COURT OF APPEAL FOR ONTARIO
MORDEN, WEILER and CHARRON JJ.A.
B E T W E E N :
TRENTON COLD STORAGE LIMITED and I.A.R.W. INSURANCE COMPANY LIMITED
Harvey Poss, Q.C.,
for the appellant
Plaintiffs (Respondent and Cross-Appellant in Appeal)
- and -
David R. McCaskill Sr.
and David R. McCaskill Jr.,
ST. PAUL FIRE AND MARINE INSURANCE COMPANY
for the respondent
Defendant (Appellant and Cross-Respondent in Appeal)
Heard: February 12, 2001
On appeal from the judgment of Justice Gerald F. Day dated January 29, 1999.
A. Overview
1This appeal concerns an action for contribution between two liability insurers. The action arises out of the failure of an ammonia system resulting in a fire and implosion that occurred on June 20, 1983 at the premises of Trenton Cold Storage Limited (“Trenton”) in Belleville, Ontario. Trenton provided cold storage facilities for its customers, one of whom, Cadbury, Schweppes, Powell Inc. (“Cadbury”), claimed damage to its product by ammonia contamination.
2Trenton was insured with I.A.R.W. Insurance Company Limited (“IARW”) under a policy which provided for coverage identified as “Warehouseman or Bailee Liability” and with St. Paul Fire and Marine Insurance Company (“St. Paul”) under a policy called “Umbrella Excess Liability Policy”. IARW settled Cadbury’s claim for $1,000,000 and then commenced these proceedings seeking contribution from St. Paul for both the Cadbury settlement and the legal costs incurred in defending the Cadbury action.
3In its action against St. Paul, IARW alleged that St. Paul was Trenton’s primary insurer and IARW the excess insurer or, alternatively, that both policies covered the same risk hence requiring St. Paul to contribute equally to the settlement and costs related to the Cadbury action. St. Paul defended the claim on the basis that its coverage was excess to IARW’s primary policy or, alternatively, that IARW was estopped by its conduct of the Cadbury action from seeking contribution from St. Paul other than as an excess insurer.
4Following the trial of the action, the trial judge granted judgment to IARW for half of the amount paid to settle the Cadbury claim, together with interest and the costs of this action, but dismissed the claim with respect to the legal costs incurred by IARW in defending the Cadbury claim. Trenton was also a plaintiff in the action but, given that it had been fully indemnified by IARW’s settlement of the Cadbury action, its claim was dismissed.
5St. Paul appeals the judgment on the ground that the trial judge erred in not finding that IARW’s coverage was primary and underlying to St. Paul’s umbrella excess liability policy. Alternatively, St. Paul argues that the trial judge erred in finding that IARW’s claim was not barred by estoppel.
6IARW cross-appeals from the dismissal of its claim for half the legal costs incurred in defending the Cadbury action. IARW submits that once the trial judge concluded that the IARW policy was not an underlying policy to St. Paul’s coverage, he erred in not giving effect to the terms of St. Paul’s policy that required St. Paul to defend the claim against Trenton. St. Paul concedes that, if this court upholds the trial judge’s finding that the IARW policy is not underlying to St. Paul’s policy, it has no argument against IARW’s position on the cross-appeal.
7If St. Paul’s appeal is allowed and IARW’s coverage is held to be underlying to St. Paul’s policy, IARW argues nonetheless on its cross-appeal that St. Paul should be liable on equitable principles to contribute to IARW’s defence of the Cadbury action since it derived a benefit from it. St. Paul takes the position that it has no obligation to contribute to the costs, either at law pursuant to the terms of its policy, or in equity.
8It is my view that IAWR’s coverage is primary and underlying to St. Paul’s excess coverage. Hence, by the terms of its policy, St. Paul has no duty to contribute to IARW’s settlement or defence of the Cadbury claim. In light of this conclusion, l do not find it necessary to deal with the alternative estoppel argument. I am also of the view that IARW’s equitable claim for contribution to its costs of defending the Cadbury claim must fail. Consequently, I would allow the appeal and dismiss the cross-appeal.
B. The Policies
9The issues between the parties turn on the wording of their respective policies. In order to determine the nature and extent of the coverage, it is necessary to look at the obligation to pay under each policy and to consider any other applicable provisions in the context of each insurance agreement as a whole.
- The IARW policy
10Part IV of IARW’s policy is entitled “Warehouseman or Bailee Liability” and by its terms obligates IARW:
(a)(1) To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay by reason of liability imposed upon him as a warehouseman or bailee, for loss or destruction of or damage to personal property of others contained in the premises…
(b)(2) To defend in the Insured’s name and behalf, any suits or other proceedings which may be brought against the Insured to enforce such claims…
11It is beyond dispute that this policy provided specific coverage to Trenton for the very risk that was in issue in the Cadbury action. It insured Trenton’s legal liability as a warehouseman of the claimant’s goods. Further, there is nothing in the policy that explicitly conditions IARW’s obligation to pay and to defend on the existence of any other insurance coverage.
12The policy contains, however, certain clauses in respect of other insurance. The first is paragraph 11 under the same Part IV:
- Insurance afforded by this policy shall be excess of any other insurance or bond available to the Insured which would apply in the absence of this policy.
Part V of the policy, entitled “General Policy Conditions and Clauses” contains the following two clauses with respect to other insurance:
EXCESS INSURANCE CLAUSE: Permission is hereby granted by this Company for other insurance being the excess of the insurance provided by this Policy.
OTHER INSURANCE CLAUSE: This insurance does not cover any loss, which at the time of the happening of such loss, is insured by or would but for the existence of this Policy, be insured by any other existing Policy or Policies except in respect of any excess beyond the amount which would have been payable under such other Policy or Policies had this insurance not been effected.
The St. Paul policy
13The obligation to pay under St. Paul’s “Umbrella Excess Liability Policy” is set out in very different language. It is premised not only on the happening of an occurrence but also on the existence of underlying insurance. The relevant provisions read as follows:
I. COVERAGE
The Company will indemnify the Insured for all sums which the Insured shall become legally obligated to pay as damages… on account of:
- Property Damage…
to which this Policy applies, caused by an occurrence.
II. DEFENSE, SETTLEMENT AND SUPPLEMENTARY PAYMENTS
A. When underlying insurance does not apply to an occurrence:
With respect to any occurrence not covered by the underlying policy(ies) of insurance described in the Schedule A hereof or any other underlying insurance collectible by the Insured but covered by terms and conditions of this Policy… the Company will …
(1) defend any suit against the Insured seeking damages on account of…property damage…
B. When Underlying Insurance does apply to an occurrence:
This Policy does not apply to defense, investigation, settlement or legal expenses covered by underlying insurance…
III. LIMIT OF LIABILITY
… the Company’s liability is limited as follows:
With respect to … property damage… the Company’s liability shall be only for the ultimate net loss in excess of the Insured’s retained limit defined as the greater of:
(a) an amount equal to the limits of liability indicated beside the underlying insurance listed in Schedule A hereof, plus the applicable limits of any other underlying insurance collectible by the Insured; or
(b) the amount specified in Item 4(b) of the Declarations [Retained Limit of $10,000] as the result of any one occurrence to which the underlying insurance does not apply… [Emphasis in original.]
14The policy does not define “underlying insurance.” Schedule A to the policy lists various other policies issued by St. Paul and by other insurance companies, but does not include the warehouseman’s legal liability policy issued by IARW or any like policy issued by another insurer.
15The policy expressly obligates the insured to maintain underlying insurance coverage pursuant to the following condition:
M. MAINTENANCE OF UNDERLYING INSURANCES
It is a condition of this Policy that the policy or policies referred to in the attached “Schedule A”, including renewal or replacements thereof not more restrictive, shall be maintained, without alteration of terms or conditions, in full effect during the currency of this Policy…. Failure of the Insured to comply with the foregoing shall not invalidate this Policy but in the event of such failure the Company shall be liable hereunder only to the extent that it would have been liable had the Insured complied therewith. ...
16The policy contains the following clause in respect of other insurance:
F. OTHER INSURANCE
If other valid and collectible insurance with any insurer is available to the Insured covering a loss also covered by this Policy, other than insurance that is in excess of the insurance afforded by this Policy, the insurance afforded by this Policy shall be in excess of and shall not contribute with such other insurance. Nothing herein shall be construed to make the Policy subject to the terms, conditions, and limitations of other insurance.
17There is no dispute that the occurrence in this case is covered under St. Paul’s policy. On its face, the policy obligates St. Paul to pay and to defend either as a primary or excess insurer, depending on whether there is any underlying insurance covering the same risk. The dispute relates to the specific nature of the coverage and the relationship of the coverage to that of IARW.
C. The Decision at Trial
18The trial judge ultimately concluded that both policies stood on equal footing in relation to Trenton’s loss. First, he considered the IARW policy and concluded on the basis of paragraph 11 and clause 7 that “[c]learly, the IARW is excess insurance.” Second, the trial judge considered the relevant provisions of the St. Paul policy and concluded that it was not a true umbrella policy providing for excess insurance to the IARW coverage because it was not conditioned upon the presence of the IARW policy as an underlying insurer. The trial judge rejected St. Paul’s contention that IARW, although not listed in Schedule A of the policy, fell within the provision for “any other underlying insurance.” He held that St. Paul could not rely “on its own unclear conditions to create an underlying insurance in the IARW policy.” Finally, the trial judge held that the other insurance clauses in the two policies were mutually repugnant and that, consequently, both parties should share equally in the total cost of the Cadbury settlement.
19Notwithstanding his conclusion that the IARW coverage was not underlying insurance to St. Paul’s policy, the trial judge concluded that St. Paul had no obligation to defend under clause II. B. of its policy, the governing provision when underlying insurance does apply. Consequently, he dismissed IARW’s claim for contribution to the legal costs incurred in the Cadbury action.
D. Analysis
20In my view, the trial judge’s conclusion that both policies were on the same footing in relation to Trenton’s loss is not supported by the wording in the respective policies. Two key findings informed the trial judge’s conclusion: first, that IARW was excess insurance; and second, that it did not constitute “any other underlying insurance” within the meaning of St. Paul’s policy.
21It is apparent from the trial judge’s reasons that his finding that IARW’s policy was excess was based solely on the “other insurance clauses” contained in the policy. In my view, this approach was fundamentally flawed. An insurance policy must be construed as a whole, not by its separate provisions. The trial judge failed to consider the fact that, apart from the possible effect of the other insurance clauses which must be considered in conjunction with other existing policies, there is nothing in the IARW policy to show an intent to provide anything other than primary coverage. The policy clearly provides for an obligation to pay and a duty to defend upon the happening of a specified occurrence without any reference to, or requirement that there be, underlying insurance. The policy further contains a clause that gives the insured permission to secure “other insurance being the excess of the insurance” provided by the policy. On its face, the IARW policy appears to be primary. Its character becomes much more apparent when the wording of the policy is compared to St. Paul’s policy.
22The wording used in the St. Paul policy is significantly different. The St. Paul policy clearly shows an intent not only to provide coverage with respect to certain risks but to limit the company’s liability to the loss in excess to that which may be collected by the insured under any underlying insurance. Further, it obligates the insured to maintain underlying insurance to the extent provided for in Schedule A during the currency of the policy. If the insured fails to maintain the stipulated underlying insurance or its equivalent, the insurer’s liability is limited to the amount for which it would have been held liable had the insurance been maintained. Therefore, in effect, the limits of the underlying policies listed in Schedule A operate as a kind of deductible. The policy also provides for “drop-down” coverage where there is no underlying insurance.
23St. Paul’s policy expressly and correctly identifies itself as an umbrella policy. An umbrella policy generally provides two types of coverage: standard form excess coverage; and broader coverage than that provided by the underlying insurance including a duty to defend lawsuits not covered by the underlying coverage. An umbrella policy is in effect a hybrid policy that combines aspects of both a primary policy and an excess policy. See Michael M. Marick, Excess Insurance: An Overview of General Principles and Current Issues, 24 Tort & Ins. L.J. 715 at 718 n. 1 (1989).
24The distinction between primary and excess insurance is succinctly set out in St. Paul Mercury Insurance Company v. Lexington Insurance Company, 78 F. 3d. 202 (5th Cir. 1996) at footnote 23, quoting from Emscor Mfg., Inc. v. Alliance Ins. Group, 879 S.W. 2d 894 at 903 (Tex. App. 1994, writ denied):
Primary insurance coverage is insurance coverage whereby, under the terms of the policy, liability attaches immediately upon the happening of the occurrence that gives rise to the liability. An excess policy is one that provides that the insurer is liable for the excess above and beyond that which may be collected on primary insurance. In a situation where there are primary and excess insurance coverages, the limits of the primary insurance must be exhausted before the primary carrier has a right to require the excess carrier to contribute to a settlement. In such a situation, the various insurance companies are not covering the same risk; rather, they are covering separate and clearly defined layers of risk. The remote position of an excess carrier greatly reduces its chance of exposure to a loss. This reduced risk is generally reflected in the cost of the excess policy. [Emphasis in original.]
25On the latter point, it is of interest to note that the limits under the IARW policy were $2,000,000 and the premium $6,936, whereas St. Paul’s limits were $4,000,000 and its premium $1,553. It was conceded at trial that St. Paul’s premium was in error and should have been $2,121. Regardless of this error, the St. Paul premium still represented a fraction of the cost of the IARW coverage.
26Based on the foregoing, I conclude that the IARW coverage is primary. The “other insurance” clauses in the policy do not change this characterization. The only effect of the ‘other insurance clauses’ would be to require a second primary insurance carrier to share in IARW’s liability. The key to the obligation to share is that the other carrier would have to provide coverage at the same level, in this case primary coverage, and not excess coverage that insures a ‘separate and clearly defined layer of risk’. A primary insurer cannot use an “other insurance clause” to require an umbrella carrier to share in its liability: Smith v. Wausau Underwriters Ins. Co., 977 S.W. 2d 291 at 294 (Mo. App. 1998).
27The question then becomes whether St. Paul, under its umbrella coverage, also provided for primary coverage in relation to the loss or whether it provided for excess coverage only. This question turns on whether the IARW coverage constitutes “any underlying insurance” within the meaning of St. Paul’s policy. For convenience, I reproduce the relevant clause again:
III. LIMIT OF LIABILITY
With respect to … property damage… the Company’s liability shall be only for the ultimate net loss in excess of the Insured’s retained limit defined as the greater of:
(a) an amount equal to the limits of liability indicated beside the underlying insurance listed in Schedule A hereof, plus the applicable limits of any other underlying insurance collectible by the Insured;
28IARW contends that St. Paul’s policy is excess only to those underlying insurance policies specified in Schedule A, or to other underlying policies providing coverage akin to the Schedule A policies. Since neither IARW nor any other policy providing like coverage is listed in Schedule A, IARW argues that St. Paul is also a primary insurer in relation to the loss.
29St. Paul takes the position that, in the context of the whole policy and umbrella excess policies generally, underlying insurance means any insurance available to the insured that covers the same risk. St. Paul argues that this interpretation is the only reasonable one that gives meaning to the words “any other underlying insurance” in clause III of the policy. St. Paul argues further that this interpretation is consistent with the general nature of an umbrella excess policy and in accord with the expectation of the parties.
30I agree with St. Paul’s position that its policy provided no primary coverage under the circumstances. In my view, the trial judge erred in finding that St. Paul was not excess insurance to the IARW coverage simply because it was not specifically conditioned upon the presence of the IARW policy as an underlying insurer. The interpretation advanced by St. Paul is more consistent with the policy as a whole. I therefore conclude that St. Paul’s coverage is excess.
31Consequently, I hold that St. Paul provides for a different layer of risk than IARW’s primary policy and cannot be called upon to contribute to the Cadbury settlement in the circumstances of this case where the IARW coverage was not exhausted. I would therefore allow the appeal and dismiss IARW’s claim for contribution the Cadbury settlement.
32With respect to the cross-appeal, it is obvious that the trial judge mistakenly applied the incorrect provision with respect to St. Paul’s obligation to defend. In light of his conclusion that IARW was not underlying insurance, clause II. A, instead of II. B., should have dictated the result on IARW’s claim for contribution to its costs incurred in defending the Cadbury action. However, because of my conclusion that IARW does constitute underlying insurance to St. Paul’s coverage, there is no reason to interfere with the trial judge’s dismissal of IARW’s claim in this regard. It is clear under the policy that St. Paul has no duty to defend where there is underlying insurance.
33IARW argues nonetheless that St. Paul should be required on equitable grounds to contribute to the legal costs incurred in defending the Cadbury claim because the defence was partially conducted for the benefit of St. Paul.
34I would not give effect to this ground of appeal. IARW did not make this argument at trial and presented no authority in support of this proposition. I find no basis on these facts to invoke equitable principles where each party’s respective liability for the Cadbury action was in accordance with what each had bargained for. IARW, as primary insurer, was obligated to defend under the terms of its policy and St. Paul, as excess carrier, was not.
E. Disposition
35I would allow the appeal, set aside the judgment against St. Paul, and dismiss IARW’s action with costs of the trial and of the appeal. I would dismiss the cross-appeal, also with costs.
(signed) “Louise Charron J.A.”
(signed) “I agree J. W. Morden J.A.”
(signed) “I agree K. M. Weiler J.A.”
RELEASED: May 17, 2001
“J.W.M”
