claims represented a small portion of the total damages claimed. Hoy J.A. noted that Hanis established that an insurer is responsible for all reasonable costs associated with the defence of a covered claim. She stated at para. 24: “It would be unfair to the insurer to fix it with defence costs that are disproportionate to the extent of its potential liability for the covered claim.”
[84] The insured was to bear the costs of the defence to the extent they exceeded the reasonable costs associated with the defence of the covered claims and in determining reasonable costs, it was appropriate to consider the quantum of the covered claims. If the parties could not agree on allocation, they could apply to court after the matter was concluded or at such time as the parties may agree.
[85] As emphasized in Tedford, Hanis establishes that an insurer is responsible for all reasonable costs associated with the defence of covered claims. Such costs may fortuitously further the defence of uncovered claims but an insurer should not be saddled with costs that are “disproportionate to the extent of its potential liability for the covered claims”: Tedford, at para. 24. Indeed, in Hanis, in holding the insurer responsible for 95% of the defence costs, the “insurer’s exposure for liability for defence costs [had not been] increased”: at para. 23. The insurer would have paid these costs to defend the covered claims even if they furthered the defence of uncovered claims.
[86] Conversely, in this case, the application judge’s disposition places a disproportionate and unreasonable burden on the selected insurers. The application judge ordered that each respondent could select a single policy to provide the defence for all the Class Action claims against it. The heavy burden associated with funding the legal costs of the Class Actions cannot seriously be challenged. For instance, as counsel for RSA argues, defence legal counsel would receive voluminous quantities of productions for the class in five actions and, in the first instance, the selected insurer would be responsible for payment of the costs associated with the review of those productions. The application judge permitted the selected insurer to seek apportionment of the defence costs at the end of the proceeding and also to seek contribution from the insurers whom she said had a concurrent obligation to defend. Seeking apportionment at the end of the proceeding requires the selected insurer to fund both lengthy and costly proceedings. Although I reject the notion that the remedy of equitable contribution is permissible in the absence of concurrent obligations, the application judge’s reliance on equitable contribution placed the burden of collecting contributions from other insurers on risk on the selected insurer: D. Carol Morgan, “Time on Risk” in Sébastien A. Kamayah, Marcus B. Snowden & Mark G. Lichty, Annotated Commercial General Liability Policy (Toronto: Thomson Reuters, 2021) (loose-leaf updated 2023, release 2), s. IF:3. Both options expose the selected Primary Insurer to costs that are disproportionate to the extent of its potential liability. AIG, for example, and as mentioned, was only on risk for approximately 6% of the class period, having agreed to defend claims only up to May 1, 1997. Requiring AIG to defend all the claims against Loblaw, including those occurring between May 1, 1997 and present, is quite clearly disproportionate to AIG’s potential degree of liability. It is not reasonable, unlike Hanis, to initially require the selected insurers to pay all the costs of the defence.
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(v) An “all sums” approach was erroneously applied
[95] Fifth, although denying that she was doing so, in permitting each insured to select one policy each for their defence, the application judge adopted an “all sums” approach to defence costs. Based on learned commentary, there is limited support for this approach.
[96] The “all sums” concept is described by Heather Sanderson in her article entitled “A Canadian Perspective on Insuring the ‘Next Asbestos’” in Hon. Todd Archibald, ed., Annual Review of Civil Litigation 2017 (Toronto: Thomson Reuters, 2017), at pp. 165-67. The author commences by noting that there are two theories of allocation used in the United States[9]: the pro rata theory of allocation and the “all sums” theory of allocation. The former has two alternatives: pro rata by time-on-risk and pro rata by limits (I will not address this second alternative of pro rata by limits as it is not relevant to this appeal and does not appear to have been applied in Canada). Sanderson explains the pro rata by time-on-risk allocation at pp. 165-66:Under “the pro-rata approach” defence costs are pro-rated. Defence costs are spread among the insurers whose policies apply to the injury or damage in issue, as well as the insured (for uninsured periods), in one of two ways, either a “time-on-the-risk” allocation or allocation by limits.
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Time on the risk refers to the period of time in which that particular insurer offered coverage in proportion to the time during which the injury or damage occurred. Each insurer is liable for a proportion of the insured’s loss, with the amount determined by the number of years the insurer was on the risk, relative to the total number of years of triggered coverage.
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Proponents of a pro-rata by time on the risk rule urge that such a rule is supported by CGL policy language. CGL policies agree to pay only for an insured’s losses which occur within the policy’s coverage. [97] She then addresses the “all sums” theory of allocation, noting that it derives its name from policies which state: “[The insurer] will pay on behalf of the insured all sums which the insured shall be legally obligated to pay as damages because of … bodily injury or … property damage to which this policy applies caused by an occurrence.” She explains at pp. 166-67:Under this theory it is argued that the policy language mandates that each insurer is liable for the whole of the defence costs incurred and it is up to that insurer to seek contribution and indemnity from any other insurer whose policy is triggered by the injury or damage in issue. This theory also states that the policy language dictates that the insured does not contribute to any of the costs incurred.
Under this theory, the insured picks the period where it has maximum coverage (i.e., a primary policy with high limits and a low deductible plus an excess policy) and forces that insurer to pay all the defence costs and all of the indemnity, subject to limits. That insurer is then forced to seek contribution and indemnity from any other insurer whose policy applies to the insured’s liability for injury or damage.
The “all sums allocation” theory is disingenuous as the policy must be read as a whole. The policy is very clear that it only applies to injury or damage occurring during the policy period. [98] Carol Morgan describes the two approaches in a similar fashion: Morgan: IF-3. pp. 78-82.
[99] In Craig Brown et al., Insurance Law in Canada (Toronto: Thomson Reuters, 2023) (loose-leaf updated 2023, release 3), s. 18:16, the authors suggest that a pro rata time-on-risk approach may be justified in situations where multiple policy periods are triggered in cases of long-term bodily injury. They describe three situations in which courts might consider allocating defence costs among primary insurers. The first occurs where there are multiple theories of liability, usually where one incident gives rise to one injury with differing theories of liability or causes of action. The authors explain that cases such as Daher v. Economical Insurance Company (1996), 1996 CanLII 639 (ON CA), 31 O.R. (3d) 472 (C.A.), and Hanis declined to allocate defence costs where there were multiple theories of liability. So too did Carneiro v. Durham (Regional Municipality), 2019 ONCA 909, 55 C.C.L.I. (5th) 1. The second situation described by the authors in which courts may consider the allocation of defence costs involves different classes of insurance where an insured may be covered under more than one type of insurance policy. Derksen v. 539938 Ontario Limited, 2001 SCC 72, [2001] 3 S.C.R. 398, is an example where both a CGL insurer and an automobile insurer were required to defend a negligence action.
[100] The third situation is where, as in these appeals, multiple policy periods are engaged. The authors describe this situation as follows:Multiple policy periods come into effect in cases of long-term bodily injury (i.e., asbestosis) or long-term property damage (i.e., gradual deterioration of building materials). The argument for allocation is that the insurer should only be responsible for a pro rata share of the damage. For example, if the insurer was only on risk for two of the ten years in which the property damage took place, the argument is that the insurer should only be responsible for 20% of the defence costs. [101] Brown et al. conclude their discussion of this issue at pp. 18-36 with:In summary, courts are very reluctant to allocate defence costs in advance of trial or settlement where there are multiple theories of liability [situation number one]. This is because it is usually impossible or very difficult to separate the cost of defending the uncovered allegations from the costs of defending the covered allegations. Courts are more likely to allocate where there are multiple policy periods because it is easier to establish a formula based on the number of years the insurer was on risk, or where the insured is covered under different classes of insurance policies [situations three and two]. The court continues at para 102-110 on this 'all sums' issue, and then proceeds on the issue of conflict of interest that may arise in such cases:(vii) The courts should limit conflicts of interest
[113] Lastly, I also agree with counsel for some of the Primary Insurers who submit that potential conflicts of interest are embedded in the scheme adopted by the application judge. The Supreme Court explained this concept in Nichols, at p. 812, underscoring the conflict that may arise if an insurer has to defend a claim that is outside its policy:Moreover, conflicts of interest may result. The insurer’s interest in defending a claim is related to the possibility that it may ultimately be called upon to indemnify the insured under the policy. It is in the insurer’s interest that if liability is found, it be on a basis other than one falling under the policy. Requiring the insurer to defend claims which cannot fall within the policy puts the insurer in the position of having to defend claims which it is in its interest should succeed. [114] It makes no sense for an insurer with minimal exposure to be tasked with controlling the defence and the defence costs. The participation of all insurers at an early stage is conducive to the conduct of the best defence possible and also serves to promote settlement.
[115] In conclusion, I would allow the Primary Insurers’ appeals as they relate to the right to select one policy in this case of consecutive coverage periods, class actions that span lengthy time frames, and no uncovered claims. The Primary Insurers’ proposed pro rata allocation of defence costs was the correct disposition.
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