RECENT TRENDS IN RESOLVING OVERLAPPING COVERAGE DISPUTES. Nigel P. Kent and Steve Donley Clark Wilson LLP tel

Transcription

1 RECENT TRENDS IN RESOLVING OVERLAPPING COVERAGE DISPUTES by Nigel P. Kent and Steve Donley Clark Wilson LLP tel

2 TABLE OF CONTENTS INTRODUCTION... 1 AN OVERVIEW OF OVERLAPPING COVER PRINCIPLES... 1 DETERMINING WHETHER THERE IS OVERLAPPING COVER... 2 COMMON LAW APPORTIONMENT BETWEEN INSURERS... 5 OTHER INSURANCE CLAUSES... 7 RESOLVING CONFLICTS BETWEEN OTHER INSURANCE CLAUSES STATUTE AND AGREEMENT OVERLAPPING DUTY TO DEFEND RECENT CASES ON OVERLAPPING COVERAGE CONCLUSIONS Kent/Donley T

3 RECENT TRENDS IN RESOLVING OVERLAPPING COVERAGE DISPUTES INTRODUCTION Overlapping insurance coverage is a long standing issue in insurance law. Indeed, as will be discussed below, common law principles were well established as early as the 1758 English case of Godin v. London Assurance Co. 1, at p. 420, requiring insurers to contribute pro rata to satisfy a loss which they had all insured. Thus, it can truthfully be said that the issues surrounding over lapping coverage are at least as old as the Canadian legal system itself. Recent times have seen a greater complexity in the rules relating to causation and the apportionment of fault, leading to more complicated insurance policy exclusion clauses, and a corresponding increase in the complexity of overlapping coverage issues. Increasing government regulation now often forces insureds to obtain many different types of specialized insurance policies. Finally, with steadily increasing damages awards and litigation costs, it is now common for insurance coverage to be capped, requiring insureds to stack multiple insurance policies on top of each other to obtain their desired level of coverage. Stacked policies must be drafted carefully to avoid coverage gaps and contribution actions between insurers. This paper is designed to provide a simple overview of the law on overlapping coverage issues for both the insurer and the insured. The paper will set out how to identify overlapping coverage, common law rules for resolving contribution disputes between insurers, and the effect of policy wording and statute on those common law rules. Finally, this paper will review some of the recent cases on overlapping coverage and discuss the issues raised. AN OVERVIEW OF OVERLAPPING COVER PRINCIPLES Overlapping cover occurs where two or more insurance policies cover the same insured, the same insurable interest, and the same risk. Overlapping coverage typically occurs in the following situations: (a) (b) (c) an insured has two policies, one specific and one general; there is a date overlap upon insurance renewal; different parties take out insurance over the same interest and risk, for example a landlord and tenant; or 1 (1758) 97 E.R. 419 (K.B.)

4 p. 2 (d) the insured inadvertently obtains overlapping cover. When overlapping coverage does exist, it is well settled that double recovery is prohibited under the principles of indemnity, thus an insured person is limited to recovering the amount of the loss 2. Liability to contribute to the insured loss must therefore be apportioned fairly and predictably among the insurers. The common law provides that, in the absence of any statute or policy terms to the contrary, each insurer providing overlapping coverage is severally liable to the insured, and the insured may claim the full amount from any one insurer 3. Upon discharging its liability, the insurer is entitled to seek equitable contribution from the other insurers on risk in proportion to the extent of the risk borne 4. The equitable contribution suit must be brought in the indemnifying insurer s own name 5. DETERMINING WHETHER THERE IS OVERLAPPING COVER Any overlapping coverage analysis must start with an examination of whether the multiple insurance policies all respond to the same claim. The conditions that must be satisfied for the existence of overlapping coverage are: (1) All the policies concerned must comprise the same subject matter; (2) All the policies must be effected against the same peril; (3) All the policies must be effected by or on behalf of the same assured; (4) All the policies must be in force at the time of the loss; (5) All the policies must be legal contracts of insurance; and (6) No policy must contain any stipulation by which it is excluded from contribution. 6 2 Family Insurance Corp. v. Lombard Canada Ltd. [2002] 2 S.C.R. 695 at para 14; Scottish Amicable Heritable Securities Assn. v. Northern Assurance Co. (1883), 11 R. 287 (Ct. of Sess.). 3 Brown C. and Menezes J. (Looseleaf), Insurance Law In Canada, 2009 Release 1, Carswell, Toronto at page Family Insurance Corp. v. Lombard Canada Ltd. [2002] 2 S.C.R. 695; Broadhurst & Ball v. American Home Assurance Co. [1990] O.J. No (Ont. C.A.); Canadian Universities Reciprocal Insurance Exchange v. CGU Insurance Co. of Canada [2007] O.J. No (Ont. C.A.); Bank of British North America v. Western Assurance Co. (1884), 7 O.R. 166 (Ont. Ch. D.). 5 Pacific Forest Products Ltd. v. AXA Pacific Insurance Co. (2003), 12 B.C.L.R. (4th) 293 (B.C.C.A.). 6 Ivamy, E.R. (1993) General Principles of Insurance Law, 6th edition, Butterworths, London, UK, at page 518; Family Insurance Corp. v. Lombard Canada Ltd. [2002] 2 S.C.R. 695 ( Family ) at para 15.

5 p. 3 The key preliminary issues will generally be whether the same risk and interests are insured by each potentially overlapping policy. Where insurance is provided in stacks, consideration must also be given to which layer of coverage responds. Is the same risk insured? The case of Lumbermen s Underwriting Alliance v. Axa Pacific Insurance Co. 7 ( Lumbermen s ) provides an example of where an insurer s contribution suit failed because the two policies insured different risks. In Lumbermen s a licensed logging company, Pacific, engaged a contractor, GBA, to fell trees on land licensed to Pacific. While GBA was logging, a fire occurred in their work area. Applicable forest management statutes required any party who started a fire (in this case GBA) to immediately take all reasonable steps to extinguish the fire. The statute also required any person carrying out an industrial activity within one kilometer of a fire (in this case both Pacific and GBA) to take specified initial fire suppression action. Pacific, upon becoming aware of the fire, immediately undertook full scale fire fighting activities to extinguish the fire. The action taken exceeded Pacific s statutory suppression obligations, and cost Pacific around $1.5 million. Pacific s policy with Lumbermen s provided coverage for Pacific s fire fighting costs. GBA held a comprehensive CGL policy with AXA, naming GBA and arguably Pacific as insureds, and providing coverage for any sum paid by the insureds because of liability imposed by law or statute. Lumbermen s paid Pacific s entire fire fighting costs and sought contribution from AXA. Unsurprisingly, the court found that the AXA CGL policy insured a different risk. The AXA policy only responded to third party claims against an insured. Accordingly, the CGL policy could only provide coverage to GBA if GBA was sued by Pacific for fire fighting costs. GBA was the only contractor operating in the area, thus the court found GBA must have caused the fire. However, evidence from Pacific, GBA and the provincial government fire fighters was unable to establish the specific act or omission that caused the fire. AXA did not discharge its burden of proving that GBA had any legal liability for the fire. As GBA could not be held liable to Pacific s claim, it necessarily followed that the AXA policy did not provide coverage. Hence, there was no overlapping coverage and Lumbermen s claim for contribution against AXA was dismissed. Is the same interest insured? The case of Clarke v. Fidelity Phoenix Fire Insurance Co. of New York 8 ( Clarke ) provides an example of non overlapping coverage due to the policies insuring different risks. The plaintiff homeowner was insured against destruction of her building by fire. The mortgagee, through his own separate policy, had insured his interest in the building. The homeowner s policy contained statutory conditions that restricted coverage where there was other insurance. The court was asked to determine whether the mortgagee s policy constituted other insurance within the meaning of the homeowner s policy. 7 [2006] B.C.J. No (S.C.) 8 [1925] O.J. No. 144 (Ont. C.A.)

6 p. 4 The court held that there was no overlapping coverage. It was held that the insured interest of the homeowner in the building was that of owner in possession entitled to the use and enjoyment of the property. The mortgagee s insured interest in the building was as holder of a security to indemnify him against losses on his loan. There being no other insurance, the homeowner was indemnified for her full loss. The Clarke decision raises some interesting implications for insurers. As there was no overlapping cover, would both the homeowner and the mortgagee be entitled to full recovery of their losses, notwithstanding any contractual or statutory terms to the contrary? Coverage layers Insurance is commonly provided in stacks (layers). Where insurance is to be stacked, an insured will obtain a primary insurance policy a policy where the insurer s liability attaches immediately on the happening of the occurrence giving rise to the insured s liability 9. In the case of liability insurance, the primary insurer will generally be under a contractual duty defend the claim on behalf of the insured. If coverage beyond the limit of the primary policy is required, an excess policy is obtained. An excess policy provides that the insurer is liable only for the excess above and beyond that which may be collected on the primary insurance 10. Where there are primary and excess insurance coverages, the limits of the primary insurance must be exhausted before the primary insurer has the right to require the excess insurer to contribute to a settlement. In a primary/excess coverage situation, the various insurers are not covering the same risk. Rather, the insurers are covering separate and clearly defined layers of risk 11. The excess insurer s remote position reduces its chance of exposure to a loss. The reduced risk generally results in a lower premium on the excess policy. Further protection may be obtained through an umbrella policy. An umbrella policy provides two types of coverage: (1) standard form excess coverage, and (2) broader ( drop down ) overage than that provided by the underlying coverage, including a duty to defend lawsuits not covered by the underlying coverage 12. The umbrella policy is therefore a hybrid of primary and excess coverage. Separate and clearly defined layers of risk are still present, thus there is no overlapping coverage between primary and umbrella policies. 9 McKenzie v. Dominion of Canada General Insurance Company (2007), 86 O.R. (3d) Ibid. 11 Ibid at para Trenton Cold Storage v. St. Paul Fire & Marine Insurance Co. (2001), 146 O.A.C. 348 (C.A.).

7 p. 5 COMMON LAW APPORTIONMENT BETWEEN INSURERS Where overlapping coverage does exist, insurers are entitled to contribution from each other. At common law, there are two methods for calculating apportionment between insurers the maximum liability method and the independent liability method 13. The two common law methods are displaced by any policy or statutory terms prescribing a different manner of apportionment. As discussed below, mutually irreconcilable policy terms may be voided by the court, in which case the court reverts to the common law apportionment principles. Maximum Liability Method The maximum liability method requires each insurer to contribute the proportion to which its coverage limit bears to the total of all coverage limits available. The coverage limits of the overlapping policies are aggregated, and contribution is determined by dividing each insurer s individual coverage limit by the aggregate. Thus, where policy A s coverage limit is $1 million and Policy B s coverage limit is $3 million, aggregate coverage is $4 million. Insurer A would pay 25 percent of the loss and insurer B would pay 75 percent. The maximum liability method requires greater contribution from insurers that provide higher coverage limits. This can be justified where the overlapping policies cover identical interests and risks. For this reason, the maximum liability method has historically been used in property insurance claims 14. In property insurance, the insurer insures the property for a fixed sum, which generally represents the value of the property. Premiums are set in proportion to the sum or value insured. Inequity results under the maximum liability method where the coverage is not concurrent, as is typically the case in liability insurance. In liability insurance, there is no fixed property value to which the coverage limit is related. Premiums are set according to risk factors, and do not increase pro rata as the limit increases. Consider the situation where a motor vehicle accident results in a $500,000 insured loss, and there is overlapping liability coverage: Policy A providing narrow coverage (for example covering an individual vehicle to a limit of $1 million) and broad Policy B (for example covering a fleet of 99 vehicles for $99 million). Applying the common law maximum liability method, Policy A would contribute 1 percent and Policy B 99 percent. There would seem little justification for making the fleet insurer pay 99 percent of the claim. The role of the maximum liability approach has not yet been decided in Canada 15. The prevailing view among Canadian commentators seems to be that the maximum liability approach may potentially apply in cases of strictly concurrent property damage insurance Brown C. and Menezes J., supra at note 2, page 14 2; Commercial Union Assurance Co. v. Hayden [1977] Q.B. 840 (Eng. Q.B.). 14 Commercial Union Assurance Co. Ltd. v. Hayden [1977] All ER 441 (C.A.) per Cairns LJ at page Billingsley B. (2008), General Principles of Canadian Insurance Law, 1st edition, LexisNexis, Markham ON, at page324; Brown C. and Menezes J., supra, at page 14 4; Boivin D. (2004), Insurance Law, Irwin Law, Toronto ON, at page 310.

8 p. 6 Independent Liability Method Under the Canadian independent liability method, insurers covering the same risk contribute equally until the lower policy limit is exhausted 17. The independent liability approach applies to apportionment of overlapping liability insurance coverage in Canada 18. Thus, where the loss falls within the coverage limits of all overlapping policies, the insurers will contribute equally, regardless of any difference in coverage limits. Returning to our motor vehicle accident example, insurers A and B would each contribute equally to the $500,000 loss. Where the loss exceeds the lower policy limits, the contributions will not be equal. If the insured loss in the motor vehicle accident example was $1.5 million, the policy limit of Policy A would be exceeded by $500,000. The loss would be shared equally between insurers A and B, up to A s $1,000,000 coverage limit. Insurer B would be solely responsible for the amount exceeding A s coverage limit. Thus, insurer A would contribute $500,000 and insurer B $1,000,000. The Canadian approach is a simplification of the English independent liability method. Under the English method, each insurer is required to pay for the loss according to the ratio that such insurer s independent liability to pay for the loss bears to the independent liability of other insurer(s) to pay the loss. The insurers independent liabilities are aggregated, and contribution is determined by dividing each insurer s independent liability by the aggregate 19. The Canadian and English methods result in the same apportionment where the liability claim falls within the coverage limits of all policies. However, where an insurer s coverage limit is exceeded, the English approach requires an insurer to contribute to the portion of the claim that exceeds that insurer s coverage limit. As contribution is proportional to the aggregate independent liability, any one insurer s contribution will never exceed its policy s coverage limit. Applying the English approach to the motor vehicle example, again with a $1.5 million loss, the aggregate independent liability would be $2.5 million ($1 million for Policy A plus $1.5 million for Policy B). Liability would be apportioned 40 percent to insurer A and 60 percent to insurer B. Some commentators have suggested that the English independent liability method may still apply in Canada. In Family, the court expressly rejected the English approach and prescribed the Canadian approach in its stead 20. As the Family case concerned a loss that fell within the lowest coverage limit, the Canadian approach set out in Family is, strictly speaking, obiter dicta as it relates to losses that exceed the lowest coverage limit 21. Accordingly, it is argued, trial courts are not bound to follow Family where the loss exceeds the lowest coverage limit, and may apply the English approach. 16 Ibid 17 Family Insurance Corp. v. Lombard Canada Ltd. [2002] 2 S.C.R. 695 ( Family ) at para 39; Simcoe & Erie General Insurance Co. v. Kansa General Insurance Co. (1994), 93 B.C.L.R. (2d) 1 at para Family at paras 39 and Commercial Union Assurance Co. Ltd. v. Hayden [1977] All E.R ( Hayden ) 20 Family, supra, at paragraph 43 adopts the dissenting judgment of Stephenson LJ from Hayden. 21 See: Billingsley B. (2008), supra, at page 323 to 324; Hilliker, G. (2006), Liability Insurance Law in Canada, 4th edition, Lexis Nexis, Markham ON, at page 61.

9 p. 7 The Family court provided compelling reasons why an insurer should not be required to contribute any portion of the loss exceeding its coverage limit. The Family court approved of the following reasoning from Stephenson LJ s dissenting judgment in Hayden: The assessment of premiums under liability policies is based on underwriting experience backed up by statistical information and actuarial projections. The risk underwritten is at its greatest with small claims and at its least with large claims. It follows that the upper limits for claims can be increased with only a small increase in premiums. When there are two insurers with differing upper limits for claims, the inference I would draw is that they were both accepting the same level of risk up to the lower of the limits. If this be so, in my judgment, a rateable satisfaction would be an equal division of liability up to the lower limit; the burden of meeting that part of the claim above the lower limit would fall upon the insurer who had accepted the higher limit. The Family court therefore unanimously decided that the Canadian approach best accorded with the fundamental principles of equitable contribution and commutative justice. Faced with such compelling support for the Canadian approach, it is practically certain the Family approach will be applied by trial courts where the loss exceeds the lowest coverage limit. Due to the proliferation of statue, industry agreements and policy terms modifying the common law apportionment rules, there have been relatively few recent Canadian decisions on the role of common law apportionment methods. As will be shown, common law apportionment continues to apply where other insurance clauses are mutually irreconcilable, and will therefore continue to have an important role in overlapping coverage disputes. OTHER INSURANCE CLAUSES Most contemporary insurance policies contain clauses limiting or excluding the insurer s liability to indemnify or contribute where other insurance policies cover the same risk or peril. Such clauses, known as other insurance clauses, vary greatly depending on the requirements of the parties to the insurance arrangements. Insurers typically rely on four types of other insurance clauses 22 : (a) Pro Rata clauses A pro rata clause states that where there is other insurance, coverage under the subject policy is restricted to a rateable portion. The pro rata clauses typically employ the maximum liability or independent liability method of determining the policy s coverage in the event of overlapping coverage. A typical pro rata clause from a liability insurance policy would provide: 22 For a detailed discussion of common other insurance clauses see: Neff, B. (1999), Understanding Allocation, The Defence Research Institute Inc., Chicago IL pages 9 to 17.

10 p. 8 If the insured has other insurance against liability of loss covered by this policy, the insurer shall not be liable for a greater proportion of such liability or loss than the applicable limit of liability bears to the total applicable limit of liability of all collectible insurance against such liability or loss. 23 (b) Excess clauses Excess clauses provide that, in the event of overlapping coverage, the subject policy provides excess coverage only. A typical excess clause would provide: If there is other insurance against a loss covered under this policy, the insurance provided under this policy shall be excess insurance over any other valid collectible insurance 24. A primary insurance policy that contains an excess clause can render an insurance policy somewhat internally contradictory. The primary policy is likely to contain duties associated with the immediate attachment of liability, such as a duty to defend. Such duties would not be contained in a true excess policy which requires the existence of a primary policy as a condition of coverage. As will be discussed below, the court s characterization of the entire policy is influential when resolving conflicts between competing other insurance clauses. Where there is conflict, courts are reluctant permit primary insurers escape primary coverage obligations, or share them with excess insurers, by employing excess clauses. Care must therefore be taken when drafting policies to ensure internal consistency. (c) Escape clauses An escape clause eliminates coverage where the loss is covered by any other insurance. A typical escape clause would provide: If any person other than the insured is also covered by other valid and collectable insurance, such other person shall not be indemnified under this policy. 25 An escape clause in the context of stacked insurance would typically provide: This insurance does not apply to any liability for such loss as is covered on a primary, contributory, excess or any other basis by insurance in another insurance company 26. It is evident that an escape clause is, in essence, an exclusion clause. The common law rules of insurance policy interpretation require exclusion clauses, and therefore escape clauses, to be interpreted narrowly From Neff, B. (1999), supra at page From Neff, B. (1999), supra at page From Neff, B. (1999), supra at page Ibid 27 For a summary of the law on interpretation of exclusion clauses, see: Billingsley B. (2008) General Principles of Insurance Law, 1st edition, LexisNexis, Markham ON, page 141.

11 p. 9 Escape clauses are commonly used in CGL policies to exclude coverage for losses covered under statutory motor vehicle insurance. For example, in Derksen v Ontario Ltd. 28, the insured negligently loaded a steel plate into the rear of a supply truck. The plate dislodged during transit, causing personal injury. The insured sought coverage under a CGL policy and a motor vehicle policy. The CGL policy contained an escape clause removing coverage for losses arising out of the ownership, use and operation of an automobile with respect to which any motor vehicle policy is in effect. The escape clause in the Derksen CGL policy did not robustly protect the insurer from contribution in the event of overlapping coverage. The escape clause required two conditions for the removal of coverage (1) a causative connection between the loss and the use of the vehicle, and (2) overlapping motor vehicle insurance. The court held that there were two concurrent causes of the loss. The first cause was the insured s failure to properly clean up the worksite and load the vehicle. The second cause was the operation of the vehicle with an improperly secured load. It was held that the escape clause was triggered in relation to the second cause, but not the first. The CGL insurer was therefore found liable to cover all losses arising from the loading of the vehicle, and the motor vehicle insurer those losses arising from the vehicle s operation. Thus, the two insurers in Derksen were left providing complementary coverage. Derksen did not decide the manner of apportionment between the insurers. Absent any applicable policy or statutory terms to the contrary, the liability insurers would likely have been required to contribute according to the independent liability method. As can be seen, escape clauses can be problematic where there are complex causation issues or where liability for the covered loss is apportioned among multiple parties. (d) Excess Escape clauses An excess escape clause provides coverage that is excess to all other insurance. The policy containing the excess escape clause responds, up to that policy s coverage limit, where the loss exceeds the limits of liability of all other policies. A typical excess escape clause from a public liability policy provides: If other valid insurance exists protecting the insured from liability for such bodily injury this policy shall be null and void with respect to such specific hazard otherwise covered, whether the insured is specifically named in such other policy or not; provided, however, that if the applicable limit of liability of this policy exceeds the applicable limit of liability of such other valid insurance, then this policy shall apply as excess insurance against such hazard in an amount equal to the applicable limit of liability of this policy minus the applicable limit of liability of such other valid insurance [2001] 3 S.C.R From Neff, B. (1999), supra at page 15

12 p. 10 Again, excess escape clauses can be problematic where there are complex causation issues or apportioned liability. RESOLVING CONFLICTS BETWEEN OTHER INSURANCE CLAUSES The insurance policy is a contract exclusively between the insurer and its insured. Thus, a policy s other insurance clause is not binding on other insurers. Further, when coverage commences, an insurer will generally be unaware of the terms of any other potentially overlapping policies. Conflict between other insurance clauses is therefore inevitable. The seminal decision on resolving conflicts between other insurance clauses was given in Family Insurance Corp. v. Lombard Canada Ltd. [2002] 2 S.C.R. 695 ( Family ). The claimant in Family fell from a horse and suffered spinal cord injuries. She sued the ostensible owner of the horse, who had the benefit of both a homeowners liability policy issued by Family Insurance Corp., and the coverage which was provided by Lombard Canada Ltd. to all members of the Horse Council of British Columbia. The limits were $1 and $5 million, respectively. Both policies, on their face, provided primary liability coverage, as the insurer s liability was to attach immediately on the happening of the occurrence giving rise to the insured s liability. The other insurance clauses in both policies provided that coverage changed from primary to excess where other insurance was present. Both policies were therefore internally inconsistent in relation to the nature of coverage provided. Further, the other insurance clauses were mutually irreconcilable. The Supreme Court of Canada considered a number of interpretive techniques that could have been used break the deadlock between irreconcilable other insurance clauses. The US Minnesota approach was considered, whereby the insurer s obligation to contribute is determined by the insurer s closeness to the risk, having regard to factors such as which premium is reflective of the greater contemplated exposure and whether one policy is more specific in the subject matter of coverage. Under the Minnesota approach, the Horse Council policy was much closer to the risk, and Lombard would have been solely liable for the claim. The Minnesota approach was rejected on the grounds that it is too subjective and unfairly and artificially favors the intentions of one insurer over the other. The US Oregon approach was also considered, whereby any conflict in the coverage clauses results in both clauses being repugnant and therefore rejected in their entirety. The conflicting clauses voided, each insurer is then liable for its proportionate share of the loss. The Oregon approach would have resulted in a 50/50 apportionment between Family and Lombard. The Oregon approach was rejected as being two simplistic, the court concluding that conflicting clauses can often be reconciled so as to give effect to both policies and provide coverage for the insured. The Court prescribed a two stage test. Firstly, attempts are made to reconcile the competing other insurance clauses so as to give the intended effect to both policies and provide full coverage for the insured. Where there is a true impasse, the mutually repugnant clauses are rendered inoperable. In the Court s own words:

13 p. 11 The insurer may seek to limit its liability in the provisions of the policy, and thus the policy itself is the proper instrument to determine the liability of each insurer. Where the contest is only between the insurers, there is no basis for referring to surrounding circumstances or looking outside the policy, there being no privity of contract between the insurers In the face of irreconcilable intentions, the court must determine the most equitable means of resolving the dispute, respecting the intentions of the parties and the right of the insured to recover fully The focus of the examination is to determine whether the insurers intended to limit their obligation to contribute, by what method, and in what circumstances vis à vis the insured. In the absence of such limiting intentions or where those intentions conflict, principles of equitable contribution demand that parties under a coordinate obligation to make good the loss must share that burden equally. This approach serves to respect the intentions of both the insurers while simultaneously respecting the insured s contractual right to full indemnity. The Family court went on to hold that when other insurance clauses are rendered inoperable, contribution must be apportioned according to common law principles. As set out above, the Canadian independent liability method was applied and Family and Lombards were required to contribute 50/50 to the insured s loss. In Family, the other insurance clauses were clearly irreconcilable. Thus, Family is of limited application when two different types of other insurance clauses conflict but are capable of reconciliation. Family does, however, prohibit in all cases the consideration of extrinsic evidence when interpreting the potentially overlapping policies. In McKenzie v. Dominion of Canada General Insurance Company 30 ( McKenzie ), a boat liability policy and a home insurance policy both provided coverage in relation to a boating accident. The home insurance policy provided: Personal Liability We will pay on your behalf all sums you become legally liable to pay as compensation for loss because of bodily injury or property damage. Other Insurance If you have other insurance not insured with us which applies to a loss or claim, or would have applied if this policy did not exist, our policy will be considered excess insurance and we will not pay any loss or claim until the amount of such other insurance is used up. The boat owner s liability provided: Personal Liability If you are legally obligated to pay damages for a loss, we will pay your net loss minus the retained limit. Our payment will not exceed the [coverage limit]. 30 (2007) 86 O.R. (3d) 419

14 p. 12 net loss [means, in part] the amount you are legally obligated to pay as damages for personal injury or property damage. retained limit [means, in part] the total limits of liability of any underlying insurance you may collect. The limits listed in the Declarations are the minimum you must maintain. The court correctly ruled that the homeowner s liability policy was intended to provide primary coverage, whereas the boat owner s liability policy was an excess policy. The presence of the excess clause in the primary policy did not make the two policies mutually irreconcilable. As there was separate and clearly defined primary and excess coverage layers, there was no overlapping primary coverage capable of invoking the primary policy s other insurance clause. Accordingly, the primary insurer was ordered to pay the full loss without contribution from the excess insurer. The primary insurer s application for leave to appeal to the Supreme Court of Canada was refused 31. In McKenzie, the court expressly recognized that the common law rules pre dating Family continue to apply when resolve conflicting other insurance clauses, subject to the prohibition on considering extrinsic evidence 32. Some US commentators have attempted to set down general rules as to which other insurance clauses will prevail in the event of a conflict 33. For example, is has been suggested that where an excess clause conflicts with an escape clause, the policy containing the later clause will be deemed primary 34. As set out above, an escape clause removes coverage where there is other valid and collectible insurance. Excess insurance does not provide valid and collectable insurance in the absence of a primary policy. Thus, it is argued, the escape clause is not engaged by the existence of excess coverage only. The case law on contests between different classes of other insurance clauses is voluminous and beyond the scope of this paper. In any event, Family makes it clear that in Canada the policy wording, and applicable statute, is determinative in the event of overlapping coverage. Thus, each overlapping coverage dispute will vary depending on the entirety of the policies involved. STATUTE AND AGREEMENT Statute has codified the contribution rules in the areas of fire and automobile insurance. Fire Insurance 31 [2007] S.C.C.A. No McKenzie, para Neff, B. (1999), supra at pages 18 to Neff, B. (1999), supra at page 33.

15 p. 13 The British Columbia the Insurance Act 35 applies to contracts of fire insurance as defined under that Act. The Insurance Act eliminates the insurers joint and several liability to the insured where there is overlapping fire insurance coverage, and imposes a proportional liability rule. The statutory conditions require the insured s proof of loss to state the amount of other insurances and the names of other insurers 36. Where there are multiple policies covering the same interest, the insurers are each liable to the insured for their rateable proportion of the loss, unless it is otherwise expressly agreed in writing between the insurers 37. The effect of the rule is as follows: The effect is merely to make each insurer responsible only for a given portion of the total insurance on the property described in the policy. An insurer can only be sued for its rateable proportion. There is no question of contribution. The purpose of the clause is to limit the original liability of the insurers instead of requiring them to seek contribution from each other. Without such a provision the insured would be at liberty to proceed against any one of his insurers, leaving it to the insurers to obtain equitable contribution among themselves. I do not see that [the statute] gives one insurer who has paid an amount more than his pro rata share the right to claim contribution from another insurer who has not. 38 A formula is prescribed for the calculation of each insurer s rateable portion where the policies are subject to a deductible 39. The Insurance Act also provides that some coverages cannot give rise to overlapping coverage. Insurance on identified articles of property to be primary, and therefore cannot be subject to contribution 40. The Insurance Act apportionment rule does not affect the validity of any divisions of the sum insured into separate items, limits on specified property, deductibles, or any contract condition limiting or prohibiting the having or placing of other insurance 41. As a consequence of the Insurance Act, excess clauses are not effective in fire insurance contracts. Similar provisions are found in other provincial statutes 42. Automobile Insurance 35 R.S.B.C. 1996, c. 226, Part 5, sections 119 to 131. Note, at time of writing this article a bill to amend the Insurance Act is before the BC Legislature and, if passed, will eliminate the fire part of the Act, and will impose rateable contributions on both property and liability insurers. 36 Insurance Act, supra, section 126, Statutory Condition Insurance Act, supra, section Continental Insurance Co. et al. v. Prudential Insurance Co. Ltd. of England (1965), 53 D.L.R. (2d) 162 at para Insurance Act, supra, section Ibid. 41 Ibid. 42 See: Ontario s Insurance Act, R.S.O. 1990, c. I.8.

16 p. 14 In BC, auto liability and no fault benefits coverage is available through Driver s Certificates, Owners Certificates, garage policies and the like. Overlapping coverage potential is common and priorities are usually determined by regulation. 43 Agreement The Insurance Bureau of Canada administers a number of voluntary agreements among insurance companies that are designed to provide insurers with an inexpensive mechanism to determine which insurer is ultimately responsible for paying the claim. The key agreements are: (a) Agreement Respecting Standardization of Claim Forms and Practices, and Guidelines for the Settlement of Claims (b) (c) Property/Boiler Disputed Loss Agreement Agreement of Guiding Principles (Property Insurance) (d) Agreement of Guiding Principles Between Primary and Excess Liability Insurers Respecting Claims; and (e) Owned and Non owned Contents Agreement (Quebec). The agreements, to which most of the major Canadian insurers are signatories, contain a number of rules for resolving overlapping coverage disputes between insurers. The specific rules contained in the agreements are beyond the scope of this paper. However, the agreements generally prefer the independent liability approach for the apportionment of contribution in property damage cases 44. OVERLAPPING DUTY TO DEFEND Primary liability policies invariably place the insurer under a duty to defend any covered claim brought against the insured. This duty is distinct from, and wider than, the duty to indemnify the insured for covered losses 45. Insurers under concurrent obligations to defend must pay a proper share of the defence costs. Overlapping insurers may compel contribution from each other under the equitable principles of contribution See Insurance (Vehicle) Regulation 447/83, Sections 50 (Drivers Certificates), 77 (Owners Certificates), 104 (no fault benefits). 44 Brown C. and Menezes J., supra, at pages to Nichols v. American Home Assurance Co. [1990] S.C.J. No Broadhurst & Ball v. American Home Assurance Company (1990), 1 O.R. (3d) 225 (C.A.).

17 p. 15 The common law rules regarding apportionment of losses between insurers apply to defence costs. Absent any contract provisions to the contrary, the maximum or independent liability methods are applied. The independent liability approach seems to be more common 47. Different principles may apply where the injury is progressive and the loss therefore occurs during contiguous policy periods. Common examples of progressive injuries are asbestos and leaky condominium cases. In progressive injury cases, insurers may apportion defence costs according to the time each insurer was on risk 48. Alternately, the insurer on risk at the time the loss arose will defend until its limits are exhausted, after which the next insurer in time would take over. Apportionment between primary and excess insurers is more complicated. As discussed above, primary and excess insurers cover separate and clearly defined layers of risk, hence there is no overlapping duty to indemnify. The duty to defend, however, is wider than the duty to indemnify. A duty to defend arises where the allegations pleaded in the lawsuit, if proven to be true, would fall within policy coverage 49. Thus, where it is clear from the pleadings that the claim will exceed primary cover, the excess insurer s duty to defend potentially arises from the commencement of the lawsuit. In practice, however, the amount of a liability claim is often not established until after documents have been exchanged and the parties examined, or sometimes not established until trial. Accordingly, the point at which the excess insurer s duty to defend arises may not always be clear. Unsurprisingly, it is common for excess insurers to include clauses restricting or modifying their duty to defend. The recent case of American Home Assurance Company v. Temple Insurance Company 50 ( Temple ) is illustrative of this point. In Temple, the insured was sued in Florida for wrongful death. The insured held primary liability cover with American Home, up to a coverage limit of $1,000,000. An umbrella policy written by Temple provided excess liability coverage up to $9,000,000. Upon receiving notice of the claim, American Home instructed defence counsel to act for the insured. Three years into the lawsuit, the plaintiff made a settlement demand in the amount of $15,000,000. American Home offered its $1,000,000 policy limit to Temple and asked it to assume conduct of the defence. Temple agreed to assume responsibility for settlement of the claim, and instructed its own counsel for this purpose, but refused to fund the insured s defence. American Home continued to fund the insured s defence to trial. A mistrial was ordered. On the eve of the second trial, Temple settled the claim for $2,200,000. American Home sued Temple seeking contribution to the defence costs. Temple relied upon the following clause in the excess policy restricting the duty to defend: 47 See Ecclesiastical Insurance Office Plc v. Sun Alliance Insurance Co. (1993) 17 C.C.L.I. (2d) 66 (N.B.Q.B.); Wawanesa Mutual Insurance Co. v. Commercial Union Assurance Co. [1994] 10 W.W.R. 701 (Man. Q.B.). 48 Alie v. Bertrand & Frere Construction Co Ltd. [2002] O.J. No (C.A.) at para 240; City of Surrey v. General Accident Assurance Co. of Canada [1996] B.C.J. No Nichols v. American Home Assurance Co., supra. 50 (2009) O.R. (3d) 534 (S.C.)

18 p. 16 With respect to any Occurrence not covered by [the underlying American Home policy], or any other underlying insurance collectible by the insured, but covered by the terms and conditions of this policy the insurer will: (a) defend any suit against the insured seeking damages on account of Personal Injury even if such suit is groundless, false or fraudulent. Temple argued that the claim was covered by the underlying American Home policy notwithstanding that the value of the claim exceeded the primary coverage limit. The court disagreed with Temple s characterization, holding that Temple s duty to defend arose at the time it received notification that the claim was likely to exceed the American Home policy limits. The notification occurred when Temple was advised of the $15,000,000 settlement demand. The two insurers were ordered to contribute equally to the defence costs from the time the overlapping duty to defend arose. The court ordered that a portion of Temple s own legal costs incurred in the settlement of the claim be set off against the amount due from Temple to American Home. RECENT CASES ON OVERLAPPING COVERAGE The recent cases set out below provide a practical illustration of the issues commonly arising in overlapping coverage disputes. In Lunenburg Industrial Foundry and Engineering Ltd. v. Commercial Union Assurance Co. of Canada 51, the plaintiff owned and operated a dry dock. The plaintiff was using its marine railway to haul a large ship out of the sea when the chain securing the ship came loose. The railway cradle on which the ship sat sped out of control, causing extensive damage to the railway. Repairs to the railway resulted in the dry dock being out of service for six months. The plaintiff sued its two insurers for loss of business income. The plaintiff was insured under a Commercial Collective Policy, which provided broad form all risk property cover. The property cover was subscribed to by Commercial Union ( CU ) to the extent of 50 percent, and by Royal Insurance (and related entities) for the remaining 50 percent. The property policy insured the dry dock and marine railway against all risks of direct and physical damage to the property insured except as herein excluded. There being no applicable exclusions, it was conceded that the property cover responded to the plaintiff s loss of income claim. The property policy did not contain any other insurance clauses. The Commercial Collective Policy contained four other coverages for which CU alone was the insurer, one of which was a machinery break down policy. The machinery break down policy, providing coverage for business interruption claims relating to the dry dock generally. The machinery break down policy contained the following terms: 7. Other Insurance. Any loss to which both this insurance and other insurance carried by the Insured apply shall be a joint loss and the Insurer shall be liable under this policy 51 [2005] I.L.R. I 4394 (N.S.S.C.)

19 p. 17 only for the proportion of the said joint loss that the amount which would have been payable under this policy on account of such joint loss, had no other insurance existed, bears to the combined total of the said amount and the amount which would have been payable under all other insurance on ac count of said joint loss, had there been no insurance under this policy. 8. Disputed Loss Agreement. In the event a recoverable loss exists, should a dispute arise between Property and Boiler & Machinery Insurers as to which in surer is liable or as to the proportion of the loss to be paid by each insurer, the IBC Agreement respecting disputed losses between Property Insurance and Boiler & Machinery Insurance Policies shall, at the Insured's option, apply, pro viding the Property Insurers are signatories to the IBC Agreement. CU argued that the losses were covered solely by the property coverage provisions, in which case the loss was to be apportioned 50/50 between CU and Royal. CU invited the court to presume that the parties intended a commercially reasonable result; that is, that the insured would not intend to pay twice for the same coverage. In support of this argument, CU highlighted that the property policy referred to the railway specifically, whereas the machinery break down policy covered the dry dock generally. Royal argued that the property and machinery break down policies provided overlapping coverage, in which case CU s contribution was to be greater than Royal s. Royal argued that it was unreasonable for the court to interpret the standard wording of the machinery break down policy differently depending on whether another insurance policy existed. The court held that clauses 7 and 8 of the machinery break down policy constituted an explicit recognition by CU that the property and machinery breakdown coverages were intended to overlap. Consequently, the court found it unnecessary to decide whether the intent behind policies must be considered individually or in the context of any package in which they are bundled. In RBC Travel Insurance Co. v. Aviva Canada Ltd. 52, the insured, a resident of Ontario, was injured in a motor vehicle collision in Michigan, U.S.A. Her travel insurer, RBC, paid the claim for emergency medical expenses and sought contribution from the motor vehicle insurer, Aviva. The travel insurance policy contained the following relevant clauses: This insurance covers the reasonable and customary medical expenses you actually incur once you have left your departure point for necessary medical care of surgery This insurance only covers expenses in excess of those covered under your government health insurance plan and by any other insurance or benefit or plan under which you are covered. If you do not contact [the insurer s adjuster] at the time of your medical emergency or you choose to receive treatment from a medical service provider outside the network, 52 [2006] O.J. No (C.A.)

20 p. 18 you will be responsible for 30% of your medical expenses covered under this insurance and in excess of your medical expenses paid by your government health insurance plan. This insurance is subject to a maximum of $20,000 if you do not have valid government health insurance plan coverage at the time of the claim. All benefits payable to you under any of our policies are in excess of the benefits for the same or similar benefits payable to you by any other insurer. The automobile insurance policy provided statutory accident benefits pursuant to a schedule set out in an Ontario regulation. The policy contained the following exclusion clause: The insurer shall pay an insured person who sustains an impairment as a result of an accident a medical benefit. The medical benefit shall pay for all reasonable and necessary expenses incurred by or on behalf of the insured person as a result of the accident for medical [and like] services. Payment of a medical benefit is not required for that portion of an expenses for which payment is reasonably available to the insured person under any insurance plan or law or under any other plan or law. Additionally, the Ontario Insurance Act provided that the automobile policy was excess insurance to any other insurance not being automobile insurance of the same type indemnifying the injured person. The motions judge held that the language of the travel insurance plan was not sufficient to render it an excess policy. The motions judge noted that the travel insurance policy did not specifically refer to any underlying coverage by a provincial auto insurance plan. The appeal court overturned the motions judge, holding that it was clear from the plain language of the travel insurance policy that it was intended to provide excess cover only. The automobile policy was interpreted as providing primary coverage, less a deduction for any other primary insurance available. As there was no primary cover, the other insurance clause in the automobile insurance policy was not triggered, and the automobile insurer was ordered to cover the entire loss. The difficulty with the RBC decision is that the travel policy clearly contained some significant primary insurance obligations. The insured was obliged to report the claim immediately and allow the travel insurer to retain some control over medical treatment. If the insured was not covered by a valid government health insurance plan, the travel insurance provided primary cover to a limit of $20,000. Thus the court may have oversimplified the intent behind the travel insurance policy to avoid mutual repugnancy between the clauses. In Wawanesa Mutual Insurance Co. v. Thiessen 53 ( Thiessen ), a child was injured after falling from a climbing wall at a bible camp. The child claimed against the camp s volunteer supervisor, Thiessen. Thiessen was insured under an SGI home insurance policy that provided coverage for liability arising from volunteer work for charitable organizations, with a coverage limit of $1,000,000. Potentially 53 [2009] S.J. No. 343 (Sask. Q.B.)