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Ontario Court Addresses Important, Recurring Issues in Complex Liability Coverage Disputes

The Court of Appeal (i) affirmed time-on-risk as the correct method for allocating the costs of defence between insurers when claims span many years, (ii) affirmed that insurers are not obligated to reimburse their insureds for the costs of legal defence incurred before the insured gave notice of the claim to the insurer, and (iii) in the face of conflicting interests, upheld a requirement for primary and excess liability insurers to commit to stringent split-file protocols as a pre-condition to associating with the defence of the insured.


The Ontario Court of Appeal has issued a significant decision on a number of liability insurance law issues in Loblaw Companies Limited v. Royal & Sun Alliance Insurance Company of Canada. The decision addresses important questions including:

  1. How defence costs are shared among consecutive liability insurers for allegations covering many years;
  2. Who is responsible for pre-tender defence costs; and
  3. How to separate liability defence information from coverage personnel within the insurer’s office when defending under a reservation of rights.

The detailed decision (121 pages) will be particularly significant to adjusters and insurance coverage counsel dealing with complex claims involving mixed covered and uncovered claims, multiple parties or multiple insurers.

The underlying lawsuits were five class actions in four different provinces (BC, Alberta, Ontario and Quebec) arising from the opioid crisis. The class actions were brought on behalf of either opioid users or government entities seeking recompense from opioid manufacturers, distributors and retail pharmacies for the harms and expenses caused by widespread addiction to prescription opioids over about 20 years from about 1996-2016. The allegations included negligence and intentional misconduct. The potential liability was in the billions of dollars.

Three of the class action defendants were Loblaw and Shoppers Drug Mart (SDM) for their roles as retail pharmacies, and Sanis Health Inc., a maker of generic drugs, for its role as an opioid manufacturer. Loblaw, SDM and Sanis were insured by a number of different occurrence-based primary and excess insurers under Commercial General Liability (CGL) and excess liability policies. For each of the insureds the coverage changed over time as insurers came on and off risk during the 20-year period of the allegations. The primary insurers acknowledged that the allegations in the class actions triggered the duty to defend their insureds but reserved their rights to deny indemnity because the allegations included harm from intentional misconduct, which the CGL policies excluded from coverage.

Loblaw, SDM and Sanis applied to the Ontario court for various declaratory relief, including a declaration that each insured was entitled to select one of its primary CGL insurers that would be wholly responsible for the defence of all of the allegations, and that any insurer, primary or excess, was required to commit to the terms of a defence reporting agreement (the DRA) that placed constraints on the insurer using for coverage purposes any privileged information obtained by associating with the defence of the class actions. As well, Loblaw sought relief from forfeiture and a declaration that it could recover from one of its liability insurers the legal costs of defending the claim before it gave notice to the insurer.

The application judge ruled in favour of the insureds on most points. The insurers appealed to the Court of Appeal on four grounds of appeal in total.

Payment of Defence Costs

The application judge agreed with the applicant insureds that each insured could call on one of its primary CGL insurers to defend it from the entire claim, regardless of time-on-risk, and it was up to that insurer to pursue the other insurers to contribute toward the defence costs. The Court of Appeal disagreed with that approach and reversed the decision, finding that the application judge had applied reasoning from cases involving a mix of covered and uncovered claims, in which case the rule is that the liability insurer has to pay all costs to defend the covered claims even if this benefits the insured with a defence of the non-covered claims. The Court of Appeal concluded this approach does not apply in this situation with consecutive primary CGL policies where each insurer’s agreement with the insured is time limited. In this situation each primary CGL contributes to the cost of defence based on its time on risk relative to the total time that the allegations span. 

The Court of Appeal gives clear exposition of time-on-risk as the basis for apportioning defence costs when allegations trigger policy periods over many years which is a welcome addition to the existing jurisprudence.

The Primary CGL’s SIRs + Deductibles

A number of the primary CGL insurers issued policies with a deductible or self-insured retention (SIR) of as much as $1 million. Having corrected the application judge’s error on the issue of payment of defence costs, the Court of Appeal determined that each primary CGL insurer’s duty to contribute to defence costs only arose once the deductible or SIR of its policy was exhausted and that payments toward defence costs made by other primary CGL insurers could count toward the exhaustion of the insured’s deductible or SIR. Before the exhaustion of the deductible or SIR, the insured was responsible for the costs of defence on the same time-on-risk basis as the primary CGL insurer.

Pre-Tender Defence Costs

Due to the passage of  time Loblaw had some difficulty locating historical CGL policies and this led to delay in notifying its primary CGL insurers. Loblaw incurred almost $220,000 paying defence counsel in the class actions before it was able to give notice of the actions to its primary CGL insurers and tender the claim for defence. Once notified, the primary CGL insurers acknowledged their defence obligations but declined to reimburse Loblaw for the pre-tender defence costs. The application judge agreed with Loblaw that it was entitled to relief from forfeiture in the circumstances and directed the primary CGL insurers to pay the pre-tender defence costs.

The Court of Appeal reversed this finding on the basis that there had not been any forfeiture from which to grant relief because the primary CGL insurers did not attempt to deny coverage based on the late notice from Loblaw. The Court of Appeal reasoned that the policy condition requiring notice to the insurer and the policy condition that the insured was responsible for any voluntary payments it made without the consent of the insurer (both of which are standard conditions found in CGL policies) were independent of each other, and that the pre-tender defence costs were clearly voluntary payments that the insurer had not consented to and therefore were the insured’s responsibility.  

This aspect of the decision will be helpful to liability insurers in Canada when faced with similar claims from their insureds to recover the costs of pre-tender legal defence.

Defence Reporting Agreement (DRA)

Finally, the insureds asked the court to require any insurer (whether primary or excess) to sign and abide by the DRA as a pre-condition to having access to any defence information that would be subject to privilege between defence counsel and the insured. The insureds maintained that the insurers were in a conflict of interest because (i) they had reserved rights to deny indemnity for intentional misconduct, and (ii) several of the insurers also insured other defendants with conflicting interests in the class actions. The application judge agreed with the insureds that this justified requiring all primary and excess liability insurers, as a condition of associating with the defence, to abide by the DRA which required them to set up strict split-file protocols within the insurer to separate defence personnel from coverage personnel.

The DRA proposed by the insureds divided defence information into “Public Facing Information” that any insurer could access and “Privileged Defence Information” that was not public facing and could not be shared with an insurer that did not commit to the DRA. Certain of the insurers took the position that there should be no limit on their use of Privileged Defence Information since the insureds were under a good faith obligation not to withhold information, even if it might result in a coverage denial.

The Court of Appeal upheld the application judge on this issue. The Court Appeal described the insurers as having a “defence head” and a “coverage head”. Its analysis includes a detailed discourse on split-file protocols within liability insurers to keep the defence head separate from the coverage head. This includes not only that the coverage head cannot direct the defence head but that the defence head needs to keep the coverage head from seeing privileged information that may have some influence on the coverage issue to the detriment of the insured. So whereas the insured has an ongoing obligation to share information, even if it is prejudicial on coverage, this obligation has limits and does not apply to anything that is covered by either the insured’s litigation privilege or solicitor-client privilege in the context of the defence of the class actions.

The Court of Appeal also agreed with the application judge that, given the significance of the class actions and the billions claimed in damages, it was inadequate for the insurers to maintain ethical screens only at the adjuster level. Rather, in this case the separation of coverage personnel from defence personnel had to be maintained to the level of senior management within the insurer.

The Court of Appeal reviewed and summarized the main Canadian jurisprudence on insurer conflicts of interests, the duties owed between insurer and insured when a claim is being defended under reservation of rights, and the scant jurisprudence on when a split-file protocol is required. The decision is now an important authority on any of these issues.

Multi-party liability insurance coverage situations are fertile ground for many types of disputes with insureds and between insurers, so it is advisable to consult an experienced insurance coverage lawyer without delay. Contact Michael Doerksen in Field Law’s Calgary office, Christine Pratt in the Edmonton office, or any member of Field Law’s Insurance Group for advice.


Link to decision: Loblaw Companies Limited v. Royal & Sun Alliance Insurance Company of Canada, 2024 ONCA 145