The Ontario Court of Appeal has released its long-awaited¹ decision in the Loblaw Companies Limited v. Royal & Sun Alliance Insurance Company of Canada (Loblaws) appeal.² While lengthy, the decision is well organized and provides notable guidance in the following key areas.

Allocation of defence costs and SIRs

The Court, relying on its earlier decision in Goodyear Canada Inc. v. American International Companies et al. (Goodyear)³, threw cold water on an ‘all sums approach’ to defence costs where the insured could select a single insurer over the period of its risk to cover all defence costs at first instance, subject to that insurer’s right to seek equitable contribution from other insurers on risk. The Court stated that “[b]ased on learned commentary, there is limited support for this [all sums] approach.” Instead, in allowing the primary insurers’ appeals, the Court strongly endorsed a pro-rata time-on-risk approach, consistent with policy language that contractually prescribes a time-limited duty to defend “during the policy period.” The Court further relied on language in the duty to defend provision of the policies that such duty was “with respect to such insurance as is afforded by the policy” and found that this established a clear link between the duty to defend and the coverage for which the parties bargained. The Court did not agree with earlier cases that the application judge had relied upon, which dealt with allocations between insured and insurer, as opposed to between insurers in this case, and also distinguished between serial (or consecutive) insurers in this case, as opposed to concurrent insurers for the same period.

In addition to the Court’s reliance on the policy language and its earlier jurisprudence, equities appeared to play a role in its decision. Notably, the Court commented that “no insurer agreed to cover risks falling outside their prescribed time period” and criticized the application judge’s disposition as placing “a disproportionate and unreasonable burden on the selected insurers.”

The Court applied this pro-rata time-on-risk approach to the issue of exhaustion of applicable SIRs and further allowed the primary insurers’ appeals. Specifically, the Court stated that “[a]s a pro rata time-on-risk formula is applicable, the issue of payment by another insurer disappears. This is because the pro rata time-on-risk formula applies to the exhaustion of the SIRs.” Here, the Court rejected the notion that non-exhausted policies’ SIRs could be eroded by the payment of defence costs by insurers whose policies have been exhausted and were selected by the insured to defend the action. Only the insured’s payment of its share of defence costs can erode the non-exhausted SIRs of policies not yet triggered.

Relief from forfeiture is inapplicable to pre-tender defence costs

The insureds in this case, relying on relief from forfeiture, sought the right to recover defence costs incurred before tender or notice of the claims to certain insurers who had nevertheless confirmed a duty to defend. The Court firmly rejected any right under the policies to pre-tender defence costs being covered, and relying on recent appellate law from British Columbia, found that a duty to defend only arises on demand or notice. The Court further went on to reject the application of relief from forfeiture in these circumstances and noted that “[t]his situation is different from those where an insurer on receiving late notice rejects the contract and refuses to defend and to pay pre-tender costs”… “[t]there is no forfeiture and relief from forfeiture is therefore not engaged.”

Insurers’ rights to and use of privileged defence information can be restricted

In assessing the reasonableness of the application judge’s endorsement of the insured’s requirement for insurers to execute a Defence Reporting Agreement (DRA) to obtain privileged defence information, the Court focused primarily on whether a reasonable apprehension of a conflict had arisen due to the insurers reserving their rights on coverage. The Court provided helpful guidance (and some comfort) to insurers in stating that “[t]he 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.” Instead, the Court focused on the specific reservation of rights and stated that “[i]f the insurer’s reservation of rights arises because of coverage questions which depend on an aspect of the insured’s own conduct that is in issue in the litigation, the onus [to establish a reasonable apprehension of a conflict] may be met.” Following this reasoning, the Court found that there was a reasonable apprehension of a conflict in this case that warranted the DRA, and summed up as follows: “[i]t will be rare that an early general reservation of rights that is almost standard form gives rise to a reasonable apprehension of conflict. However, here, the reservations were specific to intentional conduct and the pleading of intentional conduct in the Class Actions is pervasive.”

Although the Court did not require the DRA to be in place for those insurers that did not exercise a right to associate (i.e., “to exercise a voice” and “to be heard [in the defence]”), it did not authorize those insurers to use privileged defence information for coverage purposes. Nothing mandated this in the policies, and there was no common interest (which was the basis for the insurers’ right to the defence information) with the insured on coverage issues.

Notably, the Court endorsed more substantial split file handling protocols beyond just screens between coverage and claims divisions being limited to lower-level handlers, given the high value and complexities of the underlying opioid class actions. The Court stated in this regard that “[a] split-file protocol that reaches farther up that [corporate] pyramid is justified.”

It is unclear whether any parties will seek leave to appeal to the Supreme Court of Canada, in which case, there may be more to come on these significant insurance issues. In any regard, this decision will surely receive considerable commentary and judicial analysis as it is applied.

Considering that the Québec Civil Code is silent on certain issues related to the sharing of defence costs and the relationships between primary and excess insurers, the Loblaws decision could have noteworthy echoes in similar cases governed by Québec laws.

Consultation with coverage counsel is critical to tailoring facts of Loblaws to your specific case. Please contact the authors, Nathalie Durocher, Douglas B. B. Stewart, Deepshikha Dutt, Will Samson-Doel and Jade Lemieux, or a member of Dentons’ Insurance team, should you have any questions about this topic.

1. The hearing of the appeal was in April 2023.↩
2. Loblaw Companies Limited v Royal & Sun Alliance Insurance Company of Canada, 2024 ONCA 145, https://coadecisions.ontariocourts.ca/coa/coa/en/item/22133/index.do↩
3. Goodyear Canada Inc. v American International Companies et al., 2013 ONCA 395 (CanLII) ↩