2 Insurance Policies, 1 Insured: Who Defends The Action, Who Pays The Costs Of The Defence, And Who Controls The Defence?

• Published date: 09 December 2020
• Subject Matter: Insurance, Litigation, Mediation & Arbitration, Insurance Laws and Products, Trials & Appeals & Compensation
• Law Firm: McCague Borlack LLP
• Author: Mr Van Krkachovski and Ryan Smith

Updated *December 3, 2020 - Originally published May 2020

This was a dispute between AIG Insurance Company of Canada and Lloyd's Underwriters in respect of the duty to defend a claim brought against the City of Markham.

The City rented a hockey rink to the Markham Waxers Hockey Club and associated entities. A young boy was injured while attending a game at the hockey rink. He sued the City, Hockey Canada and the Waxers for damages resulting from his injuries. The City was insured by Lloyd's under a commercial general liability policy. It was also an additional insured to Hockey Canada's and the Waxers' insurance policy with AIG. The City and Hockey Canada each retained separate counsel through their respective insurers.

AIG acknowledged its obligation to defend the action on behalf of the City but claimed that Lloyd's had a concurrent duty to defend and must pay an equitable share of the City's defence costs. AIG also claimed it had a right to participate in the City's defence, including the right to retain and instruct counsel, alongside Lloyd's.

The City and AIG brought competing applications to determine which insurers had a duty to defend the action. AIG appealed the application judge's decision that it must defend the action on behalf of the City, pay the cost of defending the action on behalf of the City and collect any indemnification costs from Lloyd's upon final conclusion of the action, and may not participate in the defence with separate counsel.

The issues on appeal were whether

1. Lloyd's owes the City a concurrent duty to defend,
2. Lloyd's must pay an equitable share of the City's defence costs, and
3. AIG has the right to participate in the defence, including the right to retain and instruct counsel.

As to the first issue, there was no dispute that AIG is a primary insurer. However, AIG argued that Lloyd's is also a primary insurer and not an excess insurer, as was argued by the City. The Court of Appeal concluded that because the AIG policy contains no excess provision, AIG is the primary insurer for bodily injury or property damage claims arising from the operations of Hockey Canada and the Waxers up to its $5 million policy limit. Moreover, to the extent that the AIG and Lloyd's policies cover the same claims, AIG must defend up to its policy limits, and Lloyd's maybe an excess insurer. However, Lloyd's must still defend the City against claims that fall outside the scope of the AIG policy and within the scope of its own policy.

As to the...