Court File and Parties

COURT FILE NO.: CV-20-00649597-0000 DATE: 20220325 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: LOBLAW COMPANIES LIMITED, SHOPPERS DRUG MART INC. and SANIS HEALTH INC. AND: ROYAL & SUN ALLIANCE INSURANCE COMPANY OF CANADA, AIG INSURANCE COMPANY OF CANADA, AVIVA INSURANCE COMPANY OF CANADA, LIBERTY MUTUAL INSURANCE COMPANY, ZURICH INSURANCE COMPANY LTD., CHUBB INSURANCE COMPANY OF CANADA, CERTAIN UNDERWRITERS AT LLOYD’S as represented by their coverholder MARKEL CANADA LIMITED, ALLIANZ GLOBAL RISKS US INSURANCE COMPANY, CERTAIN UNDERWRITERS AT LLOYD’S as represented by their coverholder ELLIOTT SPECIAL RISKS, CERTAIN UNDERWRITERS AT LLOYD’S as represented by their coverholder CATLIN CANADA INC., XL INSURANCE COMPANY SE, TEMPLE INSURANCE COMPANY, SENTRY INSURANCE COMPANY, NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., TEVA CANADA LIMITED and QBE SYNDICATE 1886 AT LLOYD’S OF LONDON

BEFORE: VERMETTE J.

COUNSEL: Lawrence G. Theall, Jeffrey A. Brown and Dylan Cox, for the Applicants Mark M. O’Donnell and Cameron L. Foster, for the Respondent Royal & Sun Alliance Insurance Company of Canada Nina Bombier, Sean Lewis and Mari Galloway, for the Respondent AIG Insurance Company of Canada Jamie Macdonald, for the Respondent Zurich Insurance Company Ltd.

HEARD: In writing

Endorsement as to Costs

[1] On January 19, 2022, I released Reasons for Judgment in this matter granting the Application in part (2022 ONSC 449). Some of the parties were not able to agree on costs and have delivered costs submissions.

[2] As set out in paragraph 4 of my Reasons for Judgment, this Application raised three main issues, with each issue involving different Respondents. The three issues were the following: (1) the duty to defend and the issue of equitable allocation as between insurers (“First Issue”); (2) the exhaustion of self-insured retentions (“SIRs”)/deductibles (“Second Issue”); and (3) the defence protocol/defence reporting agreement (“Third Issue”). [1] Approximately two days were spent on the First Issue, one day on the Second Issue, and one day on the Third Issue.

[3] I have been advised that the costs related to the Third Issue have been settled by the relevant parties. Accordingly, this endorsement only deals with the First and Second Issues.

Positions of the parties

a. Position of the Applicants

[4] With respect to the First Issue, the Applicants claim costs in the amount of $600,000 on a full indemnity basis, [2] to be paid in five equal shares of $120,000 by the Primary Insurers, as defined in paragraph 14 of my Reasons for Judgment (i.e., Liberty Mutual Insurance Company (“Liberty”), Aviva Insurance Company of Canada (“Aviva”), AIG Insurance Company of Canada (“AIG”), Royal & Sun Alliance Insurance Company of Canada (“RSA”) and Zurich Insurance Company Ltd. (“Zurich”)). The Applicants submit that the Primary Insurers should split the costs of the First Issue equally as they each made detailed written and oral submissions on the questions raised within this issue. Liberty and Aviva have agreed to the $600,000 figure and to each pay $120,000 for their respective shares of the costs of the First Issue.

[5] The Applicants’ position is that the appropriate scale of costs is full indemnity given that this case involved breaches of the duty to defend: see, e.g., Godonoaga (Litigation guardian of) v. Khatambakhsh at para. 4 (Ont. C.A.), Aitken v. Unifund Assurance Company, 2012 ONCA 641 at para. 44, and Deloitte & Touche Inc. v. American Home Assurance Company at paras. 10-12, 15 (Ont. S.C.J.). They argue that the Primary Insurers breached their duties to defend by arguing they owed no duty to defend claims outside their coverage period, that the Applicants could not select a single policy period and insurer to defend, and that they could stack deductibles and SIRs (among other positions that were rejected).

[6] On the issue of quantum, the Applicants’ view is that a significant costs award is justified in light of the factors set out in Rule 57.01 of the Rules of Civil Procedure. They argue that in light of the significant amounts claimed, importance and complexity of the issues, volume of materials filed, and seniority of counsel, an unsuccessful party would reasonably expect to pay a high costs award.

[7] As for the costs of the Second Issue, the Applicants submit that they should be payable in the cause, in an amount to be determined after the trial of an issue. They state that no party succeeded on this issue at the hearing of the Application, and they point out that AIG’s and RSA’s primary request was not a trial of an issue, but a declaration that the Applicants had failed to prove the exhaustion of the SIRs/deductibles.

b. Position of AIG

[8] AIG’s position is that aside from the costs regarding the Third Issue which have been settled, the Applicants are not entitled to further costs against AIG. AIG argues that the parties should bear their own costs with respect to the First Issue because success on this issue was mixed in relation to AIG. According to AIG, success was divided because AIG was successful in its argument that its duty to defend was not triggered until the SIR was exhausted and a trial of an issue was found to be required. Thus, AIG’s duty to defend remains untriggered.

[9] In relation to the scale of costs, AIG states that since the Applicants have failed to establish that AIG’s duty to defend has been triggered, the authorities relied upon by the Applicants for the proposition that full indemnity costs are payable where an insurer breaches its duty to defend or its duty to pay defence costs have no application to AIG. AIG points out that the expected scale of costs is partial indemnity, with elevated costs awarded only in rare and exceptional circumstances.

[10] With respect to the Second Issue, AIG submits that it is entitled to partial indemnity costs in the amount of $50,000. In its view, it was successful on the Second Issue because it argued that the Applicants had not met their burden to demonstrate exhaustion of the SIR and the Court ordered a trial of the issue. AIG points out that even though the Applicants sought in the alternative that a trial be ordered on this issue, they argued against a trial of an issue in their factum and oral submissions, taking the position that a Court hearing a trial of the SIR/deductible issue would not be in a better position to deal with the evidence than the application judge. AIG’s position is that the Applicants did not succeed on the central thrust of their argument on the Second Issue, i.e. that AIG’s SIR had been exhausted, and that it is not appropriate to postpone costs on this issue to an uncertain future hearing and outcome.

c. Position of RSA

[11] RSA requests that:

a. there be no order as to costs as against it at this juncture and that the costs be determined in the cause given the fact that critical and fundamental issues remain unresolved; or b. any cost award take into account the successes of RSA and the failure of the Applicants, and at a minimum costs in the amount of $76,408.62 as a set-off.

[12] RSA’s submissions are substantially similar to AIG’s. RSA’s position is that since the Second Issue remains unresolved, there is no ruling that RSA is currently required to pay defence costs. RSA states that the Judgment is at best a mixed result for the Applicants.

[13] RSA argues that the Second Issue was bound to fail and points out that RSA sought the dismissal of the Second Issue as being inappropriate for any application. RSA states that it incurred significant legal fees – which it estimates at $76,408.62 on a full indemnity basis – in responding to the Second Issue alone.

[14] RSA submits that, from its perspective, the Second Issue was a very significant aspect of the Application and that it is not appropriate to defer the costs of the Second Issue to a potential future trial, if any.

d. Position of Zurich

[15] Zurich agrees that $600,000 constitutes reasonable full indemnity costs for the First issue and that Zurich would normally be responsible for paying one fifth of these costs. However, it argues that this amount should be reduced to account for Zurich’s success on the interpretation of the Single Retention Endorsement found in each of the Integrated Policies that Zurich issued starting in 2007. Zurich states that the resolution of this issue had an important impact on the number of SIRs that Zurich will be able to rely on in the underlying litigation. It submits that Zurich’s clear success on the issue of the Single Retention Endorsement means that Zurich and the Applicants had divided success on the Application, and this should be considered when determining costs. It points out that this issue accounted for the majority of Zurich’s oral submissions and that the Court would still have had to interpret the Single Retention Endorsement if Zurich had accepted the Applicants’ approach to the issue of the duty to defend. Ultimately, Zurich requests that the Applicants’ costs as against Zurich be reduced by 50%, for a final amount of $60,000 payable by Zurich to the Applicants.

e. Reply of the Applicants

[16] In reply, the Applicants point out that AIG and RSA failed on the two main issues that they raised within the First Issue – i.e. claims falling outside the policy period/ “all sums” approach and pre-tender costs – and that the financial consequences of this failure are important. They submit that even if the SIRs/deductibles have not been exhausted, they remain the successful parties as between themselves and AIG and RSA with respect to the First Issue, as they do not have to succeed on every issue or obtain the best result possible to be declared the successful party. The Applicants’ position is that they succeeded on the main issues within the First Issue.

[17] The Applicants also submit that AIG and RSA are wrong to argue that they have no duty to defend until the Second Issue is resolved. In their reply submissions, the Applicants highlight the differences between, on the one hand, the per-occurrence SIR/deductible in AIG’s and RSA’s respective policies and, on the other hand, the aggregate SIR/deductible in the same policies, and they argue that I have found that the duty to defend is triggered once the per-occurrence SIR/deductible is exhausted. In sur-reply, AIG submits that the Applicant’s submissions on this point are incorrect. I agree with AIG. I did not interpret the word “occurrence” in AIG’s policy, and I did not make any specific findings regarding AIG’s per-occurrence SIR and how it applies to the facts of this case. [3] The same comments apply to RSA’s per-occurrence deductible. The parties did not join issue on this point, and it would not be appropriate for me to express any views at the costs stage of the proceeding and in the absence of submissions by the parties. I note, however, that RSA stated in its Factum that the class actions “constitute a single occurrence” and it did not seek to file sur-reply submissions on this point as did AIG.

[18] With respect to the Second Issue, the Applicants submit that they should not be ordered to pay costs. They state that both AIG and the Applicants argued for the Second Issue to be decided in their favour, and both said in the alternative that a trial could be ordered. However, both were ultimately unsuccessful as a trial of an issue was ordered. According to the Applicants, “[t]he parties achieved a similar level of success (or lack thereof).” As for RSA, the Applicants submit that it asked for the Second Issue to be decided in its favour without a trial and did not ask for trial of an issue in the alternative. The Applicants also state that there is no support for RSA’s position that it is entitled to costs on a full indemnity basis.

[19] With respect to Zurich’s submissions, the Applicants argue that the court’s interpretation of the Single Retention Endorsement does not negate the Applicants’ success. They point out that although Zurich has proven that it has multiple policies with separate SIRs, that does not affect its duty to defend because once one of the $1 million SIRs is exhausted, Zurich must contribute to defence costs. According to the Applicants, Zurich’s success on the issue of the Single Retention Endorsement does not put it in any better position in relation to the duty to defend and does not affect the result of the Application, which was about the duty to defend, not the duty to indemnify. The Applicants’ position is that it is irrelevant whether the court’s finding might affect Zurich’s position in potential future indemnification proceedings.

[20] After the Applicants delivered their reply costs submissions, RSA asked that the reply submissions be struck as they reference the existence of an appeal. I decline to strike the reply submissions in their entirety, which is a disproportionate request. Given the nature of this case, it is hardly surprising that there would be an appeal, no matter the result of the Application. However, the existence of an appeal did not have any impact on my determination of the issue of the costs of the Application.

Discussion

a. Costs as against AIG and RSA with respect to the First Issue

[21] In my view, the Applicants are entitled to their costs as against AIG and RSA with respect to the First Issue. The summary of my findings on the First Issue set out at paragraph 126 of my Reasons for Judgment show that the Applicants were, overwhelmingly, the successful party on this issue. I disagree that the result on the First Issue can be described as a “mixed success”, because of the issue of the SIR/deductible or otherwise. The findings on the First Issue were subject to the deductibles/SIRs: see paragraph 26 of my Reasons for Judgment and paragraph 37 of the Applicants’ Factum.

[22] AIG’s statement in its costs submission that “[s]ubject to the SIR, AIG Canada acknowledged its duty to defend from the outset” is misleading. AIG stated the following in paragraph 4 of its Factum:

Even upon satisfaction of self-insured retentions under the Policy, AIG’s duty to defend is not unqualified, and it must be equitably allocated with other primary insurers for Loblaw covering the 21 years after AIG’s policy. [Emphasis added.]

[23] AIG strongly objected to any allocation of defence costs that would exceed 6% and opposed the Applicants’ positions on many points, including pre-tender defence costs.

[24] Similar comments apply to RSA who, among other things, strenuously argued that the Applicants were advocating for an “all-sums” approach, and that such an approach should be rejected.

[25] Having concluded that the Applicants are entitled to costs with respect to the First Issue, I now turn to the issue of the appropriate scale of costs.

[26] There is ample authority in support of the proposition that the costs of a successful duty to defend application should be paid on a full indemnity basis: see UPS Supply Chain Solutions, Inc. v. Airon HVAC Service Ltd., 2015 ONSC 3104 at para. 7 and the authorities cited therein. This departure from and exception to the usual rule that elevated costs will only be awarded in exceptional circumstances is justified by the contractual basis of the duty to defend at no expense to the insured: see E.M. v. Reed at para. 22 (Ont. C.A.).

[27] Further, courts have held that:

a. the costs of a successful application relating to preliminary coverage issues are properly payable by the insurer on a full indemnity basis: Deloitte & Touche Inc. v. American Home Assurance Company at para. 15 (Ont. S.C.J.); b. with respect to an insured’s entitlement to costs on a full indemnity basis, nothing turns on whether the applicant brought their application to enforce their right to coverage before or after legal expenses were incurred for which they were entitled to indemnity: EPCOR Electricity Distribution Ontario Inc. v. Municipal Electric Association Reciprocal Insurance Exchange, 2021 ONSC 5680 at para. 9; and c. if an insurer chooses to attempt to reduce its risk under a policy by engaging in litigation over its obligation to provide coverage, it should be made to fully compensate the successful party if it loses: Hoang v The Personal Insurance Co., 2017 ONSC 4193.

[28] Given that the Second Issue has yet to be determined and there has been no finding with respect to the issue of “per-occurrence” SIR/deductible, it is true that there has been no finding that AIG’s and RSA’s respective duties to defend have been triggered. However, in light of the strong positions they both took on the First Issue, I find that the determination of the First Issue was necessary as against AIG and RSA, whether or not their respective SIRs/deductibles were exhausted.

[29] Since the Applicants have been successful as against AIG and RSA with respect to the appropriate approach to the duty to defend in this case, it is my view that the line of authority referred to above and its rationale apply to this case. As a result, I find that the Applicants are entitled to costs on a full indemnity basis as against AIG and RSA with respect to the First Issue.

[30] AIG and RSA have not disputed the reasonableness of the quantum sought by the Applicants, i.e. $120,000 per Primary Insurer. I note that the reasonableness of this amount has been accepted by the other three Primary Insurers. I see no reason to take issue with the reasonableness of the quantum sought by the Applicants given, among other things, the importance and complexity of the issues. In my view, this is an amount that AIG and RSA should reasonably have expected to pay in the event that they were unsuccessful on the duty to defend issues.

[31] As a result, AIG and RSA are liable to each pay costs to the Applicants in the amount of $120,000.00.

b. Costs with respect to the Second Issue

[32] In light of how the Second Issue was argued by the Applicants, AIG and RSA, I agree with the Applicants’ statement that “[t]he parties achieved a similar level of success (or lack thereof).” The parties’ focus was on the merits, and very little time was spent by the parties in their factum or in oral argument dealing with the issue of whether a trial of an issue should be ordered and the legal test to be applied in this regard.

[33] Given this and the fact that the work done on the Second Issue will very likely be of use at the trial of the issue, I am of the view that the most appropriate order as to the costs of the Second Issue is that they be payable in the cause, as determined by the trial judge.

c. Costs payable by Zurich

[34] While I dealt with the issue of Zurich’s “Single Retention Endorsement” in the context of the First Issue in my Reasons for Judgment, it could arguably have been dealt with somewhere else (e.g., under the Second Issue since it deals with SIRs or as a separate issue) as this issue is not directly related to the other issues discussed in the context of the First Issue. This is illustrated by my choice of heading: “Issues specific to Zurich”. Because this issue was a standalone one that only concerned Zurich and was fully argued by both sides, I am prepared to reduce slightly the costs payable by Zurich to account for its success on this issue. In my view, this is not a “distributive” costs award given: (a) the different nature of this issue, and (b) the fact that the parties have already agreed to treat the three main issues in this matter separately for the purposes of costs. Further, I agree with Zurich that the Court would still have had to interpret the Single Retention Endorsement if Zurich had accepted the Applicants’ approach on the issue of the duty to defend, and that Zurich should not be deprived of costs just because this issue was considered in the same proceeding as the overall issue of the duty to defend.

[35] However, given the very limited nature of the Single Retention Endorsement issue compared to all the issues within the First Issue that were determined in favour of the Applicants, [4] the 50% reduction proposed by Zurich is excessive. In my view, a fair and appropriate reduction is in the amount of $15,000.

Conclusion

[36] In light of the foregoing, I order the following:

a. AIG is ordered to pay to the Applicants their costs of the First Issue in the all-inclusive amount of $120,000.00 within 30 days; b. RSA is ordered to pay to the Applicants their costs of the First Issue in the all-inclusive amount of $120,000.00 within 30 days; c. Zurich is ordered to pay to the Applicants their costs of the First Issue in the all-inclusive amount of $105,000.00 within 30 days; d. the costs of the Second Issue are payable in the cause, as determined by the trial judge.

Vermette J. Date: March 25, 2022

[1] I reject RSA’s submission that there was a fourth issue regarding the representation of the insureds by unconflicted legal counsel. This was never identified as a separate issue by counsel at the time of argument and, contrary to the three issues identified above, no significant time was spent on this issue in the parties’ facta and oral submissions.

[2] The Applicants’ bill of costs totals $645,653.21, but the Applicants seek only $600,000.00.

[3] My findings with respect to SIRs/deductibles under multiple policies issued by the same insurer (see, e.g., para. 126(e) of the Reasons for Judgment) do not directly apply to this issue as both AIG and RSA only issued one policy.

[4] Zurich’s counsel adopted the submissions of the other insurers on many of the points dealt with in the context of the First Issue, which allowed him to spend some time on the issue of the Single Retention Endorsement during his oral argument. While the role of that issue in the context of Zurich’s submissions may not have been “limited”, it has to be considered in the context of all the issues on which Zurich was unsuccessful, either directly or by adopting the other insurers’ positions.