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By: Lawrence G. Theall, Partner |
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By: Callum J. Micucci, Litigation Associate |
Introduction
Insureds who suffer a loss may find 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 insurer(s) 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 program 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 very direct impact on the scope of coverage afforded. For example, one common endorsement provides that the party is only added for vicarious liability 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 is a subject for another paper. However, these various wordings underscore the importance of each policy’s wordings, as discussed below.
This paper will provide an overview of the following issues that may arise with the duty to defend, where there are “overlapping” or concurrent insurance policies:
- identifying situations of overlapping/concurrent coverage;
- how courts resolve overlapping/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” clause(s); and
- how courts apply these principles to the allocation of defence costs.
The purpose of this paper is not to comprehensively discuss these issues, which are often complex and specific to particular policy wordings, but to introduce the basic concepts and some key cases. As is always the case, the reader should conduct their own analysis and research when advising a client.
Identifying overlapping and common defence coverage
The first step in any coverage analysis starts with the policies. Where two or more policies may respond to the claim, it is critical to consider how each policy applies, and then how they relate to one another. As the Supreme Court has noted, when undertaking a coverage analysis, it is always important to focus on the particular wording of a policy, and not be misled by the labels that may be used or attempts to pigeonhole the policy into a particular category.[2] The same holds true for terms commonly used in this area of law. Having said this, we will briefly discuss different ways two policies might interrelate, as it can and will affect the coverage analysis.
As with any insurance claim—but particularly where multiple insurance policies potentially cover the same risk—the guiding principle of indemnity requires that the insured must not recover more than the value of the loss.[3] If that principle were ignored, it would create a moral hazard, incentivizing insureds to obtain more coverage than necessary and potentially contrive their losses in an attempt to make a profit.[4] Thus, as a general rule, the insured with multiple insurance policies can never recover more than the loss by claiming the full loss from more than one insurer.
According to the Supreme Court, two or more policies may be “overlapping” where they:
- Comprise the same subject matter;
- Are effected against the same peril;
- Are effected by or on behalf of the same assured;
- Are in force at the time of the loss; and
- Are legal contracts of insurance.[5]
The policies must also cover the same interest in the subject-matter for there to be overlapping coverage.[6]
On the other hand, “concurrent” coverage refers to policies that may cover the same subject matter but for different risks, but both policies provide defence coverage for the same claim. They are not necessarily “overlapping”, but they both may require the insurer to provide a defence to the insured. In addition, the scope of the defence required under one policy may be broader than the scope provided under the other. It is important to note that some cases may use the term concurrent coverage when in fact they are referring to overlapping coverage, so it is again important not to be misled by the labels.
One should not try to “pigeonhole” the policies. They do not have to be one or the other. It is possible that a policy can be both overlapping and concurrent.
For example, in Re Wawanesa Mutual Insurance Co, a husband and wife jointly owned a home, and the husband obtained coverage on behalf of both of them for the whole property. After the couple separated, the wife obtained a policy covering the home with a different insurer. A fire destroyed the house, and the wife’s insurer was only liable for the wife’s half-interest. Therefore, the only issue of overlapping coverage was with respect to the wife’s half-interest, which both the husband and the wife insured.[7] This issue can also arise regarding partnership property.[8]
Often, it will not matter whether coverage is “overlapping” or “concurrent”, but the distinction becomes important when courts need to consider “other insurance” provisions as discussed below. When advising a party on how multiple policies may respond to a loss, the first step is to confirm there is overlapping or concurrent defence coverage, as it may not be immediately clear.
In the context of the duty to defend, it is important to remember that the duty to defend is broader than the duty to indemnify. Insurers have a duty to defend all claims where there is the mere possibility that any damages awarded may be covered by the policy, even if such claims are false, groundless or fraudulent.
Once the lawyer has confirmed there is an issue of overlapping or common defence coverage, he or she will need to advise the client as to how a court may resolve the issue.
Methods to resolve overlapping coverage disputes
In Family Insurance Corp v Lombard Canada Ltd (“Family”), the Supreme Court of Canada noted that it is a well-established principle of insurance law that the insured may select the policy under which to claim indemnity, subject to any policy conditions to the contrary (discussed below),[9] as each insurer is severally liable to the insured.[10] Under the doctrine of equitable contribution, the insurer whom the insured has selected is in turn entitled to contribution from other insurers who insured the same risk.[11] This doctrine applies in the context of the duty to defend and allocation of defence costs in overlapping and concurrent coverage situations, but some insurers have sought to argue equitable contribution is only available where the policies are overlapping, not concurrent. However, courts often allocate where insurers have concurrent defence obligations, but their policies do not overlap. This argument against equitable allocation for concurrent defence obligations was expressly rejected in a recent Ontario decision, Aviva Insurance Company v Intact Insurance Company (“Aviva”).[12]
In Aviva, the insured defendant’s friend sustained injuries when he fell off a ladder during a jam session at the insured’s engineering firm. The insured was potentially covered by three policies: the firm’s liability policy with Aviva relating to the building it owned (which excluded personal liability of the insured), the firm’s liability policy with RSA relating to its operations, and the insured’s personal homeowner’s policy with Intact that covered his personal liability (but excluded the insured’s business liability). The insured was sued in both his personal and business capacities. The Court held that the Aviva and Intact policies did not cover the same subject matter, both policies applied, and they did not overlap. As a result, the court also found the policies provided common defence coverage, and each insurer owed the insured a duty to defend.[13] Such “concurrent” policies do not fall withing the prescribed requirements for “overlapping” insurance, but they do result in a common defence. The Court accepted the proposition that in Family, the Supreme Court was dealing with overlapping policies, but went on to find that equity would assist an insurer with concurrent defence obligations,[14] although the Court preferred to rely on unjust enrichment. This can be problematic because some courts may argue that an insurer may not be able to satisfy the requirements of unjust enrichment. However, the Court in Aviva also noted the broader proposition that equity will assist an insurer with concurrent defence obligations, relying on the Ontario Court of Appeal’s earlier decision in Broadhurst & Ball v American Home Assurance Co, which involved equitable allocation between a primary and excess insurer.[15]
Absent a clause in the policy that modifies an insurer’s obligation to equitably contribute, the method for calculating the proportion each insurer must contribute varies according to the policies.[16] There is some precedent for a method called the “maximum liability method”, where one simply takes the amount of one insurer’s limits, divides it by the total of all insurers’ limits, and then multiplies that number by the loss.[17] However, the Supreme Court of Canada has held that the prevailing and preferable method is that each insurer bears the loss equally until the lower policy limit is exhausted, with the policy with the higher limit contributing any remaining amounts.[18] This is called the “independent liability method”.[19] The rationale for the independent liability method lies in the fact that the risk being underwritten is at its greatest with smaller claims and at its least with larger claims. Higher limits are often provided with only a small increase in premiums. If two insurers have different upper limits for claims, the court will draw an inference that they both accepted the same level of risk up to the lower of the limits.[20] This generally results in an “equal shares” approach to contribution.
Multiple insurers and “other insurance” clauses
As the Supreme Court of Canada noted in Family, in their policies, insurers can and often do attempt to limit their obligations to equitably contribute. While Family is an indemnity case rather than a duty to defend case, subsequent courts have consistently followed the basic principles set out in Family and applied them to duty to defend cases involving multiple insurers and allocation issues.[21] The Family decision affirmed the basic principle that where two or more insurers cover the same risk and each has attempted to limit its liability in such a scenario, since there is no privity of contract between the insurers, the “proper instrument to determine the liability of each insurer is the policy itself”.[22] The exercise is one of contractual interpretation, determining the insurer’s intentions vis-à-vis the insured, not as between insurers:
Once the interest of the insured is not longer at stake, that is where the contest is only between the insurers, there is simply no basis for looking outside the policy. In the absence of privity of contract between the parties, the unilateral and subjective intentions of the insurers, unaware of one another at the time the contracts were made, are simply irrelevant.[23]
In Family, Michelle Patterson injured herself in a fall from a horse. Patterson sued the owner of the stable, Lesley Young, and settled with her for $500,000, which amount was payable by Young’s insurers. At the time of the accident, Family Insurance Corporation insured Young under a homeowner’s policy with a limit of $1 million, while Lombard Canada Ltd. insured Young under a commercial general liability policy with a limit of $5 million. Both insurers admitted that their respective policies covered the claim.
However, both policies stated that they were primary policies unless other valid insurance were available to cover the loss, in which case they were excess policies. Both insurers sought to use these “other insurance” clauses to shield themselves from primary liability. Thus, the wordings gave rise to circular reasoning that did not resolve the problem of which policy provided the primary coverage. The Court held that in the face of such an issue, a reviewing court must determine the most equitable means of resolving the issue that respects the intentions of the parties and the right of the insured to recover.[24]
Thankfully, in determining the most equitable means of resolving the issue, the Court rejected an American approach known as the “Minnesota approach”, the modern manifestation of which involves assessing each insurer’s “closeness to the risk”. The Court endorsed a criticism of the Minnesota approach, which described any attempt to apply it to specific wordings as “mental gymnastics”.[25] The more sensible approach adopted by the Court in Family involves first confirming whether the clauses are mutually repugnant. If the wordings of the other insurance clauses can be reconciled to give effect to both while still providing coverage for the insured, then the process is simply one of giving effect to the intent of the insurers.[26] For example, in a different case where there were two potentially applicable policies, one insurer’s policy had a “pro-rata” other insurance clause which described how liability should be apportioned between insurers if there were other “valid and collectible” insurance. The other insurer had an “excess” or “escape” other insurance clause which said that insurer was liable only for the part of a claim in excess of the amount recoverable from other insurance. Since the pro-rata clause simply described how allocation should work if there was other “valid and collectible” insurance, and the excess clause effectively stated that it was not “collectible” until other insurance had been exhausted, the court found that the policy containing the pro-rata other insurance clause was primary.[27] The Court in Family endorsed this view as the prevailing and preferable view in Canada.[28]
On the other hand, in Family, the clauses were both “excess” other insurance clauses. In such a case, the Court held that it would be obviously absurd to interpret the clauses as leaving the insured without primary coverage at all. As such, if competing policies cannot be read in harmony, a court should treat the conflicting clauses as mutually repugnant and inoperative.[29] As stated above, the Court confirmed that where that is the case, each insurer is independently liable to the insured for the full loss as if the other insurer did not exist.[30]
With both clauses rendered inoperative, the only thing left for the Court to determine was how much each insurer should have to contribute. In Family, the Court used the independent liability method described above, with the loss being borne equally by each insurer until the lower $1 million policy limit was exhausted, with the $5 million commercial general liability policy contributing any remaining amounts.[31]
Multiple insurers and the duty to defend
As the risks associated with the legal liability of an insured includes 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, then the duty to defend is triggered.[32] It is important to remember that 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 above 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.
In Markham, during a hockey game at a community centre, 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 $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 $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.[33] Accordingly, in the face of the “excess” other insurance clause and the fact that the $150,000 claim was well within AIG’s $5 million limit, Lloyd’s argued that it did not have a duty to indemnify, and accordingly, it could not have a duty to defend.[34]
The Court rejected this argument, finding that Lloyd’s had a duty to defend. As discussed above, 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 only covered the City for liability regarding Hockey Canada and the hockey team’s operations, and 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.[35] 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.[36]
Markham provides a very 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.
Multiple insurers and allocation of defence costs
Citing the Supreme Court’s decision in Family, 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 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 who accepted the risk.[37] 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.[38] Excess insurers sometimes may also be required to contribute to defence costs.[39]
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.[40]
Since allocation is “a matter of fairness”, courts have approached the issue differently in situations involving multiple consecutive insurance policies and a loss 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 Insurance Company of Canada et al, the court considered both the equal shares approach and the “time on risk” approach, where each insurer would pay in proportion to the time they were “on risk”. The Court concluded that while equal shares is the common approach, where one insurer was on risk for a very small percentage of the time covered by the claim, the time on risk approach was more appropriate.[41]
The Court’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 they overlapped, the Lloyd’s policy may have been excess, but otherwise the policies afforded primary coverage. The Court decided on an approach 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”.
As a final note, it is very important to remember that 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 this doctrine should also apply to an insured. This conflates the scope of the defence an insurer may be required to provide with the equitable sharing of common costs and is not consistent with Ontario law. In Hanis v University of Western Ontario,[42] 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 its defending claims that could never be payable under the policy’s indemnity provisions. The insured is only obliged to pay 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 re-allocation 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.
Conclusion
When presented with a client who 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 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.
Footnotes
[1] Note that 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] Reid Crowther & Partners Ltd v Simcoe & Erie General Insurance Co, [1993] 1 SCR 252, 99 DLR (4th) 741.
[3] Montreal Trust Co v Caledonian Insurance Co, [1932] SCR 581, [1932] 3 DLR 657.
[4] Craig Brown et al, Insurance Law in Canada (Toronto: Thomson Reuters, 2019) at §14.1.
[5] Family Insurance Corp v Lombard Canada Ltd, 2002 SCC 48 at paras 14–15, [2002] 2 SCR 695 [Family].
[6] Brown et al, supra note 4 at §14.2.
[7] Re Wawanesa Mutual Insurance Co, [1951] 3 DLR 703, 4 WWR (NS) 88 (BC SC).
[8] See e.g. Cumming v Homestead Fire Insurance Co, [1935] OR 161, [1935] 2 DLR 261 (Ont CA).
[9] Family, supra note 5 at paras 14–15.
[10] Brown, supra note 4 at §14.3.
[11] Family, supra note 5 at para 14.
[12] Aviva Insurance Company v Intact Insurance Company, 2018 ONSC 238, [2018] ILR I-6032 [Aviva].
[13] Ibid.
[14] Ibid at paras 55–61.
[15] Broadhurst & Ball v American Home Assurance Co (1990), 1 OR (3d) 225, 76 DLR (4th) 80 (Ont CA).
[16] Brown, supra note 4 at §14.3.
[17] Ibid.
[18] Family, supra note 5 at para 39.
[19] Brown, supra note 4 at §14.3; for a more complete discussion of the specific methods of apportioning liability in these instances, see Brown, supra note 4 at §14.
[20] Family, supra note 5 at paras 42–43.
[21] See e.g. Aviva, supra note 12, and Markham, infra note 33.
[22] Family, supra note 5 at para 16.
[23] Ibid at para 19.
[24] Ibid at para 21.
[25] Ibid at paras 21–24.
[26] Ibid at para 33.
[27] See e.g. Seagate Hotel Ltd v Simcoe & Erie General Insurance Co, [1980] LR 1-1286, 22 BCLR 374 (BC SC).
[28] Family, supra note 5 at para 34.
[29] Ibid at para 38.
[30] Ibid at para 39.
[31] Ibid.
[32] Progressive Homes Ltd v Lombard General Insurance Co of Canada, 2010 SCC 33 at paras 9–10, [2010] 2 SCR 245.
[33] Markham (City) v AIG Insurance Company of Canada, 2020 ONCA 239 at paras 1–5, 22, 27, 445 DLR (4th) 405 [Markham].
[34] Ibid at para 55.
[35] Ibid at paras 65–68.
[36] Ibid at paras 73–76.
[37] Ibid at paras 78–79.
[38] Ibid at para 83.
[39] See e.g. Broadhurst & Ball, supra note 15.
[40] Markham, supra note 33 at paras 84–87.
[41] St. Paul Fire and Marine Insurance Company v AIG Insurance Company of Canada et al, 2019 ONSC 6489, 148 OR (3d) 682.
[42] Hanis v University of Western Ontario, 2008 ONCA 678, 92 OR (3d) 594.
Lawrence G. Theall is the founding partner of Theall Group LLP. He practices commercial litigation, insurance and product liability (including class proceedings), and has appeared before all levels of the Ontario and Federal courts, as well as the superior courts of Manitoba and Alberta. He is honoured to have been selected as a Lexpert Ranked Lawyer for Product liability and selected by his peers for Best Lawyers 2021 for Insurance, as well as in Expert Guides in the areas of Litigation, Product Liability, Insurance and Reinsurance. He is an editor for the Insurance chapter to be published in Bullen & Leake & Jacob’s 3rd Edition of Canadian Precedents of Pleadings in 2017 and a co-author of the annually updated loose-leaf text, Product Liability: Canadian Law and Practice (Canada Law Book)
Callum J. Micucci is an associate at Theall Group LLP where he maintains a broad commercial litigation practice. Prior to joining Theall Group LLP, Callum summered and articled at the Ottawa office of a prominent national law firm, where he worked on a variety of matters including commercial litigation, insurance, appeals, estates litigation and bankruptcy and insolvency.
For more information, visit https://theallgroup.com/
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