On March 31, 2020, the Ontario Court of Appeal (OCA) released its decision in the case involving the City of Markham (City) and AIG Insurance Company (AIG). In this case the OCA applied a practical approach to an insurance priority dispute. Rather than allow one insurance company to control a defence with multiple parties, the Court’s decision encouraged two insurers to cooperate and coexist where there were overlapping policies and competing interests.
Facts
A young boy (Plaintiff) was watching a hockey game at the Angus Glen Community Centre (Community Centre) when a hockey puck flew into the spectator’s area and broke his jaw. The Plaintiff proceeded to bring an action against the City, Markham Waxers Hockey Club and Markham Waxers Minor Hockey Association (collectively, Waxers), and Hockey Canada (HC), triggering multiple insurance policies.
The City was the owner of the Community Centre, which Waxers rented. Waxers was a member of HC, and they were both insured by AIG. The City was insured by Lloyd’s Underwriters (Lloyd’s), and was an additional insured under HC’s insurance policy with AIG.
Issues
The OCA considered whether AIG or Lloyd’s had a duty to defend the claim brought against the City. In the lower court, the Application Judge held that: (1) AIG was responsible to defend the action, (2) AIG needed to pay the cost of the defence, and (3) AIG could not participate in the defence by retaining or instructing counsel. AIG appealed the decision, and the Court considered the following questions:
- Did Lloyd’s owe the City a concurrent duty to defend?
- Did Lloyd’s need to pay defence costs?
- Did AIG have a right to participate in the defence? If so, to what degree?
Result
The OCA held that both AIG and Lloyd’s were required to defend the City. Both insurers were required to share the defence costs equally, but they could seek a reallocation at the conclusion of the action. Lastly, AIG could participate in the defence if they followed certain measures to avoid and minimize conflicts of interest. The decision requiring AIG to solely pay for, but not participate in, the defence was overturned.
Discussion
The City’s policy with Lloyd’s covered damages related to bodily injury, personal injury and property damage. Lloyd’s policy stated that where another insurance policy also covered a claim, the Lloyd’s policy only applied as excess and not as contributing insurance.
HC’s (and Waxers’) policy with AIG covered damages arising from bodily injury and property damage. AIG’s policy further stated that AIG would “have the right and duty to defend any ‘action’ seeking those damages [until AIG has] … used up the applicable limit of insurance in the payment of judgments or settlements.” The AIG policy was silent on excess insurance, but stipulated that it was the primary insurance policy. Prior to the accident, Waxers confirmed that the City was an additional insured on the AIG policy “only with respect to the operations of [HC and Waxers]”.
The application judge found that AIG had a duty to defend the City and pay for defence costs, but that it should not participate due to a perceived conflict of interest. The City filed cross-claims and third-party claims against AIG’s insureds (HC and Waxers), so the lower court rejected AIG’s proposal for a split-file protocol where separate claims handlers would be instructing counsel for the City, HC and Waxers.
However, the OCA found both AIG and Lloyd’s to have a duty to defend, as AIG’s policy only covered the City for liability in respect of HC and Waxers’ operations. One example given by the Court for an occurrence outside of HC and Waxers’ operations was the alleged failure to put up a net around the rink to protect spectators. The Community Centre was owned by the City so this oversight would potentially be covered by Lloyd’s policy rather than AIG’s.
Where the two insurers’ policies covered the same claims, AIG’s duty would be to defend up to the policy limit. When the limit was reached, Lloyd’s was the excess insurer. However, if the claims were not separate and different, Lloyd’s duty to defend was triggered.
The OCA further found that where there is a concurrent duty to defend, the fairest and most equitable allocation of costs would be an equal split. After the litigation was finalized, the parties could apply for a final determination of defence costs.
With respect to AIG being able to retain and instruct counsel for the City, Lloyd’s position was that AIG’s counsel would have a strong incentive to subordinate the City’s interests. This, Lloyd’s argued, created a conflict of interest.
The OCA recognized the potential conflict of interest but held that the City and Lloyd’s were not clear of conflicts either. Lloyd’s could seek to have responsibility for wrongdoing attributed to Waxers or HC rather than the City. This would result in damages being covered by AIG’s policy. Similarly, the City would be motivated to have claims paid by AIG in order to avoid increased premiums under its Lloyd’s policy. To remedy the issue of conflicts, AIG proposed a split-file approach. Potentially conflicting interests insured by one policy would be handled separately, and separate claims would be dealt with by different counsel.
The OCA determined that the parties could implement measures to allow a functional co-existence, and AIG should not be removed from the defence entirely. AIG’s proposal minimized risk by creating a system to protect confidential information. Thus, each of the parties could retain and instruct counsel.
The OCA added a further “balanced screen” approach, as set out in PCL Constructors Canada Inc. v Lumbermens Mutual Casualty Company Kemper Canada[1] and required that:
- The terms of this proposal must be provided in writing to those involved in managing the defence;
- Counsel appointed 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 discussion about the case with either coverage counsel; and
- Counsel must provide identical and concurrent reports to the insured and both insurers regarding the defence of the main action.
The Court felt that, given the conflicting interests, this protocol provided recognition to the legitimate interests of all parties. It would also address the concern that AIG may settle, to the prejudice of the City.
Takeaway
In cases where there is a dispute among insurers and an insured (like the City) this decision clearly reinforces a cooperative approach between all parties. The OCA endorsed the ability of insurers and sophisticated parties to arrange and implement inclusive systems that protect the parties’ interests.
[1] PCL Constructors Canada Inc. v. Lumbermens Mutual Casualty Company Kemper Canada (2009), 76 C.C.L.I. (4th) 259 (Ont. S.C.)
