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. This paper will provide an overview of several issues that may arise with the duty to defend, where there are “overlapping” or concurrent insurance policies.
The Ontario Insurance Act requires that every property insurance contract in the province give the parties a right to require that disagreements about the amount of an insured loss be resolved via an appraisal process. Other provinces’ insurance statutes contain similar provisions. However, the principles applicable to appraisals are often not well understood. Northbridge General Insurance Corp. v. Ashcroft Homes-Capital Hall Inc. seems to be the latest example of this. In that case, an Ontario judge terminated an appraisal, and in the course of doing so, reviewed the principles applicable to appraisals. Ashcroft Homes is necessary reading for any insured thinking about invoking an appraisal.
In 2014, the Supreme Court of Canada released Bhasin v Hyrnew which recognized a general principle of good faith in contractual performance. The decision highlighted one manifestation of that organizing principle: the duty not to actively deceive. Since Bhasin, there has been some confusion about how far the good faith principle extends. Two recent Supreme Court decisions have provided some clarity:
CM Callow Inc v Zollinger confirmed the expectation that parties will perform a contract without lies or deception. More importantly, it extended the duty of honest performance introduced in Bhasin, noting that inaction or silence can be “cousins in the catalogue of deceptive contractual practices”.
Wastech Services Ltd v Greater Vancouver Sewerage and Drainage District explored the exercise of contractual discretionary powers in good faith. It accepts that parties must exercise contractual discretion reasonably within the context of the agreement reached.
In both decisions, the Supreme Court was careful not to erode freedom of contract. It accepted that contractual counterparties are not required to subvert their own interests to conform to either of the duties clarified in Callow and Wastech.
Insurance applications can be challenging. The questions are often ambiguous and remembering every piece of relevant information is difficult. However, being diligent is important, as an insurer may deny coverage of a claim if an insured incorrectly answered a question or failed to disclose material information. On the other hand, insureds should be aware that courts will scrutinize claims of inadequate disclosure on a reasonableness basis. Typically, insurers cannot rely on answers to ambiguous questions in application materials unless the nature of the risks those questions sought to elicit is obvious or was brought to the insured’s attention.
On January 15, 2021, the UK’s Supreme Court rendered its much-awaited decision on business interruption coverage for COVID-19. In a decision over 100 pages long, the court ruled in favour of policyholders on almost every issue. As of today, there are no reported cases in Canada on the merits of coverage for business interruption losses caused by COVID-19, and this case will likely be positively received by our courts.
Supreme Court torpedoes Mr. Submarine’s recovery of pure economic loss from allegedly negligent supplier
On November 6, 2020, the Supreme Court of Canada released a 5-4 decision on recovery of negligently-caused pure economic loss that will be significant for defendants faced with product liability claims where no physical harm or property damage was caused. The majority in 1688782 Ontario Inc v Maple Leaf Foods Inc ruled that economic harm suffered by Mr. Submarine franchisees from a recall of potentially contaminated Maple Leaf sandwich meats was not recoverable in negligence because any danger was directed at consumers, not the franchisees, and there was no legitimate reason to superimpose tort law duties for economic harms over the business relationships already in place. Where pure economic loss claims for negligently-supplied dangerous goods are brought by an appropriate claimant, the Supreme Court also limited the scope of damages that may be recovered.
England’s Financial Conduct Authority (“FCA”) was largely successful in its test case against eight (8) insurers, with respect to business interruption coverage for infectious disease and/or prevention of access/orders of civil authority. The decision considered 21 policy forms issued by these eight insurers, but FCA’s counsel has suggested that “some 700 types of policies across 60 different insurers and 370,000 policyholders could potentially be affected by the test case.” The 150-page decision considers many issues, and notes that the particular policy wording is important. Subtle differences lead to potentially different results. However, there are some very important issues decided that appear to have very broad application.
A recent Ontario case appears to be one of the first interpreting a data exclusion often found in liability policies. The case went in favour of the insureds, with the insurer being ordered to defend claims arising out of an alleged security breach on a website owned by Family and Children’s Services of Lanark, Leeds and Grenville (“FCS”). Following the alleged breach, a lawsuit was brought against FCS, and FCS claimed over against Laridae Communications Inc., who had given FCS advice on the design and security of its website. The insurer for FCS and Laridae was ordered to defend all the claims, on the basis that not all of the claims were captured by the policy’s data exclusion.
In MDS Inc v Factory Mutual Insurance Company, the Ontario Superior Court of Justice recently held that an insurer who wrongfully denied a US$121 million claim must pay prejudgment interest based on the actual cost of borrowing, and not the rates stipulated in the Courts of Justice Act. This decision is one that counsel and adjusters would be wise to carefully consider in any future insurance coverage dispute, as it sets out a number of factors that a Court could consider in deciding whether to award commercial interest rates.
In Markham (City) v. AIG Insurance Company of Canada, 2020 ONCA 239, the Ontario Court of Appeal addressed three important elements of the duty to defend, where there is concurrent coverage under two policies: whether there was a concurrent duty to defend given the existence of an “other insurance” clause, the obligation to pay ongoing costs and its allocation, and the right to participate in the defence.