Priority coverage dispute between insurance companies – someone’s got to pay!

It is important for insurers to be sure of their coverage position before providing positive affirmations of coverage. There must be a meeting of the minds between all parties for an agreement to be valid.

Insurance law – Automobile insurance – Priority coverage – Third parties – Lessors and lessees – Duty to defend – Practice – Leave to appeal

Belair Direct Insurance Co. v. Continental Casualty Co., [2023] O.J. No. 5647, 2023 ONCA 834, Ontario Court of Appeal, December 18, 2023, J.M. Simmons, D. Paciocco and J.A. Thorburn JJ.A.

The issues on this appeal arose from a priority/coverage dispute between automobile insurance companies B and C with respect to third party liability coverage for the insured driver/lessee of a leased vehicle. The insured was sued as a result of his involvement in a motor vehicle accident.

Insurer C insured a car rental company and provided third party liability coverage for the insured, whereas insurer B did not. Even so, insurer C argued that the application judge erred in holding that it, rather than insurer B, was the priority insurer under s. 277(1.1) of the Insurance Act, R.S.O. 1990, c. I.8 and had a duty to defend the insured in the personal injury action. This section creates a set of rules to be applied to determine the order in which the third party liability provisions of various policies respond in motor vehicle accident cases, specifically where a vehicle has been leased.

At the outset of the litigation, Insurer B believed the insured was covered by its policy. Insurer B’s adjuster advised the insured that he was covered up to limits of $1 million and advised they would agree to the release of the car rental company from the action, contingent upon an agreement being reached with the plaintiff that they would limit damages sought. Plaintiffs’ counsel would not agree to this condition.

Later, insurer B discovered that the insured was not covered by its policy and advised the parties that there was no coverage. Insurer C then declined to assume the insured’s defense.

The Court of Appeal dismissed all five grounds of insurer C’s appeal. The court found that insurer B had not entered into any form of binding agreement, including any partial settlement, with insurer C to abandon any priority or coverage dispute. Even though insurer B’s adjuster’s advice to insurer C’s counsel, and the initial correspondence between counsel, left no doubt that insurer B would agree to release the car rental company from the action or consent to an order dismissing the personal injury action against the car rental company without costs, that offer was conditional on the plaintiffs agreeing to limit their claim to $1 million. However, insurer B and the plaintiffs did not not reach a consensus on these terms.

Insurer C failed to establish that insurer B’s counsel was abandoning the condition attached to his consent. The correspondence between counsel was about extricating the car rental company from the action. In counsel’s correspondence there was no discussion about which of insurer B or C was responsible for defending the insured. There was no indication in the correspondence that the parties were in agreement about abandoning any priority/coverage dispute.

This case was digested by Jaeda Lee, 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 Jaeda Lee at jlee@harpergrey.com.

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