In a world of increasing business risks, insureds often purchase one or more layers of excess coverage to secure additional protection from the unknown. Such layering of coverage, however, can trigger disputes between primary insurers and excess insurers.
In the recent decision of ACE INA Insurance v. Associated Electric & Gas Insurance Services Ltd., 2012 ONSC 6248, the Ontario Superior Court of Justice considered the issue of when an excess liability insurer would have an obligation to contribute to defence costs which are often borne by the insurer at the primary layer.
In the ACE INA Insurance decision, the Ontario Superior Court of Justice found no equitable duty to contribute to defence costs on the part of the excess insurer where the excess insurer provided an "indemnity policy” rather than a "liability policy".
In this case, Toronto Hydro was insured by a CGL policy issued by ACE and an excess policy issued by AEGIS. Toronto Hydro's liability arose out of an explosion that occurred in the underground parking area of a high-rise residential apartment building in Toronto, Ontario. Although there was no express wording in the AEGIS excess policy requiring the insurer to contribute to defence costs, ACE brought an application to obtain a declaration that AEGIS had a duty to pay defence costs pursuant to the doctrine of equitable contribution.
In defending the application, AEGIS took the position that its policy was an "indemnity policy" rather than a "liability policy". Under its policy, AEGIS limited its indemnity obligation where there was other insurance, and limited its duty to indemnify to defence costs incurred by the insured, thus excluding those incurred by a third-party such as ACE. On this point, AEGIS argued that because defence counsel had been appointed by ACE rather than the insured, AEGIS had no obligation to pay defence counsel's fees.
There was a specific exclusion in the AEGIS policy for defence costs included "in other valid and collectible insurance", such as the ACE policy. As ACE had admitted that it had a duty to defend, was required by its policy to pay for defence costs and did so, it was AEGIS's position that the defence costs at issue were "included in other valid and collectible insurance" and were, therefore, specifically excluded under the AEGIS policy.
Finally, AEGIS argued that if AEGIS were required to contribute to the defence costs, there would be a serious prejudicial effect to the insured, as there would be less coverage available for damages and settlements. Under the ACE policy, defence costs were in addition to the policy limits and were unlimited. However, payment of defence costs eroded the limits of the AEGIS policy.
Justice C.J. Brown reviewed the policy wording and held that the AEGIS policy, by its specific wording, had limited its liability to indemnify the insured for the sums which the insured would become legally obligated to pay as damage and defence costs incurred by the insured, excluding expenses which are included as other valid and collectible insurance. The Court also made mention of the jurisprudence relied upon by the parties in which the Courts have consistently held that there can be no equitable obligation to contribute to defence costs, where the excess policy precludes a duty to defend.
Not surprisingly, the Court was also mindful of the impact that an imposition of an equitable duty to contribute would have on the insured. Although not a party to the application, the Court considered the prejudice to Toronto Hydro, were AEGIS required to contribute to defence costs. Having considered these issues, the Court held that the circumstances did not warrant or justify the imposition of an equitable duty to contribute on the part of AEGIS.
The policy wording is typically a key determinant of who will succeed on a coverage dispute. A Court will rely on the specific wording of the policy to determine the intentions of the parties at the outset with a plain reading of the document. This case confirms that an excess insurer will not be required to contribute to defence costs where the indemnity policy specifically excludes defence costs "included in other valid and collectible insurance", and such other valid collectible insurance is indeed available. Often protective of the rights of an insured, this Court was especially not prepared to erode the limits of the excess insurance policy where the primary policy provides for defence costs in addition to the policy limits.