Last week, the Court of Appeal released a decision that addressed a recurring issue: “when will an excess insurer be required to contribute to defence costs incurred by a primary insurer in defending an action against a common insured?” It found that the excess carrier here was not obliged to contribute to defence costs. But the court’s reasoning made it clear that answering the above question will very much depend on the facts of each case.
em>ING Insurance Company of Canada v. Federated Insurance Company of Canada arose out of a serious single-car motor vehicle accident. One passenger was killed and another was rendered quadriplegic. Three separate actions were brought against the owner and driver of the vehicle, with claimed damages of almost $10 million.
ING insured the vehicle, with liability limits of $2 million. As it happened, the driver was the owner of a company which had two policies with Federated Insurance, each with $1 million liability coverage. All parties agreed that ING’s coverage was first loss and Federated’s was excess.
The three tort actions against the owner and driver had all been commenced by November 6, 1998. ING retained a well-known Toronto firm to conduct the defence.
It was not until March of 2001 that Federated was made aware of the tort actions (it had previously adjusted an accident benefits claim for the driver, the principal of its own insured). At the examinations for discovery, ING’s defence counsel had undertaken to obtain particulars about insurance coverage available to satisfy the tort claims and so, made contact with Federated.
Federated also learned in March, 2001, that the trials of the tort claims were scheduled for October 1, 2001.
In that initial contact with Federated, ING’s defence counsel expressed the view that, while there was some risk of the claims exceeding the driver’s $2 million limits, he was not convinced that this would occur. Counsel was also of the view that it was likely that the Ministry of Transportation would also be found liable, probably to the extent of about 25% and its insurance limits were “extensive”.
So at this point, some seven months before the trial, it did not look like Federated was facing much of an exposure.
In July, 2001 though, counsel for ING again contacted Federated and advised that it was “of considerable importance” that a representative of Federated attend a settlement conference scheduled for August, 2001.
In-house counsel for Federated then became involved. He wrote to ING’s lawyer and pointed out that Federated had very little information about the case. He asked for unedited copies of reporting letters sent to ING by its counsel, copies of offers to settle and information about whether policy limits had been tendered to the claimants.
Counsel for ING wrote back and said that he would share material with Federated, provided that it agree to contribute 50% to the defence costs that had been incurred since the beginning of the case. Federated was not prepared to agree to these terms.
Federated’s counsel ended up not attending the settlement conference. The day after it took place, ING’s solicitor advised Federated’s lawyer that ING might consider offering its policy limits to settle the claim. In return for an undertaking not to pursue the owner or driver personally, the driver would assign his rights against Federated to the plaintiffs. As the Court of Appeal put it, “It was clear to Mr. Daquisto [counsel for Federated, whose name is actually spelled “Dacquisto”] that if ING proceeded in this way Federated would be on its own in terms of defending any excess claims.”
Things then began to happen quickly. A mediation was scheduled for October, 2001, as a result of which the trial date was pushed back. Following the mediation, counsel for ING increased his assessment of the claims to $3 million and advised Federated that ING would be looking to it for a settlement contribution of $1.4 million. ING also tendered its limits to the claimants, on the basis that the owner and driver would be released from personal liability and the driver would assign to the plaintiffs his rights as against Federated. Again, Federated’s perception was that it was “on its own”.
The actions settled in November, 2001 for a little over $4.2 million. ING contributed $2.1 million, MOT $1.1 million and Federated $900,000. Federated and ING reserved their rights as against each other on the issue of defence costs.
In 2003, ING sued Federated, seeking equitable contribution to the cost of defending the action. It asked the court to order Federated to reimburse ING for 50% of the defence costs, which amounted to $60,422.66. It was this lawsuit that ended up in the Court of Appeal.
At first instance, ING had some success. The judge hearing the application reasoned that since Federated had paid 31% of the damages as part of the settlement, it should contribute 31% towards defence costs.
But the Court of Appeal reversed that decision. It held that Federated was not required to contribute anything to the defence costs. In arriving at this result, it made the following points:
an excess insurer’s obligation to contribute to defence costs is premised on the existence of a duty to defend. So, the first step is to look at the excess insurer’s policy, to see if it contains a defence obligation. In this case, Federated’s policy did contain such a provision;
the policy language dictated that a duty to defend will arise only where notice of a claim is given;
in considering the equities between or among primary and/or excess insurers, whether an excess insurer is “plainly at risk” to indemnify the insured is a crucial consideration. In this case, the court felt that Federated was not “plainly at risk” until August, 2001, following the settlement conference. It was at that point that Federated first learned that ING might tender its limits, which could have left Federated exposed to liability.
Perhaps the most important basis on which the Court of Appeal refused to require a contribution from Federated was its perception that the interests of ING and Federated were in conflict. It concluded that the efforts of ING’s counsel were not directed at protecting the interests of Federated and so, it would be unfair to require Federated to contribute to the defence, given that it had been left to “fend for itself”.
The law relating to excess insurers is complex; we have in our library a two-volume U.S. text that deals exclusively with this subject. (And that does not include the related topic of overlapping first loss coverage.)
When excess insurance is involved, the underlying claims are always large and so, the stakes are high. Sometimes it is not apparent until late in the day just how great the exposure can be. Take the ING v. Federated case: within a matter of months, the perceived value of the claim went from $2 million to over $4 million. (This is not a criticism of ING’s counsel, who was acknowledged by Federated to have “represented his client ably and skilfully”.)
From the perspective of the primary insurer, this decision of the Court of Appeal stresses the importance of notifying the excess insurer of the claim at an early stage.
As the Court of Appeal noted, whether an excess carrier is “plainly at risk” is a crucial consideration. Early notice to the excess insurer will also enable it to retain counsel and to make its own evaluation of whether it is “plainly at risk”.
This case suggests that whether an excess insurer should be required to contribute to defence costs is very much driven by the facts of the case. And the relevant facts might not crystallize until the end of the case.
Here, the way things played out, Federated and ING became adverse in interest. But even if Federated had been notified of the claim years earlier, the adversity of interest between it and ING might not have become apparent until the intense settlement discussions that took place (as they often do) on the eve of trial. (And even with early notice of the claim, it still might not have become apparent until much later, that Federated was “plainly at risk”.)
Thus, when considering whether to seek equitable contribution from an excess insurer, it is probably best to follow the course followed here by ING: settle the underlying claim (if possible), reserving rights on the issue of defence costs. After the dust settles, the circumstances can be evaluated, to determine whether or not there is a basis for seeking contribution to defence costs from an excess insurer.