by Hillel David and Howard Borlack

Table of Contents

Introduction

A. DEFENCE COSTS

• The application decision
• The appeal decision
• Errors held to have been made by the application judge
  
  1. Coverage for conduct outside the time periods specified in the policies
  2. This was not a case of concurrent insurers
  3. The decision in Hanis was not applicable to situations involving multiple policy periods
  4. The application judge did not meaningfully analyze the pleadings
  5. An "all sums" approach was erroneously applied
  6. Defence costs are not a peril in the nature of an insured risk
  7. The courts should limit conflicts of interest

B. SIRs AND DEDUCTIBLES

1. SIRs v deductibles
2. Exhausting SIRs through payments made by other insurers is inapplicable
3. Adjusting equitable allocation among insurers

C. PRE-TENDER DEFENCE COSTS

1. Notice of claim
2. Relief from forfeiture
   

D. DEFENCE REPORTING AGREEMENT ("DRA")

1. Factual overview
2. Commentary on legal issues

E. AN ASIDE: "CLAIMS-MADE" v "OCCURRENCE"
F. MANY REMAINING ISSUES

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Introduction

As stated at the outset of this decision, "The allocation of defence costs amongst serial insurers who owe their insured a duty to defend raises complex issues in the context of consecutive coverage periods and multiple class action claims that span lengthy time frames."¹ Even more graphic was the following remark: "The challenge presented by these appeals is what to do with the cost of defending claims that involve allegations of continuous or progressive injury that span many years (long-tail claims) where there are insurance policies with different insurers, different provisions involving deductibles and SIRs, and consecutive rather than concurrent coverage periods and therefore different risks. The American Professor Leo P. Martinez aptly described this as 'among the thorniest problems in insurance law'".²

In this case, there were multiple class actions relating to the sale of opioids, with claims amounting to billions of dollars and involving a time span of more than 20 years.

A. DEFENCE COSTS

The application decision³

The insurers as a group had agreed to a tentative time-on-risk equitable allocation of defence costs, which the application judge held to be appropriate. The insurers would have remained entitled to seek a different calculation of defence costs – i.e. different than time-on-risk – at a later stage, based on the evidence at trial or findings on interlocutory motions.

However, rather than adopting that simple (and agreed-upon, at least by the insurers) preliminary approach of time-on-risk pro rata allocation of defence costs, the application judge held that defence costs for each insured were initially to be borne solely by a single insurer selected by that insured, so long as there was a duty under that insurer's policy to defend that insured for at least part of the claims made against that insured. That selected insurer would be obligated to provide a defence for all claims made against that insured, including those that fell outside that insurer's coverage periods, but would be entitled (although only at the end of the proceedings) to seek a reallocation of the defence costs by way of equitable contribution from other insurers having an obligation to defend at least part of the claims.⁴

The application judge justified this decision by finding that the claims set out in the pleadings could not reasonably, practically, and realistically be separated or allocated between covered and non-covered claims for each insurer at this stage of the proceeding. Accordingly, the individual insurers respectively selected by the insureds were obligated, at least initially, to pay defence costs for the entire time period covered by the actions.

The appeal decision

On appeal it was held that the proper disposition from the start was a time-on-risk pro rata allocation of defence costs among the insurers, subject to applicable SIRs/deductibles having first been exhausted.⁵ Regarding the latter, no insurer had a duty to defend or to pay its pro rata share of the defence costs until the insureds had funded the SIR/deductible applicable under that insurer's policy.⁶

The court highlighted the potential consequences of the application decision with the following example: The insurer RSA, whose policy covered a time period of only 8 months (or approximately 3% of the class period), would have been obligated, if selected by an insured, to provide a defence for that insured for the entire class period.⁷

Errors held to have been made by the application judge

i. Coverage for conduct outside the time periods specified in the policies.⁸

"An inquiry into the nature and scope of the duties an insurer owes to its insured starts with the insurance policy that governs them…When interpreting contracts of insurance, the court should give effect to clear language, reading the contract as a whole and applying general rules of contractual construction to resolve any ambiguities."⁹ The decision of the application judge departed from the language of the policies by extending the obligation of the insurers so as to result in coverage for claims arising from wrongful conduct outside the time periods specified by the policies. "The [insurers] were not insuring the same risk. Rather, they each agreed to cover risks within certain time parameters. Each insurer covered a successive period of time that captured a different risk profile. No insurer agreed to cover risks falling outside their prescribed
time period."¹⁰

ii. This was not a case of concurrent insurers¹¹

The insurers were consecutive, not concurrent, insurers. As noted above, each provided coverage only for claims arising from conduct that occurred during the time period specified in their respective policies. It was an error to require insurers to defend claims arising from conduct outside the time periods in their respective policies. This was compounded by the error in permitting the selected insurers to seek equitable contribution from other insurers. Decisions such as Family Insurance¹² and Markham¹³ apply only where the insurers are concurrent, meaning that they have coordinate liability.

iii. The decision in Hanis¹⁴ was not applicable to situations involving multiple policy periods¹⁵

Hanis involved a single policy period and "mixed claims", the latter term referring to multiple causes of action, some of which were covered and others not. On a contractual analysis, the insurer in that case was held obligated to pay all defence costs other than those exclusively related to the defence of non-covered claims. As emphasized in the later decision in Tedford,¹⁶ Hanis established that an insurer is responsible for those costs associated with the defence of covered claims, including those which fortuitously further the defence of non-covered claims, which are reasonable.¹⁷ Requiring the selected insurers in Loblaw Companies to wait until the end of the proceeding before having an entitlement to seek equitable contribution from other insurers for extensive defence costs associated with class actions would be unreasonable.¹⁸

iv. The application judge did not meaningfully analyze the pleadings¹⁹

The application judge failed to closely consider the temporal aspects of the alleged occurrences, at least some of which were clearly outside the coverage time periods in at least some of the policies, and therefore were clearly outside coverage. "There is no single policy that could possibly be called upon to indemnify the [insureds] in full for the claims given the evolving nature of the claims and the time-limited nature of the coverage provided. The consecutive nature of the insurance policies renders a time-on-risk allocation a simple exercise at a preliminary stage in these proceedings. The time periods in the policies are readily identifiable. A time-on-risk allocation fits within the temporal nature of the allegations asserted against the [insureds]."²⁰

There was additionally no risk that any of the claims would not be covered, as the insurers had collectively agreed to pay all defence costs.²¹

v. An "all sums" approach was erroneously applied²²

The so-called "all sums" theory (the name of which is taken from typical language in the insuring agreement in a policy) mandates that the insurer in each policy is obliged to fund the whole of the defence costs, and then seek contribution from other insurers who are on risk. This was adopted as a justification for permitting the insured, in cases where there is coverage under more than one policy, to select an insurer who would fully bear the initial burden of defending the action. The flaw in the theory is that it fails to read the policy as a whole; it fails to account for the clear policy language that limits the duty to defend to loss or damage arising from conduct occurring during the policy period. Isolated decisions that appear to have adopted the "all sums" approach were treated as outliers which are inconsistent with, and have effectively been overruled by, other decisions which have correctly adopted the pro rata allocation approach.

vi. Defence costs are not a peril in the nature of an insured risk²³

"[D]efence costs are not a danger or peril in the nature of an insured risk. The relevant peril for which the [insureds] sought insurance under most of the primary policies was their unintentional infliction of 'bodily injury'. That is the harm that is causing the [insureds] to incur losses. Defence costs are a consequence of that peril, [they are] not the peril itself ."²⁴

vii. The courts should limit conflicts of interest²⁵

"It is in the insurer's interest that if liability is found, it be on a basis other than one falling under [its] policy. Requiring the insurer to defend claims which cannot fall within [its] policy puts the insurer in the position of having to defend claims which it is in its interest should succeed…It makes no sense for an insurer with minimal exposure to be tasked with controlling the defence and the defence costs."²⁶

B., SIRs AND DEDUCTIBLES²⁷

"The [principal] subject of debate is whether the [insureds] may exhaust the SIRs or deductibles by payments of defence costs made by the other insurers."²⁸

i. SIRs v deductibles²⁹

Unlike the case of a deductible, where the duty to defend generally arises immediately, in the case of an SIR the duty to defend does not arise until the SIR has been exhausted.³⁰ While SIRs and deductibles have large similarities, comments were made regarding the greater sophistication inherent in SIRs as compared to deductibles.

i. Exhausting SIRs through payments made by other insurers is inapplicable³¹

The application judge held that defence cost payments made by the selected insurer could be used to reduce the SIRs in other policies;³² that the insured would, in other words, receive a credit against its SIR obligations under other policies. "Unquestionably an SIR must be paid before an insurer has an obligation to defend. However, as a pro rata time-on-risk formula is applicable, the issue of payment by another insurer disappears. This is because the pro rata time-on-risk formula applies to the exhaustion of the SIRs."³³

A more detailed explanation might be the following: To begin with, there is no "selected insurer". Furthermore, the total amounts payable for defence costs will be whatever they ultimately amount to. The pro rata formula fixes the proportionate share payable by each insurer. If the insureds were entitled to credits for payments made by one or more insurers, those credited amounts would have to be made up by increased contributions from one or more insurers, which in turn would unravel the certainty of the time-on-risk pro rata formula. The whole purpose of that formula is to fix the allocation of costs as among all of the parties. Nor, for that matter, would there be a true and meaningful SIR.

iii. Adjusting equitable allocation among insurers³⁴

The court understood the application judge to have held that "the selected insurer whose SIR has been exhausted is [nevertheless] responsible to pay all of the defence costs until the SIRs of the remaining insurers have been exhausted."³⁵ That was held to be an error. Here again, the starting point might be that there is no "selected insurer", and in addition, if there were, the insured would almost certainly select the insurer with the lowest SIR. The basis of the appeal decision was that the liability of each insurer for payment of defence costs was limited to its pro rata share of defence costs as determined by the time-on-risk method of allocation.³⁶ As indicated above, the effect of the application decision would have been to extend the liability of the insurers beyond the limit established by the pro rata time-on-risk formula.

C. PRE-TENDER DEFENCE COSTS³⁷

i. Notice of Claim

The purpose of a policy provision requiring notice of a claim is "to enable [the] insurer to conduct an investigation and mitigate damages."³⁸ "An insurer also has the right to control the defence of an insured claim and this includes the right to appoint defence counsel."³⁹ An independent "voluntary payments" policy provision complements the notice provision.⁴⁰

ii. Relief from forfeiture

One of the insureds relied on relief from forfeiture for defence costs it incurred resulting from its failure to give notice and its initial undertaking of the defence of the claim. "Relief from forfeiture refers to the power of a court to protect a person against the loss of an interest or a right because of a failure to perform a covenant or condition in an agreement or contract. It is an equitable and discretionary remedy...[which] is granted sparingly and the party seeking the relief bears the onus of proof.⁴¹

"[I]n Ontario, relief from forfeiture is governed by s. 98 of the [Courts of Justice Act] and in the insurance context also by s. 129 of the Insurance Act."⁴² The former generally applies to pre-loss issues, and the latter to post-loss matters.⁴³

The issue in this case, however, was not whether relief from forfeiture ought to have been granted, but rather whether it could be granted, seeing that no forfeiture had actually occurred. No notice of a claim had been given to the insurers, nor had a request been made to undertake a defence. In those circumstances, there had been no breach of contract by the insurers.⁴⁴ The insured was, however, entitled to deduct its pre-tender costs from the SIR or deductible under the applicable policies.⁴⁵

D. DEFENCE REPORTING AGREEMENT ("DRA")⁴⁶

i. Factual overview

The application judge ordered that only those insurers who entered into a DRA would be entitled to associate in the defence of the class action claims and to receive privileged defence information. Among other things, the DRA required an insurer who wished to associate in the defence of the claims and to receive defence side reporting to erect ethical screens to prevent the misuse of privileged information disclosed during the defence of the actions. Some insurers argued that a DRA was unnecessary because they were entitled to use privileged defence information to inform their coverage positions, and furthermore their existing internal conflict screens provided sufficient protection. The application judge found that there were admitted conflicts, that the insurers' coverage positions created a reasonable apprehension of a conflict of interest, and that the insurers' internal procedures were insufficient. She held that the DRA represented a reasonable balance between the rights of the insureds and those of the insurers.

ii. Commentary on legal issues

The major issue was whether there existed a reasonable apprehension of a conflict of interest which warranted the imposition of a DRA. To a large extent, this turned on the facts and circumstances pertaining to each of the numerous parties.⁴⁷ There were, however, detailed comments made regarding the following issues of law (some of which overlap):

• The nature of the general duties owed by each party (insurer and insured) to the other.⁴⁸
• The scope of, and limitations to, the insurer's right to conduct the defence of the action.⁴⁹
• The circumstances in which control of the defence must be surrendered to the insured.⁵⁰
• A summary of legal principles regarding control of the defence of the action against the insured.⁵¹
• The role of excess insurers in the defence of the action.⁵²
• The right of an insurer to associate in, as opposed to the right to control, the defence of the action.⁵³
• Whether and when an insurer's reservation of rights will give rise to a reasonable apprehension of a conflict of interest.⁵⁴
• The extent to which privileged information obtained or developed by defence counsel can be shared with the insurer.⁵⁵
• The installation of ethical screens.⁵⁶

E. AN ASIDE: "CLAIMS-MADE" v "OCCURRENCE"

There is a well-established distinction between "claims made" and "occurrence" liability coverages.⁵⁷ The latter focuses on the time of occurrence of the negligent act, while the focus in the former is on the time when the claim is made by the injured person against the insured. Hybrid policies are also not uncommon. In our experience, the majority of liability policies nowadays are either "claims-made" or hybrid in nature. In the Loblaw Companies decision, however, the policies appear to have been "occurrence" in nature. Reference is made to the fact that the "policies generally provide coverage for the [insureds'] 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",⁵⁸ and that "The language in these policies clearly shows that the parties bargained for time-limited coverage. The Declarations that formed part of each policy expressly specified that each policy had a term and that any covered "occurrence" had to occur within that term."⁵⁹

F. MANY REMAINING ISSUES

Although the lengthy judgment in Loblaw Companies is almost a mini-text on liability insurance law, it unavoidably leaves many questions unanswered (although some may be addressed in a DRA or analogous agreement). A sample few are:

• Assuming the normal rule that defence counsel is selected by the insurer applies, which insurer makes that choice when there are several and they disagree? Is it the insurer with the most time-on-risk? Is it the insurer with the largest limits and therefore the most at risk? Does the insured have any say in the matter?
  
  
• In the circumstances posited above, who makes the final decision on important issues such as those relating to settlement?
  
  
• How are disagreements between or among insurers, particularly when the insured has its own position on the matter in issue, generally to be resolved?

While this case does not provide guidance on all issues, it does bring clarity to many where previously counsel was left on their own to structure solutions or face uncertain coverage applications.

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1. Para. 1.
2. Para. 65.
3. As summarized in paras. 46-48 in the appeal decision.
4. Paras. 46 and 86; application decision paras. 73 and 126(b).
5. Para. 16.
6. Para. 17.
7. Para. 67.
8. Paras. 69-75.
9. Para. 70.
10. Para. 74.
11. Paras. 76-79.
12. Family Insurance Corp. v Lombard Canada Ltd. 2002 SCC 48.
13. Markham (City) v AIG Insurance Co. of Canada 2020 ONCA 239.
14. Hanis v University of Western Ontario 2008 ONCA 678, aff'g (2005) 32 C.C.L.I. (4th) 255, Ont. S.C.J.
15. Paras. 80-86.
16. Tedford v TD Insurance Meloche Monnex 2012 ONCA 429.
17. Para. 85.
18. Para. 86.
19. Paras. 87-94.
20. Para. 93.
21. Para. 94.
22. Paras. 95-110.
23. Paras. 111-12.
24. Para. 112.
25. Paras. 113-14.
26. Paras. 113-14.
27. Paras. 116-43.
28. Para. 128.
29. Paras. 129-35.
30. See also para. 138 on this.
31. Paras. 136-39.
32. Para. 136.
33. Para. 138.
34. Paras. 140-42.
35. Para. 140.
36. Paras. 141-42.
37. Paras. 144-95 and 196-289.
38. Para. 171.
39. Para. 171.
40. Para. 173. The voluntary payments provision under consideration is reproduced at para. 146.
41. Para. 175.
42. Para. 176.
43. Paras. 179-80.
44. Paras. 183-95.
45. Para. 195.
46. Paras. 11-13 and 196-289.
47. As made clear at paras. 285-88.
48. Para. 237.
49. Paras. 240-41.
50. Paras. 242-46.
51. Para. 247.
52. Para. 250.
53. Paras. 252-53.
54. Paras. 255-57. A consideration of this issue in the context of the facts and circumstances was made in the following paragraphs.
55. Paras. 261-78.
56. Paras. 279-86.
57. See, for example, Jesuit Fathers of Upper Canada v Guardian Insurance Co. of Canada 2006 SCC 21 at paras. 23-26.
58. Para. 37.
59. Para. 40.

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