Court of Appeal weighs in on insurance coverage issues over multiple policy years

On February 27, 2024, the Ontario Court of Appeal delivered its decision in Loblaw Companies Limited v. Royal & Sun Alliance Insurance Company of Canada, 2024 ONCA 145, which involved a variety of coverage issues in the context of a class action.

This comprehensive decision on coverage will be influential in Ontario coverage matters, particularly in cases involving the application of multiple policies over different policy periods, although many aspects of the case were influenced by the unique factual circumstances.

Background

Class actions were commenced in British Columbia, Alberta, Ontario and Quebec against Loblaw Companies Limited (“Loblaw”), Shoppers Drug Mart Inc. (“SDM”) and Sanis Health Inc. (“Sanis”), in relation to the manufacture, distribution and sale of opioid drugs in Canada from 1996, when Purdue Pharma began to sell OxyContin.

Royal & Sun Alliance Insurance Company of Canada (“RSA”), AIG Insurance Company of Canada (“AIG”), Aviva Insurance Company (“Aviva”), Liberty Mutual Insurance Company (“Liberty”) and Zurich Insurance Company (“Zurich”) (the “Companies”) were the primary insurers who issued Commercial/Comprehensive General Liability policies to the three companies. The policies were issued consecutively from 1995 to 2019.

Each policy generally provided coverage for the legal liability to pay damages arising from “bodily injury” sustained as a result of an “occurrence” happening “during the policy period”, or words to that effect.

The policies contained an express duty to defend, with the exception of two, which required the insurer to pay for the “ultimate net loss” in excess of the self-insured retention (“SIR”).

Chubb Insurance Company of Canada (“Chubb”), Certain Underwriters at Lloyd’s as represented by their coverholder Markel Canada Limited (“Markel”) and QBE Syndicate 1886 at Lloyd’s of London (“QBE”) were the excess insurers.

The Companies brought applications seeking declarations that each of the primary insurers had a duty to defend the class actions, that the companies were entitled to select any single policy under which there was a duty to defend and require the various insurers to defend the claims, or, alternatively, an order allocating the respective share of defence costs that each insurer should pay.

Certain of the policies contained varying self-insured retentions or deductibles.

The Companies proposed to use a Defence Reporting Agreement (“DRA”) to report to the insurer(s) responsible for defending the actions. The Companies sought a declaration that only those insurers who entered into the DRA were entitled to associate in the defence of the claims and receive Privileged Defence Information. The DRA required an insurer to erect ethical screens to prevent the misuse of privileged information in the development of any coverage positions.

Loblaw incurred defence costs prior to providing notice of the claims to RSA and AIG in contravention of the voluntary payment provision in the policies. Loblaw sought relief from forfeiture to recover these pre-tender defence costs.

The Issues

The court dealt with the following issues:

• (a) Payment of defence costs;
• (b) The treatment of the SIRs and deductibles;
• (c) Relief from forfeiture for pre-tender defence costs;
• (d) The DRA and ancillary related matters.

The decision of the Court of Appeal was delivered by Justice Pepall.

The Payment of Defence Costs

The application judge concluded that the primary insurers were required to pay all reasonable costs associated with the defence of the class actions and that each company was entitled to select any single policy under which there was a duty to defend and require the insurer to defend. The selected insurer was entitled to seek a reallocation of the defence costs at the end of the proceedings.

It is important to note that the primary insurers had reached an agreement to pay an equitable allocation of defence costs on a time-on-risk basis.

The application judge found that the duty to defend was triggered under each of the policies. This finding was not challenged by the insurers. Moreover, there were no gaps in coverage.

Pepall J.A. held that the decision of the application judge on the payment of defence costs was in error.

The decision failed to take into account that each of the policies was a time-limited bargain. Each policy was limited to coverage “during the policy period” and the duty to defend was qualified by the words “with respect to such insurance as is afforded by the policy” or equivalent language. This linked the duty to defend to the coverage for which the parties had bargained.

The primary insurers were not insuring the same risk. Each insurer had agreed to cover risks within certain time parameters; successive periods of time that captured a different risk profile. No insurer agreed to cover risks falling outside their prescribed time period.

The application judge erred in concluding that the insurers were concurrent insurers. Rather, the primary insurers insured discreet risks in successive time periods.

While the application judge permitted the selected insurer to seek apportionment of the defence costs at the end of the proceedings, the obligation to fund both lengthy and costly proceedings was a heavy burden.

The pleadings in the actions made allegations over discrete periods of time. For example, in one of the actions in British Columbia, the representative plaintiff alleged that he was first prescribed OxyContin in or around 2003. By that time, the policies issued by RSA, AIG and Liberty had expired. To require them to defend the claim would improperly increase the scope of responsibility contemplated under their policies.

Pepall J.A. held that there were potential conflicts of interest embedded in the scheme adopted by the application judge. An insurer with minimal exposure ought not to be tasked with controlling the defence and the defence costs. The participation of all insurers at an early stage was conducive to the conduct of the best defence possible and also served to promote settlement.

Self-Insured Retentions and Deductibles

The application judge ordered that no insurer had a duty to contribute to defence costs until the applicable SIR had been exhausted. However, the application judge went on the hold that a primary insurer’s duty to defend and contribute defence costs would be triggered once its insured had exhausted the SIR/deductible under its single primary policy.

Pepall J.A. noted that the companies were clearly experienced and sophisticated users of commercial insurance products and in many instances opted to negotiate policies with significant SIRs with attendant reductions in premium payments. It followed that the SIR obligation in each policy must be satisfied before that insurer had a duty to defend. The SIRs did not have to be collectively exhausted before the obligation of a single insurer with an exhausted SIR was triggered.

On a pro rata time-on-risk formula, as proposed by the primary insurers, the SIR issue disappears as the formula applies to the exhaustion of the SIRs. The effective impact of the finding is that the Companies must pay each SIR before the defence costs are covered.

Pre-Tender Defence Costs

After being served with one of the actions in British Columbia, Loblaw searched its archives but could not find all relevant policies of insurance, including those issued by RSA and AIG. Loblaw later tracked down the policies and gave notice to the insurers, but by that time it had incurred certain defence costs.

The application judge held that Loblaw was entitled to relief from forfeiture of pre-tender defence costs from the RSA and AIG.

Pepall J.A. disagreed.

The policies contained language which provided that Loblaw was required to advise the insurers of the claim “as soon as practicable”. The policies also contained a cooperation and voluntary payment provision which stated that the insured “shall not, except at his own cost, voluntarily make any payment, assume any obligation or incur any expense.”

Pepall J.A. noted that the purpose that animates the notice provisions is to enable an insurer to conduct an investigation and mitigate damages. An insurer has the right to control the defence of an insured claim, including the right to appoint counsel, a right which flows from the insurer’s obligation to defend. An insurer is not obligated to pay for independent counsel hired by the insured without the insurer’s consent.

Absent proper notification of the claim, the insurers did not owe an obligation to Loblaw to pay defence costs.

The voluntary payments clause formed part of the contract between the parties. There was no forfeiture, and, as such, relief from forfeiture was not engaged.

The Defence Reporting Agreement and Ancillary Issues

The DRA established a two-level reporting system. The first dealt with Privileged Defence Information relating to the defence of the actions. The second dealt with Public Facing Information that was not privileged and confidential, such as pleadings, productions, transcripts, expert reports, motion records and decisions and orders of the courts.

All insurers would receive Public Facing Information from time to time. Privileged Defence Information would only be available to the insurers who executed the DRA, which provided that the insurer maintain an ethical screen to ensure that the Privileged Defence Information was not received by any person other than the designated authorized representative, with the objective of keeping the information from persons at the insurer responsible for coverage decisions.

Aviva and Zurich agreed to sign the DRA. The other insurers did not.

Pepall J.A. considered whether there was a reasonable apprehension of a conflict of interest that required the insurers to enter into the DRA delineating the following principles:

• (a) An insured and its insurer owe each other a duty of utmost good faith and the insured owes the insurer a duty of cooperation which incudes the disclosure of fact material to the risk insured and the developments in the litigation;
• (b) Where an insurer has a  duty to defend, it has a prima facie right to appoint and instruct counsel and hence control the conduct of the defence;
• (c) Though paid by the insurer, counsel’s primary duty is to the insured;
• (d) An insured is entitled to a conflict-free defence;
• (e) An insured’s right to control the defence is not absolute; the presence of a reasonable apprehension of conflict of interest on the part of the insurer may permit the insured to select and instruct its own counsel if it so choses;
• (f) The issue is the degree of divergence that must exist before the insurer is required to surrender control and pay for counsel retained by the insured. The question is whether counsel’s mandate from the insurer can reasonably be said to conflict with counsel’s mandate to defend the insured in the civil action because of the divergent interests of the insurer and the insured;
• (g) The onus to establish a reasonable apprehension of a conflict of interest on the part of the insurer is on the insured;
• (h) A reservation of rights by an insurer does not automatically put counsel in a position of having conflicting mandates;
• (i) If the insurer’s reservation of rights arises because of coverage questions which depend on an aspect of the insured’s own conduct that is in issue in the litigation, the onus may be met; and
• (j) Mechanisms short of independent counsel may be put in place to minimize conflicts of interest and provide meaningful protection.

Chubb had issued a full reservation of rights. QBE had issued a reservation of rights for intentional conduct.

Pepall J.A. held that the application judge was correct in ordering that only those insurers who entered into the DRA were entitled to associate in the defence of the claims and receive Privileged Defence Information. Without an effective ethical screen to silo Privileged Defence Information from non-DRA insurer coverage teams, the insurers’ input and advice could be tailored to align with the coverage position.

QBE and Chubb asked the court to make a blanket determination of their entitlement to the Privileged Defence Information and to allow them to use it for coverage purposes. Pepall J.A. declined. There was no provision in the insurance policies to support this approach. The two insurers shared a common interest regarding the liability issues but not the coverage issues. The case law supported the argument that privileged information relating to coverage issues which arise in the course of a solicitor-client relationship between defence counsel and the insured cannot be shared with the insurer. The disclosure of documents is a fact-specific exercise, such that a situation may arise where the insurers can seek directions from the Superior Court, if needed.

The application judge was satisfied with the screen put in place by QBE for party conflicts, which provided that Privileged Defence Information would only be received by persons designated as authorized representatives. However, she was not satisfied with the protocol related to coverage-based conflicts. Pepall J.A. agreed, but held that the scope of Privileged Defence Information to which QBE might be entitled should not be determined at this stage of the proceedings. The application judge was not satisfied with all of Chubb’s screens. Pepall J.A. agreed, holding that Chubb was required to address the deficiencies.

In short, neither QBE nor Chubb were required to sign the DRA, but that decision restricted their ability to receive Privileged Defence Information.

Loblaw requested that separate counsel be appointed to defend it in the actions. Pepall J.A. rejected this request as there was no evidence of any conflict between Loblaw, SDM and Sanis.

Concluding Comments

While the Loblaw decision provides detailed guidance on several key coverage issues, it is important to note that Pepall J.A. was guided by several key facts: the policies were concurrent, there were no coverage gaps, the insurers reached an agreement to provide coverage on an equitable time-on-risk basis and agreed that the duty to defend was triggered under each policy.

Disputes over pre-tender defence costs are relatively common and this guidance is likely to have wider application in similar fact situations.

Coverage issues such as those reviewed by the court should otherwise be considered on a case by case basis.

Should you have any questions, please feel free to reach out to a member of Miller Thomson’s Insurance Defence group.