Insurer's Duty To Defend: Are Defence Cost Obligations Subject To A 'Time On Risk' Apportionment

In Lombard General Insurance Company of Canada v 328354 BC Ltd et al, 2012 BCSC 431, the Supreme Court of British Columbia made an important addition to the case law concerning an insurer's duty to fund defence costs under a Commercial General Liability (CGL) policy, where the underlying claim alleges damage occurring over a lengthy period, falling partially outside the duration of the policy. The underlying claim had not yet gone to trial when the insurer sought a pro rata reduction in its defence obligation, proportionate to time on risk. The Court instead directed the insurer to pay for the entire defence. The Court held out some hope of an eventual re-allocation of defence costs, in favour of the insurer, but those remarks must be taken with caution in light of existing case law about the scope of the duty to defend.

This action involved a multi building strata complex that was constructed in the period 1995 to 1997. The developer purchased and maintained a wrap up Commercial General Liability policy, whose term expired two years after construction completed. After that time, the developer did not maintain any additional insurance and so was uninsured from and after 1999. An action was commenced in 2009. The action included allegations of continuous or progressive damage both during the policy period and following. The Supreme Court was asked to determine if the wrap-up insurer, Lombard, could limit its contribution to legal fees required to defend the developer in the action, to a percentage of those legal costs only, based on the insurer's calculation of its 'time on risk' relative to the overall time in which the damage was alleged to have occurred. In this case, the insurer's time on risk calculation would have seen it contribute 16.9% of the defence costs, if they were entitled to apportion them in this fashion.

The application was brought relatively early in the litigation by way of interlocutory motion.

The Honourable Mr. Justice Butler concluded that, although the project developer was obligated to pay the costs of defence solely relating to damage claims falling outside of the coverage period, at this stage of the proceeding there was no reasonable basis on which to prorate defence costs between Lombard and the project developer. Accordingly, based on its duty to defend found in the policy, Lombard has to pay the entire costs of the defence as they are incurred.

The Court determined that:

In cases of continuous or progressive...