The Ontario Court of Appeal released an important insurance coverage decision today in Markham (City) v. AIG Insurance Company of Canada, 2020 ONCA 239.
The decision addresses a common situation where an insured has its own insurance policy and is also an additional insured on another policy. In such circumstances, questions arise as to which insurance company has to defend the insured; the allocation of defence costs; and who controls the defence.
The City of Markham rented a hockey rink to the Markham Waxers Hockey Club. A young boy was watching his brother play in a hockey game. The boy’s jaw was broken after being struck by a puck. He sued the City of Markham and Hockey Canada for $150,000.
The City is insured by Lloyd’s Underwriters (“Lloyd’s”) under a commercial general liability policy. The City is also an additional insured under Hockey Canada’s insurance policy with AIG Insurance Company of Canada (“AIG”).
On an application, the application judge held that: AIG must defend the action; AIG must pay defence costs subject to indemnification of costs, if any, from Lloyd’s upon final resolution of the action; and AIG may not participate in the defence by retaining or instructing counsel.
The decision was overturned by the Court of Appeal.
Concurrent Duty to Defend
The Court of Appeal determined that both AIG and Lloyd’s have a duty to defend the City.
There was no dispute that the AIG policy covers the City against all liability with respect to the operations of Hockey Canada and the Markham Waxers. There was also no dispute that the AIG policy is a primary insurance policy and that AIG has a duty to defend the City against all claims which fall within the scope of its policy.
However, AIG argued that Lloyd’s is also a primary insurer and is the only insurer liable to indemnify the City against certain claims in the action. As a result, AIG submitted that Lloyd’s also has a duty to defend.
Lloyd’s relied on an excess insurance provision in its policy which states 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 of Appeal stated that Lloyd’s is an excess insurer only to the extent that claims are covered by the AIG policy. The AIG policy only covers the City for liability in respect of the operations of Hockey Canada and the Markham Waxers.
Certain allegations in the statement of claim may not be covered under the AIG policy, including an alleged failure to put into place proper and sufficient systems for the safety of spectators.
The Court of Appeal concluded that, to the extent the AIG and Lloyd’s policies cover the same claims, AIG has a duty to defend up to its policy limits, and Lloyd’s may be an excess insurer.
However, at a minimum, Lloyd’s owes 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 Lloyd’s policy.
Payment of Defence Costs
The Court of Appeal held that AIG and Lloyd’s are required to equally share the costs of defending the City, pending final disposition of the action and a final determination of the allocation of the defence costs.
Where two insurers are responsible to defend a claim and one insurer is selected by the insured to assume the defence, it may be inequitable for one insurer to pay all costs and the other to pay nothing, unless, for example, there is no realistic chance of the policy of the other insurer being reached.
The Court of Appeal noted that the allocation of defence costs as among insurers who have a concurrent obligation to defend is essentially a matter of fairness. It is not an exact science.
Since AIG and Lloyd’s both have a duty to defend at least some of the claims in the action, the Court of Appeal stated that each is responsible to contribute to the defence costs of the City. Given that there was no contract between AIG and Lloyd’s with respect to the defence, the principles of equity govern their respective obligations.
As the proceedings are at an early stage, the level of risk to AIG and Lloyd’s cannot be determined at this time. Therefore, a precise allocation of defence costs is not possible.
As a result, the Court of Appeal said that an equal sharing of defence costs between AIG and Lloyd’s is the most fair and equitable way to proceed, subject to potential reallocation at a later date.
The Right to Retain and Instruct Counsel
The Court of Appeal determined that AIG has the right to participate in the defence of the action, subject to certain terms.
In order to remove an insurer’s contractual right to defend and control the defence of an action, there has to be a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer.
The Court of Appeal noted that AIG, Lloyd’s, and the City have conflicting interests.
AIG has an interest in having liability determined on the basis of the City being solely and independently negligent so that AIG is not responsible for paying any damages.
Lloyd’s has an interest in having liability determined on the basis of negligence arising from the operations of Hockey Canada or the Markham Waxers, and not from the actions of the City.
The City also has an interest in having liability determined on the basis of negligence arising from the operations of Hockey Canada or the Markham Waxers so that the City’s premiums do not rise and so that it does not have to pay a deductible.
Despite the conflicting interests, the Court of Appeal stated there is no reason to believe that appropriate counsel who has an ethical obligation to defend the insured properly will not conduct the defence in the best interests of the insured.
Further, there was no evidence that any of the AIG claims handlers misused any confidential information or, with appropriate disciplinary measures put in place, will misuse confidential information in the future.
AIG proposed having a “split file” protocol, such that there would be one claims handler for the City’s defence and another claims handler for Hockey Canada’s defence, and that each claim handler will not be permitted to access information from the other file.
Moreover, AIG agreed to work cooperatively with Lloyd’s to agree on, appoint/instruct, and pay for independent defence counsel, separate from coverage counsel.
The Court of Appeal found these proposals to be reasonable.
In addition, the Court of Appeal imposed the following terms:
- The terms of AIG’s proposed participation in the defence must be provided in writing to those involved in managing the defence;
- Counsel appointed by AIG to defend the City would be instructed to fully and promptly inform the City and Lloyd’s of all steps taken in the defence of the litigation against the City such that each would be in a position to monitor the defence effectively and address any concerns;
- Defence counsel must have no discussions about the case with either coverage counsel; and
- Defence counsel must provide identical and concurrent reports to the City and both insurers regarding the defence of the main action.
These conditions will allow AIG to participate in the defence and resolution of the action while, at the same time, permitting Lloyd’s and the City the opportunity to know of and address concerns in a timely manner.
The Court of Appeal stated that, although this approach is not without any concerns, it recognizes the legitimate interests of both the City and the insurers, and addresses the concern that AIG may abuse its right to defend and settle the action to the prejudice of the City.
The Court of Appeal indicated that, in cases such as this where there is a dispute among insurers and an insured, it is incumbent upon all parties to work with one another and to exchange ideas in respect of a proposed protocol. Insurers and sophisticated parties are best placed to determine what systems could work best.
In situations where there are multiple insurance policies that may be required to respond to a claim, it is important to look at the specific allegations in the claim.
When one policy is said to be primary and the other policy is said to be excess, the insurer who issued the purported excess policy may have a duty to defend an insured if some of the allegations in the claim relate to negligence not covered by the purported primary policy. There can be a concurrent duty to defend.
If multiple insurers are required to defend an insured, defence costs should usually be shared as a matter of fairness. If a precise allocation of defence costs cannot be determined, it is equitable to require each insurer to pay an equal share of the defence costs, pending possible reallocation at a later date.
An insurer who has a duty to defend an action has a right to control the conduct of that defence, unless there is a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer. In order to minimize the potential for conflicts, protocols should be established.
In the case at issue, AIG agreed to implement a “split file” or ethical wall protocol. In addition, the Court of Appeal said that counsel appointed by AIG must keep the City and Lloyd’s fully apprised and provide identical and concurrent reports to the City and both insurers.
The Court of Appeal also encouraged insureds and insurers to work cooperatively in developing protocols and systems in these types of situations.