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15 September 2020
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 – namely:
A boy was injured when a puck struck him in the face at an arena owned and maintained by the City of Markham ('the City'). The City had rented the rink to a hockey club and two hockey associations (collectively, 'Waxers'). The rental agreement stated that Waxers assumed "all liabilities and costs for damages caused directly or indirectly by the licensee or invitees while on or using the facility". Hockey Canada ('HCan') was involved in the oversight of Canadian hockey programmes but denied having operational control over the arena or events. The plaintiff sued the City and HCan, and the City commenced a third-party claim against Waxers.
The City was insured by Lloyd's under a commercial general liability (CGL) policy, while HCan was insured by a CGL policy issued by AIG, which listed the City as an additional insured. AIG accepted that it owed a duty to defend HCan and the City, but claimed that Lloyd's had a concurrent duty to defend and should pay an equitable share of defence costs. AIG also claimed that it had the right to participate in the defence, including the right to retain and instruct counsel, along with Lloyd's. There were three issues:
The court set out the basic principle that insurers have a duty to defend where there is a mere possibility that the true nature of the pleaded claim, if proven, falls within coverage and would trigger their duty to indemnify. Relying on Hanis,(1) the court stated that the insurer is responsible for all reasonable costs relating to the defence of covered claims even if it furthers the defence of uncovered claims. However, the insurer is not required to pay costs incurred solely to defend uncovered claims.
Lloyd's relied on an 'other insurance' clause to argue that it was an excess insurer and had no obligation to contribute until the AIG policy was exhausted. That clause read:
The Insurer shall not be liable if at the time of any accident or occurrence covered by this Policy, there is any other insurance which would have attached if this insurance had not been effected, except that this insurance shall apply only as excess and in no event as contributing insurance and then only after all such other insurance has been exhausted.
The court rejected this argument, finding that that there were some claims in the underlying action that may not be covered by the AIG policy and may be covered only by the Lloyd's policy. The AIG policy covered the City only for liability in respect of HCan's and Waxers's operations, so all other occurrences that cause bodily injury or property damage were covered solely by the Lloyd's policy. Therefore, Lloyd's had a duty to defend the claims not covered by the AIG policy.
Lloyd's then sought to rely on an exclusion that stated that the policy "does not apply directly or indirectly to… any liability of the Insured [(the City)]… to any obligation to share damages with or repay someone else who must pay damages because of Bodily Injury". The court held that this exclusion applies only to the City assuming an obligation for a third party's actions, not a third party (Waxers) agreeing to indemnify the City for a third party's actions.
The court then considered whether Lloyd's had to pay the ongoing defence costs. Citing well-established precedent,(2) the court stated that where more than one insurer has an obligation to defend the same claim, the insured can select the policy to defend the claim, but that insurer may be entitled to equitable contribution on a pro rata basis from the other insurers.
The court noted that the relative level of risk between the two insurers could not be determined at this early stage of the proceedings, so they would pay an equal share of defence costs pending final disposition of the action and the final determination of the allocation of defence costs.
The final issue before the court was whether the insurers had the right to participate in the defence, including retaining and instructing counsel. Citing Brockton,(3) the court noted that an insurer with a duty to defend has a prima facie right to control the defence, unless the insured (which bears the onus) can establish that there is a "reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer".
The court noted that:
To minimise these concerns, AIG proposed a protocol such that HCan and Waxers's information would be held separately from information in respect of the City's claim. Handlers for coverage and defence would be different, as would the handlers for the City's defence and HCan's defence. If confidential information were disclosed, the claims handler would be subject to disciplinary action. AIG would work with Lloyd's to appoint, instruct and pay for independent defence counsel. Finally, AIG would share in the costs of the City's defence.
The court accepted AIG's proposal, but added the following terms:
There are three key takeaways from this decision. First, it is important to analyse the underlying claim and the competing policies to determine what is actually covered, as one policy's 'other insurance' clause may apply only to a portion of the claim, and that insurer may find itself responsible as the primary insurer for the balance of the claim. Second, the de facto position where a precise allocation of defence costs cannot be determined is that each insurer contributes equally. Finally, although there are still multiple precedents where an insurer is ordered to pay defence costs without the right to control the defence, the court may accept a reasonable protocol if it protects the rights of the insured and insurers.
For further information on this topic please contact Jeffrey A Brown at Theall Group LLP by telephone (+1 416 304 0115) or email (firstname.lastname@example.org). The Theall Group LLP website can be accessed at www.theallgroup.com.
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