Insureds who make a claim under an insurance contract should not be surprised when the insurer's counsel requests a copy of any other insurance contracts that the insured had in place at the time of the loss. The insurer's counsel is not requesting those contracts as a pretext to denying coverage; rather, the insurer asks for those contracts to determine whether any other insurance contracts may contribute financially to the loss. The question of which insurers will contribute to the loss and in what amounts is answered once the insured has been fully indemnified.
An insured, faced with a loss that is or may be covered by multiple insurance contracts, subject to any contractual conditions to the contrary, may choose the insurer to which it makes its claim in the first instance. If there is only one insurance contract in place at the time of the loss, that insurer normally must pay the claim up to its limits if covered ( Family Insurance Corp. v. Lombard Canada Ltd. (Family Insurance) at para 14). If multiple insurance contracts cover the same loss, the insurer chosen in the first instance by its insured may then have a right to seek contribution from the other insurers.
Most insurance contracts contain "other insurance" clauses. These clauses typically provide when an insurer intends for the insurance contract to operate as primary insurance, and when it is to operate as excess insurance to other insurance contracts. "Other insurance" clauses sometimes also contain provisions governing an insurer's obligation to contribute to a loss in the event that another insurance contract exists. Courts will attempt to give effect to the intentions of insurers in limiting their obligations to indemnify; if a policy contains a formula for or priority of contribution, and if it can be reconciled with the other contracts at issue, it is likely that a court will apply the contractual formula. The formula for contribution most often seen in insurance contracts is pro rata contribution according to the limits of the respective policies.
If "other insurance" clauses do not contain formulas or priorities governing contribution, or if the "other insurance" clauses cannot be reconciled with each other, courts will order insurers to equitably contribute to the insured's loss. In Family Insurance, the Supreme Court of Canada (the SCC) noted that the "doctrine of equitable contribution among insurers is founded on the general principle that parties under a co-ordinate liability to make good a loss must share that burden pro rata" (para 14).
The remedy of equitable contribution is derivative through the insured; this means that if one insurer has been called upon to respond to a loss, that insurer may claim contribution from its fellow insurers by "stepping into the shoes" of the insured. And because the insurer is seeking contribution from its fellow insurers through the insured, privity of contract is no bar to equitable contribution as between the insurers. See, for example, Ayr Farmers Mutual Insurance Co. v. CGU Group Canada Ltd. at para 8.
Although privity of contract is not required, the fact that privity does not exist as between insurers has led the SCC to conclude that, in assessing whether an insurer has a right to equitable contribution from its fellow insurers, reference to circumstances surrounding the creation of the insurance contracts is irrelevant. Thus, the equitable contribution analysis is necessarily limited to the four corners of the policy (Family Insurance at para 19).
In order for equitable contribution to be available, six conditions must be satisfied (Family Insurance, at para 15; Aetna Insurance Company v. Canadian Surety Company (Aetna) at paras 181-187):
- all the policies concerned must cover the same subject matter;
- all the policies must be effected against the same peril;
- all the policies must be effected by or on behalf of the same assured;
- all the policies must be in force at the time of the loss;
- all the policies must be legal contracts of insurance; and
- no policy must contain any stipulation by which it is excluded from contribution
If equitable contribution is awarded, the court must determine the extent to which the insurers are obligated to contribute. In the absence of a contractual formula for contribution, the SCC has endorsed equal contribution between insurers up to the limits of their respective insurance contracts (Family Insurance at para 28). Equal contribution is often undesirable from an underwriter's standpoint, as opposed to pro rata contribution according to the limits of the respective contracts, given that the burden of contribution may weigh more heavily on an insurer with a lower policy limit vis-ŕ-vis its fellow insurers. Accordingly, insurers should draft a clear contractual contribution clause at the outset rather than risking a court's determination as to what level of contribution will be equitable in a given case.
Duty to Co-operate
Insureds are often surprised when the insurer's counsel requests a copy of any other insurance contracts that the insured had in place at the time of the loss. It is not uncommon for insureds to assume that the insurer's counsel is making this request as a precursor to denying coverage. This is simply not true. Rather, the insurer requires copies of other insurance contracts to determine whether any other insurance contracts may contribute financially to the amount that the insurer ultimately pays to the insured in respect of the loss.
Insureds are required to co-operate with the insurer's request for other insurance policies pursuant to various contractual and common law duties. The extent of an insured's duty to co-operate was described by West JA of the New Brunswick Court of Appeal in Travellers Indemnity Co. v. Sumner Co. Ltd. and Fraser, in the following terms, at para 9:
"The duty of the insured to co-operate with the insurer, being a condition precedent to his right to recover, requires him to assist willingly and to the best of his judgment and ability. If in this connection a breach occurs in some material respect the insurer is entitled even to refuse to defend an action."
The duty to co-operate arises from the principle that insurance contracts are governed by a mutual duty of utmost good faith on the part of both the insurer and the insured. In circumstances where an insurer holds multiple insurance contracts from different insurers, an insured must, as part of its duty to co-operate, provide these other insurance contracts to the insurer chosen in the first instance, given that the chosen insurer will often have a right of contribution, whether in contract or at equity, as against its fellow insurers. See Thompson v. ING Halifax at para 8, citing with approval Gordon Hilliker, Liability Insurance Law in Canada, 3rd ed. (Toronto: Butterworths, 2001) at 41-42.
Insurers seeking certainty with respect to their duties to contribute in the event an insured has multiple insurance contracts are advised to review an insured's other contracts prior to underwriting a new contract of insurance. By conducting this review at the outset, underwriters may draft more meaningful "other insurance" clauses that better align with the limits and provisions of the other insurance contracts. Done properly, insurers may effectively rebut the presumption of equal contribution and better control the extent of their obligation to contribute to a loss.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.