No choice but to share: Ontario Court of Appeal rules on defence costs allocation for long-tail claims, other coverage issues


By virtue of its lengthy decision in Loblaw Companies Limited v. Royal & Sun Alliance Insurance, the Ontario Court of Appeal  has weighed in on, among other things, the allocation of defence costs for claims spanning multiple policy periods, with multiple insurers. Although this decision largely depended on the particular wording of the policies at issue, it provides comprehensive and useful commentary on how to solve what has been described as one of “the thorniest problems in insurance law.”

The case was decided within the context of five class actions commenced against Loblaw Companies Limited and its subsidiaries, Shoppers Drug Mart Inc. and Sanis Health Inc. (the insureds), in connection with the manufacture, distribution and sale of opioid drugs in Canada, beginning in 1996. Five insurance companies — Royal & Sun Alliance Insurance Company of Canada, AIG Insurance Company of Canada, Aviva Insurance Company of Canada, Liberty Mutual Insurance Company, and Zurich Insurance Company (the insurers) — issued primary liability insurance policies to the insureds during the class period. Chubb Insurance Company of Canada, Markel and QBE Syndicate 1886 were excess insurers.

The insurers were consecutive, rather than concurrent, and were on risk for varying amounts of time, with the shortest coverage period being eight months and the longest being over 14 years. Some of the policies also had self-insured retentions (SIRs) or deductibles that needed to be satisfied before the insurer assumed responsibility for defence costs.

The insureds brought applications seeking declarations that each of the insurers had a duty to defend the class actions and that each of the insureds was entitled to select any single policy under which there was a duty to defend and require that selected insurer to defend all the claims against it, including those that related to claims outside that insurer’s coverage period. In opposition, various insurers argued that the insurers should contribute to defence costs on the basis of a pro rata “time-on-risk” calculation, reflecting their respective coverage periods as a percentage of the over 20-year timeframe described in the class action.

The application judge found in favour of the insureds, albeit concluding that the selected insurer would be able to then seek contribution for defence costs from the other insurers at the end of the class proceedings.

The application judge further concluded that even though the insureds had sought coverage for defence costs under all of the insurers’ policies, the insureds were only required to exhaust the SIRs and deductibles in the policies they selected because the defence costs paid by the selected insurers could serve to exhaust the SIRs in the other policies.

Another issue was the ability for Loblaw to recover its pre-tender defence costs. Loblaw incurred legal fees before providing notice of the class action claims to its chosen insurers, contrary to the notice and voluntary payment provisions in those policies. Notwithstanding this breach, the application judge granted Loblaw relief from forfeiture and permitted recovery.

Although none of the insurers contested their responsibility to defend the class actions, the insurers appealed the application judge’s decisions as they related to the ability to select a policy, the exhaustion of SIRs and deductibles, and relief from forfeiture.

Defence Costs

With respect to payment of defence costs, the court found that the application judge erred in determining that the insureds were able to select one policy. The express language of the policies linked the insurers’ duty to defend to the insurance provided by the policies, which were limited to coverage “during the policy period.” The court found that to allow an insured to select a single policy to pay defence costs for claims that arose outside of the policy period would be inconsistent with this time-limited bargain. The insurers were not insuring the same risk; rather, each of them covered a successive period of time that captured a different risk profile.

The court also focused on the fact that coverage in this case was consecutive and not concurrent, that there were no coverage gaps, and that the pleadings raised tortious conduct that was different, and identifiable, across time periods, making it possible to determine which insurer was and was clearly not on risk at the times of the alleged conduct. The court commented on the two opposing approaches to defence costs, being the “all sums” approach versus the “pro rata approach,” and found that prevailing legal authorities endorse a pro rata approach in cases where multiple policy periods are engaged.

Accordingly, the court allowed the insurers’ appeals as they related to the right to select one policy and found that the insurers’ proposed pro rata allocation of defence costs was the correct disposition. With that finding made, the court also went on to hold that because each insurers’ policy is engaged under the pro rata approach, the SIR/deductible obligations in each policy must be satisfied before that insurer has a duty to defend claims for that particular period. The finding that a pro rata allocation was the correct one rendered the issue of whether an insured may use defence costs paid by the selected insurers to exhaust the SIRs in other policies moot. The pro rata time-on-risk formula would apply to the exhaustion of the SIRs.

Pre-tender Costs

The court also granted the insurers’ appeal concerning Loblaw’s pre-tender defence costs, confirming that the duty to defend arises on notice of a claim. The result is that pre-tender costs do not fall within that duty. Accordingly, relief from forfeiture — which is a remedy that protects a person against the loss of an interest or right because of a failure to perform a condition of an agreement — is not available where no right has been forfeited. This is especially so when, as in this case, there had been no denial of a duty to defend.


Finally, another aspect of this appeal involved a dispute among the insurers and excess insurers on the need for, and ambit of, a defence reporting agreement (DRA).

In this case, some of the insurers, and Loblaw, viewed a DRA to be necessary because the various insurers insured different entities who may have conflicting interests and many of the insurers had issued reservations of rights to Loblaw with respect to intentional conduct alleged in the underlying litigation. Some of the insurers and excess insurers did not want to sign the DRA.

The DRA established a two-level reporting system. The first dealt with privileged defence information relating to the defence of the class actions; the second dealt with public-facing information that was not privileged (pleadings, productions, transcripts, court decisions). While all insurers would receive public facing information as requested, privileged defence information would only be available to those Insurers who executed the DRA. The DRA required the insurers to maintain ethical screens to ensure that privileged defence information was not received by any person other than the designated authorized representatives.

The debate on this issue provided the court with the opportunity to comment on when conflicts of interest between insureds and insurers (or reasonable apprehensions of conflicts) may arise. Tied to this analysis were the court’s comments on the tripartite relationship between insurers, defence counsel and insureds, which are of general application.

In this case, the application judge found that there were party-based conflicts and coverage-based conflicts in relation to the insurers who opposed the DRA and that it was appropriate for the DRA to require “split handling” between coverage and defence, with different levels of disclosure. The Ontario Court of Appeal agreed that a conflict of interest did exist and, in making that determination, went over several principles that are widely applicable to insurance cases:

  • an insured and its insurer owe each other a duty of utmost good faith and the insured owes its insurer a duty of cooperation which includes the disclosure of facts material to the risk insured and of developments in the litigation;
  • where an insurer has a duty to defend, it has a prima facie right to appoint and instruct counsel and hence control and conduct the defence;
  • though paid by the insurer, counsel’s primary duty is to the insured;
  • an insured is entitled to a conflict-free defence;
  • an insurer’s right to control the defence is not absolute; the presence of a reasonable apprehension of conflict of interest on the part of the insurer may permit the insured to select and instruct its own counsel if it so chooses;
  • a reservation of rights by an insurer does not automatically put counsel in a position of having conflicting mandates;
  • if the insurer’s reservation of rights arises because of coverage questions which depend on an aspect of the insured’s own conduct that is in issue in the litigation, the onus may be met; and
  • mechanisms short of independent counsel may be put in place to minimize conflicts of interest and provide meaningful protection.

The court found that only those insurers that entered into the DRA were entitled to associate in the defence of the claims and receive privileged defence information. The court also found that, without an effective ethical screen that siloed privileged defence information from the non-contracting insurers’ coverage teams, the insurers’ input and advice could be tailored to align with the coverage position. In the face of a reservation of rights on intentional conduct in the context of the right to associate, defence counsel is put in the position of having conflicting mandates if they have to disclose privileged defence information contrary to the interests of the insured.

As for the insurers that did not sign the DRA, the court found that they were not entitled to complete disclosure and use of privileged defence information. These insurers argued that the insured’s duty of good faith mandated a blanket entitlement to this information and that this information could be used to assess their own coverage position. The court disagreed, especially when conflicts (or a reasonable apprehension of conflict) have arisen. The court determined that the scope of information that could be disclosed in this instance would be fact-specific.

Key Takeaways from Loblaw Companies Limited v. Royal & Sun Alliance Insurance

This case is noteworthy because:

  • it is strong authority for the proposition that, in cases of continuing injury with multiple insurers covering consecutive periods of that injury, a pro rata approach to allocating defence costs is to be used;
  • it provides sound reasons as to why relief from forfeiture is not available to recover pre-tender defence costs; and
  • it reiterates the duties owed in the tripartite relationship between the insured, insurer and defence counsel, and considers how to address conflicts in these duties.

This decision will undoubtedly be applied in subsequent cases and will serve as a persuasive authority on these coverage issues.

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