In Loblaw Companies Limited v. Royal & Sun Alliance Insurance Company of Canada, 2024 ONCA 145, the Ontario Court of Appeal, among other things, overturned the lower court’s finding that insureds were entitled to seek 100% of their defence costs from any one of the insurers who owed a duty to defend, regardless of whether or not the claims occurred during the insurer’s policy period. The Court confirmed that a pro rata “time-on-risk” allocation is the appropriate method for claims that span many years (long-tail claims) where there are multiple insurers issuing consecutive policies to an insured. In doing so, the Court provides welcome guidance for liability insurers involved in lengthy long-tail claims, including class actions that involve multiple policies and policy periods.

Background

The case arose from five class actions in multiple provinces seeking billions of dollars in damages against numerous defendants relating to the manufacture, distribution, and sale of opioids in Canada beginning in 1996 (the “Underlying Claims”). Three of the defendants, Loblaw Companies Limited (“Loblaw”), Shoppers Drug Mart Inc. (“SDM”) and Sanis Health Inc. (“Sanis”) (together, the “Defendants”), sought coverage from their insurers. Five insurers – Royal & Sun Alliance Insurance Company of Canada (“RSA”), AIG insurance Company of Canada (“AIG”), Aviva Insurance Company of Canada (“Aviva”), Liberty Mutual Insurance Company (“Liberty”) and Zurich Insurance Company (“Zurich”) (collectively, the “Primary Insurers”) – issued primary commercial general liability (“CGL”) policies that covered one or more of the Defendants for varying portions of the class period, with various deductibles and self-insured retentions (“SIRs”). Importantly, there were no gaps in coverage. At any given time, one of the Primary Insurers was on risk.

The Primary Insurers acknowledged their responsibility to pay defence costs of the class actions for the years they insured the Defendants and proposed a pro rata allocation of defence costs based on their respective time-on-risk for the class period (the Primary Insurers had agreed beforehand on a pro rata time-on-risk allocation amongst themselves). The Defendants rejected this pro rata allocation and applied to the Ontario Superior Court of Justice to select a single Aviva policy to defend SDM and Sanis, and an RSA policy to defend Loblaw, and to pay all of the defence costs from 1996 onward, subject only to the selected insurer’s right to seek equitable allocation as between it and other Primary Insurers at the conclusion of the litigation. Notably, the policies selected by the Defendants did not include applicable or significant self-insured retentions (“SIRs”) or deductibles, or they had already been exhausted.

The Application Judge endorsed the Defendants’ choice of the Aviva and RSA policies to defend all of the Underlying Claims. The key findings of the Application Judge included, among other things, that:

• the Primary Insurers were required to pay all reasonable costs associated with the defence of the Underlying Claims. Rather than adopting a pro rata time-on-risk allocation, each insured was entitled to select any single policy under which there was a duty to defend and require the applicable insurer to defend and pay all reasonable defence costs (subject only to a right of apportionment at the end of proceedings and the right to seek an equitable allocation of defence costs among other Primary Insurers of that insured); and
• the defence costs incurred by each of the insureds would be applied toward the exhaustion of SIRs/deductibles under other policies, even if they are paid by Aviva or RSA.

In arriving at these findings, the Application Judge relied in part on Hanis v. Teevan, 2008 ONCA 678 (“Hanis”), which involved a single insurer in a case involving mixed claims (i.e., some covered, some not) giving rise to multiple theories of liability, and Family Insurance Corp. v. Lombard Canada Ltd., 2002 SCC 48 (“Family Insurance”), which involved a single accident in relation to which two insurers had concurrently insured the same risk during the same time period.

The Primary Insurers appealed from the decision of the Application Judge, arguing that it rewrote the terms of the parties’ insurance contracts by, amongst other things, (i) obligating Aviva and RSA to defend claims for multiple years in which they did not issue primary policies to the Defendants, (ii) relieving other Primary Insurers of their contractual obligations in those same years, and (iii) permitting the Defendants to circumvent and evade SIRs and deductibles that had been freely negotiated with the other Primary Insurers.

Decision of the Court of Appeal

The Court of Appeal (the “Court”) substantially reversed the holdings of the Application Judge detailed above. The Court succinctly summarized the case as follows:

The challenge presented by these appeals is what to do with the cost of defending claims that involve allegations of continuous or progressive injury that span many years (long-tail claims) where there are insurance policies with different insurers, different provisions governing deductibles and SIRs, and consecutive rather than concurrent coverage periods and therefore different risks.

Defendants cannot select single policy to pay for all defence costs

The Court held that the Application Judge erred in a number of respects in finding that the insurers had the right to select a single policy to provide a defence over the entire period covered by the Underlying Claims.

1. Policies provide for time-limited bargain

Acknowledging that the relationship between an insured and an insurer is a contractual one governed primarily by the terms of the insurance policy, the Court concluded that the Application Judge ignored the express language found in the policies of each of the Defendants that prescribed temporal limits on coverage (i.e., “during the policy period”). The Court reasoned that each insurer covered a successive period of time that captured a different risk profile, and that no insurer had agreed to cover risks falling outside their prescribed time period.

2. The Primary Insurers are not “concurrent” insurers

The Application Judge had relied on Family Insurance and Markham (City) v. AIG Insurance Company of Canada, 2020 ONCA 239 (“Markham”) to support the finding that the Defendants had a right to select a single policy to indemnify them for all defence costs in respect of the Underlying Claims. The Court held that in doing so, the Application Judge had erred as both these cases dealt with allocation issues as between “coordinate” or concurrent insurers, and were distinguishable from the case at hand, where the Primary Insurers insured discrete risks in successive time periods and did not agree to indemnify for risks falling outside those time periods.

Family Insurance involved a single claimant who had been injured in a fall from a horse and whose claim against the owner of a stable had been settled. The stable owner thereafter claimed under two policies of insurance. The Supreme Court of Canada applied what it described as the

well established principle of insurance law that where an insured holds more than one policy of insurance that covers the same risk, the insured may never recover more than the amount of the full loss but is entitled to select the policy under which to claim indemnity, subject to any conditions to the contrary.

Markham also involved a single accident and the allocation of defence costs between concurrent insurers providing coverage. By contrast, the proposed class actions in this case allege continuous damage over multiple policy periods.

3. Hanis is not applicable to situations involving multiple policy periods

The Court held it was an error in law for the Application Judge to apply the principles from Hanis (i.e., that an insurer who owes a duty to defend is responsible for all reasonable costs associated with the defence of covered claims, even if those costs also benefit the defence of uncovered claims) to the case at hand. Unlike Hanis, which involved only one insurer and focused on mixed claims giving rise to multiple theories of liability, this case involved multiple insurers and multiple policy periods.

According to the Court, to apply the principle in Hanis to the class actions involving multiple policy periods would place an unreasonable burden on the selected insurers and impose costs disproportionate to the insurers’ potential liability for covered claims. Also, unlike in Hanis, where some claims were “uncovered”, the Court noted that in this case, the Primary Insurers collectively proposed to pay all of the defence costs for the entire period, subject only to the payment of SIRs/deductibles where applicable.

4. Rejection of “all sums” approach

The Court concluded that the proposed pro rata allocation of defence costs accords with the contractual policy periods agreed to between the Defendants and Primary Insurers. In doing so, the Court rejected the “all sums” approach to defence costs, where the insurer could select a single insurer over the period of risk to cover all defence costs, stating that “[b]ased on learned commentary, there is limited support for this approach”. Drawing on its decision in Goodyear Canada Inc. v. American International Companies et al., 2013 ONCA 395, the Court highlighted how Canadian courts have preferred the pro rata approach to allocating liability to ensure that the allocation of costs to a particular insurance policy is proportionate to the damages during the policy’s term.

The Court expressly recognized the “heavy burden” of funding legal costs for a class action, and found that the Application Judge’s decision placed “a disproportionate and unreasonable burden on the selected insurers”. The potential unfairness was particularly extreme for RSA, who the Court noted had been on risk for just eight months, or 3% of the total class period, but would have been required to defend Loblaw for the entire decades-long period.

The Court also agreed with counsel for some of the Primary Insurers that applying the “all sums” approach adopted by the Application Judge would result in conflicts of interest, as insurers who assumed the defence would be interested in ensuring that any ultimate liability arose from damage outside their policy periods. Notably, the Court concluded that “the participation of all insurers at an early stage is conducive to the conduct of the bestdefence possible and also serves to promote settlement”.

SIR in each policy must be satisfied before insurer has duty to defend

The Court also reversed the Application Judge on the issue of how SIRs should be treated in these circumstances.^[1] The Application Judge held that once the SIR or deductible on the selected insurance policy had been exhausted, then the Defendants no longer had any obligation to pay defence costs toward the SIRs/deductibles on other policies.

Since the various policies were issued over many years, unsurprisingly they included various different SIRs/deductibles negotiated between the Defendants and their insurers. One of the key reasons the Defendants had sought to rely upon only the Aviva and RSA policies was to avoid the SIRs and deductibles under the other policies – Aviva conceded that its SIRs had been exhausted, and RSA’s deductible was relatively small.

The effect of the decision in the court below was that Aviva and RSA would be paying toward the SIRs and deductibles of the other Primary Insurers. The Court found that this did not reflect the bargain struck between the Defendants and their insurers. The Court noted that SIRs are used by sophisticated insureds such as the Defendants to reduce their premiums and exercise a degree of control over costs of investigating and defending claims prior to triggering the insurer’s duty to defend. The Court cited Ontario v. St. Paul Fire and Marine Insurance Co., 2023 ONCA 173, in support of its conclusion that only after an applicable SIR has been exhausted is the duty to defend triggered. The Court held that the Application Judge’s decision was inconsistent with this principle. Until it has been determined whether the SIRs/deductibles are exhausted, the Defendants must pay their own defence costs.

Other findings on relief from forfeiture, and defence reporting

The Court also agreed with the appellants that the Application Judge had erred in granting relief from forfeiture for pre-tender defence costs (i.e., costs incurred by the Defendants prior to notifying their insurer of the claim). In the Court’s view, there was no forfeiture to be relieved from because the insurer (AIG), on receipt of notice did not reject the contract. Rather, it reserved its rights and asserted that liability did not attach until the SIR had been exhausted. This, the Court observed, was very different from the situation where late notice to an insurer results in the insurer denying the duty to defend.

The only issue of significance on which the Court substantially upheld the decision of the Application Judge was on the treatment of the Defence Reporting Agreement (“DRA”) among the Primary Insurers. The Court agreed with the Application Judge that only those insurers who entered into the DRA would be entitled to associate in defence and receive privileged defence information. The Court endorsed the DRA “split file protocol” that precluded most information-sharing between the coverage and defence sides of an insurer.

The Court also made findings on the role of reservations of rights and conflicts of interest that will be of interest to claims handlers and insurance lawyers.

Key Takeaways

• A pro rata time-on-risk approach to allocation of defence costs accords with the contractual allocation of risk and is the appropriate way of apportioning costs among consecutive (e., non-concurrent) insurers. It is worth highlighting that the Primary Insurers in this instance acted reasonably and cooperatively and arrived at an arrangement for the sharing of defence costs among themselves, which was proposed by the Primary Insurers to the insured Defendants and was rejected.
• The decision establishes important principles regarding the treatment of SIRs and deductibles, including that defence costs covered by insurers under their policies do not count towards the satisfaction of other insurers’ SIRs.
• The decision underscores the importance of policy wording and a careful assessment of the obligations and risks undertaken by an insurer and the insured.
• The Court acknowledged (quoting an academic source) that the issues considered on appeal were “among the thorniest problems in insurance law”, and it is reasonable to think that the decision will provide lasting guidance on these issues.
• While the decision is a seminal insurance decision, it also has significant implications for class actions in which damages are claimed over long periods. The Court expressly recognized the “heavy burden” of funding lengthy class actions, and that an insurer should not be exposed to costs that are disproportionate to the extent of its potential liability.

*The authors, Alan D’Silva and Glenn Zacher, were counsel of record for Aviva Insurance Company of Canada on the appeal.

[1] Traditionally, deductibles have been treated differently than SIRs in that a deductible goes only to reduce the insurer’s indemnity obligation but does not delay the point when the duty to defend is triggered. However, in this case the Court noted that the parties treated the RSA deductible as equivalent to a SIR, and declined to express any definitive view on the point.

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