ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: 05-CV-283747PD1
DATE: 2012/06/01

B E T W E E N:

AVIVA INSURANCE COMPANY OF CANADA, TANDEM REALTY ADMINISTRATION INC., TANDEM GROUP MANAGEMENT INC., VAN FORBELL and PAUL REID

Steven Stieber, for the Plaintiffs

Plaintiffs

• and -

LOMBARD GENERAL INSURANCE COMPANY OF CANADA

Mark Veneziano and Dena Varah, for the Defendants

Defendants

HEARD: January 21, February 1 and 2, 2012

GRACE J.

REASONS FOR DECISION

A. Background

[1] On January 6, 1995, fire swept through a Toronto apartment building. Tragically, several occupants of 2 Forest Laneway died. Others suffered serious injuries.

[2] Eight legal proceedings were brought against various defendants including the building’s owner, Axes Investments Inc. (the “owner”) and property manager Tandem Group Management Inc. (the “property manager”). [1]

[3] The owner and property manager turned to their insurers: predecessors of Lombard General Insurance Company of Canada (“Lombard”) [2] and Aviva Insurance Company of Canada (“Aviva”).

[4] Three policies of insurance were in existence: two with Lombard and one with Aviva.

[5] The Lombard policies were obtained by the owner. They were shortly described by the parties as the Lombard primary and the Lombard Umbrella policy with monetary limits of $1 million and $9 million per occurrence respectively.

[6] The property manager was named as an additional insured in both Lombard policies.

[7] Aviva’s policy insured the property manager subject to a monetary limit of $5 million. Aviva’s policy did not include the owner.

[8] Behind the scenes, Lombard, Aviva and their counsel discussed but did not resolve the order in which the policies would respond. Lombard acknowledged that its primary policy was the first to be utilized. Lombard retained counsel to defend the owner and property manager’s interests in the tort actions, funded their defence and made other payments until the primary policy limits were exhausted.

[9] Absent agreement, the insurers and their lawyers strategized.

[10] One tort action (“the Bakhtiari action”) was tried. Issues of damages and costs were resolved in the others. Liability in the various tort actions was to be determined based on the findings in Bakhtiari. A significant judgment was awarded against various defendants (the “tort judgment”). [3]

[11] Several defendants were found liable including the owner and property manager. The trial judge concluded the failure to maintain a self-closing device in one location and to install self-closing devices in others caused or contributed to the catastrophic consequences of the fire.

[12] Liability was not apportioned between the owner and property manager. They had not crossclaimed against one another. The owner, the property manager and a third defendant appealed.

[13] Aviva and Lombard continued to discuss but did not agree on the allocation of the balance of the judgment that remained unsatisfied.

[14] The limits of Lombard’s primary policy were clearly insufficient. [4] Lombard sought a declaration that the Aviva policy was the next to respond for its insured, the property manager (the “priority proceeding”). [5] On August 22, 2003, Hoilett J. released his reasons for decision. Lombard obtained a favourable result. Aviva appealed.

[15] On February 6, 2004, the Court of Appeal released its reasons with respect to the tort judgment. [6] The trial decision was varied. The percentage of responsibility assigned to the owner and property manager was reduced. Nonetheless, they were found to be jointly and severally liable for approximately $3.8 million inclusive of interest and costs.

[16] The plaintiffs in the tort actions demanded payment.

[17] The insurers’ position had not been finally resolved. Aviva’s appeal of the decision of Hoilett J. was pending. A joint contribution to the outstanding judgment by both insurers was proposed by Aviva but not accepted by Lombard.

[18] When full payment was not forthcoming voluntarily, counsel for the plaintiffs in the tort actions prepared to enforce the tort judgment against the owner and property manager.

[19] Counsel for the insured acted quickly. Aviva and Lombard were advised that an action for indemnification would be commenced if the property manager or owner was required to pay. Claims for consequential and punitive damages would be made.

[20] The limits of Lombard’s primary policy had been fully utilized. It paid nothing more.

[21] Aviva responded. Aviva paid $2,493,343.13 [7] representing the balance owing to the judgment creditors and certain third party costs.

[22] On May 31, 2004, the Court of Appeal heard and disposed of Aviva’s appeal in the priority proceeding. The result was this: as contemplated by Hoilett J.’s reasons, the Aviva policy was to answer for the liability of the property manager and the Lombard Umbrella policy was to address the liability of the owner. [8]

[23] As noted, by this time Aviva had already satisfied all amounts owing beyond the limits of the Lombard primary policy. In this action, Aviva says that the owner and property manager – and their insurers – should have borne responsibility for the tort judgments and third party costs equally. Aviva claims to have overpaid $1,086,195.70. It asks that judgment be granted against Lombard for that amount.

B. Analysis and Decision – Can the tort judgments and third party costs be apportioned?

[24] Aviva advances several reasons underlying its request for contribution from Lombard. Aviva argues that Lombard is liable because it failed to appoint separate counsel for the property manager. It relies on two decisions from the United States. [9]

[25] I disagree. It is true that the owner and property manager stood as one during the Bakhtiari and related actions. Issues of liability and damages were defended in concert. While Aviva requested the appointment of separate counsel, it did not pursue the issue when Lombard refused. In fact, having recorded its objection in writing, Aviva demurred.

[26] Aviva could have played a more active role but did not do so. Tactical considerations were at play.

[27] The evidence led at trial included letters between the insurers’ counsel and some of Aviva’s internal documents. It clearly establishes that Lombard and Aviva were doing their best to outmaneuver the other.

[28] Aviva was content to maintain a watching brief for three reasons. First, Aviva had no intention of answering voluntarily for any of the claims. It did not waver from its position that the Lombard primary and Umbrella policies were to answer for the costs of defence and any adverse judgment granted against the owner and the property manager. Second, there were important reasons for the owner and property manager to act in concert at trial. They sought to minimize – if not avoid – responsibility for the fire and limit the award of damages. Third, by taking a passive role, Aviva was in a position to preserve its argument that Lombard should satisfy the entire judgment because it ignored the conflicting positions of its co-insured.

[29] The issue of conflict has been raised by Aviva in an effort to obtain an advantage flowing from conduct it could have prevented. It could have sought an order requiring Lombard to pay the costs of independent counsel. It did not do so. It could have appointed counsel to act for the property manager at trial at its cost. It didn’t. Aviva made a conscious decision to let counsel retained by Lombard to act at trial and on appeal. [10]

[30] Lombard did not retain counsel affected by a disqualifying conflict. To the contrary, Aviva was content to allow Lombard to proceed and adopt a wait and see approach. In my view, Aviva tried to lay a trap for Lombard. [11] The attempt fails. [12]

[31] Next, Aviva accurately pointed out that both insurers were acting tactically. Aviva maintains that approach tacitly acknowledged that all risks would be equally shared.

[32] Again, I disagree. It is clear from the evidence that Aviva always intended to argue that any liability for damages or costs in excess of Lombard’s primary policy was covered by the Lombard Umbrella policy.

[33] Aviva’s objective was a simple and transparent one. It wanted Lombard to fully satisfy any judgment which included the property manager and all related costs without any contribution by Aviva. In fact, Aviva raised that issue unsuccessfully before Hoilett J. [13]

[34] Equal sharing was not part of any agreement or understanding between Lombard and Aviva. It was an alternative concept Aviva was prepared to advance if its principal arguments failed.

[35] Aviva also submits s. 4 of the Negligence Act [14] is at play. It provides:

If it is not practicable to determine the respective degree of fault or negligence as between any parties to an action, such parties shall be deemed to be equally at fault or negligent.

[36] Once more, I disagree.

[37] It seems to me that s. 4 of the Negligence Act could only be triggered if: first, the separate liability of the owner and property manager in tort was in issue during the Bakhtiari trial and second, the evidence led with respect to their acts or omissions did not allow the court, for whatever reason, to differentiate between them. Had those two things occurred, the statute would have required the owner and property manager to share liability equally.

[38] However, that is not what occurred. In the Bakhtiari action, liability was imposed upon and apportioned among three defendants. In that exercise, the owner and property manager were treated both at trial and on appeal as if they were one defendant. No effort was made to distinguish between the acts or omissions of the owner and property manager. In other words, the process of allocation of fault between the owner and property manager did not fail. It was never engaged. By choice.

[39] Because of that approach, the trial judge in the Bakhtiari action did not strictly adhere to s. 1 of the Negligence Act. It reads:

Where damages have been caused or contributed to by the fault or neglect of two or more persons, the court shall determine the degree in which each of such persons is at fault or negligent, and, where two or more persons are found at fault or negligent, they are jointly and severally liable to the person suffering loss or damage for such fault or negligence, but as between themselves, in the absence of any contract express or implied, each is liable to make contribution and indemnify each other in the degree in which they are respectively found to be at fault or negligent

[40] That section was applied to three tortfeasors: the City of Toronto, the occupant of the unit in which the fire started and the owner/property manager. The trial judge and Court of Appeal did not determine the degree to which the owner and property manager were at fault because they were not asked to.

[41] The analysis does not end here. A variation on the current problem was addressed by the Alberta Court of Appeal in Aetna Insurance Co. v. Canadian Surety Co. (“Aetna”). [15] For the purposes of this decision the following are the relevant facts.

[42] Turner Valley Transport (1972) Ltd. (“Turner Valley”) was hired to transport pipe from Alberta to Wyoming. Turner Valley owned a trailer to carry the pipe but could not supply a tractor or operator. It obtained those from another trucking business.

[43] While passing through the State of Montana, the tractor-trailer was involved in a fatal collision. The tractor was insured by Aetna Insurance Company (“Aetna”) and the trailer by Markel Insurance Company of Canada (“Markel”). [16]

[44] Two tort actions were commenced in Montana. Judgments were granted against the operator of the tractor-trailer and Turner Valley. For public policy reasons, Turner Valley was not granted judgment against the operator.

[45] Eventually, Aetna paid the judgments. It asserted a claim in Alberta for contribution and restitution from Markel and others.

[46] The Alberta Court of Appeal reviewed the decisions rendered in Montana. Writing for a unanimous court, Conrad J.A. concluded that liability was imposed due to the operator’s negligence in the operation of the tractor-trailer as a unit [17] and that Turner Valley’s liability was attributable to the use of the tractor and trailer. [18]

[47] Division of liability between the tractor insured by Aetna and the trailer insured by Markel remained. Conrad J.A. wrote:

The fault must be apportioned between the tractor and the trailer in the same manner as if they were two separate vehicles. While they may operate as one unit, they are insured and considered as two automobiles both in the policies and under the Insurance Act… Complicating this particular case is the fact that negligence was not apportioned by the Montana courts between the two automobiles. [19]

[48] The approach adopted was this: the Alberta court reviewed the findings of fact of the Montana courts and attributed part of the operator’s negligence to the tractor and part to the trailer “for the purpose of assessing ultimate responsibility.” [20] Conrad J.A. concluded:

Where it is not clear that the negligence relates to either one or the other vehicle, and where the automobiles are being used or operated as a unit, and a (sic) [21] finding that the driver drove both and was negligent, the only reasonable solution is to apportion responsibility for that negligence equally. I do so here. [22]

[49] Is the analysis applicable to this case? In my view, it is. Let me try to explain.

[50] Despite being separately named as defendants, the owner and property manager were treated as if they were one person in the tort actions. Indeed, on appeal in Bakhtiari, [23] the parties found negligent at trial were described as being “the registered owner of 2 Forest Laneway, Tandem Group Management Inc. (sic), [24] the property managers (collectively, “Axes”), the City of Toronto, successor to the former City of North York and Mr. Doctorow”. [25]

[51] The trial judge allocated seventy per cent responsibility to the owner/property manager based on two findings of negligence summarized by the Court of Appeal as follows:

The trial judge found as proven acts of negligence:

(iii) Axes had a duty to take positive action to make its premises reasonably safe when it first bought the premises in 1986. Further, it knew or ought to have known of recent developments relating to fires in high rises and to have placed SCDs on all suites.

(iv) Axes was negligent in failing to properly maintain the SCD on the 5th floor stairwell door which would have ensured the door was closed and latched and would not blow open at flashover by the wave of air pressure generated at that time. [26]

[52] The allocation of liability among “Axes”, the City of Toronto and Mr. Doctorow was canvassed on appeal. A re-allocation occurred. The apportionment to the City and Mr. Doctorow increased and that of “Axes” fell.

[53] In my view, the facts and analysis in Aetna are analogous. I recognize there are obvious factual differences between Aetna and this case. In the former, the issue of allocation of responsibility involved the negligent operation of two things (the tractor and trailer) by one person. This case involves negligence in relation to one thing (the property) by two people (the owner and property).

[54] In Aetna the operator and Turner Valley were separately represented at trial. Turner Valley was held to be vicariously liable for the operator because the accident occurred while goods were being transported on its behalf and pursuant to its instructions. [27] In the Bakhtiari action, the owner and property manager were jointly represented by one lawyer at trial and on appeal.

[55] However, any dissimilarity is superficial and does not make Aetna distinguishable from this case. In my view, the analysis undertaken by the Alberta Court of Appeal with respect to a tractor and trailer is applicable to the owner and property manager.

[56] The findings in Bakhtiari covered a period starting with the owner’s purchase of the property in 1986 and included a failure to maintain a self-closing device thereafter. [28] They support the conclusion that the imposition of liability was based on negligence arising from the ownership and management of the property.

[57] By melding the positions of owner and property manager, Lombard represented to the Court that their liability was indivisible. By taking a passive role, Aviva participated in and became a party to that representation.

[58] It was not until the insurers chose to litigate their own dispute that the Court was informed that the positions of Axes and Tandem were distinct. As the insurers acknowledged, it is no longer feasible to allocate liability between them in the conventional manner. [29] However, it is possible to apply the Aetna analysis and as there conclude that “the only reasonable solution is to apportion responsibility for” the negligence of “Axes” equally.

C. Analysis and Decision – Does Aviva have a remedy?

[59] Lombard’s counsel, Mr. Veneziano, argued there is no legal basis for recovery by Aviva. In addition to arguments I have already addressed, Lombard’s factum raised or addressed legal concepts such as estoppel, equitable subordination, equitable subrogation, laches and res judicata.

[60] Paragraph 41 of Aviva’s oft amended statement of claim caught my eye. It says simply:

At the very least…Lombard as the only insurer of Axes should reimburse Aviva on the basis that Axes would share one-half the liability of the Axes/Tandem defendants.

[61] I agree. That result is consistent with the judgment granted by Hoilett J. as varied by the Court of Appeal in the priority proceeding. As already noted, it was determined that Aviva’s policy was next to answer for the liability of the property manager. Aviva did not insure the owner. The Lombard Umbrella policy was next to address its liability.

[62] If Lombard’s position in this application is upheld, the owner, through its insurer, will have paid less than its share of the judgments. Nothing will have been paid under the Umbrella policy. In fact, Lombard will not have paid anything on account of the tort judgments subsequent to the determination of the priority proceeding. That simply cannot be.

[63] Lombard did not do what the Court of Appeal found it was obligated to do: answer next for the liability of Axes.

[64] I reject Lombard’s submission that laches, estoppel or res judicata apply to this fact situation. Aviva commenced this proceeding in a timely fashion. The central issue here: division of responsibility for the tort judgment between the owner, property manager and their insurers, was academic until determination of the priority proceeding.

[65] The parties have agreed the amount in issue is $1,086,195.70. Lombard is obligated to pay that sum to Aviva. [30]

[66] If my analysis to date is flawed, a more complicated legal road can be followed but it leads to the same conclusion. Aviva’s pleading claims a remedy based on principles of restitution. [31] The preconditions to the granting of a restitutionary remedy have also been satisfied.

[67] The tort judgment imposed joint and several liability on the owner and property manager. The judgment creditors had the right to recover the entire amount from one or other of them. When Lombard refused to contribute on behalf of the owner, Aviva made a payment it was obligated to make on behalf of its insured.

[68] The payment satisfied the tort judgment granted against the owner and property manager. Nothing was left for the owner – or Lombard as its insurer – to pay. As between the owner and the property manager, the owner was primarily liable to answer for one-half of the tort judgment. The payments benefitted Lombard. To the extent Aviva paid more than the property manager’s proper share, the payments were to Aviva’s detriment.

[69] Furthermore, there is no juridical reason for Lombard to retain the benefit of the payments Aviva has made. Both insurers point self-righteous fingers at the other. I do not know why. They are sophisticated, knowledgeable and experienced. They tried to outwit the other. The priority proceeding made Aviva’s objective of paying nothing on account of the tragic fire unattainable. The result of that proceeding before Hoilett J. seems to have been the catalyst for Lombard’s attempt to avoid paying anything beyond that expended under the primary policy. I observe with interest but am unaffected by the insurers’ approach.

[70] I am of the view Lombard refused to make any further contribution to the tort judgments despite a legal obligation to do so. [32] In the recently expressed words of Cromwell J. in Kerr v. Baranow [33] “there is no reason in law or justice for” Lombard’s retention of the benefit conferred by Aviva. [34]

[71] I will take a moment to address principles relating to contribution because Aviva maintained it should succeed on that basis as well. Aetna summarizes six preconditions to its application. [35] The third requirement is that all policies in question be effected by or on behalf of the same insured. Aviva submitted the requirement was clearly satisfied. The property manager is an insured under the Aviva and Lombard Umbrella policies.

[72] Despite its initial attractiveness, I reject that submission. Aviva’s claim does not arise because Lombard failed to contribute to liability imposed on the property manager beyond the limits of the primary policy. Aviva was fully responsible for that excess. Aviva’s claim is based on Lombard’s failure to satisfy the remaining liability of the owner – a different insured. For all practical purposes, it is as if Lombard insured the owner only. As in Aetna, contribution is not an appropriate basis for recovery.

D. Conclusion and Costs

[73] For the reasons given, Aviva shall have judgment against Lombard for the principal amount of $1,086,195.70.

[74] Aviva claimed other relief in its pleading. Aside from interest and costs, I do not believe that any other relief is needed or appropriate.

[75] Aviva claimed prejudgment interest from the date of the payments to the holders of the tort judgments. I am inclined to award interest from April 15, 2004 when the largest payments were made by Aviva. However, no submissions were made on this point and I will entertain short written submissions if the parties are of the view interest should commence on a different date. Those should be delivered in conjunction with the parties’ cost submissions.

[76] Written submissions on costs not exceeding four typed pages exclusive of any offer to settle, supporting dockets and authorities may be provided to me through Judges’ Administration, Court House, 12th Floor, Unit “K”, 80 Dundas Street, London, Ontario. Those of Aviva should be delivered by June 25, 2012 and those of Lombard by July 9, 2012.

“Justice A. D. Grace”
JUSTICE A. D. GRACE

Released: June 1, 2012