April 2002

Overlapping Liability Insurance, Other Insurance Clauses, Excess and Primary Coverage: Family Insurance Corp. v. Lombard Canada. Ltd., 2002 S.C.C. 48

In Family Insurance Corp. v. Lombard Canada. Ltd., 2002 S.C.C. 48 (released May 23, 2002), the Supreme Court of Canada clarified the principles that courts are to use in deciding the effect of competing "other insurance" clauses in liability policies, in those cases where an insured is insured under two or more policies and the various insurers seek to rely on their clauses to make their policy excess to the others rather than primary or sharing, or to limit the amount that the insurer pays to something less than equally with the other policies up to respective policy limits. The S.C.C. affirmed the "independent liability" approach and held that, absent some agreement between the insurers, the conflicting clauses in the various policies cancel each other so that each insurer pays towards the insured liability equally up to that insurer's policy limits.

The first paragraph of the reasons sets the stage succinctly:

"This appeal concerns the issue of overlapping insurance coverage and the proper approach to the reconciliation of disputes among two insurers, each of whom has sought to limit its liability where other insurance covers the same loss. The issue has engendered a significant amount of jurisprudence and is far from novel. Nevertheless, the reconciliation of competing and apparently irreconcilable insurance policy provisions has plagued the courts and given rise to much academic comment in Canada as well as in American jurisdictions. This is a good opportunity for this Court to clarify the law in this area."

The S.C.C. held that, interpreting the clauses, the question is what was intended as between insured and insurer. The various insurers did not contract with one another so the courts are not to enter into any consideration of expectations as between insurers.

The Court stated: "The better approach is one that recognizes that the parties involved [the competing insurers] have not contracted with each other, so that their subjective intentions are irrelevant. Although the intentions of the insurers govern the interpretation exercise, the focus of the examination is to determine whether the insurers intended to limit their obligation to contribute, by what method, and in what circumstances vis-à-vis the insured." In addition, the SCC affirmed the "independent liability" principle as the method of determining how the insurers share, absent relevant provisions in the policy. Under the "independent liability" principle, each insurer shares equally up to policy limits, rather than on the basis of some ratio which depends, for example, on the comparison of policy limits.

The problem arises in situations where an insured has insurance under more than one liability policy where each of the polices has a clause which, in substance, provides that the policy is excess to other applicable insurance and will not share with other applicable insurance. The modern Canadian approach is to hold that "other insurance" clauses which are in substance identical cancel each other out, so that that the insurers share equally in the insured liability up to policy limits.

In Family Insurance Corp. v. Lombard Canada. Ltd., the courts were dealing with the liability coverage available to the insured under a homeowners/residential policy with limits of $1 million and commercial general liability policy with limits of $5 million. The accident was a fall from a horse. The injured person sued the insured. The insured was the owner of the stable were the horse was stabled. It was admitted that the claims against the insured fell within the scope of coverage provided by both policies.

The trial court, the British Columbia Supreme Court, found that the "other insurance" clauses in each of the policies were substantially the same although the exact wording was different. As such, the clauses were "repugnant" and cancelled each other out. Each provided that it was excess if there was other liability insurance available to the insured. One policy contained a sharing provision and the other did not. The trial court followed the standard approach in these cases and found each clause inoperative and that the insurers shared equally up to their limits.

The British Columbia Court of Appeal reversed the decision, adopting the "closeness to the risk" analysis from the U.S.A. The analysis attempts to distinguish between "general" liability insurance and "specific" liability insurance. Insurers providing property insurance will be familiar with this sort of approach from the rules applicable to overlapping property insurance as set out in the Guiding Principles convention to which many insurers are signatory. The "closeness to the risk" analysis is based on developments in the U.S.A., primarily Minnesota and adds into the interpretation cauldron the requirement of comparing policies in terms of the expectations of the insurers inter se. The B.C.CA. applied this analysis to hold that the Family policy providing coverage was the primary coverage and the Lombard policy excess, only.

The Minnesota cases and the "closeness to the risk" analysis are controversial in the U.S. do not form the mainstream U.S. approach. This analysis had been rejected in Saskatchewan as early as 1980 and in Ontario as recently as 1999. In the Ontario case, the S.C.C. refused leave to appeal.

The S.C.C. restored the trial decision that the clauses were repugnant and the insurers shared equally. The Court said, in paragraphs 26 through 28, about the applicable principles of interpretation:

"There is no real suggestion in Canadian jurisprudence that a "closest to the risk" policy should be embraced, and no consensus in the American authorities. Commercial efficacy and the avoidance of litigation between insurance companies supports a split responsibility and the avoidance of litigation as to which policy is closer to the risk or the coverage."

It also said:

"The better approach is one that recognizes that the principles of contract interpretation must be applied here in light of the fact that the parties involved have not contracted with one another. Although the intentions of the insurers govern the interpretation exercise, the focus of the examination is to determine whether the insurers intended to limit their obligation to contribute, by what method, and in what circumstances vis-à-vis the insured. In the absence of such limiting intentions or where those intentions cannot be reconciled, principles of equitable contribution demand that parties under a coordinate obligation to make good the loss must share that burden equally."

Having determined that both policies were primary, the next question was how to apportion the insured liability: how much was payable under each policy. The Family policy had a provision which set out how to calculate the applicable Family policy limits were there was overlapping liability insurance involving it and other policies. The Lombard policy did not. The Family clause called for apportionment based on respective limits. If the Family clause applied, Family would not share equally. It would pay 1/5 and Lombard 4/5. In paragraphs 39-43, the S.C.C. held that the Family clause could not apply as between the insurers since the clause was not contained in an agreement between Family and Lombard. Rather, the independent liability approach applied. Each insurer's policy obligation was determined as if no other insurance existed. The S.C.C. affirmed the modern Canadian approach that "where liability is shared among insurers covering the same risk, the loss is borne equally by each insurer until the lower policy limit is exhausted, with the policy with the higher limit contributing any remaining amounts."

D.C.