ACE INA Insurance v. Associated Electric & Gas Insurance Limited

ACE INA Insurance v. Associated Electric & Gas Insurance Limited Collection Decisions of the Court of Appeal Date 2013-11-13 Neutral citation 2013 ONCA 685 Docket numbers C56418 Judges Gillese, Eileen E.; Juriansz, Russell G.; Strathy, George R. Subject Civil Decision Content COURT OF APPEAL FOR ONTARIO CITATION: ACE INA Insurance v. Associated Electric & Gas Insurance Limited, 2013 ONCA 685 DATE: 20131114 DOCKET: C56418 Gillese, Juriansz and Strathy JJ.A. BETWEEN ACE INA Insurance Applicant (Appellant) and Associated Electric & Gas Insurance Services Limited Respondent (Respondent) Glenn A. Smith and Rory Gillis, for the appellant Catherine P. Keyes and Thomas J. Donnelly, for the respondent Heard: September 26, 2013 On appeal from the judgment of Justice Carole J. Brown of the Superior Court of Justice, dated November 27, 2012, with reasons reported at (2012), 17 C.C.L.I. (5th) 128. Strathy J.A.: [1] The appellant, ACE INA Insurance (“ACE”), appeals the dismissal of its application for a declaration that the respondent, Associated Electric & Gas Insurance Services Limited (“AEGIS”), has a duty to contribute to defence costs incurred on behalf of their common insured, Toronto Hydro Corporation (“Hydro”). [2] The core issue on this appeal is whether the principle of equitable contribution, explained and applied by this court in Alie v. Bertrand & Frère Construction Co. (2002), 62 O.R. (3d) 345 (C.A.), leave to appeal to S.C.C. refused, [2003] S.C.C.A. No. 48, extends to a case, like this, where the excess policy contains no duty to defend and defence costs erode the policy limit. The application judge found that it did not. For the reasons that follow, I agree and would dismiss the appeal. The Facts [3] ACE is Hydro’s primary insurer under a comprehensive general liability policy, with a limit of $1 million per occurrence. AEGIS is Hydro’s excess liability insurer under an “umbrella” policy with a limit of $45 million in excess of the primary policy. Both policies provide coverage for defence costs, but their terms are different. The ACE policy contains a “duty to defend” clause and covers unlimited defence costs without eroding the policy limit. Under the AEGIS policy, which contains no duty to defend, the insurer is liable for defence costs only where they are not included in other valid and collectible insurance. Payment of defence costs under the AEGIS policy erodes the policy limit. [4] On July 20, 2008, an explosion occurred in the electrical vault of high-rise apartment building in Toronto. The concrete vault housed two transformers owned and operated by Hydro. The explosion, and the resulting fire, spawned five civil actions, including a class action, claiming damages in excess of $50 million for property damage and personal injuries. [5] If Hydro is found liable for the fire, the damages will far exceed the $1 million limit of liability of the ACE primary policy and therefore trigger coverage under the AEGIS excess umbrella policy. [6] To date, under its primary policy, ACE has defended Hydro against the lawsuits and has paid all defence costs, other than Hydro’s self-insured retention of $100,000. The costs as of September 2012 exceeded $1 million and counsel budgeted for over $1 million more, without accounting for the costs of experts or a trial. [7] ACE says that since AEGIS will have the lion’s share of any ultimate liability, it should share the defence costs. It has asked AEGIS to pay fifty percent of those costs, without prejudice and subject to reapportionment after resolution of the underlying actions by settlement or judgment. It has also offered to give AEGIS control of the defence. AEGIS has rejected the proposal, taking the position that it will only become liable for defence costs once the limits of the primary policy have been exhausted. AEGIS maintains, however, that it is entitled to periodic reports from ACE’s defence counsel concerning the progress of the litigation as well as counsel’s assessments of liability and damages. The Insurance Policies The ACE Policy [8] ACE issued a Comprehensive General Liability Insurance Policy to Hydro for the period of January 1, 2008 to January 1, 2009. It has a limit of liability per occurrence of $1 million, in excess of the self-insured retention of $100,000. The insuring agreement provides that ACE: …will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of … [among other things, bodily injury or property damage.] [9] ACE has a right and duty to defend Hydro against any suit seeking damages falling within the policy coverage. The policy requires ACE to pay all expenses incurred by it in the defence of any such suit, in excess of the policy limits, until such time as those policy limits have been exhausted. The relevant terms are as follows: II. Defense The Company [ACE] shall have the right and duty to defend any suit against the Insured seeking damages falling within the Coverages outlined in the Coverages above, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient, but the Company shall not be obligated to pay any claim or judgement or to defend any suit after the applicable limit of the Company’s liability has been exhausted by payment of judgements or settlements. … III. Supplementary Payments The Company will pay, in addition to the applicable limit of liability: (a) all expenses incurred by the Company, all costs taxed against the Insured in any suit defended by the Company and all interest on the entire amount of any judgement therein which accrues before or after entry of the judgement and before the Company has paid or tendered or deposited in court that part of the judgement which does not exceed the limit of the Company’s liability thereon. The AEGIS Policy [10] AEGIS issued an Excess Liability Insurance Policy to Hydro for the period covered by the ACE policy. It has a $45 million per occurrence limit of liability, in excess of ACE’s $1 million primary limit. [11] The AEGIS policy is an “umbrella” policy. It “goes up” to cover Hydro’s liability above the underlying primary layer, but it also “drops down”, when necessary, to cover liabilities that are not insured under the primary policy. [12] The insuring agreement in the AEGIS policy provides for indemnity for amounts that Hydro is legally obliged to pay: The COMPANY [AEGIS] shall indemnify the INSURED for any and all sums which the INSURED shall become legally obligated to pay as ULTIMATE NET LOSS by reason of liability imposed upon the INSURED by law or liability assumed by the INSURED under CONTRACT… [13] Unlike ACE’s primary policy, the AEGIS excess policy does not contain a duty to defend clause. Nor is there an obligation to indemnify for defence costs, unless those costs are not covered by other insurance – in which case, the AEGIS policy “drops down” to cover defence costs. This is effected through the definition of “Defense Costs”: …all expenses incurred by the INSURED in the investigation, negotiation, settlement and defense of any CLAIM or in the investigation of any OCCURRENCE or circumstances of which NOTICE OF CIRCUMSTANCES has been given, excluding all salaries, wages and benefit expenses of employees and office expenses of the INSURED; however the COMPANY shall not be liable for expenses as aforesaid when such expenses are included in other valid and collectible insurance, except where that insurance is subject to at least one hundred percent (100%) reimbursement by the INSURED. [Emphasis added.] [14] The AEGIS policy also provides that while AEGIS does not have a duty to defend Hydro, it has the right to associate in the defence and control of any civil proceeding against Hydro: The COMPANY shall not be called upon to assume charge of the settlement or defense of any CLAIM made against the INSURED, but the COMPANY shall have the right and shall be given the opportunity to associate with the INSURED, or the INSURED’S underlying insurer(s), or both, in the defense and control of any CLAIM where the CLAIM involves or may involve the COMPANY in which event the INSURED and the COMPANY shall cooperate in all things in the defense of such CLAIM. [15] The same section of the policy places the obligation to defend claims on the insured and its underlying insurers: The INSURED and its underlying insurer(s) shall, at all times, use diligence and prudence in the investigation, settlement and defense of all demands, suits and other proceedings. [16] As mentioned above, the indemnification of defence costs under the AEGIS Policy erodes the limit of liability. This is accomplished by the definition of “Ultimate Net Loss”, which is “the total INDEMNITY and DEFENSE COSTS with respect to each OCCURRENCE to which this POLICY applies”. AEGIS’s liability is capped at the Ultimate Net Loss in excess of the underlying limits. The Parties’ Submissions [17] ACE’s position is that there is no principled basis on which to distinguish between an excess policy that contains a duty to defend and a policy, such as the AEGIS policy, that contains a duty to indemnify for defence costs. It says that, as a practical matter, there is no real difference between a duty to defend and a duty to indemnify for defence costs – it is just a matter of who appoints counsel. The same equitable considerations should apply to both obligations, and where insurers share exposure, they should share defence costs. [18] ACE argues that it is simply unfair to give AEGIS a free ride on defence costs, when it faces forty-five times the exposure of the primary insurer. ACE’s policy limits will never be sufficient to settle the third party claims and it is inequitable to force ACE to continue to pay for the defence of claims it will never be able to resolve. Bringing AEGIS into the defence of the claims is not only equitable, it is good policy, because it will promote the settlement of this complex multi-party litigation by ensuring that all affected insurers are at the table. [19] AEGIS submits that the doctrine of equitable contribution does not apply unless both policies cover the same risk. In this case they do not, because the express terms of the AEGIS policy exclude coverage for defence costs. The circumstances of this case, AEGIS says, fall squarely within the decisions of the Supreme Court of Canada in Family Insurance Corp. v. Lombard Canada Ltd., 2002 SCC 48, [2002] 2 S.C.R. 695, and of this court in Trenton Cold Storage Ltd. v. St. Paul Fire and Marine Insurance Co. (2001), 199 D.L.R. (4th) 654 (Ont. C.A.). Equitable Contribution [20] ACE founds its claim on the doctrine of equitable contribution. [21] Equitable contribution is not a free-standing method of apportioning losses between different levels of insurance according to a court’s view of what would be fair in the circumstances. It is based on the principle that an insured who has taken out more than one insurance policy on the same risk should not be able to recover twice, for obvious reasons of public policy. The insured is entitled to claim against either insurer, but not both. Since it would be inequitable in these circumstances for one insurer to pay all and the other to pay nothing, the law requires each to contribute. The overpaying insurer can sue the other insurer, in its own name, to recover a proportion of the loss: see Aviva Insurance Company of Canada v. Lombard General Insurance Company of Canada, 2013 ONCA 416, 116 O.R. (3d) 161, at paras. 29-32, referring to Barbara Billingsley, General Principles of Canadian Insurance Law, 1st ed. (Markham: LexisNexis, 2008), at p. 317; Family Insurance, at paras. 14-18; John Birds, Ben Lynch & Simon Milnes, MacGillivray on Insurance Law, 12th ed. (London: Sweet & Maxwell, 2012), at para. 24-032. [22] In Family Insurance, at paras. 14-15, Bastarache J. discussed the origins and rationale of the principle of contribution and the conditions giving rise to it: It is a well-established principle of insurance law that where an insured holds more than one policy of insurance that covers the same risk, the insured may never recover more than the amount of the full loss but is entitled to select the policy under which to claim indemnity, subject to any conditions to the contrary. The selected insurer, in turn, is entitled to contribution from all other insurers who have covered the same risk. This doctrine of equitable contribution among insurers is founded on the general principle that parties under a coordinate liability to make good a loss must share that burden pro rata. It finds its historic articulation in the words of Lord Mansfield C.J. in Godin v. London Assurance Co. (1758), 1 Burr. 489, 97 E.R. 419 (K.B.), at p. 420: If the insured is to receive but one satisfaction, natural justice says that the several insurers shall all of them contribute pro rata, to satisfy that loss against which they have all insured. More recently, Ivamy's General Principles of Insurance Law (6th ed. 1993) set out at p. 518 the general principles concerning the right of contribution among insurers as follows: 1. All the policies concerned must comprise the same subject-matter. 2. All the policies must be effected against the same peril. 3. All the policies must be effected by or on behalf of the same assured. 4. All the policies must be in force at the time of the loss. 5. All the policies must be legal contracts of insurance. 6. No policy must contain any stipulation by which it is excluded from contribution. [23] The Supreme Court emphasized the importance of the intention of the insurers as manifested by the express terms of their policies when determining whether an insurer has excluded liability for a risk ostensibly covered by both policies, at paras. 16-18: It is in the context of this doctrine of equitable contribution and the opportunity for insurers to contract out of that obligation that the problem of reconciling “other insurance” clauses occurs. Although the insurer’s obligation to contribute does not arise out of the insurance contract per se, the insurer may express its intention to limit its liability in the provisions of the policy. Thus the proper instrument to determine the liability of each insurer is the policy itself. In accordance with the general principles of contract interpretation, the exercise is properly one of determining the parties’ intentions. The proper approach is best described in Couch Cyclopedia of Insurance Law (2nd ed. 1983), vol. 16, at p. 498: Intent of insurers as controlling There is authority that the liability of insurers under overlapping coverage policies is to be governed by the intent of the insurers as manifested by the terms of the policies which they have issued. Thus, it has been said that where two or more liability policies overlap and cover the same risk and the same accident, the respective liabilities of the insurers must rest upon a construction of the language employed by the respective insurers, and not upon the so-called “primary tortfeasor doctrine” or upon any other arbitrary rule or circumstance. The intention which the court seeks to determine is found by looking at the means by and extent to which each insurer has sought to limit its liability to the insured when the insured has purchased other policies covering the same risk. Thus, the interpretation exercise is concerned with determining the intentions of the insurers vis-à-vis the insured… [24] Broadhurst & Ball v. American Home Assurance Co. (1990), 1 O.R. (3d) 225 (C.A.), leave to appeal to S.C.C. refused, [1991] S.C.C.A. No. 55, was the first in the line of Ontario cases dealing with this issue. It concerned lawyers’ professional liability insurance. The lawyers’ primary and excess insurance policies both required the insurer to defend the lawyers against any action and to pay any expenses associated with the defence. This court held that the doctrine of equitable subrogation applied, and the primary insurer was subrogated to the insured’s right to compel the excess insurer to contribute to the defence costs. [25] On behalf of the court, Robins J.A. explained that the principles of “equity and good conscience” required that the excess insurer pay its fair share of the defence costs, at p. 241: On the facts of the present case, it appears to me that, as a simple matter of fairness between insurers under concurrent obligations to defend, and, as well, in fairness to the insured, [the excess insurer] should pay a proper share of the costs of defence. It follows that [the primary insurer] should be able to compel such payment. Since these insurers have no agreement between themselves with respect to the defence, their respective obligations cannot be a matter of contract. Nonetheless, their obligations should be subject to and governed by principles of equity and good conscience, which, in my opinion, dictate that the costs of litigation should be equitably distributed between them. To require a primary insurer, whose financial exposure is significantly less than that of the excess insurer, to bear the entire burden of defending an action of this nature is, in my view, patently inconsistent with those principles. By the same token, a result which allows an excess insurer to deny any responsibility for costs which it ought in good conscience to pay is likewise inconsistent with those principles. As a matter of equity, the burden that these insurers assumed in insuring the same insured against the same risks should fall on both of them and the costs accordingly be shared by them. [26] The principle in Broadhurst & Ball was explained and applied by this court in Alie. This court made it clear that, in insurance contracts not governed by statute, the obligation of an excess insurer to contribute to defence costs must either flow from a duty to defend or must be found in the express language of the policy. The court stated, at paras. 174-75: We agree that absent a statutory obligation to defend, and none exists here, an insurer's obligation, if any, to contribute to defence costs incurred by an insured in the defence of an action, must be found within the four corners of the controlling policy. That obligation may flow from the duty to defend the action, or it may be a discrete covenant within the policy: Canadian Indemnity Co. v. Simcoe & Erie Insurance Co. (1979), 103 D.L.R. (3d) 485, [1979] I.L.R. ¶1-1147 (N.S.C.A.) at p. 489 D.L.R. We also agree that Broadhurst & Ball…does not impose a duty to defend on excess insurers by virtue of the possibility that those insurers will be required to indemnify the insured if the claim is successful. The principle in Broadhurst & Ball operates where the primary and excess insurer have a concurrent duty to defend imposed by their respective policies and addresses the question of contribution as between those insurers. Broadhurst & Ball instructs that where an excess insurer has a duty to defend and is put at risk by the claim, then that excess insurer should contribute to defence costs. The exact nature of the contribution as between those insurers with a duty to defend will depend upon the equities of the specific case. [27] Thus, the mere possibility that the claims will penetrate the excess layer does not, of itself, give rise to a duty to defend. The court also noted, at para. 177, that “[t]he duty to defend is a separate obligation from the duty to indemnify,” and “[a] duty to indemnify does not automatically impose a duty to defend.” In the result, it held that claims covered by both the primary and excess policies that had the potential to exceed the limits of the primary policy triggered the duty to defend clauses in the excess policies for some of the excess insurers. [28] One excess policy, underwritten by Guardian, did not contain a duty to defend clause. The court rejected the argument of the primary insurer, Boreal, that Guardian should nevertheless contribute to defence costs, at paras. 220-22: Boreal also argues that, apart from any duty to defend that may be implied into Guardian's policy, it had “an equitable obligation of contribution” to defence costs where a claim threatened the indemnity provisions of Guardian's policy. This submission amounts to the claim that any excess insurer whose layer of insurance is threatened by a claim has a duty to contribute to the costs of the defence. We think this approach is inconsistent with Broadhurst & Ball, where Robins J.A. first considered whether the excess insurer had a duty to defend the action. It was only after concluding that such a duty existed that Robins J.A. turned to the question of the allocation of defence costs. He said at p. 234 O.R.: Accepting that…the excess insurer, and… the primary insurer, are under concurrent obligations to defend the respondents against the claims asserted in the Lumsden Building action, should the costs of defending the action be apportioned between these insurers, as American Home contends, and if so in what proportions? The principle in Broadhurst & Ball which holds that excess insurers may be required to contribute to defence costs is premised on the existence of a duty to defend on the part of the excess insurer. Without that duty, one does not reach the “equities of the matter” as among various insurers with a duty to defend. Guardian had no duty to defend. The trial judge erred in requiring Guardian to contribute to the costs of the defence. [29] Alie was applied in St. Mary’s Cement Co. v. ACE INA Insurance (2008), 68 C.C.L.I. (4th) 235 (Ont. S.C.). In that case, the insured had been sued in multiple actions for property damage as a result of allegedly defective concrete. The potential liability was far in excess of its $4 million primary insurance policy and potentially up to the limit of ACE’s $25 million excess policy. The ACE policy was, by its terms, triggered on the limits of liability of the underlying insurance being exhausted, at which point it had a duty to defend. ACE argued that it was not required to contribute to defence costs because the primary policy had not been exhausted. [30] Relying on Alie, Cumming J. held that the duty to defend is determined prospectively, based on the allegations made in the claim, unless the express terms of the policy indicate the contrary. Where the excess policy contains a duty to defend, the insurer can be called to provide that defence, even before it is known that the primary policy will be exhausted (at paras. 9-10). [31] He found that there was a realistic chance that the ACE excess policy would be required to indemnify the insured for the claims in the underlying actions and that it would be equitable to apportion the costs equally between the primary and excess insurers, subject to re-allocation following trials of the underlying claims and the resolution of various coverage issues. Analysis [32] In my view, the application judge correctly interpreted and applied the decisions of this court on equitable contribution in Broadhurst & Ball, Trenton Cold Storage and Alie. Based on these authorities, contribution only arises when insurance policies cover the same risk. In this case, the policies do not cover the same risk. Accordingly, the doctrine does not apply. [33] There is no duty to defend under the AEGIS policy. While there is a duty to pay defence costs under both policies, the express terms of the excess policy exclude liability for defence costs to the extent they are covered, as they are, by another policy. The liability for defence costs is not, therefore, congruent or overlapping in any way. Each insurer has insured different risks in relation to the defence of the insured and defence costs. [34] This made-to-measure tailoring of Hydro’s liability insurance was not by happenstance. The primary and excess policies were effected by a sophisticated insured, through a large international insurance broker. The parties informed the court that the premium for the $1 million primary policy was $270,000 and the premium for the $45 million excess policy was $567,000. Presumably in arranging its insurance Hydro wanted to be fully insured, but did not want to pay for more insurance than necessary and was not looking to purchase two policies of insurance covering precisely the same risks. [35] The excess coverage provided by AEGIS complements the primary coverage. ACE is the only insurer with a duty to defend and there is no overlap in responsibility for defence costs. There is nothing unfair in holding the primary insurer to its bargain with the insured. On the contrary, it would be quite unfair to re-write that bargain to reflect ACE’s conception of what would be fair in the circumstances. There is no basis to invoke equitable principles where “each party’s respective liability … [is] in accordance with what each had bargained for”: Trenton Cold Storage, at para. 34. [36] While there is some attraction to ACE’s policy argument that it would be a good idea to bring the excess insurer to the settlement table, it is not this court’s function to do so by changing the contract made between the insurers and their insured. [37] I agree as well with the application judge’s conclusion that ACE’s interpretation would work to the prejudice of Hydro, because requiring ACE to contribute to defence costs would erode the limits of the excess policy. Conclusion [38] For these reasons, I would dismiss the appeal, with costs in the agreed amount of $20,000, inclusive of disbursements and taxes. “G.R. Strathy J.A.” “I agree E.E. Gillese J.A.” “I agree R.G. Juriansz J.A.” Released: November 14, 2013