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Insurer's Duty to Defend: Are Defence Cost Obligations Subject to a 'Time on Risk' Apportionment

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Construction and Insurance Bulletin

In Lombard General Insurance Company of Canada v 328354 BC Ltd et al, 2012 BCSC 431, the Supreme Court of British Columbia made an important addition to the case law concerning an insurer's duty to fund defence costs under a Commercial General Liability (CGL) policy, where the underlying claim alleges damage occurring over a lengthy period, falling partially outside the duration of the policy. The underlying claim had not yet gone to trial when the insurer sought a pro rata reduction in its defence obligation, proportionate to time on risk. The Court instead directed the insurer to pay for the entire defence. The Court held out some hope of an eventual re-allocation of defence costs, in favour of the insurer, but those remarks must be taken with caution in light of existing case law about the scope of the duty to defend.

This action involved a multi building strata complex that was constructed in the period 1995 to 1997. The developer purchased and maintained a wrap up Commercial General Liability policy, whose term expired two years after construction completed. After that time, the developer did not maintain any additional insurance and so was uninsured from and after 1999. An action was commenced in 2009. The action included allegations of continuous or progressive damage both during the policy period and following. The Supreme Court was asked to determine if the wrap-up insurer, Lombard, could limit its contribution to legal fees required to defend the developer in the action, to a percentage of those legal costs only, based on the insurer's calculation of its 'time on risk' relative to the overall time in which the damage was alleged to have occurred. In this case, the insurer's time on risk calculation would have seen it contribute 16.9% of the defence costs, if they were entitled to apportion them in this fashion.

The application was brought relatively early in the litigation by way of interlocutory motion.   

The Honourable Mr. Justice Butler concluded that, although the project developer was obligated to pay the costs of defence solely relating to damage claims falling outside of the coverage period, at this stage of the proceeding there was no reasonable basis on which to prorate defence costs between Lombard and the project developer. Accordingly, based on its duty to defend found in the policy, Lombard has to pay the entire costs of the defence as they are incurred.

The Court determined that: 

  • In cases of continuous or progressive damage to property, there is no principle that requires defence costs to be apportioned between an insurer and an insured on the basis of time on risk.
  • Apportionment of defence costs prior to trial could be ordered where there is a reasonable or practical means of fairly assessing the relative obligations of the insured and insurer to pay defence costs. Apportionment is not to be determined based on the pleadings alone.  Apportionment must be determined based on evidence establishing the costs of defending the covered claims and the non-covered claims. The best time for this apportionment is likely post trial when the relevant facts have been determined.
  • Time on risk simpliciter is neither a reasonable nor a practical means of apportionment of defence cost obligations.  
  • Defence costs would have been required to defend allegations relating to damage during the insured period. It is irrelevant that those costs incidentally further the defence of damage occurring outside the coverage period. 
  • Ultimately the insurer will be entitled to recover judgment against the insured for defence costs for claims in respect of damage falling outside the period of coverage to the extent that defence of those claims results in "separate and readily ascertainable costs of defence".

This proceeding arose because the developer had not maintained liability insurance post 2009. Typically, where there are multiple insurers, they will reach an accommodation between themselves regarding respective contribution to legal fees. The Court noted that a more flexible set of equitable principles can apply to an allocation debate between insurers, unlike a dispute between an insurer and its insured, which must be governed by the terms of the contract of insurance.

Although the decision holds out the hope – perhaps a rather faint hope – of a retrospective re-allocation, at the end of the day, that might see the insured obliged to reimburse some defence costs to the insurer, this element of the decision must be taken in the context of other principles.  

It is well established that a liability insurer under a duty to defend policy must fund the defence of every potentially covered allegation. In practical terms, that means paying for all defence work, as it is incurred that benefits the defence of potentially covered claims, even if the work also benefits the defence of potentially uncovered variants of those claims, or other claims that are outside the ambit of coverage, unless the policy terms provide otherwise.  

The Lombard decision does not unseat those principles. It does not suggest, for example, that if the insured is eventually found liable on an uncovered variant of a potentially covered allegation, the insurer may then claw back the defence costs. Rather, the decision recognizes the difficulty of telling, in advance, how much of the defence work will be addressed to claims falling outside any potential for coverage. Later in the progress of the underlying action, the insurer may be able to discharge the onus of proving that some expenses already incurred, or yet to be incurred, are truly separate, readily ascertainable, and solely dedicated to claims outside coverage.

Finally, it is worth noting the underlying premise of the decision. The defence costs analysis proceeds on the basis that where defective construction within the policy period initiates a course of progressive damage that continues for a lengthy period of time after the policy expires, the portion of the damage occurring after expiry falls outside coverage. This premise obviously places limitations on the scope of the duty to indemnify, quite apart from defence costs. It is unclear from the judgment whether this premise was challenged. Could it have been said that the entire course of damage was covered, having started damage during the policy period? In other situations, such as personal injury, consequential harm that will be suffered in the future is treated as having been inflicted at the time of the initial causative event, eliminating any "time on risk" arguments against coverage, and any need for allocation of defence costs. The Lombard judgment does not discuss how to distinguish those situations from others where the consequential loss suffered after expiry of the policy falls outside coverage.


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