Loblaw Companies Limited v Royal & Sun Alliance Insurance Company of Canada, 2024 ONCA 145
Overview
On February 27, 2024, the Ontario Court of Appeal released its decision in Loblaw Companies Limited v Royal & Sun Alliance Insurance Company of Canada, 2024 ONCA 145 (“Loblaw v RSA”). With new assurance that an insurer's duty to defend only applies to the time and risk that an insurer agreed to cover, Loblaw v RSA will be welcomed by commercial liability insurers.
Background
Shoppers Drug Mart (“Shoppers”), Loblaw Companies Limited (“Loblaw”), and Sanis Health Inc. (“Sanis”) (collectively, the “Respondents”) face five class actions in British Columbia, Alberta, Ontario and Quebec for the sale and manufacture of opioids from 1996 to the present. Royal & Sun Alliance Company of Canada (“RSA”), AIG Insurance Company of Canada (“AIG”), Aviva Insurance Company of Canada (“Aviva”), Liberty Mutual Insurance Company and Zurich Insurance Company Ltd. were the Respondents' commercial general liability insurers (the “Primary Insurers”) for consecutive portions of the class period. Chubb Insurance Company of Canada, Markel and QBE Syndicate 1886 at Lloyd's of London were the Respondents' excess liability insurers (the “Excess Insurers”).
The Primary Insurers proposed covering the Respondents' defence costs pro rata, in proportion to each insurer's time-on-risk (a “Time-on-Risk Approach”). The Respondents proposed using two insurance policies for all their defence costs (an “All Sums Approach); the RSA policy, which had a relatively small deductible, and the Aviva policy, which had a self-insured reduction that was already exhausted, and rejected the Primary Insurers' proposal. Under the Respondents' proposal, RSA and Aviva would defend all claims against the Respondents, even if claims fell outside the selected insurers' policy time periods and seek contribution from the other insurers later.
The application judge allowed the Respondents' All Sums Approach and allowed the Respondents to only exhaust the self-insured retentions and deductibles in their selected Primary Insurers' policies, reasoning that the defence costs paid by the selected Primary Insurers could exhaust the self-insured retentions in other policies. Further, the application judge ruled that Loblaw was entitled to relief from forfeiture to recover defence costs it incurred before giving notice of the class actions to AIG and RSA. Finally, the application judge agreed with the majority of the Primary Insurers that a Defence Reporting Agreement was necessary to prevent the misuse of privileged information and to avoid conflicting interests in the coverage positions of the Primary Insurers and excess liability insurers.
The Appeal
The Ontario Court of Appeal (the “Court”) agreed with the application judge that in the unique circumstances of this case, a Defence Reporting Agreement was necessary for protecting privileged information, avoiding conflicts of interest between insurers, and to strike an appropriate balance between the rights of the insureds and the insurers. Without this safeguard, the insurers could tailor their input and advice to bolster their position regarding coverage. Otherwise, the Court largely allowed the appeal:
- The Respondents could not choose only one policy and
require the selected Primary Insurer to defend all class action
claims.
- The Primary Insurers' policies were time
limited.
The Court concluded that each insurance policy provided commercial general liability coverage “during the policy period”, meaning that the Primary Insurers did not agree to provide coverage outside of these policy periods. Knowledge of the addictive potential of prescription opioids, and thus the magnitude of the Respondent's allegedly tortious conduct, rose significantly across the Primary Insurers' successive policy periods. This means that a Primary Insurer who insured the Respondents in 1996, agreed to insure against a different risk than a Primary Insurer who provided insurance to the Respondents in 2010. The Primary Insurers did not agree to cover risks outside of their policy periods and should not have been directed to do so. - The Primary Insurers were not concurrent
insurers.
In concluding that the class action claims could not be allocated between covered and uncovered claims for each Primary Insurer, the Court ruled that the application judge erred in relying on Family Insurance Corp. v Lombard Canada Ltd., 2002 SCC 48, and Markham (City) v AIG Insurance Company of Canada, 2020 ONCA 239, which are both cases dealing with the allocation of costs between concurrent insurers, not consecutive insurers. Further, the application judge erred in relying on Hanis v Teevan, 2008 ONCA 678, a case involving one insurer, with only one policy period, concerning mixed claims with multiple theories of liability, to conclude that the selected Primary Insurers ought to pay all the costs of the defence. Unlike Hanis v Teevan, the present matter involves multiple consecutive policy periods. - The All-Sums approach to defence costs should not have been
applied.
The Primary Insurers never agreed to insure the Respondents outside of their policy period. Indeed, the Court found that requiring the Primary Insurers to do so would place a “disproportionate and unreasonable burden” on them, forcing them to seek contribution amongst each other after the class actions are resolved. The Court also found that the application judge's endorsement of this All-Sums Approach has limited scholarly support and is seldom used by Canadian courts. contrast, the Time-on-Risk Approach results in a fair allocation of defence costs among insurers and accords with policy language that limits the duty to defend to risks during the policy period.
- The Primary Insurers' policies were time
limited.
- The Respondents must pay each Primary Insurer's
self-insured retentions or deductibles for the Primary Insurer to
have a duty to defend.
The Respondents, who are sophisticated commercial entities, agreed to pay significant self-insured reductions on each of the Primary Insurer's policies in exchange for lower premiums, with the understanding that the insurer's duty to defend would not be triggered until the self-insured reduction had been exhausted. As such, the Court disagreed with the application judge's ruling that the selected Primary Insurers, whose self-insured reduction had been exhausted had to pay all defence costs until the other insurer's self-insured reductions had been exhausted. Flowing from the Court of Appeal's conclusion that a pro-rata time on risk formula is the appropriate way to allocate defence costs among insurers, it followed that the self-insured reduction or deductible of each policy had to be exhausted before the duty to defend was triggered. - No relief from forfeiture from Pre-tender Defence
Costs.
The Court of Appeal ruled that there was no forfeiture to be relieved from in this matter, concluding that the Respondents have no right to recover defence costs incurred before notice to the insurers. Further, AIG did not refuse to defend the Respondents and pay pre-tender defence costs due to late notice of a claim. Instead, AIG reserved its rights under the policy, holding that it would not be liable until the self-insured reduction had been exhausted per the policy.
Conclusion
Loblaw v RSA has not been appealed to the Supreme Court of Canada. As such, Loblaw v RSA, with its endorsement of a “Time-on-Risk” approach will likely provide helpful guidance to lower courts for years to come. Given the staggering cost of defending class action claims like those in Loblaw v RSA, the case serves as an important reminder to both insurers and insureds that scrutiny of commercial liability insurance policies is essential for a proper understanding of what the policy does cover, and importantly, what the policy does not cover.
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