Two Insurers – Who Pays?
The Ontario Court of Appeal’s recent decision in Markham (City) v. AIG Insurance Company of Canada, 2020 ONCA 239 clarified the scope of an insurer’s duty to defend where more than one insurance policy is triggered by a loss. In such cases, insurers may have a concurrent duty to defend an action and to share the costs of the defence equally. Where a concurrent duty to defend is found to exist, both insurers may be permitted to jointly conduct the defence. The decision is summarized and discussed below.
On February 2, 2015, the City of Markham (“the City”) rented a hockey rink it owned and maintained to the Markham Waxers Hockey Club, the Markham Waxers Minor Hockey Association, and the Markham Minor Hockey Association (collectively “Waxers”).
The plaintiff, a minor, was an observer at the rink who was injured when he was struck by a hockey puck during gameplay. The plaintiff sued both the City and Hockey Canada in the amount of $150,000.00 for his injuries. Hockey Canada was involved in the oversight of hockey programs in Canada, including the minor hockey programs promoted and developed by Waxers.
The City was insured by Lloyd’s Underwriters under a commercial general liability policy and was also named as an additional insured on Hockey Canada’s insurance policy with AIG Insurance Company of Canada.
A dispute arose between AIG and Lloyd’s in respect of the duty to defend the claim and the rights and responsibilities that flowed from same. AIG accepted responsibility in defending the action but claimed that Lloyd’s had a concurrent duty to defend and to pay an equitable share of the associated costs. AIG also claimed it had a right to participate in the defence, including the right to retain and instruct counsel, alongside Lloyd’s.
Lower Court Decision
The application judge determined that AIG alone had a duty to defend the City due to the absence of any excess provision in its policy. However, she also held that AIG had a right to seek contribution from Lloyd’s on conclusion of the action for the cost of defending claims that fell outside the coverage of the AIG policy but within the coverage of the Lloyd’s policy.
The application judge further determined that despite having a duty to fund the City’s defence, AIG was not permitted to participate in conducting the defence due to a potential conflict of interest. Firstly, the City had launched a crossclaim and third-party claim against AIG’s own insureds. Secondly, some claims were not covered by the AIG policy and were only covered under Lloyd’s policy. As such, AIG had an incentive to conduct the defence in a manner which would impose the majority of liability on the City based on the uncovered riskShe held that the City should be permitted to select and instruct its own counsel without having to report to AIG.
AIG appealed the application judge’s findings. The Court of Appeal allowed the appeal, holding the following:
- each insurer had a concurrent duty to defend the action;
- the ongoing costs of the defence were to be shared equally amongst both insurers and re-apportioned following a final disposition of the action; and
- both insurers were permitted to jointly retain and instruct defence counsel.
Insurers Have a Concurrent Duty to Defend Where Coverage Under the Policies Vary
Where more than one insurance policy exists, the duty to defend and the associated costs may depend upon the nature of each insurer’s policy and whether it constitutes a primary policy or an excess policy. Under a primary policy, liability attaches immediately upon the occurrence of the event that gives rise to liability. An excess policy exists to provide additional coverage for any damages surpassing the primary policy limit.
The Lloyd’s policy contained the following provision:
“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 of Appeal held that this provision would operate to construe Lloyd’s as an excess insurer only with respect to the claims covered under AIG’s policy. The AIG policy only provided coverage to the City for liability in respect of Hockey Canada and Waxers’ operations. Therefore, the Court held that Lloyd’s had a duty to defend against the claims in the action which were not covered by AIG’s policy – namely, all claims of bodily injury, personal injury, or property damage caused by all other occurrences. In other words, while AIG may have had a duty to defend against claims arising from gameplay which caused injury to a spectator, Lloyd’s had a duty to defend against claims for the failure of the City to install proper safety equipment to ensure the safety of its spectators. As a result, the court held that both insurers had a duty to defend.
Costs of a Defence Will be Divided Equally Where Two Primary Insurers Have a Concurrent Duty to Defend
Generally speaking, where two insurers are obliged to defend the same action, the insured is entitled to select the policy under which to claim indemnity. However, the selected insurer may be entitled to contribution from all other insurers who have a concurrent duty to defend the insured. The Court of Appeal held that where there are two primary insurers and a concurrent duty to defend exists, the most fair and equitable allocation of defence costs would require each insurer to pay an equal share of the costs pending a final resolution of the action. At that point, each insurer could make submissions to the court to re-apportion the costs incurred to defend the action.
Where a Concurrent Duty to Defend Exists, Insurers May Be Jointly Permitted to Conduct a Defence
An insurer who has a duty to defend an action also has a prima facie right to control the conduct of that defence, unless there is a reasonable apprehension of conflict of interest by counsel appointed by the insurer. Where a potential conflict arises, the court must balance the insured’s right to a full and fair defence with the insurer’s right to conduct the defence.
In this case, the difference in scope of each insurer’s policy created several potential conflicts of interest.
AIG proposed that any potential conflict of interest would be minimized by its split file protocol. Essentially, AIG proposed to have separate claims adjusters and separate counsel handling the defence of each insured. It would also work cooperatively with Lloyd’s to appoint and instruct independent defence counsel. Any internal personnel failing to adhere to the split file system would be subject to severe disciplinary action. These policies served as an incentive for employees to follow the protocols.
The Court of Appeal held that this proposal was sufficient to safeguard against any potential conflicts of interest. Counsel have an ethical obligation to conduct the defence in the best interest of the insured. Additionally, there was no evidence to suggest that any of the claims adjusters had violated the split file system protocols in the past or would do so in the future. Accordingly, the Court of Appeal held that AIG and Lloyd’s were permitted to jointly retain and instruct counsel in defending the action, provided that the proposed protocols were adhered to.
Takeaways for Insurers
The decision in Markham (City) v AIG Insurance Company of Canada has significant financial implications for insurers and qualifies an insurer’s right to conduct a defence where more than one policy is triggered. Accordingly, the following measures are recommended:
- Insurers should consider adding a clearly worded “excess provision” to their contracts specifying that the policy would operate as such in circumstances where more than one policy is triggered;
- Insurers should ask their insured about the existence of any additional policies. Insurers should investigate the scope of these additional policies and be well-informed about any differences in coverage;
- Insurers should consider charging higher premiums for broadly-worded policies providing coverage for “all occurrences”;
- Insurers should develop formal written policies in respect of managing conflicts that may arise where a concurrent duty to defend exists;
- Insurers should be willing to work cooperatively with other insurers where a concurrent duty to defend exists. Insurers should provide comprehensive and timely reports to those insurers to facilitate collaboration and minimize costs; and
- Insurers involved in jointly conducting a defence should address concerns with one another in a timely manner. A dispute resolution mechanism should be agreed upon where a potential conflict cannot be settled between the insurers.
By Shawn O’Connor and Sarah Mack, articling student