COURT FILE NO.: C-48/03 DATE: 20030409 SUPERIOR COURT OF JUSTICE - ONTARIO RE: Ayr Farmers Mutual Insurance Company v. CGU Group Canada Ltd. BEFORE: The Honourable Mr. Justice R.D. Reilly COUNSEL: D. Dyer, Esq., for the Applicant E. Vanderkloet, Esq., for the Respondent RULING [1] Ayr Farmers Mutual Insurance Company (Ayr Farmers) brings this application seeking a declaration that CGU Group Canada Ltd. (GGU) be required to contribute on a 50/50 basis to the costs incurred in defending Raymond and Patricia Ballantyne in a class proceeding initiated against them and a number of others by Howard Summerhayes, Isabelle Summerhayes and James Baldwin, c.o.b. as Baldwin Cartage, in the Superior Court of Justice, which action is Court File No. CP390/01, filed at Woodstock, Ontario. Further, and specifically, the applicant seeks an order requiring the respondent to reimburse it for one-half of all costs incurred to date in defence of the Ballantynes with respect to this action. [2] The defendants in the principal action, the Ballantynes, purchased a new home situated in a new subdivision at 16 Moyle Drive in the City of Brantford on March 19, 1999. When they assumed residency at their new home, they transferred their policy of homeowner s insurance from their previous property. The insurer was Ayr Farmers. This homeowner s insurance coverage was then renewed on May 25, 1999, which coverage extended to May 25, 2001.
- 2 - Following the expiration of this policy with the applicant, the Ballantynes then contracted with the respondent CGU for homeowner s coverage. The original policy covered the period to May 25, 2002 and the policy was renewed with a current expiration date of May 25, 2003. Both the policy with Ayr Farmers and the policy with CGU contained the usual provisions with respect to compensation for damages arising out of their ownership, use or occupancy of the home, together with the usual provision to provide a defence against any claims made against the homeowner and, more specifically, to cover all expenses incurred as a result of such defence. [3] On September 12, 2001 the Ballantynes were served with the statement of claim initiated against them in a class proceeding by the plaintiffs in the principal action noted above. Inter alia, the statement of claim alleges at paragraph 20: The defendants, 1797 lot holders, 1835 lot holders and 1672 lot holders, have continued to use this inadequate drainage system causing continuous interference with the plaintiffs farms and a continuing nuisance to the plaintiffs. [4] The plaintiffs have claimed compensatory and punitive damages essentially alleging that increased water flow onto their properties as a result of the building of the subdivision has caused erosion and flooding and further that the water has carried contaminants to the plaintiffs food lands and will continue to do so. It may be noted in passing that neither the applicants nor the respondents policy specifically provides indemnity for punitive damages. Both policies essentially provide the same coverage with this exception; the respondent CGU s policy expressly excludes coverage for property damage arising from the discharge or escape of pollutants, which term includes contaminants.
- 3 - [5] In my view the law is well settled that in order to determine whether the duty to defend is triggered, one need only examine the pleadings, specifically the statement of claim and the contract or contracts of insurance themselves. It is also clear law that the duty to defend may be properly expressed as broader than the duty to indemnify. The possibility that a claim which would fall within the policy may succeed is sufficient to trigger the duty to defend. Where damage is continuous every policy that was in effect when damage was potentially caused creates an obligation on the insurer to defend (see for example the analysis by the Supreme Court in Monenco Limited. v. Commonwealth Insurance Company (2001), 2 S.C.R. 699 and by the Ontario Court of Appeal in the case of Alie v. Bertrand and Frere Construction Company Limited (2002) O.J. No. 4697 (O.C.A.)). It is only logical that the possibility of an obligation to indemnify triggering a duty to defend applies not only in circumstances where there is a primary insurer and an excess insurer, but also to circumstances where there are successive insurers in a case where continuous damage is alleged and such damage may have occurred during the period of coverage by both insurers. [6] Accepting these basic principles as well settled in law, I now return to the facts of the case and the reason for this application. When the Ballantynes were served with a statement of claim on September 12, 2001, the continuous damage alleged by the plaintiffs had occurred over a period of some 26 months during which the Ballantynes were insured by the applicants and over a period of some four months during which the Ballantynes were covered by a policy of insurance with the respondent CGU. The Ballantynes initially directed the statement of claim to the attention of the respondent, their then current insurer. The respondents retained an adjuster
- 4 - to investigate the matter and then declined to defend the Ballantynes, referring them instead to the applicant. [7] The applicant recognized and accepted its duty to defend the Ballantynes with respect to the period in excess of two years during which they provided coverage. The cost of such defence has amounted to date to some $5,000. The applicant says it is only proper that the respondent recognize its obligations and share the expense of defending the action. I agree. It may be noted that while at the time the action was filed the respondent had provided coverage for the Ballantynes for a period of less than four months, such coverage has now been provided for a period approaching two years. During this period, I infer from the statement of claim that the torts complained of have continued. The evidence at trial, if it does establish that damage has occurred at all, may well reveal with greater specificity a time of damage or period of damage. If that be so, then the obligation to indemnify (and hypothetically, the obligation to contribute to the costs of a defence) may have to be carefully considered based upon those findings of fact at trial. [8] I am not persuaded that the absence of privity between the applicant and the respondent should constitute a bar to the relief sought by the applicant. The application of equitable principles mandates such relief in the circumstances of this case. Neither do I feel that the case of St. Paul Fire and Marine Insurance Company v. Durabla Canada Limited 29 O.R. (3d) 737 (O.C.A.) relied on by the respondent should prevent the applicant from obtaining the relief sought. In the St. Paul case, the insurer, while acknowledging a duty to defend, had sought a contribution to the cost of the defence from the insured, who had become a self insurer during the period when damages were alleged to have occurred. The court acknowledged that there was
- 5 - an element of fairness in St. Paul s submission that the insured should be obliged to make some contribution to the cost of the defence. The court concluded, however, that it was not in a position to articulate an equitable formula for the proration of such costs at that stage of the proceedings prior to trial. I conclude that I am in a position to direct such equitable formula, which formula may be subject to revision at the end of trial, if not before. [9] As justification for my ruling on this application, I can do no better than quote from the judgment of the Ontario Court of Appeal in the case of Broadhurst and Ball v. American Home Assurance Company (1990), 1 O.R. (3d) 225 (O.C.A.), (1990), O.J. No. 2317. In that case the insured sought a declaration that both his primary and his excess insurer were required to provide a defence. The court agreed and specifically directed that both insurers were required to contribute to the cost of the defence. Though I appreciate the case at bar deals with successive insurers as opposed to a primary and excess insurers, in my view the same principles apply. The wisdom of the court is worthy of repetition. Speaking for the court, Mr. Justice Robbins stated at pages 12-13: Returning to the instant case, I am persuaded that the absence of any contractual nexus between the primary and excess insurers should not, in the present circumstances, preclude the court from ordering the excess insurer to pay its fair share of the costs of defence of the Lumsden Building action. While it may be that an excess liability insurer is generally under no duty to participate in the insured s defence until the primary coverage is exhausted, it is manifest here, indeed, it is common ground, that the potential judgment against the insured respondents substantially exceeds the amount of the limits of the American Home primary policy and, should the action succeed, the primary policy will be exhausted. The excess carrier, Guardian, is plainly at risk. This is not a case in which it can be said that the amount claimed in the action, at least in terms of the insurer s liability, bears no or little relation to the true value of the claim. Furthermore, as I noted earlier, the action is difficult and complex and will involve a lengthy trial. The costs of defending it will undoubtedly run into the many thousands of dollars.
- 6 - In these circumstances, Guardian ought not to be entitled to excuse its nonperformance of its obligations to defend by pointing to the defence being provided by another insurer and insisting that that insurer s defence relieves it of any obligation to involve itself in the defence. To conclude, as did the court below, on the one hand, that Guardian has a clear contractual duty to defend the respondents under the terms of the policy and, on the other hand, that Guardian need do nothing in furtherance of the defence but may stand by and have the primary insurer bear the entire burden of the defence, is to render the contractual duty meaningless, and, at the same time, to confer a windfall on Guardian by permitting it to have its defence obligations discharged by another insurer. Furthermore, counsel for the respondents points out in her submissions in support of American Home s cross-appeal, it is in her client s professional interests to get this matter resolved as quickly as possible. However, without the active involvement of Guardian, she submits, it is impractical to discuss with the other defendants the formulation of a common defence strategy or a possible joint settlement package. She emphasizes, without in any way criticizing the quality of the defence being put forward by American Home, that the respondents, as insureds, will not be effectively represented in the action until Guardian, the insurer with the greatest exposure, shoulders its share of the burden of the defence. On the facts of the present case, it appears to me that, as a simple matter of fairness between insurers under concurrent obligations to defend, and, as well, in fairness to the insured, Guardian pay a proper share of the costs of defence. It follows that American Homes should be able to compel such payment. Since these insurers have no agreement between themselves with respect to the defence, their respective obligations cannot be a matter of contract. Nonetheless, their obligations should be subject to and governed by principles of equity and good conscience, which, in my opinion, dictate that the costs of litigation should be equitably distributed between them. To require a primary insurer, whose financial exposure is significantly less than that of the excess insurer, to bear the entire burden of defending an action of this nature is, in my view, patently inconsistent with those principles. By the same token, a result which allows an excess insurer to deny any responsibility for costs which it ought in good conscience to pay is likewise inconsistent with those principles. As a mater of equity, the burden that these insurers assumed in insuring the same insured against the same risks should fall on both of them and the costs accordingly be shared by them. Insofar as it is necessary to provide American Home with a remedy to achieve this result, and without purporting to formulate any rule of general application to all cases involving claims exceeding the limits of the primary policy, I would adopt the approach taken in the line of authority to which I have made reference and recognize the equitable subrogation
- 7 - rights of American Home to compel Guardian to pay a fair share of the costs of defence. On what basis, then, should the costs of defending the Lumsden Building action be apportioned between these insurers? In American Home s submission, they should be shared pro rate in proportion to the coverages afforded by each insurer, that is, 95 percent of the costs should be borne by Guardian and 5 percent by American Home. I cannot accept that submission. The underlying action here, unlike the situation in most of the American cases, has not yet been tried or settled; it remains outstanding and its final outcome will not likely be known for some time. In this situation, I do not think it appropriate to allocate costs simply by reference to the respective policy limits, although I would add, in other situations, this may well be a fitting basis for the allocation. The costs of providing the defence here are clearly not necessarily related to the monetary limits of the policies. It seems to me, in viewing the matter broadly and as best I can, that the fairest, most reasonable and most equitable allocation of costs that can be made in the overall circumstances of this case is to apportion them equally between the insurers. [10] In the result, the court directed that each insurer would pay one half of the costs and expenses of defending the claims, including costs and expenses incurred prior to the ruling. [11] Notwithstanding that the facts in Broadhurst were somewhat different, I conclude that principles of equity and good conscience dictate that the costs of litigation should be equitably distributed between the insurers in the case at bar as well. I conclude that the equitable distribution of such costs at the present time and for the foreseeable future should be as requested by the applicant, that each of the insurers bear one-half of costs and expenses incurred in defending the action. I would again emphasize that such apportionment might well bear reconsideration at the end of trial, if not before. I specifically adopt the approach taken by Mr. Justice Dambrot in the case of Federated Insurance Company of Canada v. Reliance Insurance Company (2001) O.J. No. 4676. At paragraph 13 His Honour stated: In my view, the resolution of the question whether or not a reallocation should be available at the end of trial in this case is hypothetical and should not be
- 8 - determined by me today. Should the matter be raised by the respondent at trial, the trial judge will have to resolve the issue. In my view, I should not. [12] In all candour, I have frequently been impressed when the issue has been raised, usually in passing, with the cooperation demonstrated by companies within the insurance industry in dealing with one another when there have been several insurers potentially liable in an action. Applications such as the present one are rare because it seems that insurers are able to agree upon some apportionment of costs and other questions related to carriage of the action. The principle issue is often who shall represent the insured as counsel. Putting aside the questions of liability that may be determined at trial, it is usually essential for a reasonable settlement of the action that both or multiple insurers have some input into the carriage of proceedings. Given the exclusion in the respondent s policy for liability for damage arising from the discharge of contaminants, I can only presume that CGU would want to have some active input, not only at trial but during examinations for discovery. If CGU expects its interests to be represented and protected, then it must expect to bear a fair share of the costs of such representation. [13] I would hope that with this ruling there will be a renewed spirit of cooperation between Ayr Farmers and CGU to their mutual benefit and to the benefit of the insured. [14] In the result, I direct an order that the respondent CGU shall be required to contribute on a fifty-fifty basis to the costs and expenses incurred in defending Raymond and Patricia Ballentyne in the class proceeding initiated against them by Howard Summerhayes, Isabelle Summerhayes and James Baldwin, c.o.b. as Baldwin Cartage, in the Superior Court action File No. CP390/01. The order shall also direct that the respondents shall reimburse the applicant for one-half of all costs and expenses incurred to July 2, 2002 in the total amount of $4,557.73,
- 9 - together with any costs incurred after July 2, 2002 and prior to the date of this order, with the exception of any costs or expenses incurred directly relating to this application. In the normal course, the applicant would be entitled to its costs of this application on a partial indemnity basis. If the parties are unable to agree on the issue of costs, they may address me with respect to such issue in writing within 30 days of the publication of this ruling, with a further 15 days accorded to each party to respond to such submissions. R.D. REILLY J. DATE: April 9, 2003