Costly Mistakes and Official Sources
When a lawsuit exceeds your liability limit: what happens and how to prepare
What happens in Canada when damages exceed a business's liability insurance limit, how defence costs, aggregates, joint liability and umbrellas affect the outcome, with worked examples.
If a court award or settlement is larger than your liability limit, the insurer pays up to the limit and the business is responsible for the rest. Under a typical commercial general liability (CGL) policy, defence costs are paid in addition to the limit, and in Quebec the Civil Code requires that; under many professional liability policies elsewhere, defence costs reduce the limit. The excess can be enforced against the business's assets, and against an owner personally only in limited situations, such as when the owner is personally named and personally at fault or has given a personal guarantee. The protections are an adequate limit, an umbrella policy, attention to aggregates, and your own lawyer as soon as an excess exposure appears.
This guide is part of the costly business insurance mistakes section. Figures are illustrative, not awards from real cases.
How large liability awards are built
Canadian personal injury awards have several parts:
| Head of damages | What it compensates | Typical driver of size |
|---|---|---|
| Non-pecuniary damages | Pain, suffering, loss of enjoyment of life | Capped for the most serious injuries under Supreme Court of Canada decisions from 1978, adjusted for inflation |
| Past and future loss of income | Earnings the injured person lost or will lose | Age, occupation and severity |
| Cost of future care | Attendant care, therapy, equipment, housing changes | Lifetime needs; often the largest part |
| Special damages | Out-of-pocket expenses already incurred | Medical and travel costs |
| Interest and costs | Pre-judgment interest and a share of legal costs | Duration of the case and court rules |
Because future care and lost income are not capped, a single catastrophic injury to a young person can produce an award well above $2 million. Property damage claims can also be large: a fire spreading from a tenant's unit to a whole commercial building is a classic example.
Worked example 1: an excess judgment
An illustrative Ontario bar: a patron who was over-served is seriously injured afterwards, and the bar is found partly responsible.
- Total damages assessed: $3,100,000
- Bar's CGL limit: $2,000,000 each occurrence
- Defence costs over three years: $350,000, paid by the insurer in addition to the limit
- Insurer pays: $2,000,000 toward the judgment, plus defence
- Excess the bar must pay: $3,100,000 - $2,000,000 = $1,100,000, plus any interest or costs not covered under the policy's supplementary payments
With a $3,000,000 umbrella above the CGL, the umbrella would pay the $1,100,000, subject to its own terms.
The same case under a policy where defence was inside the limit would leave $2,000,000 - $350,000 = $1,650,000 for the judgment, and an excess of $1,450,000.
Worked example 2: joint liability
In many provinces, when several defendants are found at fault for the same harm, each can be required to pay the whole judgment to the plaintiff, then seek contribution from the others. If another defendant has no insurance or no assets, a business found only partly at fault may end up paying far more than its share.
Illustrative: damages of $2,400,000; the business is found 30% at fault and an uninsured co-defendant 70%. The plaintiff may collect the full $2,400,000 from the business. With a $2,000,000 limit, $400,000 is uninsured, and the business's claim for contribution against the co-defendant may be worth nothing in practice.
Worked example 3: the aggregate runs out
A contractor's CGL has a $2,000,000 each-occurrence limit and a $2,000,000 products-completed operations aggregate. In one policy year:
- Claim 1 (water damage from a failed fitting): $650,000
- Claim 2 (a balcony railing failure causing injury): $1,700,000
Claim 1 uses $650,000 of the aggregate, leaving $1,350,000. Claim 2 receives at most $1,350,000, so $350,000 is uninsured, even though each claim is under the per-occurrence limit. Check aggregates as carefully as occurrence limits; see how to choose limits.
What the insurer must do, and what you should do
When a claim may exceed the limit, insurers commonly send an excess letter telling you so and recommending you consult your own lawyer. In both common-law provinces and Quebec, a liability insurer must handle the defence and settlement in good faith, which includes giving fair consideration to your interests when there is a reasonable opportunity to settle within the limit. In Quebec, articles 2500 to 2503 of the Civil Code also make the insurance proceeds available exclusively to injured third persons, allow those persons to sue the insurer directly, and place defence costs and interest over and above the proceeds.
Your steps:
- Notify every policy that may apply: CGL, umbrella, auto, professional liability. Late notice to an umbrella insurer is a common mistake.
- Retain your own lawyer to monitor the defence and advise on settlement.
- Put the insurer on notice in writing if you want it to settle within the limit.
- Do not move or transfer assets to avoid a judgment; that can be set aside and may create further liability.
- Tell your lender if loan covenants require notice of material litigation.
If the insurer refuses to defend at all, or reserves its rights because of an alleged misstatement on the application, the problem is coverage, not limits; see denied claims and complaints and disclosure and misrepresentation.
Can the owner be personally liable?
A corporation is a separate legal person, so a judgment against it is enforced against the corporation's assets. Owners, directors and employees may still be personally liable when they personally committed the wrongful act, when they are named as defendants for their own conduct, or when they gave personal guarantees, for example on a lease. Sole proprietors and partners have no such separation: business and personal assets are exposed together. This is one reason sole proprietors often benefit most from an adequate limit.
Choosing protection in advance
- Test a severe scenario, not just a typical one, in the liability quote comparison tool: enter a judgment of $1.5 million or $3 million and compare what each limit leaves you.
- Price an umbrella; higher layers usually cost less per million than the first million.
- For claims-made professional liability, ask whether defence is inside or outside the limit and price a higher limit if it is inside.
- Keep subcontractors' certificates so other policies share the loss.
Frequently asked questions
Will my insurer settle to keep the claim within my limit?
The insurer controls the defence and settlement under most policies, but it must act in good faith. If there is an offer to settle within the limit, tell the insurer in writing that you want it accepted, and involve your own lawyer.
Does my umbrella policy pay automatically?
Only if it was notified and the claim falls within its terms. Notify the umbrella insurer at the same time as the primary insurer.
Can I buy more coverage after a claim is made?
No. Insurance covers future, unknown events. A claim already made or an incident already known will be excluded from any new or increased cover.
Are punitive damages covered?
Coverage for punitive damages depends on the wording and the law, and is often excluded or uncertain. Do not count on insurance to pay them.
Sources
- Supreme Court of Canada — the court whose 1978 decisions set the non-pecuniary damages cap
- LégisQuébec — Civil Code of Québec, articles 2500 to 2503 on liability insurance
- Ontario e-Laws — Ontario statutes, including the Negligence Act
- Insurance Bureau of Canada — umbrella and liability coverage information
