C.A. Says No Allocation Between Primary and Excess Insurers

In McKenzie v. Dominion of Canada General Insurance Company, released today, the Court of Appeal clarified the law with respect to overlapping insurance coverage and the order in which liability insurance policies must respond to a claim.

In the Supreme Court of Canada’s ruling in Family Insurance Corporation v. Lombard Canada Inc., that court had dealt with “other insurance” clauses in insurance policies. In that particular case, the Court held that the “other insurance” provisions in two overlapping insurance policies, each of which sought to make that policy excess to other policies, cancelled each other out. The Supreme Court propounded a scheme whereby the two policies shared coverage equally up to the limit of the policy with the lower liability limits, after which the other policy alone would respond to the claim.

In today’s case, the issue involved the interpretation of the Family v. Lombard decision. The claim arose out of a collision between two boats. Three different insurance policies provided liability coverage for the operator of one of the boats. The policies were a boat owner’s liability policy, a homeowner’s policy and a personal liability umbrella policy (“PLUP”). In the court below, it had been determined that the boat owner’s liability policy responded first, and no issue was taken with this on appeal.

The next issue was, in what order did the two remaining policies respond? Each of those┬ápolicies had an “other insurance” clause that made it excess to other policies. The motions judge had applied Family v. Lombard and had found that because both policies said that they were excess coverage only, the “other insurance” provisions cancelled each other out and the homeowner’s and PLUP were both triggered after the boat owner’s policy.

The Court of Appeal held that the motions judge had incorrectly interpreted Family v. Lombard. It said that the rule in that case applied only between insurers with “a coordinate obligation to make good the loss”.

Here, the PLUP was a true umbrella policy. It required, as a condition of coverage, that there be underlying insurance with limits of at least $300,000. If the insured had failed to obtain such insurance, the policyholder would be self-insured for that amount.

Because of this, the Court of Appeal held that it was clear that the two policies in question did not have a coordinate obligation. One was intended to be “first loss” and the other to be “excess”. They covered, said the Court, “different layers of risk”.

That being so, the reasoning in Family v. Lombard was held to be inapplicable. The Court ruled that the homeowner’s insurer had to respond after the boat owner’s liability policy. Only if the claims were to exhaust both underlying policies would the PLUP be triggered.

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