Equitable Contribution

In May 2014, the Supreme Court of Canada rejected an application for leave to appeal a decision of the Ontario Court of Appeal which clarified the limits of the doctrine of equitable contribution. This doctrine operates to require excess insurers to share defence costs with a primary insurer. The court found that there is no such obligation on an insurer whose policy contains only a conditional obligation to provide indemnity for defence costs. The decision is ACE INA Insurance v. Associated Electric Gas Insurance Limited, 2013 ONCA 685 (CanLII).

As a result, primary insurers can now expect to pay the full costs of defending larger claims, even where their liability exposure may be just a small fraction of that of the excess carrier, in cases involving similar policies with conditional defence costs coverage. This decision has not yet been considered by any other province’s courts. However, the doctrine of equitable contribution is interpreted similarly across Canada and is of national interest so this case will likely receive some attention, especially in cases with similar excess policy wordings.

The case arose from an explosion at a hydroelectric transformer vault. The hydro utility held a $1 million primary policy with ACE INA Insurance (“ACE”) and a $45 million excess umbrella policy with Associated Electric Gas Insurance Limited (“AEGIS”). Liability for the explosion was contested. It was agreed that the damages would far exceed $1 million and noted that the total damages claimed across five separate actions exceeded $50 million.

 ACE’s primary policy contained a clear duty to defend and covered defence costs without eroding the liability limit. The AEGIS excess policy contained no duty to defend, but provided that its coverage would “drop down” to cover defence costs, by way of an indemnity for such costs that would reduce the policy limits, but only where defence costs were not covered by another valid policy. In other words, the AEGIS policy contained an indemnity for defence costs paired with a conditional exclusion.

An earlier decision of the same court, in Alie v. Bertrand & Frere Construction Co. Ltd., 2002 CanLII 31835, set out that defence costs among primary and excess insurers with overlapping duties to defend should be subject to equitable contribution, to be determined in a fair and reasonable way. Alie v. Bertrand also made it clear that where a policy did not contain any duty to defend, the courts would not write one in. Thus, had the AEGIS policy simply excluded defence costs, this case would not have broken new ground.

What makes ACE INA Insurance v. Associated Electric Gas Insurance Limited interesting is that faced with the new form of conditional indemnity for defence costs in the AEGIS policy, the Court of Appeal ruled that a policy provision obligating an insurer to provide indemnity for defence costs will not trigger a requirement for equitable contribution where that policy also contains an exclusion for coverage of such costs in the presence of another policy covering defence costs. In arriving at this conclusion the Court found that the two policies did not cover the same risk; rather, they were tailored in a “made-to-measure” way to fit together and provide full insurance, without overlapping so as to cover the same risks, by a sophisticated insured and its broker.

Thus, while the obligation to contribute to defence costs does not arise from any contractual relationship between the primary and excess insurer, an excess insurer may rely on express exclusionary language in a policy to bar or limit any such equitable obligation, even where the result is that an insurer facing as little as 1/45th the liability exposure must pay the full defence costs and the party facing up to 44/45ths of the exposure must pay none.

The Court took note of ACE’s argument that to give AEGIS a “free ride” on defence costs when AEGIS faced forty-five times the exposure of ACE, and effectively had control over the resolution of the claims (given that ACE’s liability limits left it powerless to settle the claims), would not be good policy and would hinder settlement. In rejecting this argument, the Court ruled that it would be unfair to re-write ACE’s bargain with Toronto Hydro and that as primary insurer it should be held to its obligation to pay defence costs, whatever the effect on the role of the excess insurer at the bargaining table.

The result in this case turned on the fact that the ACE policy expressly assumed responsibility for costs, without regard to whether another policy was present, while the AEGIS policy stipulated that it did not provide indemnity for costs if another policy was present. If the primary policy had itself contained such conditionality – for instance, via language that it would provide indemnity for costs only if there was no excess insurer responding to the claim, where the amount claimed exceeded the primary policy – the result in this case may well have been different.

Thus, one can anticipate that primary policies litigated in the years ahead (presumably, these are being furiously re-written as you read this) may contain toughened up, more conditional language, that attempts to shift liability for costs back to the excess insurer. Any such efforts to change the language of primary policies to address this decision will be complicated by the Ontario Court of Appeal’s earlier decision in McKenzie v. Dominion of Canada General Insurance Company, 2007 ONCA 480 (CanLII), which maintained a sharp distinction between the risk insured by primary and excess policies, and which could render futile any efforts to make such policies “mutually repugnant” enough so as to result in a sharing of costs. Ultimately, we will have to wait and see if faced with two such “mutually repugnant” policies with conditional exclusions the courts return to the doctrine of equitable contribution on a pro rata basis. 

In the interim, primary insurers defending claims exceeding policy limits in the shadow of exclusionary excess policies can expect to face significant additional costs exposure. Even more unfortunately for them, they will have little control over those increased costs, as in cases of a genuine excess claim, the power of settlement will for all practical purposes be exclusively in the hands of the excess insurer.

Meanwhile, excess insurers with the good fortune to be responding on well-crafted excess policies will have the luxury of perching behind “free” defences, giving them reduced incentives to settle. Where such a key party need not “pay to play”, the result is likely to be more drawn out litigation in complex matters involving multiple insurers.

Chad Leddy is an associate at Dutton Brock LLP with a wide-ranging insurance defence practice. Canadian Defence Lawyers (CDL) is the only national organization representing the interests of civil defence lawyers. It offers broad opportunities to unite the defence bar over common issues, as well as providing accredited continuing legal education.