"Cross-border integration creates complexities for Canadian", Lawyers Weekly
April 7, 2006Reproduced from the April 7, 2006, issue of The Lawyers Weekly with the permission of LexisNexis Canada Inc., 75 Clegg Road, Markham, Ont.
Cross-border integration creates complexities for Canadian
insurers
The high level of integration between the Canadian and U.S. markets has resulted in more Canadian companies operating or selling products in the United States. Such companies have an increased potential for becoming involved in lawsuits commenced by U.S. plaintiffs. Typically, CGL policies issued by Canadian insurers to Canadian companies respond to claims commenced against those companies in the U.S. Coverage disputes arising from cross-border litigation raise a number of issues in addition to those in a standard coverage action. Selection of the most appropriate jurisdiction for the hearing of the coverage dispute is a primary concern and must be dealt with at an early stage. Other issues to keep in mind include the difference between state and federal courts in the U.S. and the varying positions between the states with respect to issues such as bad faith and the consequences of denying coverage.
As a general rule, Canadian insurers would prefer to have coverage disputes concerning U.S. litigation against a Canadian company heard in Canada rather than in the U.S. jurisdiction where the underlying action was commenced. There are a number of reasons for this, including convenience, expense and the perception that the U.S. courts may be more likely to render a decision in favour of coverage, even if they are applying Canadian law. The subject Canadian company, which may have already retained counsel to defend the underlying action in the U.S., is likely to prefer a determination of coverage in that forum.
Once notice is provided to the Canadian insurer of an underlying action in the U.S. in which coverage is at issue, it is important that steps be taken as quickly as possible to commence an action for a determination of coverage issues in Canada, as courts will review which action is first in time as a factor, albeit not a conclusive factor, in determining which is the appropriate jurisdiction. When acting for the insured, if coverage has been denied, then the same considerations suggest that an action for coverage should be commenced in the appropriate U.S. jurisdiction as soon as possible. The governing principle of judicial comity means that a final determination on the appropriate jurisdiction in either forum will, in most instances, be recognized by the other forum.
An illustrative example of the need to take quick action in obtaining a determination of coverage issues is found in the decision Western Union Insurance Co. v. Re-Con Building Products Inc. [2001] B.C.J. No. 1838 (B.C.C.A.). Re-Con, a B.C.-based manufacturer selling goods in California, was insured by Western Union, a Canadian insurance company. A products liability class action suit was commenced against Re-Con in California, which Western Union refused to defend. Re-Con sued Western Union in California to force it to defend and for bad faith. Subsequently, Western Union sought a declaration from the B.C. Supreme Court that the policies were invalid. Re-Con applied in the B.C. action for a declaration that the B.C. courts had no jurisdiction. The B.C. Supreme Court held that B.C. was the proper jurisdiction for litigation of the insurance issues, as it had their closest real and substantial connection to the issues of formation and interpretation of the policies, despite the California action being first in time. The court noted that as the California courts had not ruled on their jurisdiction at that time, the issue of judicial comity did not apply. When the California courts refused to stay Re-Con's California coverage action, Re-Con unsuccessfully applied to the British Columbia Supreme Court to reconsider its previous ruling. The British Columbia Court of Appeal dismissed Re-Con's appeal, noting that the refusal to reconsider was not an error because if B.C. courts were required to take into account subsequent developments in foreign litigation, no decision could ever be final. The Re-Con decision underscores the need to proceed as quickly as possible with a coverage action in the chosen jurisdiction through to a final determination.
If a coverage action in the United States is considered, coverage counsel will want to consider a number of issues including which U.S. court system to select and whether or not the selected court will apply the procedural doctrine of forum non conveniens. The threshold question in the United States is whether to pursue or defend an action in federal or state court. For Canadian companies litigating in the United States, as a general rule, federal court will be preferable, if jurisdiction exists. U.S. federal judges are generally better qualified than their state counterparts. Moreover, the competency, efficiency and skill of the U.S. federal judge's staff, including law clerks, is usually superior. There is also a perception that state courts may be biased against persons or corporations from foreign jurisdictions. While this may be advantageous to a Canadian company seeking a favourable coverage determination which would ultimately benefit the U.S. litigant, it may not be as favourable to a Canadian insurer attempting to resist coverage.
In jurisdictional disputes in Canada, the central principle for deciding jurisdiction is that of forum non conveniens. This concept is based on the simple rule that a court may resist jurisdiction, even when jurisdiction is authorized, in favour of an alternate forum which may be more appropriate, based on a number of relevant factors. In the United States, the application of forum non conveniens in state courts varies widely from state to state. In general, however, the question of transfer or dismissal of a case based on an alternative forum is within the discretion of the particular judge hearing the case.
If both the Canadian and the U.S. courts assume jurisdiction over a coverage dispute, a Canadian insurer may want to apply for an antisuit injunction to prevent the Canadian company from pursuing the coverage litigation in the United States. As outlined by the Supreme Court of Canada in Amchem Products Inc. v. British Columbia (Workers Compensation Board) [1993] S.C.J. No. 34, such injunctions should be sought only in very limited circumstances where a foreign court has assumed jurisdiction on a basis inconsistent with principles relating to forum non conveniens. The court in Amchem noted that jurisdiction in that case was asserted by the Texas courts according to the Due Process Clause of the U.S. Constitution and the application of that provision was consistent with Canadian rules of private international law relating to forum non conveniens.
The importance of retaining competent coverage counsel for any potential coverage dispute in the U.S. cannot be underestimated. Timely advice on the law of the selected jurisdiction is critical. There is considerable variation between the states on issues such as the availability of bad faith claims and repercussions for an insurer that wrongfully denies coverage. For example, we act in an ongoing coverage dispute involving a Canadian company involved in U.S. litigation where the U.S. courts initially decided that coverage per se should be adjudicated in Canada but maintained jurisdiction over the bad faith claim against the insurer. This decision left open the possibility of the insured Canadian company obtaining a potentially significant remedy under U.S. law for the bad faith claim. There is also variation between the laws of the states with respect to the position of an insurer which initially denies coverage where coverage is ultimately found. In some jurisdictions, denial by the insurer is considered a breach of contract and may prevent the insurer from relying on favourable contractual provisions.
Increasing involvement by Canadian companies in the U.S. market has resulted in more litigation against Canadian companies in the U.S. The coverage issues that arise create concerns that are different from a usual Canadian coverage dispute. Issues involving jurisdiction, the timing of the coverage action and differences of law between the jurisdictions must be considered at an early stage.
G. Bruce Butler is a partner with Harper Grey LLP of Vancouver, British Columbia, and was counsel on the Re-Con decision. Jonathan D. Meadows is a partner with Harper Grey LLP of Vancouver, British Columbia. Frank M. Young, III, is a founding partner with Haskell Slaughter Young & Rediker, LLC of Birmingham, Alabama.
