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Excess Insurer Pays for Defence Costs
Published in the November 2009 issue of Litigation Notes - View Article
An excess insurer with a duty to defend in its policy was required to pay the defence costs of its insureds, where the primary insurer’s policy provided for indemnification in respect of defence expense, but contained no duty to defend.
The Ontario Superior Court of Justice recently had to consider which of two insurers should pay for the costs of defending their insureds. The two insureds (Applicants) are lawyers who were sued in their capacity as directors of Markham General Insurance Company, which was in liquidation.
American Home Assurance Company (which became AIG Commercial Insurance Company of Canada, and will be referred to herein as “AIG”) issued a Directors and Officers Liability Policy to the parent company of Markham General Insurance Company. Certain underwriters at Lloyds issued an Outside Directorship Liability Policy to the Applicants’ law firm.
The AIG policy did not contain a duty to defend but only to indemnify the insureds in respect of defence expense incurred.The Lloyds policy contained an express duty to defend As regards the wrongful acts insured, AIG was the primary insurer and Lloyd’s was the excess insurer. Both policies contained “other insurance” clauses and it was agreed by the parties at the hearing that if Lloyd’s had a duty to defend, and AIG did not, Lloyd’s would effectively be a primary, as opposed to excess, insurer with respect to the duty to defend. The Lloyds policy also contained a “follow form” clause providing that its policy was “subject to and shall follow all terms, conditions, exclusions, agreements, limitations and endorsement of any underlying insurance”.
Lloyds argued that the ‘follow form” clause converted its duty to defend into a duty to indemnify in respect of defence expense, because the underlying policy did not contain a duty to defend.
AIG took the position that the “follow form” related only to certain parts of the Lloyds policy and not to the policy provisions containing the duty to defend. The Court stated:
“I have interpreted the Lloyd’s policy as a whole, in a manner that gives meaning to all of its terms, determining the intention of the parties in accordance with the language that they used, and with regard to the objective evidence of the factual matrix underlying the negotiation of the Lloyds policy. The interpretation I have arrived at in my view is commercially reasonable and gives effect to the reasonable expectations of the parties.
Counsel, and the authorities provided to me, did not specifically address why a duty to defend is preferable, from the insured’s point of view, than a covenant to pay defence costs. On the one hand, I would have thought that in the context of a claim against a director or officer, the director or officer might prefer to have the right to choose and instruct counsel, and seek reimbursement, rather than have the insurer choose and direct counsel, as occurs where there is a duty to defend. On the other hand, however, under the AIG policy, as I assume is common, defence costs for which the insured seeks reimbursement are clearly within the definition of “loss” and erode coverage. While the point was not argued before me, it appears that under the Lloyd’s policy costs incurred by the insurer pursuant to its duty to defend do not erode coverage. Thus, effectively, the monetary coverage limits are greater - and somewhat elastic, given the uncertainty of litigation costs - where there is a duty to defend than where there is a covenant to pay defence costs.
Lloyd’s has a clear, prospective duty to defend under clause IIA of its policy. In my view, that duty to defend was not converted to an obligation to pay defence costs once the policy limits of AIG’s policy were exhausted by virtue of the “follow form” clause and subsequent language in Insuring Agreement I. I accept AIG’s argument that the “follow form”provision relates only to Lloyd’s obligation to pay Loss resulting from any Claim from a Wrongful Act. The “follow form” provision is not with respect to all insuring agreements in the Lloyd’s policy; it is with respect to Insuring Agreement B only. The duty to defend is not part of Insuring Agreement B. It forms a separate insuring agreement, contained in II A of the Lloyd’s policy..
. The Lloyd’s policy is an umbrella policy and, as explained in Trenton Cold Storage Ltd. v. St. Paul Fire & Marine Insurance Co., an umbrella policy generally provides broader coverage than that provided by the underlying insurance including a duty to defend lawsuits not covered by the underlying coverage. In my view, II A was intended to do just that and was unaffected by the “follow form” provision in I B.”
Goodman v. AIG Commercial Insurance Company of Canada, 2009 CanLII 57159