UPS Supply Chain Solutions, Inc. v. Airon HVAC Service Ltd., 2015 ONSC 3104

COURT FILE NO.: CV-13-486839

DATE: 20150519

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: UPS Supply Chain Solutions, Inc., UPS Supply Chain Solutions General
Services, Inc. and United Parcel Service of America, Inc., Applicants

AND:

Airon HVAC Service Ltd., Airon HVAC and Control Ltd., Honeywell International Inc., Industrial Technical Services (ITS) Inc., ACE INA Insurance, Northbridge Insurance and Intact Insurance Company, Respondents

BEFORE: Justice W. Matheson

COUNSEL: Kathryn Podrebarac and Alan Melamud, for the Applicants

David S. Young and Kevin Bridel, for the Respondents Airon HVAC Service Ltd. and Airon HVAC and Control Ltd.

Megan Shortreed and Emily Lawrence, for the Respondent Honeywell International Inc.

Dustin Milligan, for the Respondent Industrial Technical Services (ITS) Inc.

Douglas McInnis and Anthony Cole, for the Respondent ACE INA Insurance

David Mackenzie, for the Respondent Northbridge Insurance

Daniel Reisler, for the Respondent Intact Insurance Company

HEARD: In writing.

COSTS/TERMS ENDORSEMENT

[1] This endorsement arises from a duty to defend application, which was granted in part. Reasons for decision were released on March 18, 2015. All definitions from the above reasons for decision also apply to this endorsement.

[2] Written submissions have been received regarding costs and the form of order, including terms with respect to the appointment of independent counsel.

[3] The applicants succeeded in establishing a duty to defend in regard to the insurer respondents, specifically ACE INA Insurance (CGL insurer of Honeywell), Northbridge Insurance (CGL insurer of Airon) and Intact Insurance Company (CGL insurer of ITS). That duty extends to one of two groups of claims, as described in the above reasons. The applicants were unsuccessful in regard to the service provider respondents, specifically Honeywell International Inc., Airon and ITS.

[4] In addition to party and party costs of the application, and terms with respect to the appointment of independent counsel, the applicants seek an order with respect to costs already expended in relation to the underlying action.

Party and party costs of the application

[5] The general principles applicable to the order of party and party costs are well-settled. Costs are discretionary. Rule 57.01 of the Rules of Civil Procedure sets out factors I may consider in exercising my discretion, in addition to the result of the proceeding and any written offers to settle. Overall, the objective is to fix an amount that is fair and reasonable, having regard for, among other things, the expectations of the parties concerning the quantum of costs: Boucher v. Public Accountants Council for the Province of Ontario, 2004 14579 (ON CA), [2004] O.J. No. 2634, 71 O.R. (3d) 291 (C.A.) at paras. 26, 38.

(i) Insurers

[6] The applicants, as the successful parties, seek costs against the insurer respondents. They seek full indemnity costs.

[7] 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: Godonoaga (Litigation guardian of) v. Khatmabakhsh (Litigation guardian of), 2000 16891 (ON CA), [2000] O.J. No. 3807 at para. 4 (C.A.); Cawardine (Litigation guardian of) v. Northumberland Clarington Board of Education, [2001] O.J. No. 63 at para. 5 (C.A.); E.M. v. Reed, 2003 52150 (ON CA), [2003] O.J. No. 1791 at paras. 21-24 (C.A.); Savage v. Belecque, 2011 ONSC 5771 at para. 4, aff’d, 2012 ONCA 426; Austco Marketing and Service (Canada) Ltd. v. Lloyd’s Underwriters, 2013 ONSC 6486 at paras. 4-5. The applicants were entitled to a defence without any expense to them. However, here the duty to defend was found to apply to only one of two groups of claims, which I have taken into account in determining costs. Further, the applicants’ claim for full indemnity costs is still subject to the overarching principle that the amount must be reasonable.

[8] Northbridge submits that there should be no order for costs, mainly because the duty to defend as found extends only to one of two groups of claims. It also relies on the unsuccessful result as against the service providers and submits that more than half of the time spent on the application related to matters about which the applicants were unsuccessful. And it claims that the amount is unreasonable. ACE takes the same position as and adopts the submissions of Northbridge.

[9] Intact takes a different position. It submits that it should have its substantial indemnity costs. It first relies on Rule 49 of the Rules of Civil Procedure, but the two written communications relied upon do not even make offers to settle, let alone offers that qualify under Rule 49. It then relies on its confirmation of coverage at an earlier stage and willingness to discuss apportionment. This would deserve more weight but for the fact that the confirmation of coverage was qualified and Intact purported to withdraw it altogether at the hearing. At the hearing, Intact’s position was that it had “no duty to defend whatsoever” as put in its written submissions. None of the arguments advanced by it provide an adequate foundation for an order of costs in favour of Intact. Intact’s alternative position is consistent with the other insurers.

[10] I have considered all relevant factors in the exercise of my discretion regarding costs. Without going through every factor in detail, I highlight these items:

(a) This was a duty to defend application and the applicants were successful in establishing a duty to defend against the insurer respondents. The insurers denied a duty to defend, not just in respect of some of the claims, but in respect of all claims. Although I have taken into account the ruling that the duty applies only to one group of claims, the applicants remain the successful parties opposite the insurer respondents. The applicants should have a costs order in their favour.

(b) The apportionment as between the two groups of claims was not a topic of significant attention in the written or oral submissions. In turn, it was not a significant factor in regard to the costs expenditure required by the applicants to advance the duty to defend in the face of a complete denial by the insurers.

(c) I conclude that more than 50% of the applicants’ costs are properly attributed to the application against the insurer respondents. Part of the application material against the service providers would have been needed even if they had not been named as respondents. In order to advance the claim against the insurer respondents, it was necessary to address the service contracts themselves. And the insurers relied heavily on the service contracts in their unsuccessful attempt to avoid the duty to defend.

(d) There was considerable overlap in the issues regarding each of the insurer respondents. This overlap led to efficiencies, assisting with the reasonableness of the applicants’ costs claim.

(e) Five out of six respondents provided their party and party cost amounts, mostly on a partial indemnity basis. These costs were presumably lower than they would otherwise have been due to cooperation among them, which was evident in the materials and oral submissions. Yet, the total of these five amounts exceeds the applicants’ full indemnity costs claim without even factoring in the lower scale and the sixth respondent. This is not determinative but supports the reasonableness of the applicants’ full indemnity costs claim.

(f) Although Intact began with a more reasonable stance, its position at the hearing showed that its prior communications could not be counted on. In the end, it took the same position as the other insurers.

(g) A significant amount of the applicants’ overall costs claim was attributable to addressing the Honeywell affidavit, which I conclude ought not to be included in this aspect of the costs claim. I have therefore removed that amount when fixing the costs against the insurer respondents.

[11] The full indemnity claim by the applicants is about $170,000, after removing the amount focused on responding to the Honeywell affidavit. In the exercise of my discretion, I conclude that about two thirds of that amount should be fixed as costs against the insurer respondents, and order each of them to pay $37,000 in costs to the applicants. This figure includes disbursements and applicable tax.

(ii) Service providers

[12] The service provider respondents, which prevailed on the application, each seek costs on a partial indemnity basis, as follows: $29,251.54 is claimed by Airon, $23,035.55 is claimed by ITS and $78,971.97 is claimed by Honeywell.

[13] The applicants essentially take the position that it was necessary and efficient to include the service providers in this application, given the position taken by the insurers. They assert that if any costs are ordered, they should be paid by the insurers. They also challenge the quantum of the costs claims as unreasonable.

[14] I will deal first with the question of whether there should be a costs order in favour of the service providers, and if so, in what amount.

[15] While I accept the submission that it was efficient to deal with all the duty to defend claims in one application, it remains the case that in the ordinary course the service providers prevailed and should have a costs order in their favour.

[16] The amounts claimed by the service providers are challenged as unreasonable based on various comparisons advanced by the applicants. The applicants submit that 1/6 of their own partial indemnity costs would be more appropriate. I find it more fitting to fix costs based on the actual costs of the service providers, as claimed, subject to the overarching need for the costs to be reasonable. I find that the amounts claimed by Airon and ITS are reasonable.

[17] The amount claimed by Honeywell is another matter, given the substantial amount of evidence and argument it put forward on the merits of the claim against it in the underlying action. The affidavit of Mr. Laman was mainly comprised of evidence regarding the merits that was not relevant to the issues in the application. This caused the applicants to incur increased costs. As well, the written and oral submissions were significantly focused on and protracted by arguments attempting to show that there was no merit to the claim against Honeywell in the underlying action. In the exercise of my discretion, I am not prepared to award partial indemnity costs for this aspect of Honeywell’s defence to the application. I further take into account the additional costs the applicants were required to incur as a result. A portion of the above affidavit was relevant, and I have taken that into account.

[18] Although not determinative, a simple comparison between the Honeywell costs claim and that of the other two service providers underscores my view that the amount claimed by Honeywell is not reasonable for a party and party claim on a partial indemnity basis in this application.

[19] Bearing all relevant factors in mind in the exercise of my discretion, I fix Honeywell’s costs at $40,000, Airon’s costs at $29,251.54 and ITS’s costs at $23,035.55. These figures include disbursements and applicable tax.

[20] The applicants submit that these costs should be paid by the unsuccessful insurers. They do so for a number of reasons. To begin with, they assert that they were essentially forced to include the service providers given the position taken by the insurers. I am not persuaded by this submission.

[21] Next, the applicants submit that this is an appropriate case for a Sanderson order. As set out in Moore v. Hayik (2008), 2008 ONCA 162, 90 O.R. (3d) 463 (C.A.) at para. 41, the granting of a Sanderson order requires a two-step analysis:

(1) The threshold question is whether it was reasonable to join the several defendants (or respondents).

(2) If the answer to the threshold question is yes, the court must exercise its discretion to determine whether it would be just and fair to give such an order, in the circumstances of the case.

[22] The threshold is met in this application. It was reasonable to include all six respondents, and deal with all the duty to defend issues at once. The service contracts were relevant to both groups of respondents. There was considerable factual overlap between the application as against the insurers and as against the service providers.

[23] However, I am not persuaded to exercise my discretion to make such an order here. In coming to that conclusion, I note that the insurer respondents did not attempt to shift responsibility to the service providers. Nor did their denial of coverage force the service providers to be added as parties. There was an overlapping factual record, but the contract interpretation argument launched against the service providers regarding clause 9 related to the service providers only, not to the insurers. It was a separate claim. I conclude that it would not be just and fair to make a Sanderson order.

[24] Lastly, the applicants submit that these amounts should be paid by the insurer respondents under the “Supplementary Payments” terms of the applicable insurance policies. These policy provisions were not the focus of attention in the main application and the interpretation of those terms now advanced by the applicants is disputed. I am not prepared to permit this new coverage issue to be introduced under the rubric of this costs order. The applicants are free to pursue a claim for reimbursement under the policies, outside the context of this application, if they wish to do so.

Costs already expended in the underlying action

[25] The applicants seek an order that the three insurers now pay their portion of the costs of the defence thus far, in accordance with my prior ruling. The applicants therefore seek an order that each insurer pay 1/6 of the costs already incurred, specifically $70,310.84 from each insurer.

[26] The main challenge to this request is made by ACE. One of the issues it raises relates to the inclusion of adverse costs awards, which again calls into question the scope of the “Supplementary Payments” terms in the policies. The benefits of consistency cause me to conclude that this part of the costs already incurred should not be ordered now, again without prejudice to the applicants’ ability to seek reimbursement for it outside the context of this application. With respect to the other challenges made, and bearing in mind that my ruling already allows for reallocation as set out in paragraph 103 of my reasons for decision, I conclude that each insurer should now pay 1/6 of the total amount of costs already incurred, as claimed by the applicants, to be calculated after first removing the amount of the adverse costs orders.

Terms regarding independent counsel

[27] I have already found that because of my ruling that the duty to defend is only in respect of the second group of claims, there is an inherent conflict of interest that requires the appointment of independent counsel to defend the applicants. There is also potential for conflict as between the insurers given the potential for reallocation.

[28] The applicants request that given the conflicts, they be permitted to appoint and instruct new counsel without having to consult with, report to or receive input from the insurers.

[29] The policy contract provisions, which would ordinarily give the insurers the right to control the defence, including the appointment of counsel, do give way where there is a conflict: Brockton (Municipality) v. Grant Cowan Co., 2002 7392 (ON CA), [2002] O.J. No. 20 (C.A.), Zhou v. Markham (Town), [2014] O.J. No. 351 (S.C.) at para. 22.

[30] The insurers acknowledge the conflict, but correctly observe that it runs both ways. They ask for terms that strike a balance between the legitimate interests of the insurers and the insureds, which is appropriate: PCL Constructors Canada v. Lumbermens Casualty Company Kemper Canada, 2009 32915 (Ont. S.C.). Terms imposed in PCL Constructors Canada are requested here, among others.

[31] I conclude that there should be more involvement by the insurers than that contemplated by the applicants, while still addressing the conflicts of interest. I find that the following terms are appropriate:

Unless the applicants and insurer respondents otherwise agree:

(1) independent counsel:

(i) must be different from counsel who argued the coverage issues;

(ii) must be counsel who has not acted for any of the parties in the past five years;

(iii) must have no discussions about coverage with the parties to this application or their counsel;

(iv) must provide identical concurrent reporting to the applicants and the insurer respondents;

(v) must provide accounts in redacted format only, excluding the detail of the work performed, until the underlying action is finally determined or settled, at which time unredacted accounts shall be made available; and,

(vi) must seek instructions from the applicants and insurer respondents, take such reasonable steps as independent counsel deems appropriate to reconcile the instructions if there is disagreement, and shall follow the instructions of the applicants if the instructions are not reconciled.

(2) the claim is to be assigned to claims staff within each insurer who have not been involved with it up until this point, and who will not communicate with anyone who has been involved; new claims staff is to have access to the claim file only once it has been purged of any consideration of coverage.

[32] If any issues arise regarding terms that cannot be worked out, counsel may bring them to my attention.

Orders

[33] I therefore order as follows:

(1) Each of the insurer respondents shall pay to the applicants $37,000 for costs, within 60 days of today.

(2) The applicants shall pay $29,251.54 to Airon, $23,035.55 to ITS and $40,000 to Honeywell for costs, within 60 days of today.

(3) Each of the insurer respondents shall pay to the applicants 1/6 of the costs already incurred in the underlying action, as claimed by the applicants, excepting only the adverse costs orders, within 60 days of today.

(4) With respect to the appointment of independent counsel, the terms are set out above in paragraph 31.

[34] The applicants shall circulate a form of order for approval as to form and content, and then provide it to me for signature within 30 days of today. If there are any issues about the form of the order, the parties may make brief written submissions in that regard, on the same schedule.

W. Matheson J.

Released: May 19, 2015