Sharing the Pain: Apportioning Defence Costs

01 / 21 / 2009

Following is a brief discussion of case law concerning apportionment of defence costs between insurer and insured, and between insurers.

Liability insurers may be able to seek a time on risk or other apportionment to limit defence cost obligations to a percentage of the period across which any covered damage may have occurred or to only certain allegations against the insured: St. Paul v. Durabla (1996), 137 D.L.R. (4th) 126 (Ont. C.A.); Axa v. Guildford Marquis, 2000 BCSC 197; Hay Bay v. MacGregor, [2003] O.J. No. 2049 (S.C.J.); Surrey (District) v. General Accident, [1996] B.C.J. No. 849 (C.A.); Royal & Sun Alliance v. Fiberglass Canada Inc., [1999] O.J. No. 1275 and Alie v. Bertrand, [2002] O.J. No. 4697 (C.A.).

The insured is required to contribute to the cost of years or allegations not covered by the insurer: Surrey (District) v. General Accident. In Continental Ins. Co. v. Dia Met Minerals Ltd. [1996] B.C.J. No. 1293 (C.A.) the Court held as follows (at para. 18): “It seems both illogical and inequitable to require an insurer who has not sought to shirk its obligations, to bear the entire cost of defending a mixed claim in the face of clear terms that require it to pay the cost of defending only claims relating to the insureds’ officers as directors and officers of Dia Met, and that exclude losses arising from dishonest acts or the making of personal profits.”

See also Hay Bay v. MacGregor, at para. 46.

In Royal & Sun Alliance v. Fiberglass Canada Inc., [1999] O.J. No. 1275 (Ont. Ct. Gen. Div.) (last para): “As Royal & Sun Alliance insured for the period January 1, 1981 to January 1, 1985, four years out of the ten over which exposure took place according to the allegations in the New Brunswick action, and as there is no issue of breach of condition in respect of its policy, I am of the view that a reasonable order at this stage of the action is one which requires it to fund 40% of Fiberglas’s defence costs to date and on an ongoing basis. Those costs will be subject to assessment, however, on a solicitor and client scale. The order will be without prejudice to Royal to seek, at trial, contribution from some or all of the defendants in the action. It will also be without prejudice to Fiberglas to seek, at trial, payment from Royal of a higher percentage of its defence costs and on a more complete basis of indemnification than that which I am ordering. No order is made as against Halifax and Commonwealth at this time.”

Primary layer insurers may also be able to secure defence cost funding from excess layers. In this regard, in Alie v. Bertrand, the Court held that an excess insurer may have a duty to contribute to defence costs in some cases where it is likely that the claim would intrude into the lawyer of excess insurance.

In Boreal Insurance Inc. v. Lafarge Canada Inc., [2004] O.J. 1571 (C.A.) the Ontario Court of Appeal discussed Alie as follows (para. 36): “The Court found an equitable duty to defend, as the defence could be perceived as inuring to the benefit of the excess insurer. The duty to defend was found, notwithstanding that, in the end, no duty to indemnify was found.” However, the Court in Boreal went on to find that the decision in Alie did not apply on the facts, where the excess insurer could not have a duty to indemnify and, therefore, should not have to share in the burden of defence costs.

In ING Insurance Co. v. Federated Insurance Co, [2005] O.J. No. 1718, the Ontario court of Appeal looked at the issue of allocation between primary and excess insurers. Federated appealed a cost order finding it had to indemnify ING for costs following a settlement. ING was the primary insurer and Federated was the excess insurer. The insured had been sued, along with two co-defendants, for roughly $9.37 million. ING had a liability limit of $2 million and Federated’s policy provided excess insurance of another $1 million. The claim settled in part with $2.178 million contributed from ING and $900,000 contribution from Federated. ING sought contribution from Federated to cover a portion of the defence costs. The trial judge found that Federated should bear defence costs in proportion to the amount it had contributed towards settlement.

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