Insurers are not entitled to pro rata defence costs

Insurer’s application for declaration that its obligation to contribute to the costs of defending its insureds was limited to pro rata share based on time “on risk” was dismissed.

Lombard General Insurance Co. of Canada v. 328354 B.C. Ltd., [2012] B.C.J. No. 590, March 26, 2012, British Columbia Supreme Court, G.B. Butler J.

The insurer sought a declaration that its obligation to contribute to the costs of defending its insureds was limited to a pro rata share based on the proportion of time for which there were three comprehensive general liability policies issued by the insurer to the insureds “on risk” relative to the overall period of time during which damages were alleged to have occurred. The underlying action related to a leaky condo claim. The insureds were the developers of the project. The insureds opposed the relief sought by the insurer and, in a second petition, sought a declaration that the insurer was obligated to defend them in the underlying action and to fund 100% of the costs of the defence.

Construction on the project in issue began in 1995 and completed in 1997. The plaintiff alleged that water ingress occurred over a period of ten years before the project was remediated. The developers had commercial general liability insurance for approximately the first three years during which the damage was alleged to have occurred.

The court held there is no principle that requires defence costs to be apportioned between an insurer and an insured on the basis of time on risk in the case of continuous or progressive damage. The court held that defence costs can be apportioned prior to trial where there is a reasonable or practical means of making an order that would fairly assess the relative obligations of the two parties to pay defence costs. However, time on risk is not a reasonable or practical means of apportioning costs in the absence of evidence which suggests that the costs of defending the uncovered claims will approximate that apportionment. In this case, the court held that most of the defence costs would likely have been incurred even if the period of continuous or progressive damage ended when the insurance coverage terminated. Accordingly, the court held that the apportionment of defence costs should be left to be determined after findings of fact had been made in the underlying action or, alternatively, sufficient information regarding allocation of defence expenses could be placed before the court.

This case was digested by Cameron B. Elder and edited by David W. Pilley of Harper Grey LLP.

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