



COURT OF APPEAL FOR ONTARIO

CITATION: Markham (City) v. AIG Insurance
    Company of Canada, 2020 ONCA 239

DATE: 20200331

DOCKET: C67455

Doherty,
    Brown and Thorburn JJ.A.

BETWEEN

The
    Corporation of the City of Markham

Applicant (Respondent)

and

AIG
    Insurance Company of Canada

Respondent (Appellant)

AND BETWEEN

AIG
    Insurance Company of Canada

Applicant (Appellant)

and

Lloyds
    Underwriters and the Corporation of the City of Markham

Respondents (Respondents)

Marcus B. Snowden and Sébastien A. Kamayah, for the
    appellant

David G. Boghosian and Shaneka Shaw Taylor, for the
    respondents

Heard: February 12,
    2020

On appeal from the judgment of Justice
    Annette Casullo of the Superior Court of Justice, dated August 23, 2019, with
    reasons reported at 2019 ONSC 4977, [2020] I.L.R. I-6184.

Thorburn
    J.A.:

OVERVIEW

[1]

On February 2, 2015, the City of Markham (the
    City) rented a hockey rink at the Angus Glen Community Centre to the Markham
    Waxers Hockey Club, the Markham Waxers Minor Hockey Association, and the
    Markham Minor Hockey Association (collectively Waxers).

[2]

A young boy watching his brothers hockey game at
    the community centre (the plaintiff), was injured when a hockey puck flew
    into his face.

[3]

The plaintiff, through his litigation guardian, sued
    both the City and Hockey Canada. He seeks $150,000 in damages from the City and
    Hockey Canada for his broken jaw and associated pain and suffering.

[4]

The City is insured by Lloyds Underwriters (Lloyds)
    under a commercial general liability policy. The City is also an additional insured
    to Hockey Canadas insurance policy with AIG Insurance Company of Canada
    (AIG).

[5]

This is a dispute between AIG and Lloyds in
    respect of the duty to defend the claim brought against the City and the rights
    and responsibilities that arise from that duty.

[6]

AIG accepts responsibility to defend the action but
    claims that Lloyds has a concurrent duty to defend and must pay an equitable
    share of the Citys defence costs. AIG also claims it has a right to
    participate in the defence, including the right to retain and instruct counsel,
    alongside Lloyds.

[7]

AIG appeals the application judges decision
    that:

a)

AIG must defend the action;

b)

AIG must pay the cost of defending the action subject
    to indemnification of costs, if any, from Lloyds upon final resolution of the
    action; but

c)

AIG may not participate in the defence by
    retaining or instructing counsel.

THE ISSUES

[8]

The issues on this appeal are:

a)

Does Lloyds owe the City a concurrent duty to
    defend?

b)

Must Lloyds pay an equitable share of the
    Citys defence costs? and

c)

Does AIG have the right to participate in the
    defence, including the right to retain and instruct counsel?

[9]

For the reasons that follow, I conclude that:

a)

Both AIG and Lloyds owe a duty to defend the
    City in the action;

b)

AIG and Lloyds must share the Citys defence
    costs equally, subject to a right to seek a reallocation of the defence costs at
    the conclusion of the action; and

c)

AIG has a right to participate in the defence,
    including the right to retain and instruct counsel.

PARTIES TO THE LITIGATION

[10]

The City owns and maintains the rink.

[11]

Hockey Canada is involved in oversight of hockey
    programs in Canada. It denies having any operational control over the arena or the
    events which take place in the arena.

[12]

Waxers develops and promotes minor ice hockey
    for youth in the City. Waxers rented the rink from the City for the hockey
    game. The rental agreement provides that Waxers assumes all liabilities and
    costs for damages caused directly or indirectly by the licensee or invitees
    while on or using the facility.

THE CLAIMS

[13]

The plaintiff commenced legal proceedings
    against the City and Hockey Canada. He claims that one or both of the City and
    Hockey Canada failed to:

a)

put in place adequate safety systems for
    spectators;

b)

take reasonable and proper measures to ensure
    the hockey rink was reasonably safe for spectators;

c)

ensure the hockey rink was clear of hazards;

d)

ensure the reasonable safety of spectators by
    taking reasonable safety measures, including putting a net around the rink to
    prevent hockey pucks from striking spectators; and

e)

place signs or warnings of danger.

[14]

The plaintiff further claims that the City, Hockey
    Canada, or both:

a)

permitted spectators to be at the hockey rink
    when they knew or ought to have known that it was unsafe and dangerous; and

b)

allowed incompetent employees, agents or
    contractors to supervise the rink without suitable skill, ability or training
    and without ensuring that they followed safety rules and regulations.

[15]

The City and Hockey Canada crossclaimed against
    one another.

[16]

The City also commenced a third-party claim
    against Waxers. The City claims Waxers knew or ought to have known of the
    hazards at the location of the accident and failed to:

a)

fulfil the contractual obligations;

b)

take steps to prevent the plaintiff from being
    in the area;

c)

supervise the plaintiff;

d)

prevent the plaintiff from engaging in reckless
    behaviour;

e)

instruct the plaintiff to obey the ice rink
    policies and procedures; and

f)

otherwise take reasonable steps to prevent the
    plaintiffs accident.

[17]

The City further claims that in accordance with
    the rental agreement, Waxers is obligated to indemnify and hold it harmless
    from and against all claims and proceedings in respect of any loss, damages or
    injury arising from Waxers performance of and responsibilities under the
    Contract.

[18]

Waxers defended the Claim and pleaded that they
    are not responsible for the physical structure, layout, design, construction,
    inspection, or maintenance of the arena.

THE CITYS INSURANCE POLICIES

(a)

The Lloyds Policy

[19]

The Lloyds commercial general liability policy covers
    the City against damages related to bodily injury, personal injury, and
    property damage. The policy with the City provides that Lloyds:

agrees to pay on behalf of the Insured all
    sums which the Insured shall become legally obligated to pay by reason of
    liability imposed upon the Insured by law or  under Contract or agreement for
    damages because of

(a) Bodily Injury

(b) Personal Injury

(c) Property Damage

caused by an Occurrence during the Policy Period[.]

[20]

Each occurrence is insured for up to $5 million,
    subject to a $100,000 deductible which shall be deducted from the total amount
    of all claims.

[21]

The policy also requires Lloyds to defend the
    City against claims for damages that fall within the policy. Lloyds promises
    to:

defend in the name of and on behalf of the
    Insured and at the cost of the Insurer any civil action which may at any time
    be brought against the Insured on account of such Bodily Injury, Personal
    Injury or Property Damage or Wrongful Act but the Insurer shall have the right
    to make such investigation, negotiation and settlement of any claim as may be
    deemed expedient by the Insurer[.]

[22]

Finally, the policy provides for how liability
    is determined when another insurance policy also covers the claim. It states that:

The Insurer shall not be liable if at the time
    of any accident or occurrence covered by the Policy, there is any other
    insurance which would have attached if this insurance had not been effected,
    except that this insurance
shall apply only as excess and in no event as
    contributing insurance
and then only after all such other insurance has
    been exhausted. [Emphasis added.]

(b)

The AIG Policy

(i)

AIGs Policy Covering Hockey Canada and Waxers

[23]

AIG insures Hockey Canada and other entities,
    including Waxers, pursuant to a commercial general liability policy. The AIG
    policy insures against damages because of bodily injury or property damage that
    fall within the policy:

[AIG] will pay those sums that the insured
    becomes legally obligated to pay as damages because of bodily injury or
    property damage to which this insurance applies.

[24]

The policy also provides that [n]o other
    obligation or liability to pay sums or perform acts or services is covered
    unless explicitly provided for and that AIG will have the right and duty to
    defend any action seeking those damages [to which this insurance policy
    applies until AIG has]  used up the applicable limit of insurance in the
    payment of judgments or settlements.

[25]

Action is defined as a civil proceeding in
    which damages because of bodily injury, property damage or personal injury
    to which this insurance applies are alleged.

[26]

The AIG policy also provides indemnity for legal
    fees incurred to defend the insured for actions that fall within the coverage.

[27]

Section IV, subsection 9 of the AIG policy
    provides that [t]he insurance afforded by this Policy is primary insurance.
    There is no excess provision in the AIG policy, in respect of claims occurring
    in Canada.

(ii)

AIGs Third-Party Liability Insurance for the
    City

[28]

As part of its rental agreement, the City
    required Waxers to obtain general liability insurance for bodily injury arising
    from Waxers use of the rink and to include the City as an additional insured
    under that policy.

[29]

Waxers delivered a Certificate of Insurance to
    the City confirming that the City was added as an additional insured to the AIG
    policy 
but only with respect to the operations of the named insured [Hockey
    Canada and Waxers]
(emphasis added).

[30]

Similarly, Endorsement 2 of the AIG Policy
    provides that the City is included as Additional Insured but only in respect
    of liability arising out of the Named Insureds operations.

[31]

The Certificate also provides that it is subject
    to the limitations, exclusions and conditions of the policy.

[32]

The City is insured for up to $5 million per
    occurrence under the AIG policy as an additional insured.

THE PROCEEDINGS

(a)

Overview

[33]

The City and AIG brought competing applications
    to determine which insurers had a duty to defend the action and participate in
    the defence.

[34]

The City and Lloyds were represented by the
    same counsel who sought a declaration that AIG had a duty to defend the City
    and that the City was entitled to appoint and instruct counsel of its choice
    without having to report to or take instructions from AIG.

[35]

AIG admitted that it has a duty to defend but
    claimed that Lloyds owes a concurrent duty to defend and to contribute to the
    defence costs. AIG opposed the application and sought a declaration requiring
    AIG and Lloyds to jointly agree on and instruct counsel to defend the City in
    the underlying action.

(b)

The Application Judges Reasons

(i)

Duty to Defend

[36]

The application
    judge did not expressly state that Lloyds has no duty to defend, though paras.
    37-39 of her reasons would seem to suggest that she concluded that AIG alone
    has a duty to defend all claims in this action.

[37]

Under the heading Does Lloyds have a
    continuing duty to defend the City?, the application judge focused on the fact
    that AIG had a clear duty to defend the underlying action. She held that:

[
37
]    Where a plaintiff advances
    allegations of negligence which fall outside the scope of the contract, and the
    insurer has not clearly specified in its policy that the duty to defend is
    limited to covered rather than uncovered claims, then the insurers duty is to
    defend all of the claims, both covered and non-covered. See, for example,
Carneiro
    v. Durham (Regional Municipality)
,
[2015] O.J. No. 6812
.

[
38
]    There is nothing
in AIG
s Policy that
    qualifies its duty to defend, or to suggest that the duty to defend did not
    apply to mixed claims. AIG could have written qualifying words into the
    policy providing for an allocation of mixed claims. It chose not to do so.

[
39
]    If the court acceded
    to AIGs request there would potentially be three or more lawyers defending the
    action (one for the Waxers, one for the City, and one for Lloyds). This simply
    does not make economic sense.

(ii)

Costs of the Defence

[38]

In respect of paying the costs of the defence
    however, she held that AIG had a right to seek contribution from Lloyds at the
    end of the action for the cost of defending claims that fell outside the
    coverage of the AIG policy but within the coverage of the Lloyds policy. She
    concluded that:

[40]    In the result, AIG shall pay all reasonable
    costs associated with the defence of the underlying action, even though those
    costs further the defence of uncovered claims. This is, of course, subject to
    AIGs right to seek reimbursement from Lloyds for costs incurred in relation
    to uncovered claims.

(iii)

AIGs Participation in the Defence

[39]

Despite concluding that AIG had a duty to fund
    the Citys defence, the application judge held that AIG was not permitted to
    participate in the defence.

[40]

She found that there were two sources of
    potential or actual conflicts of interest between the City and AIG. First, the
    City had launched a cross-claim and third-party claims against AIGs own
    insureds alleging that they were either liable for breach of contract, for
    contribution and indemnity, or both. Second, as submitted by counsel for the
    City and Lloyds, some claims were not covered by the AIG policy and were only
    covered by the Lloyds policy. As such, AIG had an incentive to conduct the
    defence so as to impose the majority of liability on the City based on the
    uncovered risk, rather than the covered risk.

[41]

The application judge found that there was a
    perceived if not actual conflict of interest. She noted that AIG proposed to
    implement a split file protocol where separate claims handlers would be
    appointed to instruct defence counsel for the City and the other defendants in
    the actions, as well as to handle any coverage issues against the City. Their
    files would be screened from the files of other claims handlers and marked as
    confidential.

[42]

For the reasons that follow, she rejected AIGs
    proposal:

[
24
]    The case for
    independent counsel grows stronger,  considering the crossclaims for
    contribution and indemnity brought by the City and AIG. AIGs own casualty
    claims analyst admitted at his cross-examination that a perceived, if not
    actual, conflict of interest exists between the City and AIG.

[
25
]    AIG suggests that
    any conflict can be managed by ensuring a separate claims handler at AIG handles
    the Citys defence, and by following a split file protocol. This protocol
    consists of physically and digitally screening the file from other claims
    handlers with AIG. The physical documents are put into a folder marked
    confidential, and the electronic documents are marked internal or
    confidential. AIGs casualty claims analyst agreed there is no way to monitor
    whether other handlers can access and review the confidential documents.

[
26
]    Further, with no
    written policy setting out a formal practice in respect of managing conflicts
    through the split file protocol, AIG has not satisfied the court that
    this ethical wall is adequate to resolve the conflict of interest concerns.

[
27
]    I am mindful of
    Ferguson J.s very recent decision in
HMQ v. AIG
, 2019 ONSC 2964,
    where an application identical to the one before me was dismissed. I note there
    were some differences in the evidence in respect of AIGs split file protocol.
    For example, there was no evidence before me that a claims handler would be
    subject to discipline if she/he breached protocol. Further, AIGs analyst
    indicated there was no way of knowing whether other handlers could access and
    see documents marked confidential. Moreover, in that case only HMQ had issued
    a crossclaim, so the potential for AIG being in a position of conflict was not
    as evident.



[29
]    
    AIG would only be liable to indemnify the City to the extent of the Waxers
    liability, so its efforts would obviously be to reduce that exposure and play
    to the uncovered claims strength, being the occupiers liability claims.

[
30
]    Ultimately, I am
    persuaded by the Citys argument that counsels mandate from AIG in respect of
    defending the Waxers can reasonably be seen to conflict with AIGs mandate
    to defend the City.

[43]

She concluded that there is an irremediable
    conflict of interest in AIG defending both the City and Hockey Canada and that
    the split file protocol proposed by AIG is unworkable in respect of this
    claim for negligence and breach of contract. As such, she concluded that the
    City should be permitted to select and instruct its own counsel without having
    to report to AIG.

ANALYSIS

THE FIRST ISSUE: Does Lloyds have a Concurrent Duty to
    Defend?

(a)

The Governing Principles

(i)

The Relationship between an Insured and an
    Insurer

[44]

The relationship between an insured and an
    insurer is a contractual one governed primarily by the terms
of
the insurance
    policy. The proper instrument to determine the liability of each insurer is the
    contract itself:
Family Insurance Corp. v. Lombard Canada Ltd.
, 2002
    SCC 48, [2002] 2 S.C.R. 695, at paras. 16-18 and
Van Huizen v. Trisura
    Guarantee Insurance Company
, 2020 ONCA 222.

[45]

The language o
f
the policy is construed in accordance with
    the usual rules
of
construction
    rather than inferred "expectations" not apparent on a fair
    reading
of
the
    document. This is particularly so in the case of commercial insurance policies
    involving sophisticated parties. In so doing, the insurer must explicitly state
    the basis on which coverage may be limited:
Hanis v. Teevan
, 2008 ONCA
    678, 92 O.R. (3d) 594, at para. 22, leave to appeal refused, [2008] S.C.C.A.
    No. 504.

(ii)

The Duty to Defend Claims

[46]

An insurer has a duty to defend where there is a
    mere possibility that the true nature of the pleaded claim, if proven at
    trial, falls within coverage and would trigger the insurers duty to indemnify:
Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada
, 2010
    SCC 33, [2010] 2 S.C.R. 245, at para. 19.

[47]

If the pleadings allege facts which, if true,
    would require the insurer to indemnify the insured for the claim, then the
    insurer is obliged to provide a defence, even though the actual facts may
    differ from the allegations in the statement of claim:
Monenco Ltd. v.
    Commonwealth Insurance Co.
, 2001 SCC 49
, [2001] 2 S.C.R. 699
, at para. 28;

Alie v. Bertrand & Frère Construction Company Limited (2002)
,
62 O.R. (3d) 345 (C.A.)
, at para. 182, leave to appeal
    refused, [2003] S.C.C.A. No. 48.

[48]

In Hanis
,
at para. 23, Doherty J.A. held
    that.

I see no unfairness to the insurer in
    holding it responsible for all reasonable costs related to the defence
of
covered claims if
    that is what is provided for by the language
of
the policy.
If the insurer has contracted to cover all defence costs relating
    to a claim, those costs do not increase because they also assist the insured in
    the defence
of
an
    uncovered claim. The insurer's exposure for liability for defence costs is not
    increased. Similarly, the insured receives nothing more than what it bargained
    for -- payment
of
all
    defence costs related to a covered claim. [Emphasis added.]

[49]

However, an insurer is not obligated to pay
    costs incurred solely to defend uncovered claims:
Hanis
, at para. 25.

(iii)

Primary and Excess Coverage

[50]

In
Trenton Cold Storage v. St. Paul Fire
    & Marine

(2001), 199 D.L.R. (4th) 654 (Ont. C.A.), at para. 24,
    this court explained the difference between primary and excess insurance. Where
    there is primary insurance coverage, liability attaches immediately upon the
    happening of the occurrence that gives rise to the liability. An excess policy,
    on the other hand, is one that provides that the insurer is liable for the
    excess above and beyond that collected on primary insurance.

[51]

Determining priority for overlapping coverage
    requires both policies to cover the same risk. An excess policy is excess to
    the claims covered in the primary policy:
Family Insurance
, at para.
    15.

[52]

Where there is both primary and excess insurance
    coverage, the limits of the primary insurance must be exhausted before the
    primary carrier has a right to require the excess carrier to contribute to a
    settlement. The remote position of an excess carrier greatly reduces its chance
    of exposure to a loss:
Trenton Cold Storage
, at para. 24, citing with
    approval the explanation in
St. Paul Mercury
    Insurance Co. v. Lexington Insurance Company
,
78 F. 3
d. 202
    (5th Cir. 1996) at footnote 23, quoting from
Emscor
    Mfg., Inc. v. Alliance Ins. Group
,
879 S.W.2d 894
at 903
(Tex. App. 1994),
writ
    denied
, at 903.

(b)

Application of the Law to the Facts in this Case

(i)

The Parties Positions

[53]

There is no dispute that the AIG policy covers
    the City against all liability with respect to the operations of Hockey Canada
    and Waxers, that the AIG policy is a primary insurance policy, and that AIG has
    a duty to defend the City against claims which fall within the scope of its
    policy.

[54]

However, AIG argues that Lloyds is also a
    primary insurer on the claims covered by the AIG policy and the only insurer who
    is liable to indemnify the City against other claims in the action. As a
    result, Lloyds also owes a duty to defend.

[55]

In response, Lloyds and the City argue that AIG
    is the primary insurer on all of the claims in the action and that Lloyds is an
    excess insurer only. They contend that the decision of the British Columbia
    Court of Appeal in
Saanich (District) v. Aviva Insurance Company of Canada
,
    2011 BCCA 391, 23 B.C.L.R. (5th) 272, (although that case dealt with a dispute
    between an insurer and an insured not two insurers) supports their submission
    that the language in the AIG policy regarding coverage for the additional
    insured  only in respect of the operations of the named insured  is broad
    enough to cover all claims alleged against the City. As well, because the
    claimed amount in the underlying action  $150,000  falls well within AIGs
    policy limits, they claim there is no duty to indemnify under the Lloyds
    policy and therefore no duty to defend.

(ii)

The Lloyds Policy

[56]

The Lloyds policy covers the City for
all
claims of bodily injury, personal injury or property damage caused by an Occurrence
    during the Policy Period.

[57]

The only limitation in the Lloyds policy is
    that:

The Insurer shall not be liable if at the time
    of any accident or occurrence covered by this Policy, there is any other
    insurance which would have attached if this insurance had not been effected,
    except that this insurance shall apply only as excess and in no event as
    contributing insurance and then only after all such other insurance has been
    exhausted.

[58]

This provision seems to provide that if:

a)

at the time of the accident;

b)

the claim is covered by the Lloyds policy; and

c)

another insurance policy would have attached to
    cover all or part of the claim had the Lloyds policy not been in place,

Lloyds is not liable except as an
    excess insurer such that it has an obligation to contribute only after all
    other insurance has been exhausted.

[59]

In this case, at the time of the accident, the
    claim was covered by the Lloyds policy and the AIG policy would have attached
    to cover part of the claim had the Lloyds policy not been in place.

[60]

Therefore, to the extent but
only
to
    the extent that claims would be covered by the AIG policy, Lloyds would be an
    excess insurer with respect to those claims.

[61]

AIG refers to the case of
State Farm Fire
    and Casualty Co. v. Royal Insurance of Canada

(1998), 115 O.A.C.
    388 (C.A.)
,
where

a similar clause was held not to be an excess
    insurance policy clause.

[62]

It is not necessary to address the conclusion in
    this brief endorsement in interpreting the Lloyds provision
because
in this case
,
unlike
State Farm Fire and Casualty Co.
,
there
    are some claims in the underlying action which may not be covered by the AIG policy
    and may

only
be covered by the Lloyds policy.

[63]

In any event, I note that the
State Farm
    Fire and Casualty Co.

decision appears to have been made without
    the benefit of two other decisions 
McGeough v. Stay N Save Motor Inns
    Inc.
(1994), 92 B.C.L.R. (2d) 288 (C.A.), and
Gagnon v. Insurance
    Company of North America and Industrial Acceptance Co. Ltd.
(1967), 64
    D.L.R. (2d) 355 (Que. C.A.), affd on a different point, [1969] S.C.R. 824  that
    interpreted similar policy language and adopted a different conclusion, one
    that seems more consistent with the plain meaning of the words in the provision.

[64]

I conclude
therefore
,
that
Lloyds has a
    duty to defend
the City against those claims in the
    action
not covered by the AIG policy
. The parties are free to seek a final determination of the issue of
    coverage for the portion of the claim covered by the AIG policy, including the
    applicability, if any, of the reasoning of the British Columbia Court of Appeal
    in
Saanich
to the interpretation of the additional insured provision
    in the AIG policy, upon final resolution of the action and apportionment of
    liability.

(iii)

Lloyds Duty to Defend

[65]

Lloyds has a duty to defend the City in respect
    of all claims of bodily injury, personal injury or property damage caused by an
    Occurrence.

[66]

The AIG policy only covers the City for liability
    in respect of [Hockey Canada and Waxers] operations. AIG expressly limited
    its obligation as [n]o other obligation or liability to pay sums or perform
    acts or services is covered unless explicitly provided for. All other
    occurrences that cause bodily injury, personal injury or property damage are not
    covered by the AIG policy but are covered by the Lloyds policy.

[67]

Thus, for example, the alleged failure on the
    part of the City to ensure the reasonable safety of spectators through the use
    of reasonable safety measures, including a net around the rink to prevent
    hockey pucks from striking spectators and the failure to put into place
    proper and sufficient systems for the safety of spectators may be covered by
    the Lloyds policy but may not be covered under the AIG policy.

[68]

As a result, both AIG and Lloyds have a duty to
    defend.

[69]

This conclusion is consistent with the decision
    of this court in
Carneiro v. Durham (Regional Municipality)
,
2015 ONCA 909
,
    55 C.C.L.I. (5th) 1.
[1]
This court held, at para. 13, that:

Durham was an additional insured under
    Zurichs policy. The policy contained an unqualified promise to defend the
    insured for actions covered by the policy. Zurich is therefore obligated to pay
    the reasonable costs of Durhams defence of covered claim
, even if that defence furthers the defence of uncovered claims.
However,
    it is not obligated to pay costs related solely to the defence of uncovered
    claims
:
Hanis v. Teevan
, 2008 ONCA 678, 92 O.R. (3d) 594, at para.
    2. [Emphasis added.]

[70]

In response, Lloyds and the City submit that there
    is an exclusion in the Lloyds policy that absolves Lloyds of the duty to
    defend. It does not.

[71]

The words in the Lloyds policy:

This Policy does not apply directly or
    indirectly to  any liability of the Insured [City]  to any obligation to
    share damages with or repay someone else who must pay damages because of Bodily
    Injury[.]

refer to the City assuming an
    obligation
for
a third partys actions, not a third party (Waxers) agreeing
to
indemnify the City for the third partys actions.

[72]

Lastly, while the $100,000 deductible in the Lloyds
    policy may affect the sum Lloyds is required to pay out to the insured City upon
    final resolution of the claim, the deductible does not affect the duty to
    defend the action based on the wording of the policy.

(c)

Conclusion

[73]

AIG is the primary insurer for claims resulting
    in bodily injury or property damage arising from the operations of Hockey
    Canada and Waxers up to the $5 million policy limit because the AIG policy
    contains no excess provision:
Progressive Homes
. The $150,000 claim falls
    within AIGs policy limit.

[74]

To the extent the AIG and Lloyds policies cover
the same
claims, AIG has a duty to defend up to its policy limit, and
    Lloyds may be an excess insurer.

[75]

However, at a minimum, Lloyds owes a duty to
    defend the City against claims which may fall outside the scope of the AIG
    policy and which fall within the scope of its own policy.

[76]

The fact that AIG has a duty to defend the City
    does not, by itself, excuse another insurer from its duty to defend:
Unger
    (Litigation guardian of) v. Unger

(2004), 68 O.R. (3d) 257 (C.A.),
    at para. 10. Lloyds also has a duty to defend.

[77]

Therefore, the application judges determination
    that only AIG has the duty to defend the action is incorrect.

THE SECOND ISSUE: MUST LLOYDS PAY THE ONGOING COSTS OF
    DEFENDING THE CLAIM?

(a)

The Governing Principles

[78]

Where two insurers have an obligation to defend
    the same claim, the insured is entitled to select the policy under which to
    claim indemnity, subject to any conditions in the policy to the contrary:
Family
    Insurance
, at paras. 14-15.

[79]

However, where both insurers are responsible to
    defend and one is selected by the insured to assume the defence, it may be inequitable
    for one insurer to pay all costs and the other to pay nothing unless for
    example, there is no realistic chance the policy would be reached by the claim:
Alie
. As a result, the insurer selected by the insured to defend the
    claim may be entitled to contribution from all other insurers who have a concurrent
    duty to defend the insured.

[80]

As noted by the Supreme Court in
Family
    Insurance
,
at paras. 14-15:

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.

[Emphasis added.]

[81]

Similarly, in
Broadhurst & Ball v.
    American Home Assurance Co.

(1991), 1 O.R. (3d) 225 (C.A.), at p. 241,
    leave to appeal refused, [1991] S.C.C.A. No. 55, the court held that where two
    insurers have a concurrent obligation to defend:

[T]heir respective obligations cannot be a
    matter of contract. Nonetheless, their obligations should be subject to and
    governed by the principles of equity and good conscience, which, in my opinion,
    dictate that the costs of litigation should be equitably distributed between
    them.

[82]

The full and early participation of all insurers
    who are potentially liable promotes settlement and expedites the trial process:
Alie
,
at para. 201. The insurers have the same interest in
    minimizing their exposure by conducting the best defence possible.

[83]

The allocation of defence costs as among
    insurers who have a concurrent obligation to defend is essentially a matter of
    fairness as among those insurers. As such, the allocation of costs is not an
    exact science and an application or trial judges determination is owed
    considerable deference:
Alie
,
at para. 235;
Broadhurst
,
at p. 241.

(b)

Application of the Law to the Facts in This Case

[84]

Each of AIG and Lloyds has a duty to defend at
    least some of the claims in the action so each is responsible to contribute to
    the defence costs of the City:
Aquatech Logistics et al. v. Lombard
    Insurance et al.
, 2015 ONSC 5858, 55 C.C.L.I. (5th) 326, at paras. 43-47. As
    there is no contract between them with respect to the defence, their respective
    obligations should be governed by the principles of equity.

[85]

On the facts of this case, the respective risk
    of the two insurers is real but the level of risk cannot yet be ascertained given
    the early stage of the proceedings and the claim does not allow for a precise
    allocation of defence costs.

[86]

The usual deference does not apply to the application
    judges decision in this case as her analysis is premised on the faulty
    assumption that Lloyds has no duty to defend and her analysis does not address
    the central issue of fairness and equity.

[87]

In these circumstances where there are two
    primary insurers, the Lloyds policy is more comprehensive than AIGs, and
    there is a concurrent duty to defend, the fairest and most equitable allocation
    of defence costs would seem to be to require each of AIG and Lloyds to pay an
    equal share of the defence costs pending final disposition of the action and
    the final determination of the allocation of defence costs:

General
    Accident Assurance Co. of Canada v. Ontario Provincial Police Commissioner
(1988), 64 O.R. (2d) 321 (H.C.), at p. 325, cited approvingly in
Reeb
    v. The Guarantee Company of North America
, 2019 ONCA 862, at para. 11;
General
    Electric Canada Co. v. Aviva Canada Inc.
, 2010 ONSC 6806, 10 C.C.L.I.
    (5th) 16, at para. 82, affd 2012 ONCA 525, 10 C.C.L.I. (5th) 42.

THE THIRD ISSUE: DOES AIG HAVE THE RIGHT TO PARTICIPATE IN
    THE DEFENCE INCLUDING THE RIGHT TO RETAIN AND INSTRUCT COUNSEL?

(a)
The
    Governing Principles

[88]

In
Brockton (Municipality) v. Frank Cowan
    Co.

(2002), 57 O.R. (3d) 447 (C.A.), at para. 31, this court
    explained that an insurer who has a duty to defend an action also has a
prima
    facie
right to control the conduct of that defence.

[89]

In order to remove the insurers contractual
    right to defend and control the defence of the litigation, there must be a
    reasonable apprehension of conflict of interest on the part of counsel
    appointed by the insurer:
Brockton
, at para. 43.

[90]

In
Brockton
, at para. 43, this
    court held that:

The balance is between the insureds right to
    a full and fair defence of the civil action against it and the insurers right
    to control that defence because of its potential ultimate obligation to
    indemnify.



The question is whether counsels mandate from
    the insurer can reasonably be said to conflict with his mandate to defend the
    insured in the civil action. Until that point is reached, the insureds right
    to a defence and the insurers right to control that defence can satisfactorily
    co-exist.

[91]

Counsel defending the action should have the
    confidence of the insurer who is obliged to pay the legal fees and may have to
    pay a substantial judgment on behalf of the insured. Counsel must also meet their
    legal and ethical obligation to represent and protect the interests of the
    insured:
Hoang v. Vincentini
,
2015 ONCA 780, 57 C.C.L.I. (5th)
    119, at para. 14;
Mallory v. Werkmann Estate
, 2015 ONCA 71, 330 O.A.C.
    337, at para. 29.

[92]

The mere fact that an insurer has reserved its
    rights on coverage does not cause the insurer to lose its right to control the
    defence and appoint counsel. The question is
whether
    the circumstances of the case create a reasonable apprehension of conflict of
    interest if that counsel were to act for both the insurer and the insured in
    defending the action
:
Brockton
,
at paras. 39-40, 43,
    citing

Zurich of Canada v. Renaud & Jacob
,
[1996] R.J.Q. 2160 (C.A.)
at pp. 2168-69,
per
Lebel J.A. (as he then was)
.

[93]

The onus is on the insured to establish a reasonable
    apprehension of conflict of interest on the part of the insurer:
Brockton
,
    at para. 43;
Wal-Mart v. Intact
, 2016 ONSC 4971, 133 O.R. (3d) 716;
    and
Brookfield Johnson Controls Canada LP v. Continental Casualty Company
,
    2017 ONSC 5978.

(b)
Application
    of the Law to the Facts in This Case

[94]

In this case, AIGs policy provides that AIG has
    a duty and right to defend the action. Lloyds policy also provides that it has
    a duty and right to defend the action. The insured elected to have AIG defend
    the action.

[95]

Lloyds and the City are represented by the same
    counsel on this appeal.

Counsel claims that if AIG retains and instructs
    counsel to defend the claims against the City, that counsel will have a strong
    incentive to settle the claim as quickly as possible as against the City or [a]t
    the very least  to try to prove that only the City is liable for the Plaintiffs
    damages by way of any claims falling outside of what AIG believes is the scope
    of coverage afforded by the AIG Policy, because the AIG policy only covers
    occurrences arising from the operations of Hockey Canada and Waxers.

[96]

This they say, creates a reasonable apprehension
    of conflict of interest in counsel retained and instructed by AIG.

[97]

However, counsel for AIG argues that there is
    also a reasonable apprehension that counsel retained and instructed by Lloyds
    and/or the City would also find themselves in a conflict of interest.

[98]

The issue in this case is not
whether
the City has coverage for some or all of the claims in the action but which of
    two insurers is responsible to cover which claims in accordance with their
    respective policies of insurance. Consequently, cases which address the
    question of whether there is coverage for all or part of a claim are distinguishable.
    See for example:
Pabla v. City of Mississauga
, 2015 ONSC 5156;
Glassford
    v. TD Home & Auto Insurance Co.

(2009), 94 O.R. (3d) 630
(S.C.); and
Lefeuvre
    v. Boekee
,
2017 ONSC 6874, 74 C.C.L.I. (5th) 174.

[99]

The AIG policy only covers claims in respect of
    the operations of Hockey Canada and Waxers, while the Lloyds policy covers all
    occurrences subject to its $100,000 deductible, which is lower than the amount
    claimed.

[100]

As such, if Lloyds were to retain and instruct counsel, counsel
    might seek to have responsibility for any wrongdoing attributed to the
    operations of Hockey Canada or Waxers rather than the City, so that any damages
    are either shared by or fully encompassed by AIGs policy.

[101]

Similarly, if the City were to retain and instruct counsel, the City
    has an interest in having claims paid by AIG rather than Lloyds, as any
    payment made by Lloyds might result in an increase in premiums paid by the
    City pursuant to the Lloyds policy. The Lloyds policy also has a $100,000
    deductible, while the AIG policy does not. The City has already aligned its
    interest with Lloyds, as evidenced by the fact that one counsel represents
    them both on this appeal.

[102]

It would appear that each of AIG, Lloyds and the City have conflicting
    interests as follows:

a)

AIG has an interest in having liability
    determined on the basis of the Citys actions alone so that AIG is not
    responsible for paying any damages. This is because its policy only covers the incidents
    that arise out of the operations of Hockey Canada or Waxers and because it is
    also defending Hockey Canada and Waxers in the main action;

b)

Lloyds has an interest in having liability
    determined on the basis that the claim arose from the operations of Hockey
    Canada or Waxers and not from the actions of the City to minimize its exposure
    to the losses; and

c)

The City also has an interest in having
    liability determined on the basis that the claim arose from the operations of
    Hockey Canada or Waxers so that the Citys premiums do not rise and so that
    they do not have to assume the full $100,000 deductible in the Lloyds policy.

[103]

The court must endeavour to balance the insureds right to a full
    and fair defence of the civil action with the insurers right to control the
    defence such that AIG does not abuse its right to defend and settle the claim to
    the detriment of Lloyds and/or the City:
Brockton
, at para. 43.

[104]

In situations such as this, it is important to have in place
    mechanisms to minimize conflicts of interest and provide meaningful protections
    to the party not having control of the defence:
PCL Constructors Canada
    Inc. v. Lumbermens Mutual Casualty Company Kemper Canada

(2009)
,
76 C.C.L.I. (4th) 259 (Ont. S.C.),

at para. 89.

[105]

AIG suggests implementing a split file verbal protocol to lessen
    the concerns and provide protection to the insured and Lloyds. This would ensure
    that potentially conflicting interests insured by one policy are handled
    separately and that the separate claims be dealt with by separate counsel.

[106]

AIGs proposal is as follows:

a)

The Citys defence as an additional insured would
    be handled and screened internally so that Hockey Canada and Waxers
    information is held separately and kept confidential from information in
    respect of the City claim;

b)

Physical files would be scanned and converted
    into digital format upon receipt;

c)

A file subject to the split file protocol would
    be digitally marked confidential and would not be accessed by any other
    handler, including the handler responsible for the defence of another adverse
    insured party. This is to protect confidential information and avoid any
    perceived or actual party-based conflict of interest between the insured
    interests;

d)

The handlers for the City defence would be different
    from those handling the Hockey Canada defence. Similarly, the handlers for
    coverage issues would be different from the handlers for liability issues;

e)

A claims handler in breach of the split file
    protocol would be subject to disciplinary action and could be dismissed if
    confidential information is disclosed;

f)

AIG agrees to work cooperatively with Lloyds to
    agree upon, appoint/instruct, and pay for an independent defence counsel. That
    counsel will be different from AIGs coverage counsel; and

g)

AIG commits to sharing funding costs incurred in
    the Citys defence.

[107]

Lloyds and the City by contrast, make no proposal save that AIG
    fund the defence but have no role in retaining or instructing counsel.

[108]

The application judge erred when she determined that there were no
    measures that could alleviate the Citys concerns short of removing AIG from
    the defence entirely.

[109]

There is no reason to believe that appropriate counsel who has an
    ethical obligation to defend the insured properly, will not conduct the defence
    in the best interest of the insured. There is also no evidence that any of the
    handlers have misused any confidential information or, with appropriate
    disciplinary measures put in place, will misuse confidential information.

[110]

I note that one of the key reasons cited by the application judge
    for not accepting the proposed protocol was that no disciplinary measures would
    be taken against persons at AIG who contravened the protocol.

[111]

The application judge was mistaken.

[112]

The AIG handler confirmed that any person contravening the protocol
    would be met with disciplinary action that could lead to dismissal.

[113]

The AIG proposal attempts to minimize the risk of harm by creating a
    system to protect confidential information and separate files, enable all three
    parties to participate in retaining, instructing and receiving instructions
    from counsel and provide recourse against those who do not adhere to the
    system.

[114]

However, if AIG is to retain its right to participate in the
    defence, a few additional terms are warranted. This court imposes these
    additional obligations in accordance with AIGs acknowledgment of the balanced
    screen approach set out in
PCL Constructors Canada
and its powers
    under the
Courts of Justice Act
, R.S.O. 1990, c. C. 43, s. 134(1)(a)
    as follows:

a)

The terms of this proposal must be provided in
    writing to those involved in managing the defence;

b)

Counsel appointed would be instructed to fully
    and promptly inform the City and Lloyds of all steps taken in the defence of
    the litigation against the City such that each would be in a position to
    monitor the defence effectively and address any concerns;

c)

Defence counsel must have no discussion about
    the case with either coverage counsel; and

d)

Counsel must provide identical and concurrent
    reports to the insured and both insurers regarding the defence of the main action.

UPS Supply Chain Solutions, Inc.
    v. Airon HVAC Service Ltd.
, 2015 ONSC 3104, 49
    C.C.L.I. (5th) 201, at para. 31;
PCL Constructors Canada
, at para. 93.

[115]

This will allow AIG to participate in the defence and resolution of
    the action as set out in the AIG policy, while at the same time, allowing Lloyds
    and the City the opportunity to know of and address concerns in a timely manner:
PCL Constructors Canada
,
at para. 90.

[116]

Given the multiple conflicting interests, this protocol and the
    safeguards it provides, albeit not without any concerns, recognize the
    legitimate interests of both the insured and the insurers and address the concern
    that AIG may abuse its right to defend and settle to the prejudice of the
    insured.

SUMMARY OF CONCLUSIONS

[117]

Each of AIG and Lloyds has a duty to defend the action.

[118]

Each must therefore contribute to the ongoing cost of the defence.

[119]

The apportionment of costs cannot yet be determined. AIG and Lloyds
    are required to share the cost of the defence equally, subject to a right to
    seek a re-apportionment of the costs upon final resolution of the action.

[120]

AIG and Lloyds may also jointly retain and instruct counsel
    provided the above steps are implemented to safeguard the interests of all
    parties. This order is without prejudice to the parties right to move for
    directions from the Superior Court should they be unable to agree on the
    conduct of the defence.

[121]

In cases such as this where there is a dispute among the insurers
    and the City, it is incumbent upon all parties to work with one another and to exchange
    ideas in respect of a proposed protocol. Insurers and sophisticated parties
    like the City are best placed to determine what systems could work best.

[122]

Unless there is an agreement among the parties, all parties should
    make submissions in respect of their proposed protocol.

[123]

For the above reasons, the appeal is allowed.

[124]

On agreement of the parties, the costs order in the proceedings
    below is set aside. Costs of this appeal are awarded to AIG in the amount of $15,000,
    inclusive of HST.

Released: March 31, 2020 (D.D.)

J.A. Thorburn J.A.

I agree. Doherty J.A.

I agree. David Brown J.A.





[1]
Contrary
    to the respondents assertion,
Carneiro
does not stand for the
    proposition that whenever one aspect of a claim is covered by the policy, all
    costs of the defence must be borne by that insurer.


