The Ontario Court of Appeal recently made a precedent setting decision in Loblaw Companies Limited v. Royal & Sun Alliance Insurance Company of Canada, 2024 ONCA 145 (Loblaw), weighing in on key coverage concepts. The key takeaways from this decision are as follows:
- Pro-rata time-on-risk allocation for payment of defence costs is the appropriate approach to take where multiple consecutive insurers are involved in long-tail property damage or bodily injury claims;
- Relief from forfeiture is not available for pre-tender defence costs;
- Reservation of rights will only give rise to a conflict where a specific reservation of rights creates a reasonable apprehension of conflict. When there is a reasonable apprehension of conflict, Defence Reporting Agreements can strike the right balance between the rights of insureds and insurers; and
- Insurers are not automatically entitled to all privileged defence information. Where an insurer seeks privileged defence information for their own benefit, such as for a coverage decision, and in direct conflict with the best interests of the insured, the insurer may not be entitled to said privileged information.
Background
In Loblaw, Loblaw Companies Limited, Shoppers Drug Mart Inc., and Sanis Health Inc. were facing five class actions relating to the manufacture, distribution, and sale of opioid drugs in Canada beginning in 1996. The three companies had engaged numerous insurers throughout the class period to provide them with Comprehensive General Liability policies. Some insurers such as Royal & Sun Alliance and AIG had only insured Loblaw for a couple of years throughout the class period, whereas other insurers such as Liberty and Aviva had insured a party for decades throughout the class period. Loblaw, Shoppers Drug Mart, and Sanis sought a declaration that they could select which of their insurers throughout the class period had the obligation to defend the class action.
They were successful in the lower Court with the Applications Judge finding that the pleadings could not realistically be separated and allocated between covered and uncovered claims at this stage. As a result, Loblaw, Shoppers Drug Mart, and Sanis were entitled to select the insurance company that they wanted to cover the defence costs for the entire class period and that insurance company would have to seek contribution from the other insurers later.
Pro-Rata Time on Risk Allocation is the Correct Approach
The Court of Appeal felt that this approach was incorrect for a number of reasons. The Court distinguished this case from instances in which there are multiple insurers on concurrently for the same time period of a loss. Where there are multiple concurrent insurers, they have all bargained to insure that loss during that period of time and so each of them could be said to have reasonably expected to pay defence costs. Whereas in this instance, the insurers were on risk consecutively, and had only bargained to insure the loss for the period of time in which the insurance contract was in force. The policies themselves provided for a time limited bargain and it was not fair to require an insurer who may have only been on risk for 3% of the time period in question to mount the entire defence and seek indemnity later. A more appropriate allocation of defence costs was a pro-rata division between insurers based on the length of time that they were on risk for the claim.
No Relief from Forfeiture for Non-Payment of Pre-Tender Defence Costs
A further issue in the case was that the insureds were seeking payment of their pre-tender defence costs from AIG and RSA despite failing to provide these insurers with notice of the action in a timely manner as required by the respective policies. Pre-tender defence costs are any costs arising out of the defence of an action prior to giving the insurer notice.
In this case, a class action was commenced against the insured in August of 2018. The insured was unable to locate their CGL policies for the 1996-1998 time period of the claim. The insured did not give notice to these insurers until July of 2019, almost a year later, when the policies were located. During this time, the insured had retained counsel and incurred $220,000 of defence costs. The insured sought payment of these defence costs, which was denied. The insured in turn sought relief from forfeiture.
The Court determined that relief from forfeiture was not available in these circumstances because the insurers’ defence obligations were only triggered upon receiving notice of a claim. There could be nothing to relieve from, prior to notice being given. Further, the insurers were not denying coverage or denying a defence for the claim, they were simply denying payment of costs incurred prior to them receiving notice. The Court found that there was no forfeiture and therefore there could be no relief.
DRAs Strike the Right Balance between the Rights of Insureds and Insurers
The insurers also put into issue defence reporting agreements (DRA) with the insurers. DRAs are reporting agreements that ensured only those teams involved in the defence of the class action could receive defence-side reporting which was subject to litigation or solicitor-client privilege. Such reports would not be available to the teams involved in determining coverage for the same losses. The insureds were concerned that privileged information raised during the defence of the underlying class action would be used to deny coverage for that same claim. The application judge concluded that the DRAs struck the right balance the rights of the insureds and insurers. The Court of Appeal agreed.
In assessing the reasonableness of the requirement of the DRAs, the Court focused on whether there was a reasonable apprehension of conflict. The mere existence of a broad reservation of rights did not necessarily create a conflict. The Court found that when the reservation of rights was specific enough there may be a reasonable apprehension of conflict.
In this case, the reservation of rights by the insurers was specific to the intentional conduct of the insured. The pleadings outlined numerous instances of intentional conduct, thus resulting in the Court concluding there was a reasonable apprehension of conflict.
Insurers not Automatically Entitled to All Privileged Defence Information
In this case, some insurers had agreed to sign DRAs while others refused. Some of the insurers that refused also stated that they would be using privileged information associated with the defence of the class actions to determine coverage issues for the insureds. The Court elucidated some of the legal principles underlying an insurer’s right to defend an action It outlined that while insurers may have a right to control the defence, they may only do so when they are acting in the best interest of the insured. The primary duty of defence counsel is to the insured, despite the fact that defence counsel’s fees are paid by the insurer. Where an insurer seeks privileged defence information for their own benefit, and in direct conflict with the best interests of the insured, they may not be entitled to control of the conduct of the defence, and thus privileged information.
An insurer that exercises their right to defend a claim by obtaining and paying for a lawyer of their choice is considered to associate in an insured’s defence. In this case, the parties that refused to sign DRAs had also declined from associating in the defence of the class action. While the Court did not require those insurers that did not associate to sign a DRA, those same insurers were still required to maintain ethical screens to ensure privileged information could not be received by anyone other than designated individuals. These designated individuals were not permitted to have any involvement with assessment or determination of coverage issues.
Whether this case will get appealed to the Supreme Court of Canada remains to be seen.
Whitelaw Twining is a leader practitioner for insurance coverage matters and regularly acts as coverage counsel for national and international insurers. Should you have any coverage questions, please do not hesitate to contact our Coverage Team at Whitelaw Twining.