ACE insured Toronto Hydro, which was sued over an explosion that occurred in the underground parking of a high-rise apartment building. AEGIS was the excess insurer. Although there was no explicit duty to defend under the AEGIS policy, ACE brought an application that AEGIS had a duty to pay defence costs pursuant to the doctrine of equitable contribution.
The AEGIS policy was an "indemnity policy" rather than a "liability policy". Under its policy, AEGIS limited its indemnity obligation where there is other insurance, and limited its duty to indemnify to defence costs incurred by the insured, not those incurred by a third-party such as ACE. Defence counsel had been appointed by ACE rather than the insured. AEGIS's obligation was only to indemnify defence costs at the end of the litigation, where the costs were not covered by other insurance.
Justice C.J. Brown rejected the argument that AEGIS had an equitable duty to contribute to defence costs despite the clear wording of the policy. There is no equitable obligation to defend where an excess policy precludes a duty to defend. In addition, a relevant factor was that any defence costs paid by AEGIS would reduce the policy limits available to the insured so there was potential prejudice to Toronto Hydro.