When Two Canadian Insurers Owe Defense and Indemnity to Insureds They Must Share

An Interesting Insurance Case From Canada

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”).

A young boy watching his brother’s hockey game at the community center (“the plaintiff”), was injured when a hockey puck flew into his face. 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.

The City is insured by Lloyd’s Underwriters (“Lloyd’s”) under a commercial general liability policy. The City is also an additional insured to Hockey Canada’s insurance policy with AIG Insurance Company of Canada (“AIG”). This is a dispute between AIG and Lloyd’s in respect of the duty to defend the claim brought against the City and the rights and responsibilities that arise from that duty.

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

The trial judge found 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 Lloyd’s upon final resolution of the action; but c) AIG may not participate in the defense by retaining or instructing counsel.

In Markham (City) v. AIG Insurance Company of Canada, Court Of Appeal For Ontario, 2020 ONCA 239, DATE: 2020 – 03 -31, DOCKET: C67455 the Court of Appeals for Ontario reversed the trial court.


The relationship between an insured and an insurer is a contractual one governed primarily by the terms of the insurance policy.

The Duty to Defend Claims

In Canada, as in the U.S., 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 insurer’s duty to indemnify. 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 defense, even though the actual facts may differ from the allegations in the statement of claim.

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. The $150,000 claim falls within AIG’s policy limit. However, certain allegations in the statement of claim may not be covered under the AIG policy, including an alleged failure to put into place proper and sufficient systems for the safety of spectators.

To the extent the AIG and Lloyd’s policies cover the same claims, AIG has a duty to defend up to its policy limit, and Lloyd’s may be an excess insurer. However, at a minimum, Lloyd’s 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.

Where both insurers are responsible to defend and one is selected by the insured to assume the defense, 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. 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.

The allocation of defense 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 judge’s determination is owed considerable deference.

AIG and Lloyd’s each has a duty to defend at least some of the claims in the action. As there is no contract between them with respect to the defense, their respective obligations should be governed by the principles of equity that is, what is fair. 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 defense costs.

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

In this case, AIG’s policy provides that AIG has a duty and right to defend the action. Lloyd’s policy also provides that it has a duty and right to defend the action. The insured elected to have AIG defend the action. Therefore, each of AIG and Lloyd’s has a duty to defend the action. Each must therefore contribute to the ongoing cost of the defense.

AIG and Lloyd’s 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 defense.

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.

An insurer who has a duty to defend an action has a right to control the conduct of that defense, unless there is a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer. In order to minimize the potential for conflicts, protocols should be established.

In the case at issue, AIG agreed to implement a “split file” or ethical wall protocol. In addition, the Court of Appeal said that counsel appointed by AIG must keep the City and Lloyd’s fully apprised and provide identical and concurrent reports to the City and both insurers. The Court of Appeal also encouraged insureds and insurers to work cooperatively in developing protocols and systems in these types of situations.


The Ontario Court of Appeal had no difficulty finding that both insurers owed a defense to the insureds. Although the Lloyd’s policy might provide more extensive coverage than the AIG policy, both owed a duty to defend. The Court of Appeal then required them to share the cost of defense equally and apportion defense costs when the case is resolved and who owes what proportion of indemnity is determined. The court expects the parties to work together to resolve the dispute and agree on apportionment and application of deductibles when needed. The Ontario Court of Appeal has more confidence than I that two insurers can reach such an agreement without further action from the judiciary.

© 2020 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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