So There Exist Two Policies Covering
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
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.
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 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
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
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
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:
- "True" excess and umbrella policies require
the existence of a primary policy as a condition of coverage.
- A difference between "excess" policies
and "umbrella" policies is that the latter often provides
primary coverage for risks that the underlying policy does not
- 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
- Likewise, two "true" excess policies
at the same level of insurance pro-rate the loss - if there are
- 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
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