Recently, the Supreme Court of Canada denied leave to appeal decisions of the Alberta Court of Appeal and the Ontario Court of Appeal, respectively, regarding the duty to defend. As a result, the appellate decisions stand and are discussed below.
Intact Insurance Company v. Clauson Cold & Cooler Ltd. (2020 ABCA 161)
Clauson Cold & Cooler Ltd. (“Clauson”) operated a cold storage warehouse business, where customers stored frozen products in its warehouse. On two occasions, the temperature in the warehouse became too warm and caused two of Clauson’s customers’ products to thaw out and become damaged. These customers sued Clauson for breach of contract and negligence, claiming damages for lost products.
Clauson was insured under a “Commercial Edge Express Plus” policy (the “Policy”) issued by Intact Insurance Company (“Intact”). Intact initially assumed defence of one of the claims, for which they later denied coverage. Coverage was denied on the second claim. Clauson sought a declaration that Intact had a duty to defend the claims against it. Clauson was successful in the lower court and the decision was upheld by the Alberta Court of Appeal.
The Policy provided various coverages, four of which were relevant for consideration of the duty to defend: the Warehouse Liability Form; the Equipment Breakdown Coverage – Standard Comprehensive; the Equipment Breakdown Coverage – Consequential Damage; and the Commercial General Liability (“CGL”). Of these four coverages, only the CGL contained language relating to the duty to defend. Intact contended that its duty to defend obligation was limited to coverage provided by the CGL. The Alberta Court of Appeal rejected this argument, finding:
- The word “Policy”, as capitalized in the CGL form, mirrored the word “Policy” also capitalized on the declarations page;
- The declaration page was not boilerplate, it expressly stated that the “Policy Declarations together with the Supplementary Declarations, Policy Conditions, forms, riders and endorsements, if any, issued to form a part thereon, completes the policy”;
- Had Intact intended the duty to defend captured by the word “Policy” to mean only one component, e. the CGL form, it could have expressly set out that restriction; and
- As defined on the declarations page, Intact assigned only one policy number to the entire bundle of approximately 150 pages of insuring documents.
The court further stated that, contrary to Intact’s assertion, the chambers judge correctly held that the word “Policy” used in the declarations page and repeated in the CGL applied to the entire Policy including all of the forms and insuring documents.
The takeaway point from the Alberta Court of Appeal’s decision is that an insurer’s duty to defend under a provision in the CGL form is applicable to the insurance policy as a whole. The court stated that such an interpretation is in line with commercial realities in that Clauson, being in the business of a cold-storage warehouse, would have expected its insurer to provide coverage, for the most basic aspect of its business – the safe warehousing of customers’ frozen products.
Markham (City) v. AIG Insurance Company of Canada (2020 ONCA 239)
The decision concerns the situation where an insured has its own insurance policy and is an additional insured on another policy. In these circumstances, issues arise as to which insurer must defend the insured, the allocation of defence costs and who controls the defence.
A young boy was a spectator at his brother’s hockey game at a community centre when a puck went over the glass and struck him in the face. The boy claimed in negligence against both the City of Markham (the “City”), which owned and maintained the rink, and Hockey Canada, the body responsible for the oversight of minor hockey programs in Canada.
The City was insured by Lloyd’s Underwriters (“Lloyd’s”) under a CGL policy. The City was also an additional insured under Hockey Canada’s insurance policy with AIG Insurance Company of Canada (“AIG”). A dispute arose between AIG and Lloyd’s in respect of the duty to defend the claim brought against the City. AIG accepted responsibility to defend the action but claimed that Lloyd’s had a concurrent duty to defend and pay an equitable share of the City’s defence costs. AIG also claimed that it had a right to participate in the defence, including the right to retain and instruct counsel, alongside Lloyd’s. The City and Lloyd’s asserted that only AIG had a duty to defend the City and that the City was entitled to appoint and instruct counsel of its choice without having to report to or take instructions from AIG.
Before the Ontario Superior Court, the City’s application was successful and AIG’s counter-application was dismissed.
On appeal by AIG to the Ontario Court of Appeal, it was found that both Lloyd’s and AIG had a duty to defend. The Ontario Court of Appeal rejected the argument by Lloyd’s and the City that there was an exclusion in Lloyd’s policy that absolved Lloyd’s of the duty to defend. The wording of Lloyd’s policy stated:
This Policy does not apply directly or indirectly to … any liability of the Insured … to any obligation to share damages with or repay someone else who must pay damages because of Bodily injury.
The court found that the wording relied upon by the City referred to the City assuming an obligation for a third party’s actions, rather than a third party agreeing to indemnify the City for the third party’s actions.
The court found that both AIG and Lloyd’s had a duty to defend the claim and that each was required to contribute to the ongoing cost of the defence. As the apportionment of costs could not be determined, AIG and Lloyd’s were required to share the cost of the defence equally, subject to a right to seek a reapportionment of the costs upon final resolution of the action. AIG and Lloyd’s were also entitled to jointly retain and instruct counsel provided steps were implemented to safeguard the interests of all parties.
The takeaway points from the Court of Appeal decision are:
- There can be a concurrent duty to defend. 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. A complete examination of the specific allegations in the claim is required to determine this.
- As a matter of fairness, defence costs should usually be shared between multiple insurers. If a specific allocation of defence costs cannot be determined, each insurer will be required to pay an equal share of the defence costs, pending possible reallocation at a later date.
- An insurer with a duty to defend has the right to control the conduct of that defence, unless there is a reasonable apprehension of conflict of interest on the part of the counsel appointed by the insurer. Defence protocols can (and should) be adopted in order to minimize the potential for conflicts.