Introduction

On February 27, 2024, the Ontario Court of Appeal (ONCA) provided guidance – and some issues for further consideration – in Loblaw Companies Limited v Royal & Sun Alliance Insurance Company of Canada, 2024 ONCA 14, addressing the allocation of defence costs, self-insured retentions, and the management of conflicts of interest for liability insurers and insureds.[1]

This article is the first in a multi-part series discussing key take-aways from Loblaws. Below, we briefly summarize the background, the issues addressed by the ONCA, and delve into the Court’s reasoning regarding the allocation of defence costs among liability insurers.

Background

The ONCA’s decision arises out of five underlying opioid class actions alleging negligence in the manufacture, distribution, and sale of opioids in Canada since 1995. Loblaw Companies Limited, Shoppers Drug Mart Inc., and Sanis Health Inc. (together, “Loblaws”), all named as defendants in the class actions, sought coverage from their primary and excess insurers (the “Insurers”).[2]

Loblaws was continuously insured by the Insurers over the relevant period – although individual coverage periods ranged from eight months to over 14 years, policies were subject to different self-insured retentions (SIRs), and different coverage available under each policy.[3]

Each insurer had acknowledged a duty to defend Loblaws in the underlying actions, subject to satisfaction of the applicable SIR. In addition, some insurers only extended coverage to Loblaws pursuant to a reservation of rights letter, particularly concerning alleged intentional acts of the insured. Dissatisfied with this arrangement, Loblaws applied for a declaration that each insurer had a duty to defend Loblaws in the class actions and that Loblaws could select any single policy under which there was a duty to defend, requiring the chosen insurer to defend all claims.[4]

The Application Judge’s Decision

The application judge held that:

  • Loblaws was entitled to coverage for all reasonable defence costs associated with the class actions from any one insurer. Contrary to a pro rata allocation based on each insurer’s time-on-risk, the application judge allowed each respondent to choose any single policy for defence, with the selected insurer required to defend all claims, even those falling outside its coverage period, subject to equitable contribution between Insurers.[5]
  • Loblaws was not entitled to coverage until it had exhausted an SIR. However, once an SIR had been exhausted and coverage had been engaged, ongoing defence cost contributions of the triggered insurer could be used to erode the SIRs of other insurers.[6]
  • Loblaws was entitled to relief from forfeiture for defence costs incurred prior to its tender of the claims to the Insurers.[7]
  • Given the reasonable apprehension of a conflict, and the lack of adequate handling protocols, only insurers who had signed the Defence Reporting Agreement (DRA) were entitled to receive privileged defence information.

The Court of Appeal’s Decision

On appeal, the Court overturned the application judge in many respects, holding that:

  • A time-on risk approach rather than an “all-sums” approach should be applied to the contributions of insurers to the defence of Loblaws.
  • Satisfaction of one SIR does not permit the insured to then apply defence costs paid by one insurer to the erosion of another SIR. The insured must satisfy each SIR before coverage will be triggered under the respective policy.
  • An insured is not entitled to relief from forfeiture with respect to voluntarily incurred pre-tender defence costs where an insurer subsequently confirms its duty to defend.
  • An insured is entitled to a “conflict free defence”. Given the nature of the claims advanced and the reservations taken by certain insurers, the application judge’s decision upholding the use of the DRA and the information to which the insurers were entitled, was reasonable in the circumstances.

Below, we take a closer look at the Court’s reasons with respect to the defence cost obligations of Loblaws primary insurers.

The Duty to Defend in Long-Tail Claims

The Duty to Defend Stems from the Pleadings

It is trite law in Canada that where there is a possibility that the claim as pled could fall within the coverage provided by the policy, the insurer’s duty to defend will be triggered.[8] Where the claim in question arises out of a discrete “occurrence” and therefore falls within only one policy period, such an analysis is relatively straight forward: the insurer on risk for the policy period will be obligated to defend the insured. However, with long-tail claims involving continuous or progressive injury spanning many years, multiple policies and insurers, and consecutive rather than concurrent coverage, the analysis becomes more complex. As the ONCA described it, this is “among the thorniest problems in insurance law.”[9]

Contractual Bargain in Insurance Agreements

Applying the duty to defend analysis, the ONCA found that the application judge erred in allowing Loblaws to select one policy to provide coverage for defence costs for all claims arising during the entire period of the class action.[10] First noting that the policies in question were liability policies which provided coverage for occurrences arising during the policy period, the ONCA emphasized that insurance agreements are a contractual bargain, with coverage provided for a specific time period in accordance with the terms of the policy.[11] Applying this lens, the ONCA found that the application judge departed from the language of the insurance policies by extending one insurer’s obligation to defend the insured for claims arising from conduct outside the period specified in the policies. This contravened the contractual framework of the policies, which were designed to cover risks within defined temporal parameters.[12]

Relying on this contractual foundation, the ONCA further found that the application judge erroneously classified insurers as concurrent rather than consecutive insurers, leading to an inappropriate expansion of the coverage available under any one policy. As clarified by the ONCA, consecutive insurers are only liable for claims stemming from conduct occurring within their policy periods. Should multiple claims arise across multiple policy periods, the appropriate approach is to identify the insurers on risk at the time the occurrence arose rather than to paint all insurers with the same brush and leave the insurers to sort out contribution between themselves.[13]

Rejection of All-Sums Approach

The ONCA’s focus on the contractual bargain between the insurer and insured, was further buttressed by the ONCA’s confirmation that the “all sums” approach to coverage has generally been rejected by Canadian courts.  The “all-sums” theory of allocation argues that each insurer is responsible for covering all defence costs incurred by an insured in the defence of a covered claim, allowing the insured to choose the policy with the best coverage and compel that insurer to pay all costs. The chosen insurer must then seek contributions from other insurers.

Moreover, a potential conflict of interest arises when insurers are obligated to defend claims beyond their policy parameters, as required by an “all-sums” approach. Conflicts arise when insurers must defend claims outside their policy coverage as their interest is to have liability found on grounds not covered by the policy. This misalignment of interests can compromise the defence. Mandating an insurer to defend claims that fall outside the policy’s coverage places the insurer in a position where it must advocate for claims that would be beneficial for it to fail, potentially creating a conflict of interest. [14]

In rejecting this approach, the ONCA endorsed a pro rata “time on risk” approach in line with the consecutive nature of the coverage available to Loblaws. [15] Unlike the “all sums” approach, a pro rata “time on risk” allocation of defence costs – i.e. insurers sharing in the defence of the insured based upon their proportionate time insuring the insured – is both better aligned with the contractual basis for coverage and has salutary policy implications as it ensures early participation of all insurers, fostering a stronger defence and encouraging settlement while mitigating the potential for conflicts in the defence.[16] This approach recognizes that it is not appropriate for an insurer with minimal exposure to control the defence and associated costs.[17]

Commentary

What is not discussed in the ONCA’s decision confirming the application of a “time on risk” analysis to the sharing of defence costs between insurers, but is a relevant concern in applying the analysis to other cases of consecutive insurers is the trigger theories underlying the claim.

As set out in Alie v Bertrand, 2002 CanLII 31835 (ONCA), when considering whether an occurrence has arisen during a policy period for the purpose of determining whether a liability policy is engaged, a Court may consider and apply any one of four “trigger” theories as the situation may dictate being: exposure, manifestation, injury in fact, and continuous.[18] Where, as in the case of Loblaws, multiple injuries are alleged to occur to a class of plaintiffs over the entire class period, it likely makes sense to apply the exposure or continuous trigger theories thereby engaging all insurers who provided coverage during the class period and permitting a straightforward time on risk analysis.

With this in mind, one should be cautious in applying a blanket approach to other scenarios. For instance, a construction claim may allege resulting damage arising out of the work of a contractor on site, with the damage occurring over multiple policy periods. While the contractor may be insured by multiple policies during the period in which damage occurred, it may be more appropriate to apply the “injury in fact” trigger to find that the “occurrence” arose during only one policy period such that there is no requirement for a time on risk analysis.

A further question arises as to the appropriate manner of proceeding. While here the insured applied for a finding that it was entitled to call upon a single policy, often it will be an insurer who has been tagged for coverage that will seek equitable contribution from other consecutive or concurrent insurers – often times on a “time on risk” basis. The decision in Loblaws would indicate that the obligation is now squarely on the insured to ensure that all potentially responsive insurers are engaged and contributing, especially, as will be discussed in the next part of this series, where each policy is subject to deductible obligations.

[1] Loblaw Companies Limited v Royal & Sun Alliance Insurance Company of Canada 2024 ONCA 145 [Loblaw].

[2] Ibid at paras 1-5, 35.

[3] Ibid at para 7 and 36.

[4] Ibid at para 5.

[5] Ibid at para 46.

[6] Ibid at para 117.

[7] Ibid at para 144.

[8] Ibid at para 88.

[9] Ibid at para 65.

[10] Ibid at para 68.

[11] Ibid at paras 69-75.

[12] Ibid at paras 73.

[13] Ibid at paras 76-78

[14] Ibid at para 113.

[15] Ibid at para 108.

[16] Ibid at para 114.

[17] Ibid at para 115.

[18] Alie v Bertrand, at para 93; See also, Privest Properties Ltd. v Foundation Company of Canada Ltd., 1991 CanLII 2346 (BCSC)

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