Duty to defend
Allocation of defence costs
Insureds which suffer a loss may find that they are covered by multiple insurance policies for that loss. Such situations can arise inadvertently, or the existence of multiple overlapping policies may be by design. For example, the prudent insured may have purchased several distinct types of coverage, one or more of which overlap to cover a risk. Or the insured may have required another entity to name it as an additional insured, while also having its own coverage for the risk. In the context of liability claims, having multiple insurance policies can cause disputes over which insurers have a duty to defend and, if more than one, how associated defence costs should be allocated. It is not uncommon for the insured to get caught up in these fights, although they most frequently involve disputes between the insurers.
Where a party is an additional insured, it will often have its own insurance that covers some or all of the claim. That other coverage may be intended to act as primary insurance or solely as excess to the other policy. For example, large retail vendors often require their suppliers to add them as an additional insured but will also have a corporate global programme intended to provide umbrella coverage.(1) There are also many different policy wordings that may add a party as an additional insured. That wording may have a direct impact on the scope of coverage afforded. For example, one common endorsement provides that the party is added only for vicarious liability which it may have for the acts of the named insured. Other wordings may extend to cover all liabilities arising from the named insured's activities. Others cover the additional insured for all forms of liability arising from the sale or distribution of the named insured's products (commonly known as a 'vendor's endorsement'). A consideration of the scope of coverage provided under these various wordings was discussed in an earlier article.(2) However, these various wordings underscore the importance of each policy's wordings.
A number of issues may arise with the duty to defend, where there are overlapping or concurrent insurance policies – namely:
- identifying situations of overlapping or concurrent coverage;
- how courts resolve overlapping or concurrent coverage absent a clause in one or more of the policies that deals with the issue;
- how courts resolve overlapping coverage where there is one or more 'other insurance' clauses; and
- how courts apply these principles to the allocation of defence costs.
This article focuses on the last of these issues.
As the risks associated with the legal liability of an insured include the risk of defending a costly lawsuit, even if the insured successfully defends such a lawsuit, liability policies often contain a clause requiring the insurer to defend claims against their insureds even when such claims are groundless or false. If there is even a mere possibility that the true nature of the pleaded claim, if proven at trial, falls within coverage and would trigger the insurer's duty to indemnify the insured, the duty to defend is triggered.(3) Even if the claim is proven false, the insurer cannot later ask the insured to reimburse the defence costs, as the duty to defend applied to the false claim.
Where more than one liability policy may be triggered to defend that claim, the same basic principles discussed in an earlier article also apply to the duty to defend. A relatively recent Ontario Court of Appeal case, Markham (City) v AIG Insurance Company of Canada, demonstrates this.
Markham arose from a hockey game at a community centre, during which a hockey puck flew into the stands and hit a young boy watching the game, breaking his jaw. The boy (through his litigation guardian) sued both Markham and Hockey Canada for C$150,000. The city was insured by Lloyd's Underwriters under a commercial general liability policy and was also named as an additional insured under Hockey Canada's insurance policy with AIG Insurance Company of Canada. Both policies were subject to a C$5 million limit. The dispute was between AIG and Lloyd's regarding the duty to defend the claim against the city and the rights and responsibilities that arise from that duty. The Lloyd's policy contained an 'excess' other insurance clause, while the AIG policy did not.(4) Accordingly, in the face of the excess other insurance clause and the fact that the C$150,000 claim was well within AIG's C$5 million limit, Lloyd's argued that it did not have a duty to indemnify and, accordingly, that it could not have a duty to defend.(5)
The Court of Appeal rejected this argument, finding that Lloyd's had a duty to defend. As previously discussed, the critical first step in an analysis of a potential overlapping coverage situation is to confirm that the policies cover the same subject matter, to the same extent. The court in Markham found that the AIG policy covered the city only for liability regarding Hockey Canada and the hockey team's operations; all other occurrences that caused bodily injury were not covered by AIG's policy. The Lloyd's policy, on the other hand, covered the city regarding all claims of bodily injury caused by "an occurrence". Thus, for example, the city's alleged failure to ensure the safety of spectators, such as using netting around the rink, may not be covered by the AIG policy but may be covered by the Lloyd's policy.(6) Therefore, the court concluded that to the extent that the policies covered the same claims, AIG had a duty to defend up to its policy limit, and Lloyd's may be an excess insurer. However, the court found that, at a minimum, Lloyd's owed a duty to defend the city against claims which may fall outside the scope of the AIG policy and which fall within the scope of the Lloyd's policy.(7)
Markham provides a helpful illustration of how the difference between overlapping coverage and concurrent duties to defend will affect both the coverage analysis and the potential effect of an 'other insurance' clause. It also demonstrates how the scope of the additional insured coverage can also affect this analysis, since coverage was limited to the named insured's operations.
Citing the Supreme Court's decision in Family Insurance Corp v Lombard Canada Ltd,(8) the court in Markham confirmed that, where two insurers have an obligation to defend the same claim, the insured is entitled to select the policy under which to claim defence, subject to any policy conditions to the contrary. However, in such a situation, it may be inequitable for one insurer to pay all of the costs and the other to pay nothing (unless there is truly no chance that the policy would be reached by the claim) so, under the basic principles described in Family, the selected insurer may be entitled to equitable contribution from all other insurers which accepted the risk.(9) Allocating defence costs in such a situation, the court says, is "essentially a matter of fairness as among those insurers" and, as such, it is not an exact science.(10) Excess insurers sometimes may also be required to contribute to defence costs.(11)
Since the level of risk of each insurer could not yet be ascertained given the early stage of the proceedings, the claim did not allow for a precise allocation of defence costs, so the court concluded that the fairest approach would be equally sharing the city's defence costs, pending final disposition of the claim, at which point there may be a reallocation of defence costs.(12)
Since allocation is "a matter of fairness", some courts have approached the issue differently in situations involving multiple consecutive insurance policies covering losses that occurred across two or more policy periods, in contrast to multiple insurers covering the same loss during the same policy period. For example, in St Paul Fire and Marine Insurance Company v AIG Insurace Company of Canada, the court considered both the equal shares approach and the 'time on risk' approach, where each insurer would pay in proportion to the time that they were 'on risk'. The court concluded that while equal shares is the common approach, where one insurer was on risk for a small percentage of the time covered by the claim, the time on risk approach may be more appropriate.(13)
The Court of Appeal's decision in Markham underscores the importance of focusing on the policy wordings as the controlling instruments in what the court admits is not an exact science, since the duty to defend is determined based on whether there is a mere possibility that the policy may respond to claims in the underlying action, if proven. The coverage provided by the policies in Markham overlapped to some degree but were distinct in other areas. To the extent that they overlapped, the Lloyd's policy may have been excess, but otherwise both policies afforded primary coverage. The court decided on an approach which it found fair and equitable in the circumstances, while leaving the door open to reallocation at the conclusion of the underlying action once the parties were no longer operating in the realm of "mere possibility".
Equitable allocation is a doctrine used to fairly distribute defence costs where multiple insurers must provide a defence. In some cases, insurers try to argue that this doctrine should also apply to an insured. This conflates the scope of the defence that an insurer may be required to provide with the equitable sharing of common costs and is inconsistent with Ontario law. In Hanis v University of Western Ontario,(14) the Ontario Court of Appeal rejected this, finding that allocation as between an insured and insurer is based solely on the insurance contract. The insurer must pay all costs associated with defending covered claims, even if this results in it defending claims that could never be payable under the policy's indemnity provisions. The insured is obliged to pay only legal costs that are incurred solely on the defence of uncovered claims, and the insurer must pay the rest. This is why insurers are generally ordered to pay the full costs of defence subject to reallocation at the end of the case. The fact that two or more insurers may be involved does not change this. A good rule of thumb is to remember that an insured should never be worse off because there are two insurers involved.
When presented with a client which may have overlapping or concurrent coverage for a loss, the following are the important analytical steps:
- identify the policies and assess the scope of the coverage;
- determine the scope of the duty to defend; and
- consider other insurance provisions and allocation.
It is critical to first read the policies closely, in the context of the facts pleaded, to confirm that there is an issue. As Markham demonstrates, this can be a difficult exercise that turns on one or two short sentences. If it is a true problem of overlapping or common defence coverage, courts will look to the specific wording of each policy to determine each insurer's obligation to contribute to the loss, since no privity of contract exists between insurers. In such a situation, insureds with multiple responding policies may select an insurer to cover the loss, and that insurer is entitled to equitable contribution from the other insurer(s) covering the risk. If there are 'other insurance' clauses at play, one must exercise caution in interpreting them to mean that the policy in question is excess to other insurance, because such clauses may be compatible with other policies that contain a similar clause, while also still providing coverage to the insured. These basic principles apply to the duty to defend and allocation of defence costs.
For further information on this topic please contact Lawrence Theall or Callum Micucci at Theall Group LLP by telephone (+1 416 304 0115) or email ([email protected] or [email protected]). The Theall Group LLP website can be accessed at www.theallgroup.com.
(1) True umbrella coverage differs from excess coverage. Umbrella coverage 'drops down' to provide primary coverage where there is no underlying primary insurance for that risk, whereas excess coverage does not.
(2) This article is the last in a series on additional insured coverage and multiple insurers. For earlier articles in the series, please see:
- "'Additional insured' coverage and multiple insurers: overlapping and common defence coverage";
- "'Additional insured' coverage and multiple insurers: resolving overlapping coverage disputes"; and
- "'Additional insured' coverage and multiple insurers: 'other insurance' clauses".
(3) Progressive Homes Ltd v Lombard General Insurance Co of Canada, 2010 SCC 33 at paras 9 to 10  2 SCR 245.
(4) Markham (City) v AIG Insurance Company of Canada, 2020 ONCA 239 at paras 1 to 5, 22, 27, 445 DLR (4th) 405.
(8) Family Insurance Corp v Lombard Canada Ltd, 2002 SCC 48 at paras 14 to 15  2 SCR 695.
(11) See, for example, Broadhurst & Ball v American Home Assurance Co (1990), 1 OR (3d) 225, 76 DLR (4th) 80 (Ont CA).
(12) Markham, supra Endnote 4 at paras 84 to 87.
(13) St Paul Fire and Marine Insurance Company v AIG Insurance Company of Canada, 2019 ONSC 6489, 148 OR (3d) 682.
(14) Hanis v University of Western Ontario, 2008 ONCA 678, 92 OR (3d) 594.