Introduction
On February 27, 2024, the Ontario Court of Appeal (ONCA) provided guidance – and some issues for further consideration – in Loblaw Companies Limited v Royal & Sun Alliance Insurance Company of Canada, 2024 ONCA 14. In this decision, the Court addressed the allocation of defence costs, self-insured retentions, and the management of conflicts of interest for liability insurers and insureds in long-tail claims.
This article reviews and provides commentary on the Court's decision with respect to self-insured retentions ("SIRs") and deductibles, before highlighting some potential issues that may arise with the pro-rata time-on risk formula to the exhaustion of SIRs endorsed by the ONCA.1
For an overview of the case itself, readers may wish to review our prior article, "The Duty to Defend in Long-Tail Claims: An initial review of the Ontario Court of Appeal's decision in Loblaw Companies Limited v Royal & Sun Alliance Insurance Company of Canada".
Background
The ONCA's decision arises out of five underlying opioid class actions alleging negligence in the manufacture, distribution, and sale of opioids in Canada since 1995. Loblaw Companies Limited, Shoppers Drug Mart Inc., and Sanis Health Inc. (together, "Loblaws"), all named as defendants in the class actions, sought coverage from their primary and excess insurers (the "Insurers").2
Loblaws was continuously insured by the various insurers over the relevant period – although the individual coverage periods ranged from eight months to over 14 years, policies were subject to different SIRs, and different coverage available under each policy.3
Loblaws applied for a declaration that each insurer had a duty to defend Loblaws in the class actions and that Loblaws could select any single policy under which there was a duty to defend and require the chosen insurer to defend all claims on the exhaustion of the SIR applicable to that insurer's policy. The application judge agreed with Loblaws, finding that an insured was entitled to select any one policy to defend it and that payments made by the selected insurer could be used to reduce the SIRs on other policies.4
On appeal, the application judge's decision raised a number of legal and policy issues for the ONCA, including whether, in effect, an insured's satisfaction of a single SIR could unlock a "cascade" of insurance funds that would relieve the insured of paying any further SIRs where multiple policies may respond to a given claim?
The Court of Appeal's Decision Regarding SIRs and Deductibles
Overturning the decision of the application judge, the ONCA's reasons effectively plugged the leak that had threatened to turn into a waterfall. The Court rejected Loblaw's contention that once a SIR has been exhausted and coverage had been engaged, ongoing defence costs contributions of the triggered insurer could be used to erode the SIRs of other insurers.5 Instead, the ONCA found that given that the insured's entitlement to coverage is a question of the insured's satisfaction of each individual contract of insurance – the same pro-rata formula applicable to the defence obligations of each insurer must equally apply to the exhaustion of the insured's SIRs. The insured must, itself, satisfy each SIR before coverage will be triggered under each respective policy.6
Again, premised on the contractual basis for coverage and the pro rata time-on-risk analysis, the ONCA also disagreed with the application judge's finding that, until such time as another SIR was exhausted, the insurer under the policy whose SIR had been satisfied would be required to pay all defence costs.7 Rather, the insured is responsible for defence costs incurred up to the exhaustion of the SIR and such responsibility does not affect the proportion of time for which other insurers are responsible. It is incumbent on the insured to pay the percentages of legal fees allocated to those policies based on the time-on-risk formula until the SIR is exhausted. After that point, the insurers are responsible for the proportion of the defence costs equivalent to their time on risk.8
Commentary
As we noted in our prior comment, the ONCA's decision emphasized that insurance agreements are contractual bargains, with coverage provided for a specific period of time and subject to specific conditions precedent (in this case, including the satisfaction of an SIR).9 The Court said: "given that the respondents look to each policy for coverage for separate policy periods, it follows that the SIR obligation in each policy must be satisfied before that insurer has a duty to defend"10
One of the reasons identified by the Court in support of its conclusion was that Loblaws was a sophisticated insured who had chosen to manage its risk for many years by purchasing policies with high SIRs to reduce the premiums payable. In those circumstances, the Court observed, Loblaws should not be relieved from the consequence of its risk management decision (ie. a high SIR) simply because it had at some earlier time purchased a different policy with a lower deductible or SIR that would also respond to the present claim. The Court's reference to this circumstance raises the question as to whether or not the same result would arise in the case of a less sophisticated insured. In our view, it likely would – or certainly should. The Court's reference to Loblaws' risk management strategy is consistent with the broader theme underlying the entirety of its decision, which is, that the obligations of the insured and insurer ought to reflect the "bargain" to which the parties agreed as set out in the insurance contract.
On a related point, we note that the ONCA stated that SIRs do not have to be collectively exhausted before the obligation of a single insurer with an exhausted SIR is triggered.11 What was neither discussed nor decided in the ONCA's pro-rata "time on risk" approach to SIRs is the situation where an insured has several consecutive policies with the same insurer. Take, for example, an insured contractor supplying metal roofing materials to a building site. Many years after the initial installation, corrosion is identified on the roofing materials supplied by the insured and a claim is commenced against them for defective product. That insured obtained product liability insurance from the same insurer for the entire period from the delivery of the materials on site to the date of the claim, with coverage under each policy subject to a $25,000 deductible. In that circumstance, does the insured have to exhaust every single deductible contracted for in order to obtain the benefit of each policy? Is the insured entitled to request a defence from only one policy for damage occurring during that period or is it obligated to trigger and then satisfy the SIR for each policy that may cover some portion of the alleged damage period? We anticipate that this and other related issues will be addressed in subsequent cases to refine the general approach outlined by the ONCA.
Footnotes
1. Loblaw Companies Limited v. Royal & Sun Alliance Insurance Company of Canada, 2024 ONCA 145 [Loblaw. .
2. Ibid at paras 1-5, 35.
3. Ibid at para 7 and 36.
4. Ibid at para 5 and 46.
5. Ibid at para 117.
6. Ibid at para 135 and 138.
7. Ibid at para 140.
8. Ibid at para 141.
9. Ibid at paras 69-75.
10. Ibid at para 135.
11. Ibid.
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