NEWMARKET COURT FILE NO.: CV-18-134205-00

DATE: 20190823

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

THE CORPORATION OF THE CITY OF MARKHAM

Applicant

– and –

AIG INSURANCE COMPANY OF CANADA

Respondent

David G. Boghosian, for the Applicant

Marcus B. Snowden, Sébastien Kamayah, and Pearl Rombis for the Respondent

AND BETWEEN:

AIG INSURANCE COMPANY OF CANADA

Applicant

– and –

LLOYD’S UNDERWRITERS and THE CORPORATION OF THE CITY OF MARKHAM

Respondents

Court File No. CV-18-136319-00

Marcus B. Snowden, Sébastien Kamayah, and Pearl Rombis for the Applicant

David G. Boghosian, for the Respondents

HEARD: March 1, 2019 and April 3, 2019

REASONS FOR DECISION

CASULLO J.:

Relief Sought

[1] The Corporation of the Town of Markham (“City”) brings this application pursuant to Rule 14.05(3)(d) of the Rules of Civil Procedure against the Respondent, AIG Insurance Company of Canada (“AIG”) for the following relief:

(a) A declaration that AIG is required to defend the City in respect of all claims made against the City in Ontario Superior Court of Justice, Court Actions CV-17-132116-00 and CV-17-13211600A1 commenced at Newmarket (the “Actions:);

(b) An order that the City is entitled to indemnity from AIG for any and all sums it is ordered to pay to the Plaintiff in the Actions;

(c) An order that the City is entitled to appoint and instruct counsel of its choice, who need not report to or take instructions from AIG, at the expense of AIG, in respect of the actions;

(d) An order that AIG reimburse the City for all past legal and administrative expenses incurred in defending the Actions; and

(e) Costs of the Application on a full indemnity basis.

[2] By the time the application was before the court AIG had conceded it had a duty to defend the City, thus the only live issues were (c) – (e).

[3] AIG brings a counter-application against the City and its CGL insurer, Lloyd’s Underwriters (“Lloyd’s”), seeking the following declarations:

(a) That it is only responsible for the defence costs incurred by the City post-tender, or May 5, 2016;

(b) That post-tender defence costs should be shared equitably with Lloyd’s, which continues to owe the City a defence; and

(c) That AIG is entitled to fully participate with the City and Lloyd’s in receiving advice from and instructing defence counsel.

[4] AIG further seeks its costs for an earlier motion to compel evidence. While the parties resolved the issues on consent, such that a hearing was unnecessary, by order of Master Muir (as he then was), the costs of the motion were reserved to the judge hearing the application and counter-application.

Background Facts

[5] The actions arise out of an incident on February 2, 2015 wherein the Plaintiff was struck by a hockey puck while watching his brother’s pre-game hockey warm up. The ice rink is located in the Angus Glen Community Centre in the City (“Ice Rink”). The Plaintiff claims his injuries were caused by the negligence of both the City and Hockey Canada, for failing to keep the Ice Rink in a safe condition.

[6] The City and Hockey Canada each crossclaim for contribution and indemnity.

[7] There is also a third party claim in which the City seeks contribution and indemnity from the Markham Waxers Hockey Club, the Markham Waxers Minor Hockey Association, and the Markham Minor Hockey Association (collectively, the “Waxers”).

The Rental Contract

[8] In or about September 2014, the City entered into a rental contract with the Waxers, wherein the Waxers rented out the Ice Rink on February 2, 2015 (among other days) to both practice and play hockey (“Contract”). The Contract was in effect at the time of the Plaintiff’s injury.

[9] Pursuant to the Contract, the Waxers were responsible for:

(a) the conduct and discipline of its club, group, participants, spectators and invitees;

(b) assuming all liabilities and costs for damages caused directly or indirectly by the licensee or invitees while on or using the facility; and

(c) assuming the risk of damage and injury while on the premises for the licensee and invitees and hold the licensor harmless and indemnified therefrom.

[10] The Waxers were required to obtain third party general liability insurance covering bodily injury arising from the use of the premises and insuring the City as an additional insured under that policy.

The Insurance Contract

[11] AIG issued a liability policy covering the operations of its policy holders Hockey Canada and other entities including the Waxers (“AIG Policy”).

[12] AIG does not contest that the Waxers agreed to add the City as an additional insured to the AIG Policy. Pursuant to the provisions of the insurance certificate (“Certificate”), the City was covered for Commercial General Liability for $5,000,000, with respect to liability arising out of the operations of the Waxers.

[13] The Certificate provides for indemnity for legal fees incurred in the defence of the insured, without limitation or reduction in respect of allegations made against the insured that fall outside the coverage provided for under the AIG Policy. In other words, 100% of the defence costs are to be paid regardless of whether there are allegations that fall outside the coverage provided for under the AIG Policy.

[14] The AIG Policy also stipulates that if there is other insurance available to an insured, the AIG policy is primary (with certain exceptions not applicable here). It bears noting that the City’s policy of insurance with Lloyd’s stipulates that it is excess to any other policy of insurance.

Position of the City

[15] The City submits that a conflict of interest exists between AIG’s defence of the allegations against Hockey Canada and the Waxers, and the duty to defend AIG owes to it. It argues that AIG’s natural inclination would be to impose the majority of liability on the City based on the physical condition of the Ice Rink (uncovered risk), rather than a breach of the rental contract with the City (covered risk). Hence, this inherent conflict is best dealt with by the City continuing to retain counsel independent of AIG.

[16] Further, the City submits that it is entitled to the costs of defending the action both pre- and post-tender, as provided in the AIG Policy.

Position of AIG

[17] AIG submits there is no conflict of interest in the case at bar. It does acknowledge that where there is a reasonable apprehension of conflict of interest, an insured is entitled to independent legal representation at the insurer’s expense.

[18] With respect to the costs of defending the action, AIG submits that its obligation in respect of payments did not arise until it first received tender of the action.

[19] Finally, AIG submits that under the doctrine of “equitable contribution” Lloyd’s has a concurrent duty, alongside AIG, to defend the City. This is so given that the pleadings disclose a “mere possibility” that the City may be found liable under the Occupier’s Liability Act, R.S.O. 1990, c. O.2 (“OLA”). As noted above, claims under the OLA are not covered by AIG.

Analysis

A. Is the City entitled to appoint and instruct counsel of its choice at AIG’s expense?

[20] In its seminal decision regarding choice of counsel, our Court of Appeal held that when determining whether an insurer ought to surrender control of the defence and pay the cost of counsel retained by the insured, a balance must be found between the insured’s right to a full and fair defence of the action against it, and the insurer’s right to control that defence, given the potential of it bearing the entire indemnification burden: The Corporation of the Municipality of Brockton v. Frank Cowan Company Limited, 2002 CanLII 7392 (ON CA), [2002] O.J. No. 20.

[21] The Court, at para. 43, held this balance is:

…appropriately struck by requiring that there be, in the circumstances of the particular case, a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer before the insured is entitled to independent counsel at the insurer’s expense. The question is whether counsel’s mandate from the insurer can reasonably be said to conflict with his mandate to defend the insured in the civil action. Until that point is reached, the insured’s right to a defence and the insurer’s right to control that defence can satisfactorily co-exist.

[22] Conflict can exist in a myriad of circumstances. For example, where an insurer has initially denied a duty to defend, courts have found a conflict to exist: Appin Realty Corp. v. Economical Mutual Insurance Company (2008), 2008 ONCA 95, 89 O.R. (3d) 654 (C.A.).

[23] With AIG’s initial denial, and subsequent acquiescence, the spectre of conflict exists. However, this alone would be insufficient to allow the City to retain independent counsel at the expense of AIG.

[24] The case for independent counsel grows stronger, however, considering the crossclaims for contribution and indemnity brought by the City and AIG. AIG’s own casualty claims analyst admitted at his cross-examination that a perceived, if not actual, conflict of interest exists between the City and AIG.

[25] AIG suggests that any conflict can be managed by ensuring a separate claims handler at AIG handles the City’s defence, and by following a “split file” protocol. This protocol consists of physically and digitally screening the file from other claims handlers with AIG. The physical documents are put into a folder marked confidential, and the electronic documents are marked “internal” or “confidential.” AIG’s casualty claims analyst agreed there is no way to monitor whether other handlers can access and review the confidential documents.

[26] Further, with no written policy setting out a formal practice in respect of managing conflicts through the “split file” protocol, AIG has not satisfied the court that this ethical wall is adequate to resolve the conflict of interest concerns.

[27] I am mindful of Ferguson J.’s very recent decision in HMQ v. AIG, 2019 ONSC 2964, where an application identical to the one before me was dismissed. I note there were some differences in the evidence in respect of AIG’s “split file” protocol. For example, there was no evidence before me that a claims handler would be subject to discipline if she/he breached protocol. Further, AIG’s analyst indicated there was no way of knowing whether other handlers could access and see documents marked “confidential.” Moreover, in that case only HMQ had issued a crossclaim, so the potential for AIG being in a position of conflict was not as evident.

[28] As the Supreme Court of Canada explained in Canadian National Railway Co. v. McKercher LLP, 2013 SCC 39, [2013] 2 S.C.R. 649, at para. 23:

The law of conflicts is mainly concerned with two types of prejudice: prejudice as a result of the lawyer’s misuse of confidential information obtained from a client; and prejudice arising where the lawyer “soft peddles” his representation of a client in order to serve his own interests, those of another client, or those of a third person.

[29] The concerns outlined by the Supreme Court are applicable in the case at bar. AIG would only be liable to indemnify the City to the extent of the Waxers’ liability, so its efforts would obviously be to reduce that exposure and play to the uncovered claims’ strength, being the occupiers’ liability claims.

[30] Ultimately, I am persuaded by the City’s argument that counsel’s mandate from AIG in respect of defending the Waxers can reasonably be seen to conflict with AIG’s mandate to defend the City.

[31] To address this irremediable conflict of interest, the City is entitled to appoint and instruct independent counsel of its choice to defend it in the underlying action. The City’s counsel is not required to report to or take instructions from AIG in this litigation.

B. Is the City entitled to reimbursement for its pre-tender defence costs?

[32] Appellate courts in Ontario and elsewhere have consistently held that, absent specific wording or agreement, a commercial general liability insurer does not cover pre-tender defence costs. This is so because the insurer’s right and duty to defend is only triggered when it receives notice of a potentially covered claim: Brockton, para. 54.

[33] AIG’s Supplementary Payments section states in part that it will pay “all reasonable expenses incurred by the insured at our request to assist us in the investigation or defence of the claim or action” (emphasis added).

[34] AIG’s Voluntary Payment condition clause states that “no insureds will, except at their own cost, voluntarily make any payment, assume any obligation, or incur any expense, other than for first aid, without our consent.”

[35] AIG’s policy wording is unequivocal. The pre-tender defence costs incurred by the City were made voluntarily, before notice was given. Accordingly, the City is not entitled to reimbursement for any past legal or administrative expenses.

C. Does Lloyd’s have a continuing duty to defend the City?

[36] AIG submits that Lloyd’s has a duty to defend the City in the underlying action for bodily injury arising out of the Occupier’s Liability Act claim, given that liability arising out of the City’s own operations and independent negligence are not covered under the AIG policy. Coverage is indeed limited to “liability arising out of the Named Insured’s operations.”

[37] Where a plaintiff advances allegations of negligence which fall outside the scope of the contract, and the insurer has not clearly specified in its policy that the duty to defend is limited to covered rather than uncovered claims, then the insurer’s duty is to defend all of the claims, both covered and non-covered. See, for example, Carneiro v. Durham (Regional Municipality), [2015] O.J. No. 6812.

[38] There is nothing in AIG’s Policy that qualifies its duty to defend, or to suggest that the duty to defend did not apply to “mixed claims.” AIG could have written qualifying words into the policy providing for an allocation of “mixed claims.” It chose not to do so.

[39] If the court acceded to AIG’s request there would potentially be three or more lawyers defending the action (one for the Waxers, one for the City, and one for Lloyd’s). This simply does not make economic sense.

[40] In the result, AIG shall pay all reasonable costs associated with the defence of the underlying action, even though those costs further the defence of uncovered claims. This is, of course, subject to AIG’s right to seek reimbursement from Lloyd’s for costs incurred in relation to uncovered claims.

Costs

[41] The parties have both provided their bill of costs on this application. Taking into consideration the mixed result, and Rule 57.01 of the Rules of Civil Procedure, I exercise my discretion and award costs to the City in the amount of $15,000, all inclusive.

[42] With respect to the costs of AIG’s motion, I award costs of $2,500, all inclusive.

CASULLO J.

Released: August 23, 2019