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
"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
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
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
"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."
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