Library:
Excess Insurer Must Contribute to Defence Expense
Published in the January 2009 issue of Litigation Notes - View Article
The Ontario Superior Court of Justice rules that an excess insurer must contribute to costs of defence and sees no material difference between Ontario and Quebec law on the issue
A Quebec company, Tidan Inc (“Tidan”) operated an oceanfront hotel in Florida. Tiden was insured by a commercial general liability policy issued by American Home Assurance Company (“American Home”) with a limit of $1 million for claims involving bodily injury or death. It also had an umbrella policy issued by Temple Insurance Company (“Temple”) which provided an additional $9 million of coverage for bodily injury or death claims. Both policies contained provisions requiring the insurer to defend the insured in respect of claims for which an indemnity was provided by the policy.
A guest of the hotel drowned as a result of being caught in a riptide while swimming in the ocean off the hotel’s private beach. A wrongful death action was commenced by the deceased’s widow and children and in November of 2003. American Home appointed Florida counsel to represent Tidan. In January of 2006 the plaintiffs presented Tidan’s counsel with a settlement demand of $15 million. As this was in excess of the primary policy limits, Tidan was asked if additional insurance was available, at which point the existence of the umbrella policy was disclosed. At that point, Temple were put on notice of the settlement demand.
Following an unsuccessful mediation in March of 2007, American Home tendered its policy limits. The plaintiffs were unwilling to settle for less than $15 million and the case went to trial, with American Home continuing to pay the defence expense. The first trial resulted in a mistrial and prior to the second trial, the case was settled for $2,273,000. American Home paid the first $1 million and Temple paid the balance. Between April of 2006 when Temple was notified of the claim and the settlement of the action, American Home had paid $515,000 in legal fees. Of that amount $477,000 was referable to the time period subsequent to March 15, 2007. Despite repeated requests by American Home that Temple share in the cost of Tidan’s defence, Temple refused to do so and American Home brought an application in the Ontario Superior Court of Justice.
It was acknowledged by the parties that under Ontario law Temple would have had an equitable obligation to contribute to the costs of defence. However, Temple argued that its policy was governed by Quebec law and that the law of Quebec was different from that of Ontario. Temple pointed to the wording of its policy which provided that its defence obligation existed only in respect of an occurrence “not covered by underlying insurancex”. Temple took the position that since American Home had provided coverage, Temple had no defence obligation. In Ontario, it is clear that an excess insurer’s duty to defend is triggered where the primary insurance may be exhausted. Temple took the position that the situation is different in Quebec and that the term “covered” is referable only to the nature of the claim and does not extend to the quantum of the claim.
The Ontario Superior Court of Justice was not impressed with Temple’s argument. In the first place, the Court considered that the proper law of the contract was the law of Ontario. Although Tidan was domiciled in Montreal, had applied to a broker in Montreal for the policy and the policy was prepared and delivered to the Insured’s broker in Montreal, the Insurer was prominently identified on the policy as “Temple Insurance Company, Toronto, Ontario”. Temple is based in Toronto. It has no claims office in Montreal and all of the personnel who dealt with the claim were based in Toronto. Furthermore, the American Home policy was covered by Ontario law and it made sense that the parties would have expected that an excess policy intended to provide coverage over the layer provided by American Home, would be governed by the same law.
Furthermore, the Court felt that even if the Law of Quebec did apply, it was not different in any material respect from the law of Ontario. Temple had produced an expert witness on the law of Quebec, but the most that witness could state was that there was no caselaw directly on point dealing with the meaning of “covered”. The expert suggested that to conclude that “covered” relates to quantum would require the re-writing of the contract to modify the word “covered” with the word “completely”. However, the Court pointed out that it could be equally said that to hold otherwise would involve re-writing the policy by modifying “covered” with “partly”.
The Court went on to consider whether or not Temple should have any duty to contribute to the defence costs incurred by American Home. The Court concluded that American Home was first in line when the claim arose and accepted the risk that it might be solely responsible for funding the defence, even if the amount claimed exceeded the limits of its policy. Between November of 2003 and early 2006 it appeared that any recovery on the claim would not exceed American Home’s limits and Temple’s duty to defend remained dormant. However, in 2006 it became clear to Temple that there was a realistic risk of an award of damages that would exceed the limits of American Home’s policy. At that point Temple’s duty to defend became concurrent with that of American Home. After American Home tendered its policy limits Temple’s exposure became greater than that of American Home and Temple eventually became the only insurer with a continuing interest in reducing the settlement value of the case.
Consequently, the Court ordered Temple to pay American Home 50% of the costs billed to American Home for the defence of Tidan from the beginning of May 2006 forward, but reduced by 25% of the costs billed to Temple by its own counsel.
American Home Assurance Company v. Temple Insurance Company, 2009 CanLII 1648