A primary insurer is not required to defend an action once the limits in the insurance policy have been exhausted. Similarly, an excess insurer is required to defend an action once the policy limits of the primary insurance policy have been exhausted.

Boreal Insurance Inc. v. Lafarge Canada Inc., [2004] O.J. No. 1571, Ontario Superior Court of Justice

Lafarge is a large supplier of fly ash, an ingredient that is used in concrete. Lafarge supplied fly ash to Bertrand, a company that produces and supplies concrete to home builders. In 1992, it was determined that the foundations of homes that had been built using Bertrand’s concrete needed to be replaced. A lawsuit was commenced against Bertrand and Lafarge with respect to defective concrete that was used in the basements of various new homes built in eastern Ontario between 1986 and 1988.

During the relevant times, Lafarge received primary insurance coverage from Boreal Insurance Inc. (“Boreal”), and from Cigna Insurance Company of Canada (“Cigna”). Lafarge also received a second layer of liability coverage in the form of excess insurance from Scottish & York when it was covered by Boreal, and from National Union when it was covered by Cigna. An initial lawsuit resulted in a large judgment to the Plaintiffs which depleted the limits of the insurance provided by the primary insurers Boreal and Cigna. After the first lawsuit, a class action lawsuit was commenced against Lafarge by other homeowners for claims identical to those made by the Plaintiffs in the first lawsuit.

This case involves an application made by Lafarge to determine whether its primary insurers, Boreal and Cigna, have a duty to defend the class action despite the fact that the limits of indemnity have been exhausted under their insurance policies. In addition, the court was asked to consider whether the excess insurers, Scottish & York and National Union, were required to defend the action if Boreal and Cigna were not.

Boreal submitted that the duty to defend was tied to the duty to indemnify, and that if there was no duty to indemnify, there could be no duty to defend. The insurers relied on Nichols v. American Assurance Home Co. [1990] 1 S.C.R. 801, and Non-Marine Underwriters, Lloyd’s of London v. Scalera [2000] 1 S.C.R. 551, for this proposition. Scottish & York and National Union submitted that these cases were distinguishable because they dealt with a duty to defend based on an assessment of the pleadings. In this situation, it was clear that the action fell within the policy of coverage. Scottish & York and National Union claimed that any limitation of the duty to defend was akin to an exclusion from coverage, and as such, any attempt to limit the duty to defend must be stipulated in clear and unambiguous terms in the insurance policy.

The court determined that the key clause in the primary insurance polices was the stipulation that a duty to defend was owed “with respect to such insurance as is afforded by this policy …”. The court considered the decision of the Quebec superior court in Les Mines d’Amiante Bell Ltee v. Federal Insurance Company, [1985] C.S. 1096. The court determined that no logical distinction could be made between an insured’s obligation to defend where the limits of liability had been exhausted and an insurer’s obligation to defend where the policy afforded no coverage due to the nature of the claim. The court noted that there was no equitable reason to compel a primary insurer, whose policy limits had been exhausted, to contribute to the costs of defending an action. The court concluded that there was no duty on Boreal or Cigna to defend Lafarge in the second action because their policy limits had been exhausted.

In reviewing the policy and language of the excess insurers, Scottish & York and National Union, the court concluded that the language was clear that in the event that the primary insurer had exhausted it’s policy limits, the duty to defend devolves to the excess insurer. The court therefore ordered that Scottish & York and National Union were required to defend Lafarge in the second action.

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