Family Insurance Corp. v. Lombard Canada Ltd.

Bastarache J. -- This appeal concerns the issue of overlapping insurance coverage and the proper approach to the reconciliation of disputes among two insurers, each of whom has sought to limit its liability where other insurance covers the same loss. The issue has engendered a significant amount of jurisprudence and is far from novel. Nevertheless, the reconciliation of competing and apparently irreconcilable insurance policy provisions has plagued the courts and given rise to much academic comment in Canada as well as in American jurisdictions. This is a good opportunity for this Court to clarify the law in this area.

In March of 1996, Michelle Patterson was injured in a fall from a horse. Patterson sued Lesley Young, the owner of the stable, and Douglas Blanchard, the owner of the horse. Ms. Patterson’s claim was eventually settled, with the quantum of damages payable by Ms. Young's insurers set at $500,000.

At the time of the accident, Lesley Young was insured by the appellant, Family Insurance Corporation (“Family”), under a homeowner/residential insurance policy with a maximum benefit of $1 million. Young was also insured by the respondent, Lombard Canada Ltd. (“Lombard”), under a Commercial General Liability Policy for up to $5 million, a policy Young obtained when she became a member of the Horse Council of British Columbia (“HCBC”). Although Lombard denied liability initially, both insurers concede that Young’s liability claim falls within the scope of coverage of both of the policies.

Although the wording of each is different, both insurance policies contain “other insurance” clauses that declare the policies to be “excess coverage” to any other insurance coverage held by the insured. The Family policy contains the following “other insurance” clause:

If other insurance exists which applies to a loss or claim or would have applied if this policy did not exist, this policy will be considered excess insurance and the Insurer is not liable for any loss or claim until the amount of such other insurance is used up.

The Lombard policy phrased its “other insurance” clause as follows:

If other valid and collectible insurance is available to the Insured for a loss we cover under Coverages A, B or D of this form, our obligations are limited as follows:

. . .

This insurance is excess over other existing insurance if any, whether such other insurance be primary, excess, contingent or on any other basis, that is liability insurance such as, but not limited to comprehensive personal liability, comprehensive general liability coverages or similar coverage for liability arising out of the activities of any insured.

The contest, then, is between the two insurers and concerns the extent to which each of them is liable to pay the insured’s claim. Each insurer relies on its “other insurance” clause as a means of shielding itself from primary liability.

At trial, the parties agreed that the only issue before the court was the extent, if any, of the liability of each insurer. They further agreed that, if the court held both insurers liable under the respective policies, each would share equally in the liability to their respective policy limits. McEwan J. of the British Columbia Supreme Court found each insurer to be primary and, accordingly, that each should contribute equally to the loss. Lombard appealed, arguing that the trial judge erred in finding Lombard to be a primary insurer. Similarly, Family cross-appealed, claiming the trial judge erred in finding that Family was liable as a primary insurer. At the hearing, however, Family abandoned its cross-appeal and agreed with the Court of Appeal that its position was untenable.

McEwan J. first noted that the wording of the two clauses was not identical. Thus the first step was to determine whether the two clauses could be reconciled by determining the intent of the two insurers as revealed by the content of their respective policies: Simcoe & Erie General Insurance Co. v. Kansa General Insurance Co. (1994), 93 B.C.L.R. (2d) 1 (C.A.). McEwan J. noted that the appellant’s policy was worded so that the test for liability was whether the other policy would function as the primary insurance if the appellant’s policy did not exist. The respondent argued that its policy was excess even to excess policies, so that even if the appellant met its own definition as an excess insurer, then the respondent would be excess to it. McEwan J. rejected this view, noting that such an interpretation leads to circular reasoning that does not resolve the problem of which policy provides primary coverage: McGeough v. Stay ’N Save Motor Inns Inc. (1994), 116 D.L.R. (4th) 137 (B.C.C.A.). He stated, at para. 8: “Beyond a certain point I do not think it makes much sense to arbitrate what amounts to a kind of drafting ‘tag’. The clauses are irreconcilable. Applying the principle set out in the cases the excess clauses are inoperative.”

McEwan J. then addressed the issue of how to apportion liability as between the two insurers. He noted that the Lombard policy provided a formula for sharing liability whereas the Family policy was silent on the issue. He held that without an agreement between the parties, Lombard’s formula could not bind Family. Applying the “independent liability approach” from Dominion of Canada General Insurance Co. v. Wawanesa Mutual Insurance Co. (1985), 64 B.C.L.R. 122 (S.C.), McEwan J. held that the “other insurance” clauses cancel each other out. As both “other insurance” clauses were inoperative, each policy is regarded as providing primary coverage, so that each insurer is required to contribute equally to the applicable limits of each policy or until none of the loss remains: McGeough, supra, at p. 146; Dominion of Canada v. Wawanesa, supra, at pp. 130 and 132-33.

Hall J.A. reviewed the competing policies and noted that the HCBC advised its members that liability coverage under the Lombard policy was excess to personal liability insurance that its members might possess. Although he did not believe that the HCBC’s advertisement governed the interpretation of the policies, he reasoned as follows, at para. 4:

One must have regard to the language of the policies although a consideration of policy language cannot be completely divorced from surrounding circumstances and commercial reality.

In reaching his decision, he adopted the approach of Legg J.A. in McGeough, supra, that reconciliation of overlapping coverage policies is governed by the intent of the insurers as manifested by the terms of the policies issued. Hall J.A. also relied upon E. R. H. Ivamy, General Principles of Insurance Law (3rd ed. 1975), at pp. 312‑13, where the author states:

The cardinal rule of construction is that the intention of the parties must prevail. But the intention is to be looked for on the face of the policy, including any documents incorporated therewith, in the words which the parties have themselves chosen to express their meaning. The Court must not speculate as to their intention, apart from their words, but may, if necessary, interpret the words by reference to the surrounding circumstances.

Hall J.A. agreed with the trial judge that, on a consideration of the clauses alone, the “other insurance” clauses were irreconcilable. He further noted that the “traditional way” to apportion liability where the wording of the policies cannot be reconciled accords with what McEwan J. did in this case. Finally, he agreed with the trial judge that Simcoe & Erie v. Kansa, supra, stipulated that the liability of insurers with overlapping policies was governed by the intent of the insurers as manifested by the terms of the policies.

Hall J.A. distinguished Simcoe & Erie v. Kansa, supra, where it was held that the clauses cancelled each other out and liability was apportioned equally, on the basis that the competing policies in that case were alike in type and coverage. He held that had the present policies been similar, he would have agreed with the result reached by McEwan J. at trial. Turning to the surrounding circumstances of this case, Hall J.A. reasoned as follows, at para. 15:

[I]t seems to me that the court can and should take account of the circumstance that these two policies do appear rather different from each other in type and purpose. I believe we must consider the particular circumstances reflected by the description and wording of the respective policies. It is also, in my judgment, appropriate to take account of the limited surrounding facts we have in this case in an effort to resolve this dispute between the competing insurers.

Hall J.A. then noted that the Family policy was a standard homeowner policy covering inter alia dwelling premises, personal property and personal liability. The Lombard policy covered Young through her membership in the HCBC. Hall J.A. found that, because the Lombard policy was offered through a club, it was “the intent of the insurer to offer a type of excess coverage generally to a class of insureds with a proviso that, absent any other coverage, the policy could provide primary insurance coverage” (para. 16). He also considered that the HCBC believed Lombard’s policy provided excess coverage for its members. Although he did not give this factor much weight, he took it into account as a surrounding circumstance which gave some indication that such an interpretation of the Lombard policy would accord with commercial reality.

Hall J.A. took note of the higher coverage provided by the Lombard policy, the broader net of coverage and its availability to a group of insureds. He also observed that the underwriting considerations were different for this policy than for the Family policy. He stated at para. 19:

Concerning the Family policy, rates will be based on past or anticipated loss experience related to all homeowners likely to purchase an individual homeowners policy. A limit of $1 million is provided for to limit maximum exposure to that sum in a personal liability claim. The Lombard policy is underwritten based on past or anticipated loss experience related to the covered group, bearing in mind on the one hand the strong probability of other existing coverage for most members, and thus the avoidance of coverage or responsibility on most claims and on the other hand providing a higher limit to afford, in the rare case, excess coverage to an insured having a large claim. Excess coverage may very occasionally be required for a catastrophic claim over the amount covered by the limits of the anticipated existing insurance coverage and in most cases, primary coverage will not be given under the Lombard policy, because of the existence of existing liability insurance coverage of the insured.

Hall J.A. noted again that, in most cases, the analysis undertaken by the trial judge would have properly disposed of the matter. In this particular case, however, a departure from the normal course was necessary due to the unusual circumstances presented by the policies under consideration, which were designed to be different as to their purpose and anticipated scope of coverage. He concluded that based on the policies and the surrounding circumstances, the Family policy provided the primary coverage to the insured, while the Lombard policy should be viewed as excess coverage. As a result he allowed the appeal.

It is a well-established principle of insurance law that where an insured holds more than one policy of insurance that covers the same risk, the insured may never recover more than the amount of the full loss but is entitled to select the policy under which to claim indemnity, subject to any conditions to the contrary. The selected insurer, in turn, is entitled to contribution from all other insurers who have covered the same risk. This doctrine of equitable contribution among insurers is founded on the general principle that parties under a coordinate liability to make good a loss must share that burden pro rata. It finds its historic articulation in the words of Lord Mansfield C.J. in Godin v. London Assurance Co. (1758), 1 Burr. 489, 97 E.R. 419 (K.B.), at p. 420:

If the insured is to receive but one satisfaction, natural justice says that the several insurers shall all of them contribute pro rata, to satisfy that loss against which they have all insured.

More recently, Ivamy’s General Principles of Insurance Law (6th ed. 1993) set out at p. 518 the general principles concerning the right of contribution among insurers as follows: