Better to ask for permission than to seek forgiveness!

Excess liability insurer did not have an obligation to indemnify an insured because it did not consent to the settlement.

Insurance law – Property insurance – Exclusions – Subrogation – Excess liability –  Practice – Settlement of action

Greenwin Inc. v. St. Paul Fire and Marine Insurance Co., [2023] O.J. No. 3987, 2023 ONSC 5097, Ontario Superior Court of Justice, September 8, 2023, L.P. Merritt J.

Following a fire at a high-rise building, a subrogated claim was brought by the building owner’s insurer against the building’s property manager. A multi-million dollar settlement was negotiated but one of the property manager’s excess liability insurers was not privy to the settlement negotiations. The Court was asked to make a number of determinations in relation to whether that excess liability insurer was required to indemnify the property manager for a portion of the settlement, once the underlying liability policies had been exhausted.

The question was ultimately determined based on whether the excess insurer had lost its right under its policy to approve the settlement on the basis that it had breached or repudiated the insurance contract. Ultimately, the Court held that the excess insurer had not denied a claim for indemnity or refused to participate in the settlement discussions, and therefore had not lost its right under its policy to approve the settlement. Accordingly, the excess insurer was not required to indemnity the insured property manager for the settlement that was reached.

In considering whether the excess insurer had denied a claim for indemnity, the court concluded that the property manager had never sought coverage from the excess insurer. The excess insurer had not denied coverage or refused to provide a defence. Although an application was filed by the property manager seeking an order requiring the excess insurer to contribute to the defence and indemnity upon exhaustion of various underlying policies, the Court held that this did not constitute a demand for a defence and indemnity. The duty to defend pursuant to the policy only arose when the immediate underlying liability insurance no longer had a duty to defend solely because its limit of coverage had been used up. At the time, it was not alleged that any underlying policies had been exhausted. In the context of this application, the excess insurer took the position that the property manager did not have the right to coverage. The Court held that a denial on its own is not a repudiation of a policy and challenging coverage in an application is not a contractual breach that forfeits an insurer’s right to approve a settlement pursuant to the policy.

In considering whether the excess insurer had refused to participate in the settlement, the Court noted that although the settlement proposal was sent to the excess insurer, there was no deadline to respond. The excess insurer asked for further information. But just over a month later, the other insurers and parties executed the settlement. The court did not find that the excess insurer refused to participate.

Once this determination was made, many of the other questions before the court did not need to be decided.

The “owned property exclusion” was interpreted to mean that there was no coverage for damage to the property caused by the property manager. This exclusion was found to apply in this case.

The tenant’s legal liability coverage was found not to apply as the building was not rented to or occupied by the named insured but rather was owned by the named insured.

The request for relief from forfeiture was denied. The applicants offered no explanation as to why they settled the case without insisting on a reply from the excess insurer. The prejudice to the excess insurer was great. The damage caused by the breach was great. The Court also held that the lack of immediate disclosure of a confidential agreement between AIG and one of the other liability insurers did not warrant a stay of the action for recovery.

This case was digested by Dionne H. Liu, and first published in the LexisNexis® Harper Grey Insurance Law Netletter and the Harper Grey Insurance Law Newsletter. If you would like to discuss this case further, please contact Dionne H. Liu at dliu@harpergrey.com.

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