Markham (City) v. AIG Insurance Company of Canada

Markham (City) v. AIG Insurance Company of Canada Collection Decisions of the Court of Appeal Date 2020-03-31 Neutral citation 2020 ONCA 239 Docket numbers C67455 Judges Doherty, David H.; Brown, David M.; Thorburn, Julie Subject Civil Decision Content COURT OF APPEAL FOR ONTARIO CITATION: Markham (City) v. AIG Insurance Company of Canada, 2020 ONCA 239 DATE: 20200331 DOCKET: C67455 Doherty, Brown and Thorburn JJ.A. BETWEEN The Corporation of the City of Markham Applicant (Respondent) and AIG Insurance Company of Canada Respondent (Appellant) AND BETWEEN AIG Insurance Company of Canada Applicant (Appellant) and Lloyd’s Underwriters and the Corporation of the City of Markham Respondents (Respondents) Marcus B. Snowden and Sébastien A. Kamayah, for the appellant David G. Boghosian and Shaneka Shaw Taylor, for the respondents Heard: February 12, 2020 On appeal from the judgment of Justice Annette Casullo of the Superior Court of Justice, dated August 23, 2019, with reasons reported at 2019 ONSC 4977, [2020] I.L.R. I-6184. Thorburn J.A.: OVERVIEW [1] On February 2, 2015, the City of Markham (“the City”) rented a hockey rink at the Angus Glen Community Centre to the Markham Waxers Hockey Club, the Markham Waxers Minor Hockey Association, and the Markham Minor Hockey Association (collectively “Waxers”). [2] A young boy watching his brother’s hockey game at the community centre (“the plaintiff”), was injured when a hockey puck flew into his face. [3] The plaintiff, through his litigation guardian, sued both the City and Hockey Canada. He seeks $150,000 in damages from the City and Hockey Canada for his broken jaw and associated pain and suffering. [4] The City is insured by Lloyd’s Underwriters (“Lloyd’s”) under a commercial general liability policy. The City is also an additional insured to Hockey Canada’s insurance policy with AIG Insurance Company of Canada (“AIG”). [5] This is a dispute between AIG and Lloyd’s in respect of the duty to defend the claim brought against the City and the rights and responsibilities that arise from that duty. [6] AIG accepts responsibility to defend the action but claims that Lloyd’s has a concurrent duty to defend and must pay an equitable share of the City’s defence costs. AIG also claims it has a right to participate in the defence, including the right to retain and instruct counsel, alongside Lloyd’s. [7] AIG appeals the application judge’s decision that: a) AIG must defend the action; b) AIG must pay the cost of defending the action subject to indemnification of costs, if any, from Lloyd’s upon final resolution of the action; but c) AIG may not participate in the defence by retaining or instructing counsel. THE ISSUES [8] The issues on this appeal are: a) Does Lloyd’s owe the City a concurrent duty to defend? b) Must Lloyd’s pay an equitable share of the City’s defence costs? and c) Does AIG have the right to participate in the defence, including the right to retain and instruct counsel? [9] For the reasons that follow, I conclude that: a) Both AIG and Lloyd’s owe a duty to defend the City in the action; b) AIG and Lloyd’s must share the City’s defence costs equally, subject to a right to seek a reallocation of the defence costs at the conclusion of the action; and c) AIG has a right to participate in the defence, including the right to retain and instruct counsel. PARTIES TO THE LITIGATION [10] The City owns and maintains the rink. [11] Hockey Canada is involved in oversight of hockey programs in Canada. It denies having any operational control over the arena or the events which take place in the arena. [12] Waxers develops and promotes minor ice hockey for youth in the City. Waxers rented the rink from the City for the hockey game. The rental agreement provides that Waxers assumes “all liabilities and costs for damages caused directly or indirectly by the licensee or invitees while on or using the facility.” THE CLAIMS [13] The plaintiff commenced legal proceedings against the City and Hockey Canada. He claims that one or both of the City and Hockey Canada failed to: a) put in place adequate safety systems for spectators; b) take reasonable and proper measures to ensure the hockey rink was reasonably safe for spectators; c) ensure the hockey rink was clear of hazards; d) ensure the reasonable safety of spectators by taking reasonable safety measures, including putting a net around the rink to prevent hockey pucks from striking spectators; and e) place signs or warnings of danger. [14] The plaintiff further claims that the City, Hockey Canada, or both: a) permitted spectators to be at the hockey rink when they knew or ought to have known that it was unsafe and dangerous; and b) allowed incompetent employees, agents or contractors to supervise the rink without suitable skill, ability or training and without ensuring that they followed safety rules and regulations. [15] The City and Hockey Canada crossclaimed against one another. [16] The City also commenced a third-party claim against Waxers. The City claims Waxers knew or ought to have known of the hazards at the location of the accident and failed to: a) fulfil the contractual obligations; b) take steps to prevent the plaintiff from being in the area; c) supervise the plaintiff; d) prevent the plaintiff from engaging in reckless behaviour; e) instruct the plaintiff to obey the ice rink policies and procedures; and f) otherwise take reasonable steps to prevent the plaintiff’s accident. [17] The City further claims that in accordance with the rental agreement, Waxers is obligated to indemnify and hold it harmless from and against all claims and proceedings in respect of any loss, damages or injury arising from Waxers’ performance of and responsibilities under the Contract. [18] Waxers defended the Claim and pleaded that they are not responsible for the physical structure, layout, design, construction, inspection, or maintenance of the arena. THE CITY’S INSURANCE POLICIES (a) The Lloyd’s Policy [19] The Lloyd’s commercial general liability policy covers the City against damages related to bodily injury, personal injury, and property damage. The policy with the City provides that Lloyd’s: agrees to pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay by reason of liability imposed upon the Insured by law or … under Contract or agreement for damages because of (a) Bodily Injury … (b) Personal Injury (c) Property Damage caused by an Occurrence during the Policy Period[.] [20] Each occurrence is insured for up to $5 million, subject to a $100,000 deductible which “shall be deducted from the total amount of all claims”. [21] The policy also requires Lloyd’s to defend the City against claims for damages that fall within the policy. Lloyd’s promises to: defend in the name of and on behalf of the Insured and at the cost of the Insurer any civil action which may at any time be brought against the Insured on account of such Bodily Injury, Personal Injury or Property Damage or Wrongful Act but the Insurer shall have the right to make such investigation, negotiation and settlement of any claim as may be deemed expedient by the Insurer[.] [22] Finally, the policy provides for how liability is determined when another insurance policy also covers the claim. It states that: The Insurer shall not be liable if at the time of any accident or occurrence covered by the 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. [Emphasis added.] (b) The AIG Policy (i) AIG’s Policy Covering Hockey Canada and Waxers [23] AIG insures Hockey Canada and other entities, including Waxers, pursuant to a commercial general liability policy. The AIG policy insures against damages because of bodily injury or property damage that fall within the policy: [AIG] will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. [24] The policy also provides that “[n]o other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for” and that AIG “will have the right and duty to defend any ‘action’ seeking those damages [to which this insurance policy applies until AIG has] … used up the applicable limit of insurance in the payment of judgments or settlements”. [25] “Action” is defined as “a civil proceeding in which damages because of ‘bodily injury’, ‘property damage’ or ‘personal injury’ to which this insurance applies are alleged.” [26] The AIG policy also provides indemnity for legal fees incurred to defend the insured for actions that fall within the coverage. [27] Section IV, subsection 9 of the AIG policy provides that “[t]he insurance afforded by this Policy is primary insurance”. There is no excess provision in the AIG policy, in respect of claims occurring in Canada. (ii) AIG’s Third-Party Liability Insurance for the City [28] As part of its rental agreement, the City required Waxers to obtain general liability insurance for bodily injury arising from Waxers’ use of the rink and to include the City as an additional insured under that policy. [29] Waxers delivered a Certificate of Insurance to the City confirming that the City was added as an additional insured to the AIG policy “but only with respect to the operations of the named insured [Hockey Canada and Waxers]” (emphasis added). [30] Similarly, Endorsement 2 of the AIG Policy provides that the City is included “as Additional Insured but only in respect of liability arising out of the Named Insured’s operations.” [31] The Certificate also provides that it is subject to the limitations, exclusions and conditions of the policy. [32] The City is insured for up to $5 million per occurrence under the AIG policy as an additional insured. THE PROCEEDINGS (a) Overview [33] The City and AIG brought competing applications to determine which insurers had a duty to defend the action and participate in the defence. [34] The City and Lloyd’s were represented by the same counsel who sought a declaration that 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. [35] AIG admitted that it has a duty to defend but claimed that Lloyd’s owes a concurrent duty to defend and to contribute to the defence costs. AIG opposed the application and sought a declaration requiring AIG and Lloyd’s to jointly agree on and instruct counsel to defend the City in the underlying action. (b) The Application Judge’s Reasons (i) Duty to Defend [36] The application judge did not expressly state that Lloyd’s has no duty to defend, though paras. 37-39 of her reasons would seem to suggest that she concluded that AIG alone has a duty to defend all claims in this action. [37] Under the heading “Does Lloyd’s have a continuing duty to defend the City?”, the application judge focused on the fact that AIG had a clear duty to defend the underlying action. She held that: [37] Where a plaintiff advances allegations of negligence which fall outside the scope of the contract, and the insurer has not clearly specified in its policy that the duty to defend is limited to covered rather than uncovered claims, then the insurer’s duty is to defend all of the claims, both covered and non-covered. See, for example, Carneiro v. Durham (Regional Municipality), [2015] O.J. No. 6812. [38] There is nothing in AIG’s Policy that qualifies its duty to defend, or to suggest that the duty to defend did not apply to “mixed claims.” AIG could have written qualifying words into the policy providing for an allocation of “mixed claims.” It chose not to do so. [39] If the court acceded to AIG’s request there would potentially be three or more lawyers defending the action (one for the Waxers, one for the City, and one for Lloyd’s). This simply does not make economic sense. (ii) Costs of the Defence [38] In respect of paying the costs of the defence however, she held that AIG had a right to seek contribution from Lloyd’s at the end 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. She concluded that: [40] In the result, AIG shall pay all reasonable costs associated with the defence of the underlying action, even though those costs further the defence of uncovered claims. This is, of course, subject to AIG’s right to seek reimbursement from Lloyd’s for costs incurred in relation to uncovered claims. (iii) AIG’s Participation in the Defence [39] Despite concluding that AIG had a duty to fund the City’s defence, the application judge held that AIG was not permitted to participate in the defence. [40] She found that there were two sources of potential or actual conflicts of interest between the City and AIG. First, the City had launched a cross-claim and third-party claims against AIG’s own insureds alleging that they were either liable for breach of contract, for contribution and indemnity, or both. Second, as submitted by counsel for the City and Lloyd’s, some claims were not covered by the AIG policy and were only covered by the Lloyd’s policy. As such, AIG had an incentive to conduct the defence so as to impose the majority of liability on the City based on the uncovered risk, rather than the covered risk. [41] The application judge found that there was a perceived if not actual conflict of interest. She noted that AIG proposed to implement a “split file” protocol where separate claims handlers would be appointed to instruct defence counsel for the City and the other defendants in the actions, as well as to handle any coverage issues against the City. Their files would be screened from the files of other claims handlers and marked as confidential. [42] For the reasons that follow, she rejected AIG’s proposal: [24] The case for independent counsel grows stronger, … considering the crossclaims for contribution and indemnity brought by the City and AIG. AIG’s own casualty claims analyst admitted at his cross-examination that a perceived, if not actual, conflict of interest exists between the City and AIG. [25] AIG suggests that any conflict can be managed by ensuring a separate claims handler at AIG handles the City’s defence, and by following a “split file” protocol. This protocol consists of physically and digitally screening the file from other claims handlers with AIG. The physical documents are put into a folder marked confidential, and the electronic documents are marked “internal” or “confidential.” AIG’s casualty claims analyst agreed there is no way to monitor whether other handlers can access and review the confidential documents. [26] Further, with no written policy setting out a formal practice in respect of managing conflicts through the “split file” protocol, AIG has not satisfied the court that this ethical wall is adequate to resolve the conflict of interest concerns. [27] I am mindful of Ferguson J.’s very recent decision in HMQ v. AIG, 2019 ONSC 2964, where an application identical to the one before me was dismissed. I note there were some differences in the evidence in respect of AIG’s “split file” protocol. For example, there was no evidence before me that a claims handler would be subject to discipline if she/he breached protocol. Further, AIG’s analyst indicated there was no way of knowing whether other handlers could access and see documents marked “confidential.” Moreover, in that case only HMQ had issued a crossclaim, so the potential for AIG being in a position of conflict was not as evident. … [29] … AIG would only be liable to indemnify the City to the extent of the Waxers’ liability, so its efforts would obviously be to reduce that exposure and play to the uncovered claims’ strength, being the occupiers’ liability claims. [30] Ultimately, I am persuaded by the City’s argument that counsel’s mandate from AIG in respect of defending the Waxers can reasonably be seen to conflict with AIG’s mandate to defend the City. [43] She concluded that there is an “irremediable conflict of interest” in AIG defending both the City and Hockey Canada and that the “split file” protocol proposed by AIG is unworkable in respect of this claim for negligence and breach of contract. As such, she concluded that the City should be permitted to select and instruct its own counsel without having to report to AIG. ANALYSIS THE FIRST ISSUE: Does Lloyd’s have a Concurrent Duty to Defend? (a) The Governing Principles (i) The Relationship between an Insured and an Insurer [44] The relationship between an insured and an insurer is a contractual one governed primarily by the terms of the insurance policy. The proper instrument to determine the liability of each insurer is the contract itself: Family Insurance Corp. v. Lombard Canada Ltd., 2002 SCC 48, [2002] 2 S.C.R. 695, at paras. 16-18 and Van Huizen v. Trisura Guarantee Insurance Company, 2020 ONCA 222. [45] The language of the policy is construed in accordance with the usual rules of construction rather than inferred "expectations" not apparent on a fair reading of the document. This is particularly so in the case of commercial insurance policies involving sophisticated parties. In so doing, the insurer must explicitly state the basis on which coverage may be limited: Hanis v. Teevan, 2008 ONCA 678, 92 O.R. (3d) 594, at para. 22, leave to appeal refused, [2008] S.C.C.A. No. 504. (ii) The Duty to Defend Claims [46] An insurer has a duty to defend where there is a “mere possibility” that the true nature of the pleaded claim, if proven at trial, falls within coverage and would trigger the insurer’s duty to indemnify: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at para. 19. [47] If the pleadings allege facts which, if true, would require the insurer to indemnify the insured for the claim, then the insurer is obliged to provide a defence, even though the actual facts may differ from the allegations in the statement of claim: Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, at para. 28; Alie v. Bertrand & Frère Construction Company Limited (2002), 62 O.R. (3d) 345 (C.A.), at para. 182, leave to appeal refused, [2003] S.C.C.A. No. 48. [48] In Hanis, at para. 23, Doherty J.A. held that. I see no unfairness to the insurer in holding it responsible for all reasonable costs related to the defence of covered claims if that is what is provided for by the language of the policy. If the insurer has contracted to cover all defence costs relating to a claim, those costs do not increase because they also assist the insured in the defence of an uncovered claim. The insurer's exposure for liability for defence costs is not increased. Similarly, the insured receives nothing more than what it bargained for -- payment of all defence costs related to a covered claim. [Emphasis added.] [49] However, an insurer is not obligated to pay costs incurred solely to defend uncovered claims: Hanis, at para. 25. (iii) Primary and Excess Coverage [50] In Trenton Cold Storage v. St. Paul Fire & Marine (2001), 199 D.L.R. (4th) 654 (Ont. C.A.), at para. 24, this court explained the difference between primary and excess insurance. Where there is primary insurance coverage, liability attaches immediately upon the happening of the occurrence that gives rise to the liability. An excess policy, on the other hand, is one that provides that the insurer is liable for the excess above and beyond that collected on primary insurance. [51] Determining priority for overlapping coverage requires both policies to cover the same risk. An excess policy is excess to the claims covered in the primary policy: Family Insurance, at para. 15. [52] Where there is both primary and excess insurance coverage, the limits of the primary insurance must be exhausted before the primary carrier has a right to require the excess carrier to contribute to a settlement. The remote position of an excess carrier greatly reduces its chance of exposure to a loss: Trenton Cold Storage, at para. 24, citing with approval the explanation in St. Paul Mercury Insurance Co. v. Lexington Insurance Company, 78 F. 3d. 202 (5th Cir. 1996) at footnote 23, quoting from Emscor Mfg., Inc. v. Alliance Ins. Group, 879 S.W.2d 894 at 903 (Tex. App. 1994), writ denied, at 903. (b) Application of the Law to the Facts in this Case (i) The Parties’ Positions [53] There is no dispute that the AIG policy covers the City against all liability with respect to the operations of Hockey Canada and Waxers, that the AIG policy is a primary insurance policy, and that AIG has a duty to defend the City against claims which fall within the scope of its policy. [54] However, AIG argues that Lloyd’s is also a primary insurer on the claims covered by the AIG policy and the only insurer who is liable to indemnify the City against other claims in the action. As a result, Lloyd’s also owes a duty to defend. [55] In response, Lloyd’s and the City argue that AIG is the primary insurer on all of the claims in the action and that Lloyd’s is an excess insurer only. They contend that the decision of the British Columbia Court of Appeal in Saanich (District) v. Aviva Insurance Company of Canada, 2011 BCCA 391, 23 B.C.L.R. (5th) 272, (although that case dealt with a dispute between an insurer and an insured not two insurers) supports their submission that the language in the AIG policy regarding coverage for the additional insured – “only in respect of the operations of the named insured” – is broad enough to cover all claims alleged against the City. As well, because the claimed amount in the underlying action – $150,000 – falls well within AIG’s policy limits, they claim there is no duty to indemnify under the Lloyd’s policy and therefore no duty to defend. (ii) The Lloyd’s Policy [56] The Lloyd’s policy covers the City for all claims of bodily injury, personal injury or property damage “caused by an Occurrence during the Policy Period”. [57] The only limitation in the Lloyd’s policy is that: 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. [58] This provision seems to provide that if: a) at the time of the accident; b) the claim is covered by the Lloyd’s policy; and c) another insurance policy would have attached to cover all or part of the claim had the Lloyd’s policy not been in place, Lloyd’s is not liable except as an excess insurer such that it has an obligation to contribute only after all other insurance has been exhausted. [59] In this case, at the time of the accident, the claim was covered by the Lloyd’s policy and the AIG policy would have attached to cover part of the claim had the Lloyd’s policy not been in place. [60] Therefore, to the extent but only to the extent that claims would be covered by the AIG policy, Lloyd’s would be an excess insurer with respect to those claims. [61] AIG refers to the case of State Farm Fire and Casualty Co. v. Royal Insurance of Canada (1998), 115 O.A.C. 388 (C.A.), where a similar clause was held not to be an excess insurance policy clause. [62] It is not necessary to address the conclusion in this brief endorsement in interpreting the Lloyd’s provision because in this case, unlike State Farm Fire and Casualty Co., there are some claims in the underlying action which may not be covered by the AIG policy and may only be covered by the Lloyd’s policy. [63] In any event, I note that the State Farm Fire and Casualty Co. decision appears to have been made without the benefit of two other decisions – McGeough v. Stay ‘N Save Motor Inns Inc. (1994), 92 B.C.L.R. (2d) 288 (C.A.), and Gagnon v. Insurance Company of North America and Industrial Acceptance Co. Ltd. (1967), 64 D.L.R. (2d) 355 (Que. C.A.), aff’d on a different point, [1969] S.C.R. 824 – that interpreted similar policy language and adopted a different conclusion, one that seems more consistent with the plain meaning of the words in the provision. [64] I conclude therefore, that Lloyd’s has a duty to defend the City against those claims in the action not covered by the AIG policy. The parties are free to seek a final determination of the issue of coverage for the portion of the claim covered by the AIG policy, including the applicability, if any, of the reasoning of the British Columbia Court of Appeal in Saanich to the interpretation of the additional insured provision in the AIG policy, upon final resolution of the action and apportionment of liability. (iii) Lloyd’s Duty to Defend [65] Lloyd’s has a duty to defend the City in respect of all claims of bodily injury, personal injury or property damage caused by “an Occurrence”. [66] The AIG policy only covers the City for “liability in respect of [Hockey Canada and Waxers’] operations”. AIG expressly limited its obligation as “[n]o other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for”. All other occurrences that cause bodily injury, personal injury or property damage are not covered by the AIG policy but are covered by the Lloyd’s policy. [67] Thus, for example, the alleged failure on the part of the City to “ensure the reasonable safety of spectators through the use of reasonable safety measures, including a net around the rink to prevent hockey pucks from striking spectators” and the failure to “put into place proper and sufficient systems for the safety of spectators” may be covered by the Lloyd’s policy but may not be covered under the AIG policy. [68] As a result, both AIG and Lloyd’s have a duty to defend. [69] This conclusion is consistent with the decision of this court in Carneiro v. Durham (Regional Municipality), 2015 ONCA 909, 55 C.C.L.I. (5th) 1.[1] This court held, at para. 13, that: Durham was an additional insured under Zurich’s policy. The policy contained an unqualified promise to defend the insured for actions covered by the policy. Zurich is therefore obligated to pay the reasonable costs of Durham’s defence of covered claim, even if that defence furthers the defence of uncovered claims. However, it is not obligated to pay costs related solely to the defence of uncovered claims: Hanis v. Teevan, 2008 ONCA 678, 92 O.R. (3d) 594, at para. 2. [Emphasis added.] [70] In response, Lloyd’s and the City submit that there is an exclusion in the Lloyd’s policy that absolves Lloyd’s of the duty to defend. It does not. [71] The words in the Lloyd’s policy: This Policy does not apply directly or indirectly to … any liability of the Insured [City] … to any obligation to share damages with or repay someone else who must pay damages because of Bodily Injury[.] refer to the City assuming an obligation for a third party’s actions, not a third party (Waxers) agreeing to indemnify the City for the third party’s actions. [72] Lastly, while the $100,000 deductible in the Lloyd’s policy may affect the sum Lloyd’s is required to pay out to the insured City upon final resolution of the claim, the deductible does not affect the duty to defend the action based on the wording of the policy. (c) Conclusion [73] AIG is the primary insurer for claims resulting in bodily injury or property damage arising from the operations of Hockey Canada and Waxers up to the $5 million policy limit because the AIG policy contains no excess provision: Progressive Homes. The $150,000 claim falls within AIG’s policy limit. [74] To the extent the AIG and Lloyd’s policies cover the same claims, AIG has a duty to defend up to its policy limit, and Lloyd’s may be an excess insurer. [75] However, at a minimum, Lloyd’s owes a duty to defend the City against claims which may fall outside the scope of the AIG policy and which fall within the scope of its own policy. [76] The fact that AIG has a duty to defend the City does not, by itself, excuse another insurer from its duty to defend: Unger (Litigation guardian of) v. Unger (2004), 68 O.R. (3d) 257 (C.A.), at para. 10. Lloyd’s also has a duty to defend. [77] Therefore, the application judge’s determination that only AIG has the duty to defend the action is incorrect. THE SECOND ISSUE: MUST LLOYD’S PAY THE ONGOING COSTS OF DEFENDING THE CLAIM? (a) The Governing Principles [78] Where two insurers have an obligation to defend the same claim, the insured is entitled to select the policy under which to claim indemnity, subject to any conditions in the policy to the contrary: Family Insurance, at paras. 14-15. [79] However, where both insurers are responsible to defend and one is selected by the insured to assume the defence, it may be inequitable for one insurer to pay all costs and the other to pay nothing unless for example, there is no realistic chance the policy would be reached by the claim: Alie. As a result, the insurer selected by the insured to defend the claim may be entitled to contribution from all other insurers who have a concurrent duty to defend the insured. [80] As noted by the Supreme Court in Family Insurance, at paras. 14-15: 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. [Emphasis added.] [81] Similarly, in Broadhurst & Ball v. American Home Assurance Co. (1991), 1 O.R. (3d) 225 (C.A.), at p. 241, leave to appeal refused, [1991] S.C.C.A. No. 55, the court held that where two insurers have a concurrent obligation to defend: [T]heir respective obligations cannot be a matter of contract. Nonetheless, their obligations should be subject to and governed by the principles of equity and good conscience, which, in my opinion, dictate that the costs of litigation should be equitably distributed between them. [82] The full and early participation of all insurers who are potentially liable promotes settlement and expedites the trial process: Alie, at para. 201. The insurers have the same interest in minimizing their exposure by conducting the best defence possible. [83] The allocation of defence costs as among insurers who have a concurrent obligation to defend is essentially a matter of fairness as among those insurers. As such, the allocation of costs is not an exact science and an application or trial judge’s determination is owed considerable deference: Alie, at para. 235; Broadhurst, at p. 241. (b) Application of the Law to the Facts in This Case [84] Each of AIG and Lloyd’s has a duty to defend at least some of the claims in the action so each is responsible to contribute to the defence costs of the City: Aquatech Logistics et al. v. Lombard Insurance et al., 2015 ONSC 5858, 55 C.C.L.I. (5th) 326, at paras. 43-47. As there is no contract between them with respect to the defence, their respective obligations should be governed by the principles of equity. [85] On the facts of this case, the respective risk of the two insurers is real but the level of risk cannot yet be ascertained given the early stage of the proceedings and the claim does not allow for a precise allocation of defence costs. [86] The usual deference does not apply to the application judge’s decision in this case as her analysis is premised on the faulty assumption that Lloyd’s has no duty to defend and her analysis does not address the central issue of fairness and equity. [87] In these circumstances where there are two primary insurers, the Lloyd’s policy is more comprehensive than AIG’s, and there is a concurrent duty to defend, the fairest and most equitable allocation of defence costs would seem to be to require each of AIG and Lloyd’s to pay an equal share of the defence costs pending final disposition of the action and the final determination of the allocation of defence costs: General Accident Assurance Co. of Canada v. Ontario Provincial Police Commissioner (1988), 64 O.R. (2d) 321 (H.C.), at p. 325, cited approvingly in Reeb v. The Guarantee Company of North America, 2019 ONCA 862, at para. 11; General Electric Canada Co. v. Aviva Canada Inc., 2010 ONSC 6806, 10 C.C.L.I. (5th) 16, at para. 82, aff’d 2012 ONCA 525, 10 C.C.L.I. (5th) 42. THE THIRD ISSUE: DOES AIG HAVE THE RIGHT TO PARTICIPATE IN THE DEFENCE INCLUDING THE RIGHT TO RETAIN AND INSTRUCT COUNSEL? (a) The Governing Principles [88] In Brockton (Municipality) v. Frank Cowan Co. (2002), 57 O.R. (3d) 447 (C.A.), at para. 31, this court explained that an insurer who has a duty to defend an action also has a prima facie right to control the conduct of that defence. [89] In order to remove the insurer’s contractual right to “defend and control the defence of the litigation,” there must be a “reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer”: Brockton, at para. 43. [90] In Brockton, at para. 43, this court held that: The balance is between the insured’s right to a full and fair defence of the civil action against it and the insurer’s right to control that defence because of its potential ultimate obligation to indemnify. … The question is whether counsel’s mandate from the insurer can reasonably be said to conflict with his mandate to defend the insured in the civil action. Until that point is reached, the insured’s right to a defence and the insurer’s right to control that defence can satisfactorily co-exist. [91] Counsel defending the action should have the confidence of the insurer who is obliged to pay the legal fees and may have to pay a substantial judgment on behalf of the insured. Counsel must also meet their legal and ethical obligation to represent and protect the interests of the insured: Hoang v. Vincentini, 2015 ONCA 780, 57 C.C.L.I. (5th) 119, at para. 14; Mallory v. Werkmann Estate, 2015 ONCA 71, 330 O.A.C. 337, at para. 29. [92] The mere fact that an insurer has reserved its rights on coverage does not cause the insurer to lose its right to control the defence and appoint counsel. The question is whether the circumstances of the case create a reasonable apprehension of conflict of interest if that counsel were to act for both the insurer and the insured in defending the action: Brockton, at paras. 39-40, 43, citing Zurich of Canada v. Renaud & Jacob, [1996] R.J.Q. 2160 (C.A.) at pp. 2168-69, per Lebel J.A. (as he then was). [93] The onus is on the insured to establish a reasonable apprehension of conflict of interest on the part of the insurer: Brockton, at para. 43; Wal-Mart v. Intact, 2016 ONSC 4971, 133 O.R. (3d) 716; and Brookfield Johnson Controls Canada LP v. Continental Casualty Company, 2017 ONSC 5978. (b) Application of the Law to the Facts in This Case [94] In this case, AIG’s policy provides that AIG has a duty and right to defend the action. Lloyd’s policy also provides that it has a duty and right to defend the action. The insured elected to have AIG defend the action. [95] Lloyd’s and the City are represented by the same counsel on this appeal. Counsel claims that if AIG retains and instructs counsel to defend the claims against the City, that counsel will have a strong incentive to “settle the claim as quickly as possible as against the City” or “[a]t the very least … to try to prove that only the City is liable for the Plaintiff’s damages by way of any claims falling outside of what AIG believes is the scope of coverage afforded by the AIG Policy”, because the AIG policy only covers occurrences arising from the operations of Hockey Canada and Waxers. [96] This they say, creates a reasonable apprehension of conflict of interest in counsel retained and instructed by AIG. [97] However, counsel for AIG argues that there is also a reasonable apprehension that counsel retained and instructed by Lloyd’s and/or the City would also find themselves in a conflict of interest. [98] The issue in this case is not whether the City has coverage for some or all of the claims in the action but which of two insurers is responsible to cover which claims in accordance with their respective policies of insurance. Consequently, cases which address the question of whether there is coverage for all or part of a claim are distinguishable. See for example: Pabla v. City of Mississauga, 2015 ONSC 5156; Glassford v. TD Home & Auto Insurance Co. (2009), 94 O.R. (3d) 630 (S.C.); and Lefeuvre v. Boekee, 2017 ONSC 6874, 74 C.C.L.I. (5th) 174. [99] The AIG policy only covers claims in respect of the operations of Hockey Canada and Waxers, while the Lloyd’s policy covers all occurrences subject to its $100,000 deductible, which is lower than the amount claimed. [100] As such, if Lloyd’s were to retain and instruct counsel, counsel might seek to have responsibility for any wrongdoing attributed to the operations of Hockey Canada or Waxers rather than the City, so that any damages are either shared by or fully encompassed by AIG’s policy. [101] Similarly, if the City were to retain and instruct counsel, the City has an interest in having claims paid by AIG rather than Lloyd’s, as any payment made by Lloyd’s might result in an increase in premiums paid by the City pursuant to the Lloyd’s policy. The Lloyd’s policy also has a $100,000 deductible, while the AIG policy does not. The City has already aligned its interest with Lloyd’s, as evidenced by the fact that one counsel represents them both on this appeal. [102] It would appear that each of AIG, Lloyd’s and the City have conflicting interests as follows: a) AIG has an interest in having liability determined on the basis of the City’s actions alone so that AIG is not responsible for paying any damages. This is because its policy only covers the incidents that arise out of the operations of Hockey Canada or Waxers and because it is also defending Hockey Canada and Waxers in the main action; b) Lloyd’s has an interest in having liability determined on the basis that the claim arose from the operations of Hockey Canada or Waxers and not from the actions of the City to minimize its exposure to the losses; and c) The City also has an interest in having liability determined on the basis that the claim arose from the operations of Hockey Canada or Waxers so that the City’s premiums do not rise and so that they do not have to assume the full $100,000 deductible in the Lloyd’s policy. [103] The court must endeavour to balance the insured’s right to a full and fair defence of the civil action with the insurers’ right to control the defence such that AIG does not abuse its right to defend and settle the claim to the detriment of Lloyd’s and/or the City: Brockton, at para. 43. [104] In situations such as this, it is important to have in place mechanisms to minimize conflicts of interest and provide meaningful protections to the party not having control of the defence: PCL Constructors Canada Inc. v. Lumbermens Mutual Casualty Company Kemper Canada (2009), 76 C.C.L.I. (4th) 259 (Ont. S.C.), at para. 89. [105] AIG suggests implementing a “split file” verbal protocol to lessen the concerns and provide protection to the insured and Lloyd’s. This would ensure that potentially conflicting interests insured by one policy are handled separately and that the separate claims be dealt with by separate counsel. [106] AIG’s proposal is as follows: a) The City’s defence as an additional insured would be handled and screened internally so that Hockey Canada and Waxers’ information is held separately and kept confidential from information in respect of the City claim; b) Physical files would be scanned and converted into digital format upon receipt; c) A file subject to the “split file” protocol would be digitally marked confidential and would not be accessed by any other handler, including the handler responsible for the defence of another adverse insured party. This is to protect confidential information and avoid any perceived or actual “party-based” conflict of interest between the insured interests; d) The handlers for the City defence would be different from those handling the Hockey Canada defence. Similarly, the handlers for coverage issues would be different from the handlers for liability issues; e) A claims handler in breach of the “split file” protocol would be subject to disciplinary action and could be dismissed if confidential information is disclosed; f) AIG agrees to work cooperatively with Lloyd’s to agree upon, appoint/instruct, and pay for an independent defence counsel. That counsel will be different from AIG’s coverage counsel; and g) AIG commits to sharing funding costs incurred in the City’s defence. [107] Lloyd’s and the City by contrast, make no proposal save that AIG fund the defence but have no role in retaining or instructing counsel. [108] The application judge erred when she determined that there were no measures that could alleviate the City’s concerns short of removing AIG from the defence entirely. [109] There is no reason to believe that appropriate counsel who has an ethical obligation to defend the insured properly, will not conduct the defence in the best interest of the insured. There is also no evidence that any of the handlers have misused any confidential information or, with appropriate disciplinary measures put in place, will misuse confidential information. [110] I note that one of the key reasons cited by the application judge for not accepting the proposed protocol was that no disciplinary measures would be taken against persons at AIG who contravened the protocol. [111] The application judge was mistaken. [112] The AIG handler confirmed that any person contravening the protocol would be met with disciplinary action that could lead to dismissal. [113] The AIG proposal attempts to minimize the risk of harm by creating a system to protect confidential information and separate files, enable all three parties to participate in retaining, instructing and receiving instructions from counsel and provide recourse against those who do not adhere to the system. [114] However, if AIG is to retain its right to participate in the defence, a few additional terms are warranted. This court imposes these additional obligations in accordance with AIG’s acknowledgment of the “balanced screen” approach set out in PCL Constructors Canada and its powers under the Courts of Justice Act, R.S.O. 1990, c. C. 43, s. 134(1)(a) as follows: a) The terms of this proposal must be provided in writing to those involved in managing the defence; b) 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; c) Defence counsel must have no discussion about the case with either coverage counsel; and d) Counsel must provide identical and concurrent reports to the insured and both insurers regarding the defence of the main action. UPS Supply Chain Solutions, Inc. v. Airon HVAC Service Ltd., 2015 ONSC 3104, 49 C.C.L.I. (5th) 201, at para. 31; PCL Constructors Canada, at para. 93. [115] This will allow AIG to participate in the defence and resolution of the action as set out in the AIG policy, while at the same time, allowing Lloyd’s and the City the opportunity to know of and address concerns in a timely manner: PCL Constructors Canada, at para. 90. [116] Given the multiple conflicting interests, this protocol and the safeguards it provides, albeit not without any concerns, recognize the legitimate interests of both the insured and the insurers and address the concern that AIG may abuse its right to defend and settle to the prejudice of the insured. SUMMARY OF CONCLUSIONS [117] Each of AIG and Lloyd’s has a duty to defend the action. [118] Each must therefore contribute to the ongoing cost of the defence. [119] The apportionment of costs cannot yet be determined. AIG and Lloyd’s are required to share the cost of the defence equally, subject to a right to seek a re-apportionment of the costs upon final resolution of the action. [120] AIG and Lloyd’s may also jointly retain and instruct counsel provided the above steps are implemented to safeguard the interests of all parties. This order is without prejudice to the parties’ right to move for directions from the Superior Court should they be unable to agree on the conduct of the defence. [121] In cases such as this where there is a dispute among the insurers and the City, it is incumbent upon all parties to work with one another and to exchange ideas in respect of a proposed protocol. Insurers and sophisticated parties like the City are best placed to determine what systems could work best. [122] Unless there is an agreement among the parties, all parties should make submissions in respect of their proposed protocol. [123] For the above reasons, the appeal is allowed. [124] On agreement of the parties, the costs order in the proceedings below is set aside. Costs of this appeal are awarded to AIG in the amount of $15,000, inclusive of HST. Released: March 31, 2020 (“D.D.”) “J.A. Thorburn J.A.” “I agree. Doherty J.A.” “I agree. David Brown J.A.” [1] Contrary to the respondents’ assertion, Carneiro does not stand for the proposition that whenever one aspect of a claim is covered by the policy, all costs of the defence must be borne by that insurer.