Goodman et al. v. AIG Commercial Insurance Company of Canada et al. [Indexed as: Goodman v. AIG Commercial Insurance Co. of Canada]
101 O.R. (3d) 714
2010 ONCA 391
Court of Appeal for Ontario,
Cronk, MacFarland and Karakatsanis JJ.A.
June 2, 2010
Insurance -- Insurer's obligation to defend -- "Follow form" clause in insurance policy applying only to that part of policy dealing with indemnity and not with duty to defend -- That part of policy setting out duty to defend not containing "follow form" language -- "Follow form" clause not converting duty to defend to duty to reimburse defence costs only (as provided by underlying insurance policy).
Two lawyers were sued in their capacity as directors of a company. Their law firm had an outside directorship liability policy issued by a Lloyd's syndicate. The company had a directors' and officers' liability policy issued by AIG. The AIG policy did not provide a duty to defend. The Lloyd's policy contained two distinct insuring agreements: the first (IA.) applied where there was no underlying insurance (and was irrelevant in this case), and the second (IB.) applied where there was underlying insurance. IB. contained a "follow form" clause, stating, "With respect to Insuring Agreement B, this policy is subject to and shall follow all terms etc. of the Underlying Insurance in all respects except for the Limits of Liability." Lloyd's argued that the effect of that clause was to convert the duty to defend contained in its policy to a duty to pay defence costs only, which was a term of the AIG policy. The application judge found that the "follow form" clause did not apply to the duty to defend and that the Lloyd's policy was primary for the defence costs at issue. Lloyd's appealed.
Held, the appeal should be dismissed.
The duty to defend is separate from the duty to indemnify. Those aspects of coverage were dealt with separately in the Lloyd's policy. The "follow form" clause clearly referenced only IB. IB. dealt only with indemnity and not the duty to defend. There was no "follow form" language in the defence section of the Lloyd's policy. The follow form clause did not convert the duty to defend in the Lloyd's policy to a clause requiring only the reimbursement of defence costs.
APPEAL from the judgment of Hoy J., 2009 57159 (ON SC), [2009] O.J. No. 4389, 78 C.C.L.I. (4th) 249 (S.C.J.) holding that the appellant's insurance policy was primary for defence costs.
Cases referred to Nichols v. American Home Assurance Co., 1990 144 (SCC), [1990] 1 S.C.R. 801, [1990] S.C.J. No. 33, 68 D.L.R. (4th) 321, 107 N.R. 321, J.E. 90-643, 39 O.A.C. 63, 45 C.C.L.I. 153, [1990] I.L.R. Â1-2583 at 10058, 20 A.C.W.S. (3d) 699
Peter E. Manderville, for appellant Lloyd's Underwriters. Thomas J. Donnelly, for respondents Goodman and Reeve. Ramon V. Andal, for respondents AIG & American Home. [page715]
The judgment of the court was delivered by
MACFARLAND J.A.: --
I. Introduction
[1] This litigation involves consideration of two directors' and officers' insurance policies in relation to responsibility for the payment of defence costs. The issue on appeal is a narrow one -- whether the "follow form" clause contained in the Lloyd's policy applies to the duty to defend in that same policy. The parties are agreed that if it does apply, Lloyds has no duty to defend and the AIG policy is primary in relation to defence costs. If however, the "follow form" clause does not apply to the duty to defend, then the Lloyd's policy provides a duty to defend and is primary in relation to defence costs.
[2] The application judge concluded that the follow form clause did not apply to the duty to defend and that therefore the Lloyd's policy was primary for the defence costs at issue. For the reasons that follow, I agree with the application judge.
II. Background
[3] The facts are not in dispute. Goodman and Reeve, two lawyers at Cassels Brock, were sued in their capacity as directors of Markham General Insurance Company. Both Cassels Brock and Markham General have policies of insurance that cover directors' and officers' liability. Markham General has a directors' and officers' liability policy issued by AIG and American Home. Cassels Brock has an outside directorship liability policy issued by a Lloyd's syndicate.
[4] The lawyers brought an application to determine which of the two insurers was required to pay their defence costs. At the time of their application, the claim had settled -- payment having been made by AIG -- and their defence costs paid by their law firm.
III. The AIG Policy
[5] The declaration page of the AIG policy contains the following notice:
NOTICE: THE INSURER DOES NOT ASSUME ANY DUTY TOP DEFEND. HOWEVER THE INSUREDS MAY UNDER CERTAIN CONDITIONS TENDER THE DEFENCE OF A CLAIM. IN ALL EVENTS, THE INSURER MUST ADVANCE DEFENCE COSTS PAYMENTS PURSUANT TO THE TERMS HEREIN PRIOR TO THE FINAL DISPOSITION OF A CLAIM. [page716]
[6] The insuring agreements of that policy provide:
The Insurer does not assume any duty to defend . . .
[7] The defence costs, settlements, judgments (including the advancement of defence costs) part of the policy provides:
The Insurer does not assume any duty to defend. The Insureds shall defend and contest any Claim made against them.
[8] There are provisions in the AIG policy whereby an insured may in some circumstances tender the defence of a claim to the insurer but those provisions have no application to the present appeal.
[9] Further, under the heading "Other Insurance and Indemnification", the AIG policy states:
Such insurance as is provided by this policy shall apply only as excess over any other valid and collectible insurance. This policy specifically shall be excess of any other policy pursuant to which any other insurer has a duty to defend a Claim for which this policy may be obligated to pay Loss.
[10] Both Goodman and Reeve separately retained counsel who represented them through the conclusion of the lawsuit against them.
[11] The AIG policy had limits of $10 million and the Lloyd's policy had limits of $5 million. The suit against the two lawyers and other directors claimed damages of $40 million.
IV. The Lloyd's Policy
[12] There are two distinct insuring agreements in the Lloyd's policy: the first -- IA. -- where there is no underlying insurance and the second -- IB. -- where there is. It is only the latter provision which is relevant to this appeal and it provides:
B. If there is Underlying Insurance arranged for the benefit of the Directors and Officers of the Corporation, the Insurer shall pay on behalf of the Named Insured who serves in Outside Directorships all Loss resulting from any Claim first made during the Policy Period for a Wrongful Act for which the Named Insured is not indemnified by the Corporation excess of the greater of such Underlying Insurance or the amount set forth in Item 10 of the Declarations and excess of the Deductible as set forth in Item 6 of the Declarations and subject to the Limit of Liability as set forth in Item 5 of the Declarations.
[13] It is accepted by the parties that the definition of "Loss" under the Lloyd's policy includes defence costs. Clause IB. goes on to state:
With respect to Insuring Agreement B, this policy is subject to and shall follow all terms, conditions, exclusions, agreements, limitations and endorsements of the Underlying Insurance in all respects except for the Limits of Liability. However, the terms, conditions, exclusions, agreements, limitations [page717] and endorsements of this policy shall apply if they are more restrictive than those of the Underlying Insurance. Coverage hereunder will attach only after all of the Underlying Insurance has been exhausted by payments for Losses. In no event shall coverage under this policy be broader than coverage under any Underlying Insurance. [Emphasis added] This is the follow form clause which is in issue in the case.
[14] The "Defence" section of the Lloyd's policy provides:
With respect to Wrongful Acts insured by this policy: A. If defence of the Named Insured is not provided by the Corporation or any Underlying Insurance, the Insurer shall defend any Claim against the Named Insured even if such Claim is groundless, false or fraudulent, but the Insurer may make such investigation, negotiation and settlement of any Claim as they deem expedient. The Insurer shall not be obligated to pay any Claim or judgment or to defend any Claim after the aggregate limit of the Insurer's liability has been exhausted by payment of loss. (Emphasis added) and under OTHER INSURANCE AND INDEMNITY:
If the Corporation maintains Underlying Insurance and a Claim otherwise covered by this policy is first made against any Named Insured, then with respect to such Claim this policy shall be specifically excess of the amount of payment from such Underlying Insurance.
Under Insuring Agreement I.B, a minimum Underlying Insurance limit of CAN $5,000,000 shall apply to Corporations Publicly Traded in Canada and CAN $10,000,000 shall apply to Corporations Publicly Traded in the United States as set forth in Item 10 of the Declarations and such limit or limits shall be maintained in full force and effect during the currency of this policy, except for any reduction in the aggregate limit or limits contained therein solely by payment of Claims in respect of Claims made during the period of this policy. Failure of the Named Insured to comply with the foregoing shall not invalidate this policy, but in the event of such failure, the obligations of the Insurer under this policy shall be interpreted as if the minimum Underlying Insurance limit was in place.
If any Loss arising from any Claim made against any Named Insured is insured under any other valid policy(ies), prior or current, then this policy shall cover such Loss, subject to its limitations, conditions, provisions and other terms, only to the extent that the amount of such Loss is in excess of the amount of payment from such other insurance, whether such other insurance is stated to be primary, contributory, excess, contingent or otherwise, unless such other insurance is written only as specific excess insurance over the Limits of Liability provided by this policy.
V. Discussion
[15] The duty to defend is separate from the duty to indemnify: see Nicholls v. American Home Assurance Co., 1990 144 (SCC), [1990] 1 S.C.R. 801, [1990] S.C.J. No. 33. While a duty to defend will arise where a claim is made that may possibly fall within cover, [page718] indemnity is only required when a claim is proved to fall within cover. They are separate and distinct aspects of coverage and are dealt with separately in the Lloyd's policy. It is undisputed that the AIG policy does not provide a duty to defend.
[16] The insuring agreements of the Lloyd's policy deal with indemnity. There are two insuring agreements: A. and B. A. deals with the situation where there is no underlying insurance and is not relevant for present purposes. Insuring agreement B., which applies where there is underlying insurance, is the relevant clause for present purposes.
[17] The follow form clause contained in the Lloyd's policy, set out above, is part and parcel of insuring agreement B. Its opening words make it clear that it only applies to insuring agreement B.:
With respect to Insuring Agreement B, this policy is subject to and shall follow all terms etc. of the Underlying Insurance in all respects except for the Limits of Liability[.]
[18] The appellant argues that the effect of this clause is to convert the duty to defend contained in its policy to a duty to pay defence costs only, which is a term of the AIG policy. The application judge disagreed and in my view she was correct to do so.
[19] First, the language of the Lloyd's policy clearly references only insuring agreement B. -- where the Lloyd's policy is to follow the terms of the underlying AIG policy. Insuring agreement B. deals only with indemnity and not the duty to defend.
[20] There is no similar follow form language in the Defence section of the Lloyd's policy, where the duty to defend is set out, nor in the declarations or general provisions of the policy.
[21] Secondly, if the appellant's position is correct, it would render the duty to defend clause meaningless in situations where there is underlying insurance. The duty to defend, by the policy terms under clause II.A., arises where there is no duty to defend in the underlying insurance. If the follow form clause applied to convert the duty to defend to a duty to pay defence costs only when there is no duty to defend in the underlying policy, there would rarely be an occasion where the duty to defend would arise. This, in turn, would render section II.A. of the policy virtually meaningless in this respect.
[22] In my view, it is clear on the plain language of this policy that the follow form provision relates to indemnity coverage and has nothing whatever to do with the duty to defend. The limiting words "with respect to insuring agreement B . . ." make that abundantly clear.
[23] There is no issue here as to which layers of coverage the policies in issue are intended to provide. By their language, the [page719] AIG policy is clearly primary while the Lloyd's policy is equally clearly excess insurance.
[24] The duty to defend coverage in the Lloyd's policy is what is referred to as "drop down" coverage. Where there is no cover in the underlying insurance, the excess policy may provide cover to fill that gap. This only makes sense: where there is no underlying insurance or no duty to defend in the underlying policy, an excess insurer may well want to control or at least be represented in any litigation. That does not convert the excess policy to a primary policy.
[25] I therefore agree with the application judge's conclusion that the follow form clause does not convert the duty to defend in the Lloyd's policy to a clause requiring only the reimbursement of defence costs.
[26] I note that the appellant, supported by the lawyers, argued that this result is not in accordance with their mutual subjective expectations; however, those expectations are not dispositive. It remains for the court to interpret the policy in a reasonably commercial way and in a manner that gives meaning to all its terms and provisions.
[27] Further in my view, this interpretive conclusion is reinforced if one considers clauses II.B. and II.D. of the Lloyd's policy.
[28] Clause II.B. provides:
If defence of the Named Insured is provided by the Corporation or any Underlying Insurance, the insurer shall not be called upon to investigate, settle or defend any Claims made, or suits brought, or proceedings instituted against the Named Insured, but shall have the right and be given the opportunity to be associated in the defence and trial of any such Claims, suits or proceedings relative to any occurrence which, in the opinion of the Insurer, may create a potential liability on the part of the Insurer under the terms of this policy.
[29] If, as the appellant argues, its policy "follows form" of the underlying insurance in all respects, one must query the meaning of this clause which seems to suggest that where an underlying policy contains a duty to defend clause, the appellant has no duty to defend under its policy.
[30] On the appellant's argument, under this scenario -- where the underlying policy has a duty to defend -- the "follow form" provision would cause the Lloyd's policy to also have a duty to defend. That is not, however, what clause II.B. says.
[31] Similarly, if one examines clause II.D. of the Lloyd's policy, a similar argument can be made. Clause II.D. states:
If the Named Insured refuses to consent to any settlement or compromise recommended by the Insurer or by any other insurer who provides Underlying Insurance and which settlement or compromise is acceptable to the claimant and the Named Insured elects to contest the Claim, the Insurer's liability for Loss, including Defence Costs, shall not exceed the lesser of either: [page720] 1. the amount for which the Claim could have been settled, less the remaining deductible, plus the Defence Costs incurred up to the time of such refusal; or 2. the applicable Limit of Liability.
The Insurer shall have the right to withdraw from the further defence thereof by tendering control of said defence to the Named Insured.
[32] If the Lloyd's policy were simply to follow the form of the underlying insurance in its entirety, there would be no need for these provisions, which contradict the follow form argument. There would be no purpose for these terms and conditions.
[33] Although not strictly relevant to the narrow issue on appeal, I do not wish to be taken as endorsing the application judge's finding, at para. 51 of her reasons, where she noted:
While the point was not argued before me, it appears that under the Lloyd's policy costs incurred by the insurer pursuant to its duty to defend do not erode coverage.
[34] In my view, this observation is incorrect.
[35] The policy provides:
NOTICE: This is a claims-made policy. . . . the Limit of Liability available to pay damages shall be reduced and may be completely exhausted by payment of Defence Costs.
[36] And "defence costs" are defined in the policy as follows:
"Defence Costs" means reasonable and necessary costs, charges, fees and expenses (other than regular or overtime wages, salaries or fees of the Directors, Officers or employees of the Corporation) incurred in defending, investigating or monitoring Claims and the premium for appeal, attachment or similar bonds.
[37] In my view, the Lloyd's and AIG policies both provide that the limits of liability under the policies will be eroded by defence costs.
VI. Disposition
[38] For these reasons, I would dismiss the appeal.
[39] Costs to the respondents AIG and American Home fixed in the sum of $6,000 and to the respondents Goodman and Reeve also fixed in the sum of $6,000. These amounts are inclusive of disbursements and GST.
Appeal dismissed.