The recent decision in Markham (City) v. AIG Insurance Company of Canada, 2020 ONCA 239 concerns a dispute between two insurers over the duty to defend, duty to contribute, and right to control a defence where there is concurrent insurance coverage by more than one policy. It is held that, where distinct allegations against the same defendant could result in coverage under two separate policies, both insurers may be required to share in the cost of the defence with each having a prima facie right to participate in the defence.
The City of Markham rented a hockey rink at the Angus Glen Community Centre to the Markham Waxers Hockey Club, the Markham Waxers Minor Hockey Association, and the Markham Minor Hockey Association. A young boy who was watching a game at the rink was injured when a hockey puck struck him in the face. He sued the City and Hockey Canada, seeking $150,000 in damages.
The City is insured by Lloyd’s Underwriters under a commercial general liability policy. The City is also an additional insured to Hockey Canada’s insurance policy with AIG Insurance Company of Canada.
AIG accepted responsibility to defend the action, but claimed that Lloyd’s has a concurrent duty to defend and must pay an equitable share of the City’s defence costs. AIG also claimed it has a right to participate in the defence, including the right to retain and instruct counsel, alongside Lloyd’s.
AIG appealed the application judge’s decision that (i) it must defend the action, and (ii) it must pay the cost of defending the action subject to indemnification of costs, if any, from Lloyd’s upon final resolution of action, but (iii) it may not participate in the defence by retaining or instructing counsel.
The Court of Appeal allowed AIG’s appeal.
Writing for the court, Justice Thorburn held that both AIG and Lloyd’s owe a duty to defend the City in the action.
The Lloyd’s policy covers the City for all claims of bodily injury, personal injury or property damage “caused by an Occurrence during the Policy Period”. It contains a limitation which provides that if, at the time of the accident the claim is covered by the Lloyd’s policy and another insurance policy would have been attached to cover all or part of the claim had the Lloyd’s policy not been in place, Lloyd’s is not liable except as an excess insurer such that it has an obligation to contribute only after all other insurance has been exhausted. In this case, at the time of the accident, the claim was covered by the Lloyd’s policy, and the AIG policy would have attached to cover part of the claim had the Lloyd’s policy not been in place. Therefore, to the extent, but only to the extent that claims would be covered by the AIG policy, Lloyd’s would be an excess insurer with respect to those claims. In this case, there were some claims in the underlying action which may not be covered by the AIG policy and may only be covered by the Lloyd’s policy.
Thorburn J.A. concluded that Lloyd’s has a duty to defend the City against those claims in the action that are not covered by the AIG policy. Lloyd’s has a duty to defend the City in respect of all claims of bodily injury, personal injury or property damage caused by “an Occurrence”. The AIG policy only covers the City for “liability in respect of [Hockey Canada and Waxers’] operations”. AIG expressly limited its obligation as “[n]o other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for”. All other occurrences that cause bodily injury, personal injury or property damage are not covered by the AIG policy but are covered by the Lloyd’s policy. As a result, both AIG and Lloyd’s have a duty to defend.
Justice Thorburn went on to hold that AIG and Lloyd’s must share the City’s defence costs equally, subject to a right to seek a reallocation of the defence costs at the conclusion of the action.
Finally, she held that AIG has the right to participate in the defence, including the right to retain and instruct counsel. An insurer who has a duty to defend an action has a prima facie right to control the conduct of that defence. In order to remove the insurer’s contractual right to defend and control the defence of the litigation, there must be a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer.
In Justice Thorburn’s view, the application judge erred when she determined that there were no measures that could alleviate the City’s concerns short of removing AIG from the defence entirely. She accepted AIG’s proposal of a “split file” verbal protocol to lessen the concerns and provide protection to the insured and Lloyd’s. This would ensure that potentially conflicting interests insured by one policy are handled separately and that the separate claims be dealt with by separate counsel. Thorburn J.A. held that this proposal --with some added obligations-- adequately recognizes the legitimate interests of both the insured and the insurers and addresses the concerns that AIG may abuse its right to defend and settle to the prejudice of the insured.
This decision is important because many municipalities, and other organizations, have their own insurance while simultaneously being listed as an “additional insured” on the policy of a third party. Often legal claims against the municipality include distinct allegations that could give rise to liability covered by either or both of the policies. For example, a failure to maintain the non-delegable duty to supervise versus a failure to carry-out operational matters contracted to the third party. Whereas previous case law has indicated that the third party’s insurer may be required to assume the entire defence because the cost of doing so is not increased by defending uncovered claims, the decision in Markham indicates that, in scenarios where there are distinct claims covered by separate policies, both insurers have a duty to defend and each a corresponding right to participate in the defence, subject to the rise of a reasonable apprehension of conflict of interest. The decision also provides guidance on internal processes that can help to avoid such a conflict.
