Scott W.K. Urquhart and Nikta Shirazian
In most instances where a duty to defend has been triggered the insurer has the obligation to pay the defence costs and will have conduct of the defence. However, this arrangement is not true in all cases. Indeed, certain circumstances arise where the costs of defending an action can be allocated amongst various parties. For example, such a scenario may arise when an insured has more than one liability insurer and both are obligated to defend an action. It may also arise in instances where there are covered and uncovered aspects to a particular claim. The purpose of this paper is to provide an overview of the legal principles governing the allocation of defence costs in the aforementioned scenarios. This paper will also address the legal principles governing the determination of which party obtains conduct of the defence in such circumstances.
How and when defence costs will be shared amongst insurers where there are concurrent obligations to defend will ultimately be fact-driven. That said, the courts have identified several overarching principles to assist in the determination.
This issue of when defence costs will be shared amongst insurers was addressed by the Ontario Court of Appeal in Broadhurst & Ball v. American Home Assurance Co [“Broadhurst & Ball”]. There, the Ontario Court of Appeal considered what happens when the insured has more than one liability insurer and both are obligated to defend the action. Although the appeal concerned the allocation of defence costs among primary and excess insurers, the general principles emanating from the decision are nevertheless instructive.
In holding that the excess insurer was required to pay a proper share of the costs of the defence, Robins JA declared that the insurers “obligations should be subject to and governed by principles of equity and good conscience”. Robins JA expanded on the function of equity and good conscience to the allocation of defence costs at page 95:
To require a primary insurer, whose financial exposure is significantly less than that of the excess insurer, to bear the entire burden of defending an action of this nature is, in my view, patently inconsistent with those principles. By the same token, a result which allows an excess insurer to deny any responsibility for costs which it ought in good conscience to pay, is likewise inconsistent with those principles.
As a matter of equity, the burden that these insurers assumed in insuring the same insured against the same risks should fall on both of them and the costs accordingly be shared by them.
However, despite the result, Broadhurst & Ball should not be interpreted to mean that an “excess insurer with a duty to defend will be compelled to contribute to the defence costs in each and every case where a claim exceeds the limits of the primary insurer.” Indeed, this exact interpretation of Broadhurst & Ball v. American Home Assurance Co was confirmed by the Ontario Court of Appeal in Alie v Bertrand & Frere Construction Co. [“Alie”]. In Alie, the Court of Appeal reiterated that in Broadhurst & Ball:
Robins J.A. recognized that the excess insurer’s obligation to contribute, if any, was a “matter of equity” or “fairness” as among the insurers who were under a duty to defend the claim. The determination of the equities depends on the circumstances of the particular case. Those equities include the first in line status of the primary insurer, the nature of the risk insured by each insurer, the potential windfall to an excess insurer who was not obliged to contribute to a defence which potentially benefited that insurer and the contractual obligation of the excess insurer to the insured.
Both of these authorities were confirmed by the British Columbia Court of Appeal in Danicek v. Alexander Holburn Beaudin & Lang. There, Co-operators, the personal defendant’s home insurer, defended Jeremy Poole in Ms. Danicek’s personal injury claim against him and her employer law firm. Lombard, the firm’s insurer, refused a defence on the basis that there was no indemnity. Co-operators sought contribution from Lombard for the defence costs. Following a finding that there was a possibility of indemnity and therefore a duty to defend on the part of Lombard, Kelleher J. held that Lombard was obligated to contribute to Mr. Poole’s defence costs.
Noting that allocation “is not an exact science”, “fairness” is the object, and both insurers would have been required to contribute to the defence regardless of priority, the Court found that equality was appropriate. Citing Madam Justice Southin in Affiliated FM Insurance Co. v. Quintette Coal Ltd. Kelleher J. held that “equality is equity”. Accordingly, half the defence costs were owed by Lombard to Cooperators.
The issue takes on a different hue when the contest is between insurer and insured when some claims are covered and some not, and the defendant is insured for some period of time when damage was occurring, and was uninsured for the balance.
In Lombard General Insurance Co. of Canada v. 328354 B.C. Ltd., the insurer had underwritten three successive wrap-up policies to a developer and coverage was sought with respect to a “leaky condo” action. The damage was alleged to be continuous or progressive. The developer was uninsured for a significant portion of the time during which the damage was said to have occurred. Through a pre-trial application, the insurer sought declarations to the effect that its obligation to defend was limited to a pro rata share based on time on risk. The developer opposed this and sought declarations that the insured was obligated to defend for all of the costs of the defence.
In considering whether in instances of continuous or progressive damage, should defence costs be apportioned between an insurer and an insured on the basis of time on risk, Mr. Justice Butler reviewed the relevant authorities and held at para 39:
I conclude that there is no settled principle in the Canadian decisions regarding continuous damage claims that favours an apportionment based on time on risk. Rather, the principle I extract from the decisions is that defence costs can be apportioned between an insurer and an insured if there is a reasonable or logical basis upon which to do so.
Next, Mr. Justice Butler considered the extent that the equitable concept of fairness discussed in cases dealing with apportionment of defence cost among insurers applied in cases of continuous of progressive damage where defence costs may be apportioned between the insurer and the insured. Mr. Justice Butler relied on the Ontario Court of Appeal’s decision in Hanis v. University of Western Ontario and distinguished between the two scenarios on the basis that “the latter involves a contractual relationship that specifically addresses the obligation of one party to pay the defence costs of the other”. Butler J explained at paragraph 53:
The rationale for importing equitable considerations into the analysis is that there is, in such situations, no contractual relationship between the insurers. The insurers do not owe duties to each other….However, the question of fairness does not arise in the same way where there is only a single insurer and the focus is on the contractual relationship.
In this regard, Butler J cited with approval the Ontario Court of Appeal’s rationale in Hanis at para 54:
The relationship between an insured and an insurer is contractual and must be governed primarily by the terms of the relevant policy of insurance. The insurer’s obligations are found first and foremost in the policy. Those obligations may include the obligation to pay all or some of the costs associated with the defence of covered claims. It makes eminent sense that any inquiry as to the nature and scope of the insurer’s duty to pay those costs should start with the language of the policy.
Ultimately, Butler JA held that “[t]he apportionment of defence costs between an insurer and an insured should be determined by the operative language in the policy.”
Finally, the court dealt with the issue of whether apportionment of defence costs should be made prior to trial in instances where apportionment is warranted. Butler J acknowledged the difficulty in apportioning defence costs prior to trial and held:
There is a decided preference in the jurisprudence for waiting to make the assessment as to apportionment until there is a solid basis in fact for doing so. The assessment necessarily involves consideration of the circumstances at the time of the application. The circumstances relevant to the apportionment of defence costs prior to trial can be very different from those arising at the conclusion of trial.
Broadly speaking, where the facts and causes of action reasonably permit, allocation of defence costs between insurer and insured is possible. Such a finding would, of course, be guided by the operative language in the particular policy. Nevertheless, despite the fact that it is possible, the allocation of defence costs between an insurer and insured will often be the exception rather than the rule.
Most insurance policies grant the insurer the right to conduct the defence. That said, in cases of real or potential conflict, it may be appropriate for the insured to control the defence at the expense of the insurer.
Such was the case in British Columbia Medical Association v. Aviva Insurance Company of Canada. There, the plaintiff sought declarations that the insurer had the duty to defend but could not control the defence. The underlying action involved allegations of defamation including intentional and knowing falsehoods made with the intent to injure. The insurer denied coverage on the basis of the usual exclusions for intentional defamation.
The honourable Madam Justice Ross found that the allegations supported a non-derivative claim for defamation simpliciter, which did not require intent of knowing falsity, and therefore the duty to defend was triggered. Having found for coverage, Ross J. turned to the issue of conduct of the defence.
While acknowledging that the insurer has the right to control the defence it is paying for, Ross J. noted that the right “is not absolute”. Citing with approval Brockton (Municipality) v. Frank Cowan Co. and Foremost Insurance Co. v. Wilks, the court stated that a reservation of rights, in and of itself, would not be sufficient to oust the insurer’s right of control. Where the coverage issue has “nothing to do with the issues being litigated in the underlying action” there is no conflict of interest that would require independent counsel. Conversely, where the coverage issue depends “upon an aspect of the insured’s own conduct” then such a conflict arises.
Given the nature of the causes of action – defamation – and the centrality of the insured’s intent to the underlying litigation, it was appropriate that the insured control the defence in that particular case. Otherwise, the insured could not instruct or inform counsel without possible running afoul of the exclusions. A wedge would be driven between client and counsel. In this regard, Ross J. held as follows:
…in the present case, it is my conclusion that the Insured’s knowledge, purpose and intention will be a central issue at trial in the Underlying Action and the conflict presented between the interests of Aviva and the Insured in this regard is, to quote Russell J., “too substantial to ignore”. In the result, I have concluded that Aviva is not entitled to exercise any right to control the defence of the Insured.
In PCL Constructors Canada v. Lumbermens Casualty Co. Kemper Canada [“PCL”] the Ontario Superior Court of Justice declined to order independent counsel in the absence of a conflict of interest or evidence that appropriate defence counsel would not conduct the defence in the best interests of the insured. That matter involved claims against PCL as construction manager in a development which showed post-construction water ingress.
The policy at issue appeared to be a fairly standard Commercial General Liability policy. The insurer denied coverage, relying on the policy’s “own work” exclusions. The Court found that the allegations triggered coverage for a duty to defend due to exceptions to exclusions and there was therefore a possibility of indemnity. The Court went on to consider conduct of the defence, beginning at paragraph 73, Thorburn J. held:
In some circumstances an insured may be concerned that in controlling the defence an insurer may prejudice the insured. Where there is a conflict of interest between the insurer and insured, the insured may not wish to allow the insurer to exercise its rights under the contract fearing that in exercising such powers the insurer may prefer its own interest to that of the insured.
In the face of such concerns, the courts have on occasion determined that the insured should be entitled to select its counsel at the insurer’s expense and that such counsel will be instructed exclusively by the insured. While this responds to the insured’s concern, it creates a similar concern on the part of the insurer. The insurer may be prejudiced by the conduct of the defence in these circumstances and the insurer’s contractual right to control the defence and to settle would be denied.
The Courts must seek to strike a balance in these circumstances recognizing the legitimate interests of both the insured and the insurer. The potential tension in the relationship between insured and insurer is not sufficient to require the insurer to surrender control of the defence. There must be a reasonable apprehension that if counsel were to act for both the insurer and the insured in defending the action, counsel would be in conflict of interest.
Thorburn J. referred to Brockton (Municipality) v. Frank Cowan Co where Goudge J.A. for the Court described the dilemma as follows:
The issue is the degree of divergence of interest that must exist before the insurer can be required to surrender control of the defence and pay for counsel retained by the insured. The balance is between the insured’s right to a full and fair defence of the civil action against it and the insurer’s right to control that defence because of its potential ultimate obligation to indemnify. … The question is whether counsel’s mandate from the insurer can reasonably be said to conflict with his mandate to defend the insured in the civil action. Until that point is reached, the insured’s right to a defence and the insurer’s right to control that defence can satisfactorily co-exist.
Ultimately, Thorburn J. summarized the legal test for ousting the insurer’s right to control the defence, as follows:
In order to remove the insurer’s contractual right to “defend and control the defence of the litigation,” there should exist both a conflict of interest and a reasonable apprehension that the insurer may abuse its right to defend and settle to the prejudice of the insured.
The coverage issues at play in PCL had to do with the nature and extent of the damage suffered by the plaintiff, the timing of the occurrence, and the involvement of subcontractors. No conflict arose with respect to the conduct of the insured itself, as in a typical defamation or assault case. In the result, it was not appropriate that independent counsel be appointed. That said, the appointment was on terms to give meaningful protections to the party subject to a reservation of rights and not having control of the defence, set out at paragraph 90 as follows:
Both the insured and the insurer should be fully and promptly informed of all steps taken in defence of the litigation in order to be in a position to monitor the defence effectively and address any real bases for concern. This obligation is not unduly burdensome nor does it compromise the right to defend. It allows the insurer in this case to benefit from its contractual rights to defend and settle while providing meaningful protection to the insured against the possibility in the event that it later appears that there is some legitimate basis for concern.
Moreover, defence counsel should not have a close connection to either the insurer or the claim, and the insurer’s personnel handling carriage of the defence of the claim should be different from personnel handling the coverage issue.
The court further provided a set of requirements that ought to be followed in such scenarios. Holding at paragraphs 93 and 94:
Unless the parties agree otherwise, legal counsel selected:
(a) must be different from counsel who argued coverage;
(b) must be counsel who has not acted for either party in the past five years, such that there is no appearance of conflict of interest;
(c) must have no discussions about the case with coverage counsel; and
(d) will provide identical concurrent reporting to both the insurer and the insured.
Moreover, the claim is to be assigned to claims staff within the insurer who have had nothing to do with this claim up until this point, and who will have no communication with any person who has had dealings with this claim. New claims staff is to have access to the claims file only once it has been purged of any consideration of coverage.
Often when a duty to defend has been triggered the determination of defence costs and conduct of the defence is straightforward. However, as explained above, certain scenarios may arise which warrant the allocation of defence costs amongst numerous parties. Ultimately allocation of defence costs is a fact-driven inquiry. When dealing with allocation of defence costs amongst numerous insurers, the court is guided by the principles of “equity” and “fairness”. However, the issue takes on a different hue when considering the allocation of defence costs between and insurer and an insured in instances where there are insured and uninsured aspects to a given claim. A review of the case law illustrates that in such scenarios the court is ultimately guided by the operative language in the policy in determining the mechanics of the allocation of defence costs.
Relatedly, when defence costs are shared amongst an insurer and insured, issues arise with respect to determining who assumes the conduct of the defence. This of course, requires the court to strike a balance between the insurer’s contractual right to assume the conduct of the defence and the potential prejudice to the insured in the defence of the uninsured aspects of the claim. In such a scenario the court has held that in order to remove the insurer’s contractual right to defend and control the defence of the litigation, there should exist both a conflict of interest and a reasonable apprehension that the insurer may abuse its right to defend and settle to the prejudice of the insured.
 Ibid at 95.
 Alie v Bertrand & Frere Construction Co  OJ No 4697; 62 OR (3d) 345 (ONCA) [“Alie”].
 Ibid at para 203.
 2011 BCSC 65, aff’d 2012 BCCA 434 [“Danicek”].
 Ibid at paras 99-102.
 (1998), 156 DLR (4th) 307;  8 WWR 139 (BCCA).
 Danicek, supra note 6 at paras 99-102. The issue was dealt with differently in Economical Mutual Insurance v Lloyd’s Underwriters, 2014 BCSC 979. There, Economical defended a personal insured in a bodily injury claim on a liability policy. The plaintiff had been injured during a recreational hockey game. Lloyd’s insured the arena through a Commercial General Liability policy and refused coverage to the personal defendant. Because of the wording of both policies, it was uncontested that if Lloyd’s policy was triggered such that a duty to defend was owed, then that policy would be primary and the Economical policy excess. Ultimately, the court agreed that the duty to defend was triggered and Lloyd’s was liable to pay Economical 100% of the defence costs incurred to date.
 See Mark G Lighty and Marcus B. Snowden in Annotated Commercial General Liability Policy, Release No. 26, (Toronto: Thomson Reuters Canada, 2016) at 12:20.6. for a summary of emerging principles.
 2012 BCSC 431 [“Lombard”].
 Ibid, at para 39.
 2008 ONCA 678.
 Lombard, supra note 11 at para 53.
 Ibid at para 54.
 Ibid at para 56.
 Ibid at para 66.
 2011 BCSC 1399 [“BCMA”].
 Ibid at para 72.
 (2002), 57 O.R. (3d) 447,  O.J. No. 20 (ONCA) [“Brockton”].
 253 Cal Rptr 596, (1988) (California Court of Appeal).
 BCMA, supra note 18 at para 73, citing Brockton, supra note 20.
 BCMA, supra note 18 at para 74.
 Ibid at para 78.
  OJ No 2664; 76 CCLI (4th) 259 (Ont Sup Ct) [“PCL”].
Ibid at para 73.
 Ibid, citing Brockton, supra note 20 at para 76.
 PCL, supra note 25 at para 80.
 Ibid at para 90.
 Ibid at paras 93-94.