Pro Rata Sharing of Policy Funds in Legal Expense Insurance Policies

By Megan Chan

In Spencer et al. v. Omega Insurance Company et al., 2025 ONSC 1022, the Court interpreted a Legal Expense Insurance policy in an application by the defendants in an underlying lawsuit for indemnification for their legal costs awarded to them in that lawsuit.

This decision reiterated the general principles of and correct approach to insurance contract interpretation. The Court found, based on a plain and ordinary reading of the insurance policy, that the policy funds were to be paid out on a pro rata basis between the “Defendant’s Costs” and the insured plaintiff’s “Own Disbursements”. In order for one set of costs to be paid in priority over the other, the policy needed to have specific and clear wording indicating same.

Facts

The underlying action was commenced by the respondent, John Belton (“Mr. Belton”), against the applicant, Katie Spencer (“Ms. Spencer”), in relation to personal injuries Mr. Belton suffered while walking Ms. Spencer’s horse.

Mr. Belton was represented by Martin & Hillyer Associates (“MHA”) on a contingency fee agreement basis. MHA obtained a Legal Expense Insurance policy (the “LEI”) from Omega General Insurance (“Omega”), which provided coverage for the underlying action with a policy limit of $100,000. MHA was the policyholder.

At trial, Mr. Belton’s action was dismissed, and a costs award of $469,972.52 was made against Mr. Belton. MHA claimed disbursements of $59,842.23 in relation to advancing Mr. Belton’s claim to trial.

Ms. Spencer and Elite Insurance Company (“Elite”) (collectively the “Applicants”) brought an application, pursuant to Rule 14.05(3)(d) for declarations as to their entitlement to indemnity available through the Omega policy. At the time of the application, MHA was no longer pursuing a claim against the Omega policy for recovery of their disbursements.

The Application

The Applicants sought the following declarations:

• that Ms. Spencer met the definition of Defendant in the LEI;
• that Elite met the definition of Defendant in the LEI;
• that the costs awarded were “Defendant’s Costs” as defined in the LEI;
• that the dismissal of Mr. Belton’s claim was an “Unsuccessful Outcome” as defined in the LEI; and
• that the Applicants were third-party beneficiaries under the LEI.

The Applicants also sought either a pro rata sharing of the policy funds as between them and MHA, or in the alternative, that the Applicants be awarded 100% of the funds.

The Law and General Principles

The Court summarized the general principles of insurance policy interpretation, as set out in the Supreme Court of Canada decisions, Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 331 and Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37.

• Where the language of the policy is unambiguous, the Court should give effect to clear language, reading the policy as a whole.
• Only where the language of the policy is ambiguous, should the Court rely on general rules of contract construction, to resolve ambiguity:
  • Courts should prefer interpretations that are consistent with the reasonable expectations of the parties, so long as such an interpretation can be supported by the text of the policy.
  • Courts should avoid interpretations that would give rise to an unrealistic result or that would not have been in the contemplation of the parties at the time the policy was concluded.
  • Courts should strive to ensure that similar insurance policies are construed consistently.
• If the above rules of construction fail to resolve the ambiguity, the Court should construe the policy contra proferentum (against the insurer).  Coverage granting provisions are to be interpreted broadly and exclusion clauses narrowly.

The Court noted (and, as discussed below, distinguished from the present case) the decision Peter B. Cozzi Professional Corporation v. Szot, 2019 ONSC 1274 (“Cozzi”), which also involved a legal expense insurance policy. In Cozzi, the plaintiff had obtained his own legal expense insurance policy and was a party under disability. The contingency agreement was set aside, having not been approved by a judge. The Court found that the plaintiff was the “beneficiary” and only person entitled to the proceeds of the policy. Accordingly, the plaintiff had the right to determine how the policy funds were to be used as he saw fit (not necessarily to pay costs award or disbursements).

The LEI

The LEI stated as follows (emphasis as in the policy):

The following definitions were contained within the policy:

You/Your/Yours means the lawyer and/or the law firm stated in the Schedule as the Policyholder and the lawyer who will act for the Claimant in the Litigation.

Insured Liability means the amount payable for the Defendant’s Costs, and/or Own Disbursements, which We have agreed to indemnify up to the Maximum Limit for a File.

Defendant’s Costs means Costs owed by the Claimant to the Defendant in respect of the Litigation which the Claimant becomes liable to pay to the Defendant by way of Order.

Claimant means a person who signs a Contingency Fee Agreement with the Policyholder for Litigation covered by this Policy.

Defendant means any person opposing the Claimant in the Litigation and/or the Defendant insurer.

Own Disbursements means amounts incurred by You on the Claimant’s behalf to advance the Litigation pursuant to the Contingency Fee Agreement, including the Premium (but excluding Own Solicitor’s Fees).

Analysis

In contrast with Cozzi, in the present case, MHA—not Belton—had obtained the LEI. Further, the LEI was clear that the funds were meant to pay down costs awarded in an unsuccessful litigation (Defendant’s Costs as defined in the LEI) and to cover disbursements (Own Disbursement as defined in the LEI), and not to provide a cash award to an unsuccessful litigant.

The Court found that the LEI was a standard form contract that had been written in easily comprehensible language, with bolded text indicating defined terms within the policy. The language of the LEI was clear and unambiguous, except for on the issue of how policy funds were to be divided as between competing claims for costs of the action and for disbursements.

Ultimately, the Court interpreted the terms of the LEI to mean that Omega was to pay Ms. Spencer’s/Elite’s costs (owed by Mr. Belton, in respect of the litigation, which Mr. Belton became liable to pay by way of a Costs Order) and also amounts incurred by MHA on Mr. Belton’s behalf to advance the litigation (pursuant to the Contingency Fee Agreement, including the Premium, but excluding MHA’s own fees).

As to ambiguity in the LEI on the issue of priority of payment as between the Applicants’ costs and MHA disbursements, the Court (relying on general rules of contract construction) found that the reasonable expectation of the parties would be a pro rata sharing of the available policy funds. The purpose of a LEI policy is to assist in reducing the impact of the costs on both sides, as both sides have likely incurred significant costs in situations where there is an unsuccessful outcome at trial. Absent specific wording outlining priority within the LEI, to allow one set of costs to be paid in priority over the other, would make little sense.

Conclusion

The Court granted the declarations sought by the Applicants. As MHA was no longer seeking their own disbursements from the LEI funds, the Court ordered the entire $100,000 policy amount to be paid to the Applicants.