Onex Corporation et al. v. American Home Assurance Company et al.

DATE: 2012-01-31 DOCKET: 08-CV-365387 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Onex Corporation, Gerald W. Schwartz, Christopher A. Govan, Mark Hilson and Nigel Wright, Plaintiffs AND: American Home Assurance Company, Brit Syndicates Ltd. (Lloyd’s Syndicate 2987) and Heritage Managing Agency Limited (Lloyd’s Syndicate 3245), XL Insurance Company Limited, Liberty Mutual Insurance Company, Lloyd’s Underwriters Syndicates No. 2623, 0623, 0033 and AIG Europe (UK) Limited, Houston Casualty Company, Defendants

BEFORE: L.A. Pattillo J.

COUNSEL: G. Adair Q.C., for the Plaintiffs M. Snowden and B. Wells, for the Defendant American Home Assurance Company A. D’Silva and P. Ellard, for the Defendants Brit Syndicates Ltd. (Lloyd’s Syndicate 2987) and Heritage Managing Agency Limited (Lloyd’s Syndicate 3245), XL Insurance Company Limited, Liberty Mutual Insurance Company and Houston Casualty Company

HEARD: December 12, 2011

Costs ENDORSEMENT

Introduction

[1] On June 30, 2011, I released reasons for decision granting the Plaintiffs summary judgment in their Action against the Defendant American Home Assurance Company (“American Home”) for a declaration that American Home is required by the terms and conditions of its Executive and Organization Liability Insurance Policy number 240 22 88 for the period of November 29, 2002 to November 29, 2003 (the “2002-2003 D&O Policy”) to indemnify the Plaintiffs as their interests may appear in respect of the expenses incurred and ongoing on behalf of the individual Plaintiffs in defence of the action commenced against them by Richard M. Kipperman, in his capacity as Trustee for the Magnatrax Litigation Trust, on May 10, 2005, in the United States District Court for the Northern District of Georgia (the “Kipperman Action”) to the extent that such expenses were not covered under American Home Policy No. 350-15-03 issued to Magnatrax Corporation (the “Magnatrax Policy”) and judgment against American Home consequential to such declaration in an amount to be determined by the court. I further dismissed American Home’s summary judgment motion seeking dismissal of the Plaintiffs’ action.

[2] At the same time, I dismissed the Plaintiffs’ summary judgment motion against the Defendants Brit Syndicates Ltd. (Lloyd’s Syndicate 2987), Heritage Managing Agency Limited (Lloyd’s Syndicate 3245) and XL Company Limited, the remaining excess insurers on American Home’s Executive and Organization Liability Insurance Policy No. 358 12 14 issued to Onex for the period from November 29, 2004 to November 29, 2005 (the “2004-2005 D&O Policy”), (the “Excess Insurers”), allowed the Excess Insurer’s cross-summary judgment motions and dismissed the Plaintiffs’ action against those Defendants in its entirety.

[3] Subsequently, upon being advised that after taking into account what the individual Plaintiffs had been paid pursuant to the Magnatrax Policy, they had still incurred in excess of US$15 million in defence costs, I granted the Plaintiffs judgment against American Home in the amount of US$15 million, which is the limit of American Home’s liability under the 2002-2003 D&O Policy, plus pre-judgment interest thereon to be agreed or determined.

[4] What remains to be decided therefore are pre-judgment interest and costs.

Pre-Judgment Interest

[5] The Plaintiffs are entitled to pre-judgment interest on their judgment amount of US$15 million pursuant to s. 128 of the Courts of Justice Act R.S.O. 1990, Ch. C. 43, as amended (the “Act”), at a rate of 3.3% per annum.

[6] The Plaintiffs and American Home have agreed that, as a result of my dismissal of American Home’s motion for summary judgment on its counterclaim for a set-off or reallocation (reasons released January 20, 2012), the Plaintiffs are entitled to the Canadian dollar equivalent of US$820,000 on account of pre-judgment interest on their judgment.

Costs

[7] Section 131 of the Act and rule 57.01(1) give the court a broad discretion in awarding costs. That discretion must be exercised having regard to the factors set out in rule 57.01(1) including the amount in issue, the complexity of the proceedings, the conduct of the parties, the principle of indemnity, the reasonable expectation of the unsuccessful party and any other relevant factor. The guiding principle is fair and reasonable: Boucher v. Public Accountants Council for the Province of Ontario (2004), 2004 CanLII 14579 (ON CA), 71 O.R. (3d) 291 (C.A.); Davies v. Clarington (Municipality) (2009), 2009 ONCA 722, 100 O.R. (3d) 66 (C.A.).

Position of the Parties

[8] The Plaintiffs were successful in the Action against American Home and are entitled to their costs of the motion and the Action. They seek costs against American Home on a full indemnity basis and a Bullock or Sanderson Order in respect of any costs award made against them in favour of the Excess Insurers.

[9] American Home submits that the Plaintiffs should not be granted full indemnity costs. It further submits that the award of partial indemnity costs to the Plaintiffs in the Action should take into account American Home’s own costs in successfully defending the Plaintiffs’ claim under the 2004-2005 D&O Policy prior to the Plaintiffs asserting their claim under the 2002-2003 D&O Policy in October, 2009. American Home submits that the Plaintiffs did not incur any relevant costs in the Action prior to amending their claim to assert the 2002-2003 D&O Policy. American Home further submits that the costs owing to it in the initial action commenced by the Plaintiffs against it by statement of claim dated August 10, 2006 (the “First Action”) which was administratively dismissed with costs on December 18, 2008, should be taken into account in determining the Plaintiffs’ costs of the Action. Finally, American Home submits that a Bullock or Sanderson Order is not appropriate given the circumstances of the Action.

[10] The Excess Insurers were successful in their defence of the Action and are accordingly entitled to their costs of the summary judgment motions and the Action. They seek substantial indemnity costs based on what they submit was unreasonable conduct of the Plaintiffs in commencing the Action against them and during its course. They take no position on the issue of whether a Bullock or Sanderson Order should be made.

The Plaintiffs

[11] The Plaintiffs claim full indemnity costs of $632,421.58 made up of fees of $540,039.00, taxes of $32,402.34 and disbursements of $59,980.24. On a partial indemnity basis, the total claimed is $403,444.62 comprised of fees of $324,023, taxes of $19,441.38 and disbursements of $59,980.24.

(a) Scale of Costs

[12] In support of their submission for costs on a full indemnity basis, the Plaintiffs rely on similar cost orders in cases where the insurer wrongfully denied its duty to defend. The justification for such an award arises from the unique nature of the insurance contract which entails a duty to defend at no expense to the insured: Godonoaga (Litigation guardian of) v. Khatambakhsh (2000), 2000 CanLII 16891 (ON CA), 50 O.R. (3d) 417 (C.A.); E.M. v. Reed, 2003 CanLII 52150 (ON CA), [2003] O.J. No. 1791 (C.A.) at para. 22.

[13] American Home submits that not all duty to defend cases give rise to an award of full indemnity costs against the insurer: Halifax v. Innopex, 2004 CanLII 33465 (ON CA), [2004] O.J. No. 4178 (C.A.) at para. 57. It further submits that there were unusual circumstances in this case which dictate against an award of full indemnity costs to the Plaintiffs. In particular, it points to its reimbursement of the individual Plaintiffs up to policy limits under the Magnatrax Policy, the Plaintiffs actions in bringing multiple claims and its success in defending the Plaintiffs claim under the 2004-2005 D&O Policy.

[14] As I found in my Reasons (para. 126), based on the wording of the Policies in issue, the duty to advance defence costs is broader than the duty to indemnify which makes the duty similar to the duty to defend. Clause 8(a) of the Policies requires that the insurer “shall” advance covered “defence costs” as that term is defined in the Policies, no later than 90 days after receipt by the insurer of such defence bills. It goes on to provide a requirement for the insured to repay such amounts “in the event and to the extent that any such Insured Person or Organization shall not be entitled under this policy to payment of such Loss.”

[15] From the clear wording of the Policy, the Plaintiffs were entitled to receive full indemnity for their solicitor and client costs 90 days after submission of the bills subject only to Policy limits, even if American Home disputed entitlement. Failure to pay in such circumstances exposes American Home to liability for the Plaintiffs full indemnity costs incurred to enforce that obligation. In my view, absent unusual circumstances, the Plaintiffs should be reimbursed their full solicitor and client costs incurred to enforce American Home’s clear obligation under the Policies.

[16] In that regard, I am of the view that there are no unusual circumstances here which would justify reducing the Plaintiffs entitlement to full indemnity costs. I do not consider the Plaintiffs’ conduct of the Action should penalize them in costs. Nor do I think that their costs entitlement should be affected because American Home paid some costs under another Policy or was successful in respect of an alternative claim in the Action. Finally, the fact that the Plaintiffs were only successful on their alternate claim has no bearing on their entitlement to full indemnity costs. American Home failed to pay in the face of a clear duty under the 2002-2003 D&O Policy.

[17] Accordingly, the Plaintiffs are entitled to their costs against American Home on a full indemnity basis.

(b) Quantum

[18] American Home submits that because the Plaintiffs were only successful in their alternate claim under the 2002-2003 D&O Policy, any costs award in their favour should only follow the result in respect of that claim. Further, because American Home was successful in having the Plaintiffs’ claim under the 2004-2005 D&O Policy dismissed, it submits it should be awarded costs for that claim. In that regard, American Home has submitted a cost outline claiming partial indemnity costs for the Action and summary judgment motions of $369,766.26 made up of fees of $362,408.77 and disbursements of $7357.49. It further submits that it incurred approximately $195,000 in partial indemnity costs prior to the Plaintiffs’ amendment to assert their 2002-2003 D&O Policy claim.

[19] In determining the Plaintiffs’ costs, American Home submits there should be an allocation of costs between the two claims which, in the absence of a more detailed bill of costs from the Plaintiffs, should be determined utilizing the ratio of its partial indemnity fees incurred before the Plaintiffs’ amendment asserting the 2002-2003 D&O Policy claim and its total partial indemnity fees for the Action. Utilizing that approach, American Home’s pre-amendment partial indemnity fees of $195,000 represent 53% of its total partial indemnity fees for the Action of $362,408.77. Applying a ratio for post-amendment fees of 47% to the Plaintiffs’ partial indemnity fees of $324,023.40, American Home submits that the Plaintiffs’ post amendment fees in respect of their 2002-2003 D&O Policy claim are $152,291.00.

[20] With respect to its costs, American Home submits that in addition to its pre-amendment partial indemnity costs of $195,000 in its successful defence of the Plaintiffs’ 2004-2005 D&O Policy claim, it is also entitled to partial indemnity costs of $44,292.51 (fees of $43,217.99 and disbursements of $1,074.52) for the First Action. Together, the costs American Home submits it is entitled to total $239,292.51 ($195,000 + $44,292.51).

[21] In the end result, American Home submits that the Plaintiffs’ costs of $152,291.00 in respect of its 2002-2003 D&O Policy claim should be offset by American Home’s total costs in defence of the 2004-2005 D&O Policy claim and the First Action in the amount of $239,292.51 resulting in the net amount owing to American Home by the Plaintiffs of $87,001.51.

[22] Costs in an action are generally awarded based on overall success and not issue by issue based on a party’s success on each issue. The Court of Appeal has stated that distributive costs orders are not appropriate: Pearson v. Inco Ltd. (2006), 2006 CanLII 7666 (ON CA), 79 O.R. (3d) 427 (C.A.). On the other hand, rule 57.01(4)(a) provides that nothing in rule 57.01 affects the authority of the court under s. 131 of the Act to award or refuse to award costs in respect of a particular issue or part of a proceeding.

[23] Regardless of whether distributive cost orders are or are not permitted, I do not consider such an order to be appropriate in the circumstances of this case. The defendants, including American Home and the Excess Insurers initially defended the Plaintiffs’ claim on the basis that the sole liability for defence costs in the Kipperman Action was the Magnatrax Policy and they had no liability under the 2004-2005 D&O Policy. When the defendants subsequently amended their defences to plead prior notice and the 2002-2003 D&O Policy, it was reasonable in my view for the Plaintiffs to amend their claim to assert an alternative claim under the 2002-2003 D&O Policy. Apart from sufficiency of the prior notice, the issues raised by the amendment remained essentially the same. The defendants also denied liability under the 2002-2003 D&O Policy and continued to take the position that the only liability was under the Magnatrax Policy. The wording of the Policies was virtually identical. The defendants’ denial of coverage raised issues of interpretation similar to all of the Policies. Because of the overlapping issues, it is neither appropriate nor accurate in my view to allocate the costs incurred in respect of each claim based on a division of costs prior to and after the amendment. Time spent before the amendment is applicable to issues raised by the alternate claim and vice-versa.

[24] In my view, therefore, it would not be appropriate to award costs in the Action based on the success in respect of the alternate claims. The Plaintiffs were successful in the Action and are entitled to their costs.

[25] I am of the view, however, that American Home is entitled to a credit for its partial indemnity costs of the First Action which, as noted, was administratively dismissed against it with costs. Prior to its dismissal, American Home filed a defence, prepared for mediation and responded to a summary judgment motion commenced by the plaintiffs, neither of which appears to have taken place. The Plaintiffs have filed a cost outline claiming partial indemnity costs of $44,292.51 (fees of $43,217.99 and disbursements of $1,074.52) in respect of the first action. Recognizing that some of the time spent was beneficial in its subsequent defence of the Action, in my view, a fair and reasonable amount for American Home’s partial indemnity costs of the First Action is $30,000 inclusive of disbursements and taxes.

[26] Notwithstanding the Plaintiffs are entitled to full indemnity costs of the Action, in my view the costs awarded must still be fair and reasonable having regard to the issues in the Action. In that regard, the hourly rates charged by counsel for the Plaintiffs for lawyers, clerks and students are reasonable. Unfortunately the Plaintiffs’ bill of costs provides no breakdown of dates or work done. To the extent the costs claimed relate to the First Action they cannot be recovered. I also have a concern, likely related, in relation to the overall hours charged. Mr. Adair’s total of 516 hours appears excessive particularly when viewed along with the 436 hours claimed for more junior lawyers, the 238 hours for clerks and the 43 hours for students.

[27] In the final result, after allowing American Home a credit of $30,000 for its costs in the First Action, I would award the Plaintiffs their costs of the Action on a full indemnity basis in the amount of $575,000.00

(c) Bullock or Sanderson Order

[28] A Bullock Order requires an unsuccessful defendant to reimburse the plaintiff for the costs the plaintiff is ordered to pay to a successful defendant. A Sanderson Order achieves a similar result by requiring the unsuccessful defendant to pay the costs of the successful defendant directly to that defendant. In this case, the Plaintiffs request that American Home be required to pay the costs of the successful Excess Insurers.

[29] The test to determine whether a Bullock or Sanderson Order should be made has two steps. The first requires a determination of whether it was reasonable for the Plaintiffs to have joined several defendants in one action. If the answer is no then a Bullock or Sanderson Order should not issue. If the answer is yes, the court must still determine, having regard to the circumstances of the action, whether either Order should issue. In exercising its discretion in that regard, the court must determine whether it would be just and fair in the circumstances and particularly whether the defendants tried to shift the blame to each other; whether the unsuccessful defendant caused the successful defendant to be added; whether the causes of action were independent of each other; and, if applicable, ability to pay: Moore v. Wienecke (2008), 2008 ONCA 162, 90 O.R. (3d) 463 (C.A.) at para. 41 – 49.

[30] Given the claim as first advanced by the Plaintiffs, there is no question in my view that it was reasonable to join both American Home and the Excess Insurers as defendants in the Action. At the time the Action was commenced, the Plaintiffs had expended in excess of US$22 million in defence costs for the Kipperman Action with no end in sight. The claim for incurred and projected defence costs engaged both the primary and the excess layers of the 2004-2005 D&O Policy. I am also of the view it was reasonable for the Plaintiffs to maintain their claim under the 2004-2005 D&O Policy against American Home and the Excess Insurers after they amended their claim to allege an alternative claim under the 2002-2003 D&O Policy. As noted, the issues relating to coverage under either Onex Policy remained essentially the same. More importantly, however, were the amounts available under each Policy given the Plaintiffs’ incurred and future legal costs and potential damages in the Kipperman Action. The Plaintiffs claim against the 2004-2005 D&O Policy, involving as it did the Excess Insurers, provided for coverage of US$90 million. Their alternative claim against the 2002-2003 D&O Policy against only American Home provided for coverage of US$15 million. Given that the Plaintiffs had incurred approximately US$22 million in legal costs by the start of the Action and US$35 million by the summary judgment motion, it was reasonable for them to continue to pursue their claim against the 2004-2005 D&O Policy.

[31] Turning to a consideration of the specific factors noted in Moore (supra), it is clear that American Home did not cause the Excess Insurers to be joined in the Action. More importantly, it did nothing to ensure they remained as defendants after the Plaintiffs amended their claim. That decision was entirely the Plaintiffs. Nor did any of the Defendants attempt to resile from liability by pointing the finger of blame at each other. For the most part, the Defendants presented a common front. Further, although there were similar issues arising from similar wording, the causes of action in respect of the 2004-2005 D&O Policy and the 2002-2003 D&O Policy were separate and distinct. The last factor, ability to pay, is a non issue here.

[32] Having regard to the circumstances surrounding the presence of the Excess Insurers as defendants in the Action and especially the above factors, in my view it would not be either just or fair to issue a Bullock or Sanderson Order against American Home. The Plaintiffs were aware at all times that if they were entitled to coverage, it would be in respect of either the 2004-2005 D&O Policy or the 2002-2003 D&O Policy. While I consider that it was reasonable for the Plaintiffs to have continued their claim against the 2004-2005 D&O Policy in the circumstances, they did so at their own risk for costs. The decision to continue their claim against the 2004-2005 D&O Policy was entirely that of the Plaintiffs and had nothing to do with any action by American Home.

The Excess Insurers

[33] As noted, the Excess Insurers are entitled to their costs of both the Plaintiffs’ and their summary judgment motions and the Action. They seek substantial indemnity costs of $670,303.32, made up of fees and taxes of $602,680.00 and disbursements and taxes of $67,623.32. On a partial indemnity basis, the Excess Insurers claim costs of $469,399.15, made up of fees and taxes of $401,775.83 and disbursements and taxes of $67,623.32.

(a) Scale of Costs

[34] In support of their request for substantial indemnity costs, the Excess Insurers rely on what they submit are the unreasonable actions of the Plaintiffs in the commencement and conduct of the Action. They submit that the commencement of the Action and subsequent motion for summary judgment against them was unreasonable given that the Plaintiffs were well aware before the Action was commenced that their claim for defence costs of the Kipperman Action belonged to the 2002-2003 D&O Policy as a result of Onex’s prior notice to American Home. They submit that the Plaintiffs conduct in expanding the evidentiary record unnecessarily lengthened the proceedings. They further submit that the Plaintiffs caused additional expense and delay due to unwise strategic decisions and they acted unreasonably in not letting the third and fifth layer Excess Insurers out of the Action prior to the argument.

[35] The Excess Insurers also rely on an offer they made to the Plaintiffs in writing ten days before the commencement of the hearing of the summary judgment motions offering to settle the Action on the basis that it would be dismissed against them on a without costs basis. While the offer complies with rule 49, the Excess Insurers concede that it does not entitle them, under the rule, to substantial indemnity costs. They submit, however, that it is a factor to consider in their request for substantial indemnity costs.

[36] Substantial indemnity costs should only be awarded in “special and rare cases”: Murano et al. v. Bank of Montreal (1998), 1998 CanLII 5633 (ON CA), 41 O.R. (3d) 222 (C.A.), quoting with approval Blair J., as he then was, in 131843 Canada Inc. v. Double “R” (Toronto) Ltd. (1992), 7 C.P.C. (3d) 15 (Ont. Gen. Div.) at p. 15. In respect of summary judgment motions, rule 20.06 provides that the court may order costs on a substantial indemnity basis if “(a) the party acted unreasonably by making or responding to the motion; or (b) the party acted in bad faith for the purpose of delay.”

[37] It is instructive that the Excess Insurers have not alleged the Plaintiffs acted in bad faith, either in respect of their prosecution of the Action or their summary judgment motion.

[38] Further, for reasons already stated, I do not consider it unreasonable that the Plaintiffs commenced the Action and summary judgment motion notwithstanding their prior notice of the claim. Nor do I consider that the Plaintiffs conduct expanded the evidentiary record or unnecessarily lengthened the proceedings. In my view, both sides are to blame for the expanded evidentiary record and the unnecessary length of the proceedings. It was, in fact, the defendants who first put the intention of the parties in issue. The Plaintiffs then responded in kind. Given the constellation of affidavits, the subsequent predictable cross-examinations and further production issues that arose, it is no wonder delay occurred. Further, the various motions and appeals that arose concerning production and discovery issues which also contributed to the delay were instigated by both sides.

[39] The Plaintiffs settled with the defendant on the fourth layer of excess insurance on the eve of the motions. While I agree that it would have made sense to then resolve the issues against the Defendant on the fifth layer, the Plaintiffs elected not to given mainly, as I understand it, because that Defendant, along with the second and thirds layers, (collectively the Excess Insurers), were represented by one counsel. The risk to the Plaintiffs in not settling with the fifth layer at that stage was costs, but not in the circumstances substantial indemnity costs.

[40] Finally, apart from the fact rule 49 is of no assistance to the Excess Insurers, their offer to settle, given its timing, has no impact in my view on whether substantial indemnity costs should be awarded for the entire Action or the summary judgment motions.

[41] Accordingly, the Excess Insurers have failed to establish that the Plaintiffs conduct comes even close to entitling them to an award of substantial indemnity costs either for the summary judgment motions or the Action. They are entitled to costs on a partial indemnity basis.

(b) Quantum

[42] The Plaintiffs submit that the quantum of costs claimed by the Excess Insurers is excessive. They point to the fact that some of the items claimed in the bill of costs relate to appearances where no costs were ordered or motions where costs have already been ordered. They further submit that, at times, the Excess Insurers had too many lawyers on the brief. Finally they point to the duplication of issues with the primary insurer, American Home. In the end result, the Plaintiffs submit that a fair and reasonable amount for fees on a partial indemnity basis for the Excess Insurers is $250,000.00 plus disbursements and taxes.

[43] The Excess Insurers concede that $54,000 of fees should be excluded from their bill of costs as it relates to appearances where no costs were ordered or motions where costs were ordered and have already been paid. Further and while I have no difficulty with the partial indemnity rate claimed for Mr. D’Silva, the rates for the other lawyers on the file are high throughout given their dates of call. While for the most part I consider counsel’s staffing on the file to be consistent with that of the other parties, in my view the claim for three counsel at the hearing is excessive. The Excess Insurers are only entitled to fees for two counsel during argument.

[44] My biggest concern with respect to the Excess Insurers bill of costs, however, is the overall amount of costs claimed on their behalf. Given the claim asserted against them and the amounts involved, the Excess Insurers were required to have counsel to defend the claim against them. However, apart from a distinct issue between American Home and the Excess Insurers concerning changes made between American Home and Onex to the primary 2004-2005 D&O Policy which the Excess Insurers did not agree to, the issues in the Action and the summary judgment motions in respect of the 2004-2005 D&O Policy were similar for both American Home and the Excess Insurers. Given that American Home was the lead insurer and the Excess Insurers agreed to follow-form, it was reasonable to expect American Home to carry the lead in defending the claim. Although there was some division of issues, counsel for the Excess Insurers addressed many of the same issues American Home did resulting, in my view, in unnecessary duplication. In the circumstances, it is neither fair nor reasonable in my view to require the Plaintiffs to pay for the Excess Insurers costs in their entirety.

[45] As a result, therefore, it is my view that a fair and reasonable amount for the Excess Insurers’ partial indemnity costs of the summary judgment motions and the Action is $325,000.00 inclusive of disbursements and taxes.

Conclusion

[46] In summary, therefore, and for the above reasons:

1. The Plaintiffs are entitled to pre-judgment interest on their judgment in the Canadian dollar equivalent of US$802,000.

2. The Plaintiffs are entitled to their costs of the Action and the summary judgment motions on a full indemnity basis fixed at $575,000 inclusive of disbursements and taxes payable by American Home.

3. The Excess Insurers are entitled to their costs of the Action and summary judgment motions on a partial indemnity basis fixed at $325,000 inclusive of disbursements and taxes payable by the Plaintiffs.

L. A. Pattillo J.

Released: January 31, 2012