Clark Wilson LLP Insurance Bulletin
Case Law Review Archive
WHAT COMES FIRST: BOATS, HORSES AND “OTHER INSURANCE” CLAUSES?
The Supreme Court of Canada recently refused leave to appeal a decision of the Ontario Court of Appeal in an overlapping coverage dispute between primary and umbrella/excess policies. The case, McKenzie v. Dominion of Canada General Insurance Co. clarifies the principles to be applied in this often poorly understood area of insurance law.
THE FACTS IN McKENZIE
In August 2002 two boats collided on a lake in the heart of Ontario’s cottage country, resulting in serious injuries and related lawsuits against Mr. McKenzie who was the operator of one of the boats. Fortunately for him, Mr. McKenzie was covered under three separate policies of insurance including:
a boat owners liability policy issued to the owner by State Farm;
a personal liability umbrella policy also issued to the owner by State Farm; and
a homeowners policy issued to the McKenzie family by Dominion.
The Trial Court held that the boat owners policy provided primary insurance and was responsible for Mr. McKenzie’s defence costs and indemnity exposure from the first dollar until policy limits were exhausted. The issue on appeal, however, was which of the other two policies should pay next - i.e., whether they both contributed according to some formula or whether one was obliged to respond before the other.
THE PREVIOUS SUPREME COURT DECISION
The Supreme Court of Canada had only once before addressed the question of overlapping insurance coverage in a 2002 case called Family Insurance v. Lombard Canada. That case had arisen out of a horse-riding accident which resulted in a personal injury lawsuit against the owner of the horse. The owner had coverage under her own homeowners policy as well as the liability policy provided by Lombard Canada to all members of the Horse Council of British Columbia. The policy limits were $1,000,000 and $5,000,000 respectively and each policy contained an “other insurance” clause which purported to make it excess to any other coverage. In that case, the Supreme Court of Canada ruled,
if the “other insurance” clauses can be reconciled and enforced in a commercially sensible fashion, then those “other insurance” clauses will be applied to determine the contribution under each of the policies; however,
if the “other insurance” clauses cannot be reconciled, for instance if both clauses state that the policy provides only excess coverage, then each of the policies will be required to contribute equally up to exhaustion of each respective policy limit.
The Court rejected the lower court’s assessment of “underwriting considerations determining the true intent of the insurers” and held that, because the clauses could not be reconciled, both policies were required to contribute equally.
The Supreme Court also emphasized the general principles which govern the rights of contribution between insurers, and which came to be of critical importance in the McKenzie decision:
The policies must cover the same subject matter;
The policies must insure against the same peril;
The policies must be for the benefit of the same insured;
The policies must be legally enforceable contracts of insurance and in force at the time of the loss; and
The policies must not contain provisions excluding contribution.
“Other insurance” clauses come into play under the last of these rules. The Court expressly rejected the majority United States rule which holds that all types of “other insurance” clauses are mutually repugnant and ought not be enforced. Rather, the Court held that if the “other insurance” clauses can be reconciled so as to give effect to both policies whilst providing coverage to the insured, then they should be applied to that effect.
The “other insurance” clause in the McKenzie’s homeowners policy provided,
“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 and we will not pay any loss or claim until the amount of such other insurance is used up.”
The boat owners personal liability umbrella policy issued by State Farm provided coverage for “net loss minus the retained limit”. The “ retained limit” was defined to mean “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 other words, the State Farm policy provided excess coverage over certain prescribed minimum amounts (or, as some might say, a substantial deductible).
In the Family Insurance case the outcome was equal contribution by both insurers. In the McKenzie case, however, the Court held that the homeowners policy was primary and was called upon to respond before the personal liability umbrella policy. This was because the policies covered “different layers of risk”, i.e., one was a primary policy and the other was a true excess policy:
“While both policies provide similarly worded other insurance clauses, they will only effectively cancel one another out if, to use the language of the Family Insurance case, the parties were under “coordinate obligation to make good the loss”…
…I respectfully disagree…that the “other insurance” clauses in the umbrella and homeowners policy are irreconcilable. Such a conclusion is only possible where the policies in question cover the same level of risk. The two policies in issue before this court do not. The State Farm policy is a true umbrella policy while the homeowner’s policy is a primary policy, which pays first dollar insurance coverage unless there is other insurance. The reference to “other insurance” in a primary policy can only reasonably refer to other primary insurance….If the Supreme Court of Canada had intended to do away with any distinction among primary, excess and/or umbrella policies of insurance, it would have done so in clear and express language to that effect…the reasoning in Family Insurance does not apply…where the relevant policies of insurance provide different layers of coverage, or, stated another way, where the contest is between a primary insurer and an excess or umbrella insurer.”
One wonders whether the outcome would have been different if the umbrella policy had incorporated a “drop-down” feature instead of imposing a mandatory retained limit. Overlapping coverage disputes can involve mind boggling complexities. The McKenzie decision can be accessed at:
http://www.canlii.org/en/on/onca/doc/2007/2007onca480/
2007onca480.html but readers looking for a more extensive analysis of the law can find it in a paper written by Neo Tuytel. An executive summary of the paper is accessible on Clark Wilson’s website at:
http://www.cwilson.com/pubs/insurance/njt2
If you have any questions regarding overlapping coverage or any other insurance matter, please feel free to contact Neo at 604-643-3180, or njt@cwilson.com, Nigel Kent at 604-643-3135, or npk@cwilson.com, or any other member of the Clark Wilson LLP Insurance Practice Group.
