Excess Insurers Must Be Properly Notified of Claims

If an excess insurer is not provided with proper notice of a claim, the excess insurer need not contribute to defence costs. This was the conclusion of the Ontario Court of Appeal in a decision handed down May 3 2005, ING Insurance Co. of Canada v. Federated Insurance Co. of Canada.

On November 8, 1996, Mr. Blake was driving a vehicle owned by Lamsar Mechanical when he was involved in a serious accident. There were four passengers in the car, one of whom died. Three separate actions were launched alleging damages of $9.3 million. Lamsar had a standard auto policy with ING with liability limits of $2 million. Since Mr. Blake carried on business as a tire dealer, he had two policies with Federated, a standard garage policy and a fleet policy, each with limits of $1 million. It was agreed that the ING policy was first loss insurance and the Federated policies were excess only.

Mr. Blake contacted Federated shortly after the accident regarding his own claim for accident benefits. These were paid and the file closed. The first Federated had any notice of the tort claims was March 14, 2001, approximately three years after the claims were commenced. Initially, the lawyer appointed by ING to defend the case advised that the claims against Mr. Blake should settle for less than $2 million and that the Ministry of Transportation, a co-Defendant, would also be liable. In July it was suggested that Federated should attend a full day settlement conference in late August. When Federated requested information regarding the actions to date, defence counsel responded that since Federated had neither acknowledged coverage nor offered to share in defence costs, he had no obligation to Federated.

After a settlement conference, defence counsel provided Federated with an assessment just under $3 million and advised Federated that ING intended to offer its limits in exchange for an agreement from the Plaintiffs that Lamsar and Blake would not be personally pursued but would assign any right they had to indemnity from Federated. Settlement of the tort actions was eventually reached with ING contributing $2.1 million, the Ministry $1.1 and Federated $900,000.

ING sought a contribution to the defence costs from Federated. The judge at first instance concluded that costs should be apportioned proportionately to the share of damages (37%), but the Court of Appeal disagreed. There was no duty to defend, and therefore no obligation to contribute to defence costs.

The Court of Appeal reviewed the law in Broadhurst & Ball v. American Home Insurance Company and Alie v. Bertrand & Frere Construction Co., noting that an excess insurer’s duty to contribute to defence costs is premised on the existence of a duty to defend. For the duty to arise there must be notice and, as required by the statutory condition, the insured must give written notice of any claim made on account of an accident. It must also be clear that the excess insurer is “plainly at risk”.

When Federated was first contacted, defence counsel was still of the opinion the claim was less than $2 million. When it was made clear the claim could exceed $2 million, it was also made clear that defence counsel was not protecting Federated’s interest, only ING’s. In this case, the excess insurer, knowing of the claim had not sat back and benefited from the work of the primary insurer. In the circumstances it was not fair to require Federated to pay any part of ING’s defence costs.

In light of cases such as this it is clear that primary insurers should carefully consider whether an excess insurer needs to be put on notice. ING had not proceeded to trial or admitted liability, which presumably would have given Federated grounds to resist any payment. Nevertheless, the failure to involve Federated in a clear and timely way meant there was no duty to defend and no defence costs owing.

Readers with questions concerning this or other insurance related topics are welcome to contact Larry Munn at lm@cwilson.com or 604-643-3160 or any other member of the CW insurance and risk management practice group. For those wishing to read further on the topic, there is also a detailed paper about the relationship between primary and excess insurers on the CW website.