October 2007

So There Exist Two Policies Covering Your Liability:
Do Both Pay Ratably? "Not So Fast"

Frequently, a claim in negligence is brought against someone who happens to be insured under more than one liability insurance policy.

In the recent case of McKenzie v. Dominion of Canada General Insurance Co. et al (2007) 86 O.R. (3d) 419, the Court of Appeal for Ontario articulated the basis by which priority ranking between insurers (that is, which insurer has to respond, and in which order, to claims against an insured) are resolved in respect of "primary", "excess", and "umbrella" policies of insurance. Sounds confusing or remote? The situation happens quite frequently where more than one liability policy might respond to a claim filed by a plaintiff.

Consider the McKenzie case. This case involved an August 16, 2002 collision occurring between two boats in Georgian Bay. Tragic losses were encountered resulting in a number of actions for damages being brought against Michael McKenzie who was operating one of the boats with the consent of its owner, one Warren Tischler who had a boat owner's liability policy issued by the State Farm Insurance Company. Mr. Tischler also had additional insurance coverage from State Farm, by way of a separate policy being a "Personal Liability Umbrella Policy". It so happened that as Mr. McKenzie still resided at home with his parents that he qualified as an "unnamed insured" under a homeowner's policy of insurance that had been issued by the Dominion of Canada General Insurance Company to Mr. McKenzie's father.

There was no dispute that liability coverage was available to Mr. McKenzie under all three policies. However, the question as to which insurer would pay, and in which order, was of course paramount in the minds of all parties concerned and in particular the various insurers.

At trial, the Superior Court of Justice of Ontario ruled that by virtue of the wording of the State Farm boat owner's policy that had been taken out by Mr. Tischler that policy was the "primary" policy, which would pay the "first dollar and continue to pay until its limits are exhausted" all sums that Mr. McKenzie would have to pay as compensatory damages to the plaintiffs consistent with the provisions of that policy. The judgment further declared that after the coverage under that policy was exhausted in settlement of claims, that the Dominion of Canada homeowners policy and the State Farm umbrella policy were then required to contribute equally in respect of claims made against Mr. McKenzie.

State Farm was unhappy with the decision and appealed to the Ontario Court of Appeal. It had argued that it should only have to pay after the Dominion policy 'paid'. It turns out that State Farm was right.

The Court of Appeal allowed State Farm's appeal. The Court of Appeal ruled that the trial judge made an error and substituted a finding that the Dominion homeowner's policy would be the one to respond after the [primary] State Farm boat owner's policy, with the State Farm umbrella policy not being called upon to respond to any claims against Mr. McKenzie until the limits of both the State Farm boat owners's policy and the Dominion homeowner's policy [in that order] were exhausted.

The Analysis

The Court of Appeal noted the relevant coverage provisions in the Dominion and State Farm Umbrella policies.

The relevant coverage grant in the Dominion homeowner's policy was as follows:

We will pay on your behalf all sums you become legally liable to pay as compensation for loss because of bodily injury or property damage.

...

You are insured against claims arising out of your use or operation of any type of watercraft you do not own provided that the watercraft is being used or operated with the owner's consent.

...

Other insurance: If you have other insurance not insured with us which applies to a loss or claim, or would have applied if this policy did not exist, our policy will be considered excess insurance and we will not pay any loss or claim until the amount of such other insurance is used up.

In turn, the relevant coverage grant in the State Farm umbrella policy provided as follows:

...If you are legally obligated to pay damages for a loss, we will pay your net loss minus the retained limit. Our payment will not exceed the amount shown on the declarations page...

The State Farm umbrella policy defined "net loss" as the amount that the insured would be legally liable to pay as damages and, in turn, the "retained limit" was defined as the "the total limits of liability of any underlying insurance you may collect. The limits listed in the Declarations are the minimum you must maintain".

In effect, the umbrella policy by State Farm required that the insured either maintain "underlying" insurance with prescribed limits or, failing this, the insured would be considered to be self-insured for that amount.

The State Farm umbrella policy also had an "other insurance clause" which provided that if there was "other insurance that this would be excess over any other valid and collectable insurance".

The trial judge focused simply on the competing "other insurance" clauses between the Dominion and the State Farm umbrella policies. The trial judge found that because the two policies had similar "other insurance" wording that it was not possible to reconcile the same in terms of categorizing one policy as being primary, with the other being excess, and therefore the standard rules set down by the Supreme Court of Canada - providing that where two policies contain similarly worded "other insurance" clauses, they effectively cancel each other out, with both policies then paying pro-rata.

The problem in this case, as noted by the Court of Appeal, was that when the language of both policies was considered as a whole the language of the policies and the coverage provisions were different. The Dominion homeowner's policy and the State Farm umbrella policy were not equivalent as the policies covered different layers of risk. Therefore, it was not possible to equate the coverage provided by the homeowner's policy with the umbrella coverage by the State Farm policy in terms of assuming that both provide primary coverage after the State Farm boat owner's policy. While both policies contained similarly worded "other insurance" clauses, they will only effectively cancel each other out if the insurers were under a co-ordinate obligation to make good the loss. As mentioned, the State Farm umbrella policy was written in contemplation of there being other underlying insurance coverage. The Dominion homeowner's policy was not, its language making it clear that the intention was that it provide primary insurance. As such, these were not policies of coordinate obligation and therefore the pro rata rule, invoked by the trial judge by virtue of the policies having similar "other insurance language" did not apply. Thus, as between those policies, after the State Farm boat-owner's policy the Dominion homeowner's policy would be considered as primary with the State Farm Umbrella policy excess to it.

This emphasizes the importance of considering competing policies as a whole and not just particular policy provisions or clauses in isolation in terms of determining priority as to "who pays first".

By this ruling, the Ontario Court of Appeal has affirmed that there continues to be the important distinction between primary, excess and umbrella policies of insurance. In its analysis, some further rules of thumb were confirmed:

1. "True" excess and umbrella policies require the existence of a primary policy as a condition of coverage.
   
   
2. A difference between "excess" policies and "umbrella" policies is that the latter often provides primary coverage for risks that the underlying policy does not cover.
   
   
3. As a general rule, where two policies have competing "other insurance" clauses, the clauses cancel each other out and the policies pro-rate - again, if the insurers have a "co-ordinate" obligations.
   
   
4. Likewise, two "true" excess policies at the same level of insurance pro-rate the loss - if there are "co-ordinate" obligations.
   
   
5. As a rule, however, excess and umbrella policies are regarded as excess over and above any type of primary coverage.

In conclusion, the Court of Appeal found that the State Farm umbrella policy was a "true" excess or umbrella policy not to be called upon to respond to this loss until the limits of the Dominion Insurance homeowner's policy were spent.

This decision illustrates the importance of avoiding an automatic conclusion that where two or more policies exist that they will pro-rate simply where they contain similar "other insurance" clauses.

Gordon Hearn