March 1, 2024
Newsletter Special Edition – February 29, 2024
DIVIDING THE BILLS, DRIVING THE BUS:
LOBLAW COMPANIES LIMITED v. ROYAL
& SUN ALLIANCE, 2024 ONCA 145
By Cecilia Hoover, Dolden Calgary, Paul Dawson, Dolden Vancouver, Michael Libby, K.C., Dolden Vancouver, and Mark Barrett, Dolden Toronto
Loblaw Companies is one of the biggest insurance law decisions from Canadian courts in maybe a decade or more. For the most part, it is very positive for liability insurers involved in long-tail disputes that trigger multiple policies and policy periods. At the same time, it has some salutary warnings and guidance on how liability insurers should defend claims under reservations of rights, at the risk of losing access to important information about the defence. It is a must-read decision for insurers, adjusters, and anyone involved in the world of Canadian liability insurance.
Loblaw Companies was released by the Ontario Court of Appeal on February 27, 2024. The unanimous judgment, written by Pepall, J.A., overturns several important elements of the application judgment, released by the Superior Court in January 2022. See our newsletter summarizing that decision here. The coverage litigation at issue arose from a monstrous tangle of underlying litigation: five class actions in four Provinces against dozens of defendants, all alleging negligence and other misconduct in the development, marketing and sale of opioid drugs since 1996. Three of those defendants – Loblaw Companies, Shoppers Drug Mart Inc., and Sanis Health – tendered their defences to twelve different insurers who insured them for varying portions of the class period, with varying deductibles and self-insured retentions (SIRs), and under various reservations of rights. Five of the insurers provided primary coverage; they and the other seven also provided excess coverage in certain policy years.
The primary insurers each acknowledged a duty to defend and agreed among themselves that each would pay a percentage of defence costs based upon time on risk. They also took the position that the insureds would have to satisfy the self-insured retention (SIR) under each responding policy before the insurers would contribute to the defence. The insureds opposed this approach and brought an application to resolve several important coverage issues.
Key holdings of the resulting trial judgment included that:
a) each insured was entitled to seek 100% of its defence costs from any one of the insurers who owed a duty to defend, and a time-on-risk allocation of defence costs would not be appropriate;
b) payment of defence costs by any insured (or by any insurer the insured selected to defend) counts towards the satisfaction of other insurers’ SIRs (where the SIR applies to defence costs), so the insureds effectively only need to satisfy one SIR, at least at the defence stage;
c) the insureds were entitled to relief from forfeiture with respect to defence costs they incurred before notifying the insurers;
d) some of the insurers were in a conflict of interest because their policies allowed them to associate with but not control the defence, raising the possibility they would seek to influence the defence in a way that avoided their own liability to indemnify; and
e) the insurers’ split-file protocols (i.e., between defence and coverage) did not adequately protect the insureds’ interests if the same decision-makers could access information from both sides of the screen.
As set out below in more detail, the Court of Appeal substantially reversed findings a) to c), and provided further guidance on d) and e).
1. Duty to Defend and Equitable Allocation of Defence Costs
First, the Court of Appeal found that where a “long tail” loss exists, such as this one spanning over thirty years, the appropriate way to allocate of defence costs among the successive occurrence policies is by time on risk.
This conclusion required the Court to address several important sub-issues.
a) “All Sums” Approach not Applied in Canada
The Court of Appeal overruled the trial judge’s holding that the insureds could select any one insurer from a long line of successive insurers in a twenty-year occurrence period to provide them a full defence. The trial judge had reasoned that the selected insurer could subsequently seek equitable contribution from the other insurers whose policy also responded. The Court of Appeal noted that this “all sums” approach has been rejected by the Canadian courts, and that the insurers would not be entitled to equitable contribution absent concurrent obligations, which was unlikely where they had covered different policy periods and on different terms. The Court of Appeal declared that the time-on-risk allocation proposed by the primary insurers be implemented.
The Court of Appeal also agreed with the insurers that applying the “all sums” approach ordered by the trial judge would create significant conflicts of interest, since the insurers who assumed the defence would have an interest in seeing that any ultimate liability arose from damage occurring outside their policy periods. Pepall, J.A., concluded that “the participation of all insurers at the early stage is conducive to the conduct of the best defence possible and also serves to promote settlement”.
b) The Duty to Defend has Temporal Prescription
Part of the reason each insurer should only be required to contribute to the defence in proportion to its share of the time on risk is that a duty to defend can only arise when there is a possibility of coverage under the subject policies. The Court of Appeal reasoned that the policy wordings contained explicit temporal limits on coverage, i.e., to injury or damage occurring during the policy’s prescribed policy period. The Court of Appeal found that the trial judge ignored the language prescribing the temporal scope of the duty to defend.
c) Apportionment of Defence Costs Should not be Disproportionate to Potential Indemnity
It was also improper of the trial judge to apply the principle established in the prior appellate decision in Hanis v. Teevan, (i.e., that an insurer who owes a duty to defend must pay all reasonable costs necessary to defend covered claims, even if those costs also benefit the defence of uncovered claims). The Hanis principle is not supposed to saddle an insurer with costs disproportionate to the insurer’s potential liability for covered claims. Nor should it generally apply where there is continuous coverage through the entire “damage period”. The Court of Appeal pointed out that the duty to defend is not a peril insured, per se, but rather the consequence of that peril.
The effect of the Court of Appeal’s endorsement of the time-on-risk allocation of defence costs over successive policy periods will be significant. It will reduce any incentive insureds might have to simply trigger only one insurance policy and leave that insurer to engage other insurers who might also owe a duty to defend. It will also reduce the need for additional litigation between insurers seeking equitable contribution from other insurers. Finally, it will encourage all insurers to be involved in the defence from the outset, and it will clarify their respective obligations to participate in the defence.
d) Issues for Other Days
It is important to note that the Court of Appeal decision did not have to address at least two issues that will often be relevant to insureds and insurers alike.
First, the policies at issue had different wordings. Some arguably applied only one SIR or deductible per occurrence, even if that occurrence triggered multiple policy periods. Others arguably applied separate deductibles or SIRs to the coverage provided in each policy period. Still others had aggregation clauses that potentially limited the number of SIRS or the cumulative value of multiple SIRs. In each case, the policy wording would have to be considered to determine what an insured’s obligation to pay SIRs or deductibles might be. As the Court of Appeal notes, until a judge has determined that an insurer’s SIRs have been satisfied (or presumably if the parties agree on that score), the insureds must contribute the proportion of defence costs allocated to those policies by time-on-risk (para. 141).
Second, the Court of Appeal did not have to deal with the issue of how to address uninsured periods in the time-on-risk allocation. All of the insurers in this case had agreed to defend, and the insureds had been continuously insured by one or more of the insurers – there were no “gaps” in coverage. Neither the trial judge nor the Court of Appeal therefore had to consider whether the time-on-risk allocation should be based on the entire occurrence period, including uninsured periods, or just the totality of covered periods. If the former, no insurer would have to pay defence costs allocated to uninsured periods, and these would presumably fall to the insured. If the latter, the insurers would collectively cover 100% of defence costs.
2. Payment of SIRs
In its second major reversal of the application decision, the Court of Appeal held that where there are successive policies for long tail risks, the “SIR obligation in each policy must be satisfied before that insurer has a duty to defend” (para. 135). The time-on-risk allocation discussed above also applies to SIRs because each insurer had agreed to defend claims for damage or injury during their respective policy periods, and so to pick up a proportionate share of the defence costs. Where a particular policy applies an SIR to defence costs payable under that policy, the SIR has to be satisfied before a duty to defend arises for that policy period.
This finding has an important corollary, of great significance to insurers and insureds alike. The Court of Appeal overturned the trial judge’s ruling that once an insurer’s SIR is exhausted, that insurer’s payment of further defence costs would count towards satisfying the insureds’ SIR on other responding policies. Insureds must satisfy the SIRs on each policy in order to be defended under that policy; payments by other insurers are only relevant to their respective policy periods. This upholds the successive bargains struck between the insureds and insurers, and it would create an unfair windfall for the insureds if they were not required to satisfy the SIRs to which they had agreed. Notably, the Court of Appeal emphasized that the insureds in this case are sophisticated parties who opted to assume the exposure of their multiple SIRs.
3. Relief from Forfeiture not Available in Respect of Pre-Notification Costs
Thirdly, the Court of Appeal held that where an insurer has not denied its defence obligations upon notification, that insurer may enforce contractual provisions barring coverage for any costs the insured incurs voluntarily, such as defence costs incurred before the insured notified the insurer about the claim, so-called pre-tender defence costs. Further, an insured cannot obtain relief from forfeiture for pre-tender defence costs. In this respect, the Court followed and applied a 2016 decision of the British Columbia Court of Appeal, Lloyd’s Underwriters v. Blue Mountain Log Sales Ltd. Dolden lawyers Eric Dolden and Paul Dawson were counsel for the successful appellant insurer in that case; see our newsletter on that decision here.
The issue arose in Loblaw Companies because Loblaw incurred substantial defence costs before notifying one of its insurers, AIG, about the class actions. The trial judge ruled that, despite the late notice, the circumstances favoured granting Loblaw relief from forfeiture. The Court of Appeal reversed, finding that AIG’s duty to defend only arose upon being notified about the claim, and further, that Loblaw was not “forfeiting” coverage for pre-tender defence costs – those costs were simply not covered under the policy, applying its terms as written.
However, it is important to recognize that the Court of Appeal was animated by the fact that once AIG had been notified about the claim, it acknowledged its coverage obligations, simply reserving its rights and its expectation that the SIR would be exhausted before AIG would contribute to the defence (paras. 193-195). AIG also conceded that the subject policy’s SIR would be reduced by the amount of the pre-tender defence costs. If an insurer were held to have wrongly denied coverage after being notified of a claim, it might not be able to rely upon Blue Mountain Log Sales or Loblaw Companies to avoid paying pre-tender defence costs.
4. Conflict of Interests arising from Reservation of Rights – The Two-headed Hydra
Lastly, the Court of Appeal confirmed that insurers who reserve rights based on exclusions, terms, or conditions of the applicable policy may not be entitled to full defence disclosure in some circumstances. Further, the circumstances of each case will dictate the extent of the ethical wall that is appropriate between the “coverage” arm of the insurer and the ‘defence” arm. The Court agreed with the trial judge that in cases where the reservation of rights arises due to coverage questions that turn upon the insured’s own conduct in issue in the underlying action, a reasonable apprehension of a conflict of interest exists.
A good portion of the written decision is dedicated to the issues arising from the Defence Reporting Agreement (“DRA”). In a nutshell, the DRA permitted the all insurers who had opted to participate in the defence to share otherwise privileged defence information, in the spirit of cooperation in the defence of the class action. It required participating insurers to follow a “split file protocol” that precluded contact between an insurer’s coverage and defence examiners except at much higher levels in “the corporate decision-making pyramid”, beyond the adjuster or front-line claims examiner. Certain insurers had declined to sign the DRA, but still insisted on receiving privileged information. The trial judge ordered that privileged defence information (such as opinions and expert reports) would only be available to those insurers who entered into the DRA.
The non-participating insurers appealed this ruling, arguing that they had the right to fully associate in the defence including access to all relevant information, including privileged defence information.
The Court of Appeal dismissed this aspect of the appeal. The Court agreed with the trial judge that, absent participation in the DRA, the reasonable apprehension of conflict arising from insurers’ reservation of rights was not adequately addressed. The Court reasoned that a conflict of interest arises in situations where insurers reserve rights on coverage questions “which depend on an aspect of the insured’s own conduct at issue in the underlying litigation” (para. 242). In this case, for example, insurers reserved rights based on the intentional act exclusion. Insurers who reserved rights on this basis would have an interest in claims falling within the exclusion. The Court emphasized the primacy of an insured’s right to a “coverage neutral defence” (para. 255ff.), free from fear that its provision of information to its defence counsel might be detrimental to coverage.
The Court concluded that the trial judge had not erred in making participation in the DRA a pre-condition for receiving privileged defence information, or that the protocols proposed by the non-participating insurers would not provide sufficient protection. Notably, the Court stressed that defence lawyers’ primary duty of loyalty is owed to the insured. In sum, the court concluded that insurers may only rely on privileged defence information when determining coverage if they implemented ethical screens at least equivalent to those required by the DRA (para. 278), or if the insured provided a waiver to that effect.
The impact of this portion of the appellate decision is somewhat uncertain, and will likely depend on the circumstances of each case. The Court declined to define the scope of disclosure stating that it would be premature at the early stages of litigation. This strongly signals that this determination may have to wait until well into the litigation if not to its conclusion. Likewise, the Court did not mandate specific protocols or ethical screens but concluded that the determination of appropriate ethical screens and measures would be dictated on a case by case basis. In some cases where a high degree of potential conflict exists, it may be appropriate for the insured to retain independent counsel at the insurer’s cost. In “run of the mill” reservation of rights cases or cases with relatively low indemnity exposure, a split file protocol might suffice.
5. The Takeaways
Insurers and other participants in the liability insurance market will likely be closely examining Loblaw Companies for many years to come. It is a lengthy and complex decision that touches upon many important issues in the defence of long-tail liability claims. For now, we suggest a few key pointers about the decision:
- Where a claim triggers a potential defence under multiple successive policy periods, defence costs should in most cases (and subject to the policy wordings at issue) be allocated amongst all participating insurers based on their proportion of their time on risk – likely discounting any periods of non-insurance.
- Insurers are entitled to require that all SIRs on their responding policies be satisfied before they begin contributing to defence costs. Defence costs covered by some insurers under their policies do not count towards the satisfaction of other insurers’ SIRs.
- Insurers are also entitled to rely upon “no voluntary payment” clauses to deny coverage for pre-tender defence costs. Insureds cannot obtain relief from forfeiture for such costs, since no forfeiture has occurred. However, insurers who wrongfully deny coverage might not be able to rely upon such clauses.
- Finally, insurers must take great care to ensure that they maintain ethical screens between their defence and coverage “arms”, to a degree reasonable to the nature of the claim at issue. Larger and more complex claims might necessitate a stricter division, extending further up the “pyramid”, in order to ensure the insured receives a “coverage-free” defence. For more on ethical screens, see Dolden’s paper, “Two Files or One – When Do You Have A Conflict With Your Insured?” (May 2020)
Should you have any questions about the impact of Loblaw Companies, please don’t hesitate to contact the writers.
For further information or if you have any questions about the above article, please contact the author: Cecilia Hoover, Dolden Calgary, Email: [email protected], Paul Dawson, Dolden Vancouver, Email: [email protected], Michael Libby, K.C., Dolden Vancouver, Email: [email protected], and Mark Barrett, Dolden Toronto, Email: [email protected].
