The Concurrent Duty to Defend – Court of Appeal for Ontario’s Latest Decision Affecting Municipal Insurers

Written on April 16, 2020.

In the recently released decision of Markham (City) v. AIG Insurance Company of Canada, 2020 ONCA 239,the Ontario Court of Appeal set aside a ruling by an Application Judge and ordered Lloyd’s to share equally in the defense costs with AIG, pending the final determination of a case involving a young person allegedly injured by a hockey puck at a rented City arena, claiming damages of $150,000 (who surely faces an uphill battle for any compensation from the City due to prior caselaw finding such incidents are an inherent risk for spectators see: Hagerman v. City of Niagara Falls, for example).   This latest appeal decision on the duty to defend an additional insured and how the defense costs are to be allocated between primary and excess insurers is of significance to all municipalities in Ontario, and their insurers.   The City was insured by Lloyd’s under a commercial general liability policy. The City was also an additional insured under Hockey Canada’s insurance policy with AIG Insurance Company of Canada, who had rented the City’s arena for a hockey tournament. The Lloyd’s policy is excess to the claims covered by the AIG policy, but primary for claims not covered by the AIG policy (i.e. independent acts of negligence by the City).   The Plaintiff was allegedly injured by a puck during a hockey game at the City arena. He is only suing for $150,000. By now, it seems likely legal fees incurred over who should defend the claim and pay for its costs, probably exceed whatever judgment or settlement the Plaintiff will ever receive, given the state of the law on such incidents.   On an application launched by counsel for the City/Lloyd’s, the application judge held that: AIG must defend the action; AIG must pay defense costs subject to indemnification of costs, if any, from Lloyd’s upon final resolution of the action; and AIG may not participate in the defense by retaining or instructing counsel. The decision was overturned by the Court of Appeal.   The Court of Appeal held Lloyd’s is an excess insurer only to the extent that claims are covered by the AIG policy. The AIG policy only covers the City for liability in respect of the operations of the renters of the City’s hockey arena.   Certain allegations in the statement of claim may not be covered under the AIG policy, including an alleged failure by the City to put into place proper and sufficient systems for the safety of spectators.   The Court of Appeal concluded that, to the extent that the two insurance policies cover the same claims, AIG had a duty to defend up to its policy limits, and Lloyd’s may be an excess insurer. (due to the Lloyd’s excess insurance clause, which was not present in the AIG policy).   However, at a minimum, the Court of Appeal held that Lloyd’s owes a duty to defend the City against claims which may fall outside the scope of the AIG policy and which fall within the scope of Lloyd’s policy. Thus a concurrent duty to defend exists.   Who Pays Defence Costs?  The Court of Appeal held that AIG and Lloyd’s are required to equally share the costs of defending the City, (50-50) pending final disposition of the action and a final determination of the allocation of the defence costs, rather than what the Application Judge ordered, which was for AIG to pay all defence costs defending all claims whether insured under its policy or not going forward, and settling up with Lloyd’s later.   The Court of Appeal held that where two insurers are responsible to defend a claim and one insurer is selected by the insured to assume the defence, it may be inequitable for one insurer to pay all defense costs and the other to pay nothing as the matter progresses, unless, for example, there is no realistic chance of the policy of the other insurer being reached.