In January 1995 a fire destroyed a Toronto apartment building. Eight legal proceedings were brought against various defendants including the building’s owner, Axes Investment Inc. (“Axes”) and the property manager, Tandem Group Management Inc. (“Tandem”).
Three policies of insurance were available to Axes and Tandem to respond to the loss; two with Lombard and one with Aviva:
- A Lombard primary policy, with limits of $1 million, insuring both Axes and Tandem;
- A Lombard umbrella policy, with limits of $9 million, insuring both Axes and Tandem; and
- An Aviva policy with limits of $5 million insuring Tandem only.
In the tort action Lombard acknowledged that its primary policy was the first to respond and retained counsel to defend both Axes and Tandem and funded this defence. Although entitled to do so, Aviva did not participate in the defence of the tort actions or retain its own counsel for that purpose.
As a result of Aviva and Lombard’s position, Axes and Tandem presented a unified defence in the tort actions, with only one counsel representing them both. No cross claims seeking apportionment of liability as between them were sought.
The Court noted that it was clear early on that the extent of the plaintiff’s claims would exceed the limits of Lombard’s primary policy; however, the issue between Aviva and Lombard was which of them was responsible for what portion of the excess losses.
Lombard took the position that the Aviva policy was required to respond next after the Lombard primary policy and that the Lombard umbrella policy was only triggered if and when the Aviva $5 million had been exhausted. Aviva took the opposite position, maintaining that the Lombard umbrella policy was next to respond completely because it covered both the Axes and Tandem.
Upon trial and appeal in the tort claim the joint liability as “one defendant” of Axes and Tandem was set at 45%. Following this appeal the tort plaintiffs demanded payment and were entitled to do so from either or both insurers. At this point Aviva proposed a joint payment, sharing the claim equally. Lombard did not agree. Ultimately, in the words of Lombard’s counsel, Aviva “blinked” and paid Axes/Tandem’s portion of the damages amounting to approximately $2.5 million dollars, including prejudgment interest and costs [after deducting Lombard’s $1 million primary policy coverage].
The Ontario Court of Appeal noted that the issue at bar was not about how to apportion liability as between two defendants but rather as to how to apportion responsibility for that “one defendant” liability as between two insurers. The Ontario Court of Appeal held that these issues were properly resolved through the application of the notions of equitable contribution, or some combination of equitable contribution and the restitutionary principle of unjust enrichment. The Court described these principles as simply being both examples of the fair play rules imposed by equity.
The Court of Appeal stated that the principles of equitable contribution were “germane to these circumstances,” and reiterated the traditional criteria for applying the doctrine of equitable contribution as between insurers as:
- All policies concerned must comprise the same subject matter.
- All policies must be effected against the same peril.
- All policies must be effected by or on behalf of the same assured.
- All policies must be in force at the time of the loss.
- All policies must be legal contracts of insurance.
- No policy must contain any stipulation by which it is excluded from contribution.
The Court of Appeal noted that in the insurance context, equitable contribution has traditionally been applied to prevent over recovery by an insured with more than one insured covering the same risk and to do so by calling on all relevant insurers of that same risk to share pro rata in the payment for the loss. In this case that risk was the equal obligation on the part of Aviva and Lombard to respond to the tort claims against Axes and Tandem.
The Court held that Lombard and Aviva were each equally obligated to respond to the plaintiffs’ claims in full. The plaintiffs could have approached either Axes [insured only by Lombard] or Tandem [insured by both Lombard and Aviva] to recover the totality of the judgment against them. The Court held that Lombard and Aviva were each equally obligated to respond to the plaintiffs’ claims in full and the fact that Aviva “blinked” first did not detract from Lombard’s legal obligation to respond, had the tort plaintiffs pursued Axes alone. The Court went on to state:
““Blinking” cannot be the defining principle of insurance law upon which the respective responsibilities of Aviva and Lombard for responding for the losses are determined”.
With regards to the criteria that all policies must be affected by or on behalf of the same assured the Court of Appeal did note that there were two insured entities here, Axes and Tandem. However, the Court went on to state that: “I do not see this criteria as a rigid impediment to extending the doctrine of equitable contribution to the circumstances found in this case. Resort to principles of equity calls for flexibility.”
The Court placed great emphasis on the fact that when two insurers insure the same risk and choose, as was done here, to present a unified front as one defendant in tort actions then the two insurers acting on behalf of what could be perceived as a single combined defendant may, in effect, be viewed as though they are subject to a “coordinate liability” and therefore, as if they were the same assured for the purposes of that particular risk.
The Court again emphasized that as Aviva and Lombard decided to put forward a “one defendant” stance in the tort action without inviting a split of liability they effectively created a single insured for the purposes of responding to the damages awarded against both Axes and Tandem. Accordingly, the Court of Appeal held the principle of equitable contribution mandated that both Aviva and Lombard were equally obligated to pay the plaintiffs and should share that obligation equally.
The Court also held that under the unjust enrichment principal of restitution Lombard was responsible for contributing equally to the damages awarded as against Axes/Tandem. The Court noted that the principle of unjust enrichment has to be applied with flexibility and common sense. The categories of circumstances in which a claim of unjust enrichment will be met are not limited but rather recovery is permitted where a plaintiff can establish three elements: an enrichment of or benefit to the defendant, a corresponding deprivation of the plaintiff, and the absence of a juristic reason for the enrichment. The Court of Appeal found that the criteria for an unjust enrichment were met in the circumstances of this case. Here, the Court held, Lombard retained the obligation to pay damages on behalf of Axes and when Aviva covered that obligation (in the course of making payment in relation to Tandem) it conferred a benefit of Lombard in that Aviva’s payments spared Lombard from incurring an expense it would otherwise have to occur.
This case is a nice example of the flexibility courts will use when considering equitable principles. It also highlights the importance of a considered analysis of potential indemnification issues at the inception of the tort claim. The Ontario Court of Appeal placed great emphasis on Lombard and Aviva’s decision to undertake a joint defence of both Axes and Tandem. In essence, by not seeking cross claims or liability apportionment, the insurers were hampered in the apportionment of indemnity arguments. While the insurers may have saved some defence costs by only appointing one counsel, as opposed to two separate counsel being instructed by separate adjusters, at the end of the day, this decision may have cost the insurers more than they may have saved.