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Published in the July 2008 issue of Litigation Notes - View Article

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Synopsis: An excess insurer is required to contribute to defence expenses in circumstances where there is a risk that the excess insurer will have exposure for the loss

Liberty International Underwriters Canada (Liberty) provided commercial general liability insurance with a limit of $2 million to St. Mary’s Cement Company Inc. (St. Mary’s) and undertook to defend any legal actions until its applicable limit was “exhausted by payment of judgments or settlements or by the insurer’s tendering of the remaining applicable Limits of Liability”.

ACE Ina Insurance (ACE) provided umbrella liability coverage to a limit of $25 million, provided that the limits of the underlying insurance were exhausted.

St. Mary’s was sued in 18 court actions arising from the supply of allegedly defective concrete which resulted in property damage to residential premises and damages claimed in excess of $27 million. St. Mary’s applied to the Ontario Superior Court of Justice for a declaration that ACE had a legal obligation to contribute to its defence costs. The Court outlined a number of principles which were applicable in this case:

  1. Absent a statutory obligation to defend, the insurer’s obligation to contribute to defence costs must be found within the terms of the policy.

  2. A duty to indemnify does not automatically impose a duty to defend. The duty to defend is a separate obligation from the duty to indemnify.

  3. Where an excess insurer has a duty to defend as provided by the policy and is put at risk by the claim, then the excess insurer should properly contribute to defence costs.

  4. It is not necessary to prove that the obligation to indemnify will in fact arise in order to trigger the duty to defend. The operation of the duty will be determined prospectively by reference to the allegations made in the claim.

In this case the Court considered evidence with respect to St. Mary’s potential liability, including material which was sealed so as to remain confidential. The Court concluded that there was a realistic risk that St. Mary’s may be liable for damages in excess of Liberty’s limits and that there was therefore a realistic chance that the ACE policy may be called upon to indemnify St. Mary’s in respect of the claims advanced in the actions. The Court therefore ordered that Liberty and ACE should share the ongoing defence costs on a 50/50 basis, without prejudice to the rights of either party to reallocate the defence expense after trial or upon the settlement of the action.

St. Mary’s Cement Company Inc. v. Ace Ina Insurance, 2008 CanLII 32307