Claims made against defendants who are also contractual parties may give rise to concurrent coverage issues. For example, a defendant party may be named as an additional insured to the policy of a tenant, landlord, business partner, service provider, etc., who is also a co-defendant, in addition to maintaining their own insurance. This creates the potential that more than one liability policy must respond to the claim for that defendant party, creating a concurrent coverage scenario.
The recent decision of the Ontario Court of Appeal in Markham (City) v AIG Insurance Company of Canada provides an analysis of how to address concurrent duties to defend, allocation of defence costs, and choice of counsel in a concurrent coverage scenario.
The Facts of Markham (City) v. AIG Insurance Company of Canada
In the underlying action, the plaintiff was struck by a hockey puck while watching his brother’s pre-game hockey warmup at Angus Glen Community Centre in Markham, Ontario. Markham (the “City”) owned the rink. Markham Waxers Minor Hockey Association (“Waxers”) organized the event. Hockey Canada is the governing body for minor league hockey in Canada. The plaintiff claimed $150,000 in damages against the City and Hockey Canada.
The pleadings allege the injuries were caused by the negligence of both the City and Hockey Canada, for failing to keep the ice rink in a safe condition. The City and Hockey Canada each filed crossclaims against each other for contribution and indemnity. The City also sought contribution and indemnity from Waxers by way of a Third Party Claim.
Lloyd’s Underwriters issued a CGL policy to the City (the “Lloyd’s Policy”). The Lloyd’s Policy contained a per-occurrence limit of $5M subject to a $100,000 deductible for bodily injury claims. However, the Lloyd’s Policy contained an “other insurance” clause which stated that it functioned as an excess policy to other insurance:
The Insurer shall not be liable if at the time of any accident or occurrence covered by the Policy, there is any other insurance which would have attached if this insurance had not been effected, except that this insurance shall apply only as excess and in no event as contributing insurance and then only after all such other insurance has been exhausted. [Emphasis added.]
AIG issued a CGL policy to Waxers and Hockey Canada, which also named the City as an additional insured (the “AIG Policy”). The AIG Policy only covered the City for liability in respect of Hockey Canada and Waxers’ operations; however, defence costs were to be paid regardless of whether there were allegations that fall outside of coverage. Section IV, subsection 9 of the AIG Policy stated that “[t]he insurance afforded by this Policy is primary insurance.”
The City brought an application seeking a declaration that AIG was required to defend the City in the underlying action, but claimed that a conflict of interest existed between AIG and the City that enabled the City to independently appoint and instruct defence counsel. AIG brought a competing application seeking a declaration that Lloyd’s had a concurrent duty to defend the City and should contribute equally to the City’s defence. AIG also sought a declaration that it was entitled to fully participate in the defence.
Concurrent Duties to Defend
Insureds are entitled to select from which insurance policy to seek coverage. However, where another insurance policy also covers the same claim, the selected insurer has standing to bring a proceeding to have the issue of the other insurer’s scope of coverage decided. This was the scenario in Markham.
In Markham, the application judge held that AIG was solely obligated to defend the City for both covered and uncovered claims, as the AIG Policy did not explicitly provide for an allocation of mixed claims. Further, she held that it would not make “economic sense” to have multiple insurers instructing multiple lawyers to defend the action.
On the other hand, the Court of Appeal held that both Lloyd’s and AIG had duties to defend the claim. The Court held that AIG was the primary insurer for claims arising from the operations of Waxers/Hockey Canada. The Court held that the Lloyd’s Policy only functioned as an excess policy with respect to those claims covered by the AIG Policy, i.e. that arose out of Waxers/Hockey Canada’s operations. The Court noted that there were allegations in the statement of claim that did not arise out of the operations of Waxers or Hockey Canada. For example, the statement of claim alleged that the City failed to place a safety net around the rink to protect spectators. The Court held that such claims would not be covered by the AIG Policy, but would be covered pursuant to the Lloyd’s Policy.
The Court confirmed that an insurer’s duty to defend is not vitiated simply because another insurer also owes a duty to defend, unless the policy explicitly states otherwise. In cases involving multiple insurers, Courts should consider the wording of the respective policies and the nature of the allegations in the pleadings to determine whether multiple insures each owe a duty to defend.
Accordingly, both Lloyd’s and AIG owed the City defence obligations for the same lawsuit, arising out of different claims within that lawsuit. As such, it could be said that the Lloyd’s and AIG policies provided complementary, not strictly overlapping, coverages.
Allocation of Defence Costs
Where it has been established that multiple insurers owe defence obligations to the same insured for the same lawsuits, Courts will attempt to apportion how much each insurer has to pay. This is because an insured is not entitled to double recovery. This allocation of defence costs is a matter of fairness. Allocation of costs is not an exact science, and appellate courts give considerate deference to an application or trial judge. 
Generally speaking, Canadian courts have allocated defence costs on a proportionate or pro rata basis.
In Markham, the Court of Appeal held that both AIG and Lloyd’s were responsible for contributing to defence costs as primary insurers due to their complementary coverages, as noted above. In the absence of a contract between AIG and Lloyd’s regarding how costs were to be split, the Court relied on the principles of fairness and equity to require that both pay an equal share of the defence costs pending final disposition of the action and the final determination of the allocation of defence costs.
The Right to Participate in the Defence
As noted above, the City sought to control its own defence. In Markham, both policies afforded the insurers rights to control and conduct the defence of the City. This is a prima facie right afforded to insurers in standard duty to defend policies. This involves appointing and instructing defence counsel on behalf of the insured. On the other hand, the insured has a right to a full and fair defence. Notwithstanding its appointment by the insurer, defence counsel’s primary duty of utmost loyalty is owed to the insured. Generally, the respective rights of the insured and the insurer may co-exist; however, an insurer must surrender control of the defence to the insured where there arises a reasonable apprehension of conflict of interest between defence counsel’s mandate from the insurer and defence counsel’s mandate to defend the insured.
In determining whether there is a reasonable apprehension of conflict of interest, the Court will consider the circumstances of the particular case and the mandates that the insurer gives to defence counsel. Conflicts of interest may arise in a myriad of circumstances, such as where the insurer has denied a duty to defend, or has reserved its rights on coverage based on an aspect of the insured’s own conduct.
The facts of the Markham decision bring to light a practical dilemma between multiple insurers covering a risk where each wants to exercise its right to defend, not to mention an insured that also wants control over the defence. Each party – AIG, Lloyd’s and the City – had competing interests:
- AIG had an interest in having liability determined solely on the basis of the City’s acts/omissions, so as to not trigger indemnity under the AIG Policy;
- Lloyd’s had an interest in having liability based on the operations of Hockey Canada or Waxers, so as to minimize exposure under the Lloyd’s Policy; and
- The City had an interest in having liability attributed to the Hockey Canada or Waxers so as to avoid paying the $100,000 deductible and be subject to increased premiums.
Not every situation involving competing interests warrants the insurer or insurers losing control of the defence if the policy or policies in place afford them that right. The case law provides some discussion of split file protocols and rules of joint instruction of counsel. Courts have endorsed “split file” approaches claims handling to mitigate against conflict of interests. In Markham, the Court of Appeal endorsed a “split file” approach, which it modified from the approach suggested by AIG. The key features were that:
- AIG would utilize multiple claims handlers – i.e. different handlers for the City, Hockey Canada, Waxers, and coverage.
- There would be ethical walls between the files.
- Any claims handler in breach of the “split file” protocol would be subject to disciplinary action and could be dismissed if confidential information is disclosed.
- AIG would agree to cooperate with Lloyd’s in the City’s defence, and the two insurers would appoint an independent defence counsel for the City (i.e. not one of the lawyers involved in the coverage proceedings).
- These terms would be provided in writing to those involved in managing the defence.
- Defence counsel appointed must fully and promptly inform the City and Lloyd’s of all steps taken in the defence such that each would be in a position to monitor the defence effectively and address any concerns.
- Defence counsel could not discuss the case with coverage counsel for AIG or Lloyd’s.
- Defence counsel would provide identical and concurrent reports to the insured and both insurers regarding the defence of the main action.
We expect that courts will look at each concurrent coverage scenario, where control over the defence of the common insured is at issue, on its own. This is because every case has the potential to present its own unique set of facts. That said, insurers would be wise to review the above protocols and consider utilizing similar ones for similar scenarios.
The Markham decision is important for liability insurers and insureds who regularly enter into service contracts or rental agreements. The analysis of the Court of Appeal suggests that one ought to pay close attention to each and every allegation when deciding whether a duty to defend is triggered. Although an “other insurance” clause in a policy may contemplate assuming the role of excess insurance in the event another policy responds to the claim, Markham indicates that claims not covered by another insurance policy may still trigger a duty to defend and obligate the other insurer to contribute to the defence. In this sense, the policies may be complimentary, as opposed to overlapping.
The decision also provides insight for insurers regarding how to jointly instruct defence counsel with potentially adverse parties in litigation, and how to ensure file management in such situations sufficiently protects the rights of insureds.
The overarching message from the Courts in these situations appears to be fairness. Insurers dealing with additional insured scenarios should carefully review the allegations in light of both policies, in order to decide whether another insurer should contribute to the defence of a claim. Additionally, insurers should take steps to ensure that the insured (whether named or additional) is treated fairly and with transparency.
 2020 ONCA 239 [Markham (City)].
 Ibid at paras 13-18.
 Ibid at para 18.
 Markham (City) v. AIG Insurance Company of Canada, 2019 ONSC 4977 at paras 37-38.
 Ibid at para 39.
 Unger (Litigation Guardian of) v. Unger, 2003 CanLII 57446 (ON CA) at para 10.
 Aviva Insurance Company v. Intact Insurance Company, 2018 ONSC 238 (CanLII)
 Markham (City), supra note 1 at para 83.
 Markham (City), supra note 1 at para 87.
 Brockton (Municipality) v. Frank Cowan Co., 2002 CanLII 7392 (ON CA) at para 31 [Brockton].
 Ibid at para 43.
 Hoang v. Vicentini, 2015 ONCA 780 at para 14.
 Brockton, supra note 19 at paras 41-43 and Fridel Limited v. Intact Insurance Co., 2018 ONSC 5923 at paras 22-24.
 Appin Realty Corp v. Economical Mutual Insurance Company, 2008 ONCA 95.
 Brockton, supra note 19 at para 42.
 UPS Supply Chain Solutions, Inc. v. Airon HVA Service Ltd, 2015 ONSC 3104; HMQ v. AIG, 2019 ONSC 2964.