In the recent decision of Lombard General Insurance Company of Canada v. 328354 B.C. Ltd., 2012 BCSC 431 the Supreme Court of British Columbia addressed for the first time the issue of whether an insurer’s obligation to fund the costs of defence can be apportioned prospectively prior to trial on a “time on risk” basis.
The underlying action involved “leaky condo” litigation arising out of the construction of a strata complex in Squamish, BC. Lombard insured the developer under several wrap-up CGL policies. Following expiry of the policies the developers did not purchase any further insurance coverage, thereby leaving themselves uninsured for a period of approximately 10 years.
Lombard sought a declaration that their obligation for defence costs in the underlying action was limited to a pro rata share based on the proportion of time for which their policies were “on risk” relative to the overall period of time in which the damage was alleged to have occurred. Using a “time on risk” calculation, Lombard assessed its pro-rata share of the defence costs at 16.3% leaving the uninsured developers responsible for the remaining 83.7%.
The developer opposed this on the grounds that allegations in the pleadings were broadly framed and did not clearly establish a timeline for the occurrence of the alleged damage. Therefore, they argued that apportionment of defence costs was a matter to be left determined at or after the trial based on the relevant findings of fact. They argued that, in the interim, Lombard was obliged under the policies to fund 100% of the defence costs in the action.
The Court ultimately held that:
- There is no principle that requires defence costs to be apportioned between an insurer and an insured on the basis of time on risk in the case of continuous or progressive damage;
- The concept of fairness does not require a court to order an apportionment of defence costs in cases of continuous or progressive damage. Rather, the obligation owed by an insurer to defend an insured and the extent to which an insurer must pay or contribute to the costs of that defence are dependent upon the terms of the policy and the circumstances of the underlying litigation;
- Apportionment of defence costs prior to trial can be ordered where there is a reasonable or practical means of making an order that fairly assesses the relative obligations of the two parties to pay defence costs. However, time on risk is not a reasonable or practical means of apportioning costs in the absence of evidence which suggests that the costs of defending the uncovered claims will approximate that apportionment; and,
- In this instance it was likely that most of the defence costs that would be incurred would have been incurred even if the period of continuous or progressive damage ended when the insurance coverage terminated. It did not matter that those defence costs would incidentally benefit the insured by assisting with the defence of damage that occurred outside of the coverage period. In such circumstances, the apportionment of defence costs should be left to be determined after findings of fact had been made in the underlying action or when sufficient information regarding allocation of defence expenses can be placed before the court.
Duty to Defend
In its analysis, the Court accepted that where it is possible to distinguish between claims falling within and outside of the policy coverage the extent of an insured’s defence obligations can be limited accordingly and that an insurer has no duty to defend claims which clearly fall outside the granted coverage. Further the Court noted that the extent of an insurer’s defence obligations in a case involving a mix of covered and non-covered claims will depend primarily on the precision of the allegations in the pleadings and the operative languages in the coverage provisions of the policy.
The Court found that that in view of the coverage language and the substance of the allegations in the pleadings, it was clear that some of the property damage claims in the underlying action were outside of coverage. However the real issue, noted the Court, was whether the costs of defending the covered / non-covered claims could be readily apportioned at that stage of the proceedings.
“Time on Risk”
The Court concluded that there was no settled principle in Canadian case authority regarding continuous damage claims that favours an apportionment based on time on risk. Rather, the principle the Court extracted from prior decisions was that defence costs can be apportioned between an insurer and an insured “if there is a reasonable or logical basis upon which to do so”. The Court noted that most times when faced with the difficulty of apportioning defence costs at an early stage in the proceedings most Courts have declined to do so.
The Court ultimately held that:
 For the reasons discussed above, I conclude that none of these authorities support a pre-trial apportionment of defence costs between an insurer and an insured on the basis of time on risk. In my view, time on risk is not a reasonable or practical means of apportioning defence costs in the absence of evidence from which it can be established or inferred that the costs of defence for periods of time when an insured did not have coverage will approximate that apportionment.
Equitable Concept of Fairness
With regards to whether the equitable concept of fairness required an apportionment to defence costs, the Court drew a distinction between insurer-insurer disputes and insurer-insured disputes. In the former the question of fairness may arise as the insurers do not owe duties to each other as there is no contractual relationship between them. However in the latter the question of fairness does not arise in the same way as the focus is instead on the contractual relationship between them.
The Court adopted a “contractual interpretation analysis” which holds that the apportionment to defence costs between an insurer and an insured should be determined by the operative language in the policy. Where there is an unqualified obligation to pay for the defence it claims falling within coverage the insurer is required to pay all reasonable costs associated with the defence of those claims, even if those costs also further the defence of uncovered claims.
Ultimately the Court held:
59] In summary on this issue, I conclude that the equitable concept of fairness does not require a court to order an apportionment of defence costs in all cases of continuous or progressive damage. Rather, an insurer’s duty to defend and the extent to which it must pay for or contribute to the cost of that defence are to be determined according to the terms of coverage and the circumstances of the underlying litigation.
The Court rejected Lombard’s submission that the extent of the duty to defend and the amount it must pay to fulfill that duty, is to be determined solely on the basis of the pleadings. The Court noted that this argument merges the the duty to defend (which is determined solely on the pleadings) with the responsibility to pay for or contribute to the costs of that defence (which should be determined on some rational basis that has a real connection with the actual costs of defending the covered claims). As such the Court again noted that there is a decided preference by the courts to apportion only once there is a solid basis in fact for doing so.
The Court held that in the circumstances before it there was no reasonable or practical means of apportioning defence costs. The pleadings did not specify the extent to which damage was alleged to have occurred within or outside the policy period and there was no useful evidence regarding the costs associated with defending the claims falling within or outside of coverage. As such, the Court held there was no basis upon which it could infer that the allocation of defence costs bear a direct proportion to the parties’ time on risk.
Rather, the Court noted that all of the property damage claims had their “genesis” in the same allegations of water ingress due to construction deficiencies and defects. The Court opined that it was likely a substantial amount of the defence costs that would be incurred would be incurred even if the period of continuous or progressive damage ended when the insurance coverage terminated.
The Court held that the express wordings of the wrap-up policies provided that Lombard had a duty to defend any actions seeking compensatory damages because of property damage occurring within the policy period and it followed that Lombard must pay all reasonable costs defending such claims regardless of whether they also assist in the defence of claims in respect of damage falling outside the policy period.
The Court went on to state that the result did not amount to providing the developers with a “free defence” as it would be open to Lombard to seek reimbursement at a later stage in the proceedings. As such, the Court stated that there was no unfairness to Lombard in requiring it to provide a full defence.
This somewhat naively assumes that an insured would have readily available assets upon which to pay defence costs at a later time, which may not be the case. As such while theoretically able to ultimately claim back against an insured for an apportionment of defence costs, the reality is that such efforts may ultimately be futile.
As the Court clearly rejects the proposition of an automatic pre-trial “time on risk” apportionment in continuous damage situations it is likely to significantly increase an insurer’s expenses when defending leaky condo litigations.
Apart from such continuous damage claims, this decision provides a nice general overview of the factors to consider in a pretrial apportionment of defence costs between covered and uncovered claims and it ultimately stands for the proposition that a pretrial allocation of defence costs can only be made where there is a “reasonable or practical means of making an order that fairly assesses the relative obligations of the two parties to pay defence costs”.