On June 23, 2025, in 9219-1568 Québec inc. c. Sovereign General Insurance Company, the Honourable Luc Morin ordered the split of the proceedings based on the principles of proportionality and effective case management in the context of insurance coverage dispute between the parties.
Facts
Plaintiffs, ten (10) separate entities of Aylo, formerly known as MindGeek (hereinafter collectively referred to as “Aylo”), operate numerous adult content websites such as Pornhub and Brazzers. This adult entertainment giant is defending fifteen lawsuits, in Canada and in the United States, involving serious allegations including human trafficking and the exploitation of minors.
In this context, Aylo incurred approximately $100 million in legal fees for its defense, in addition to paying approximately $7.8 million to settle one of the lawsuits. It is now seeking reimbursement of these expenses from its insurer, The Sovereign General Insurance Company (“TheSovereign”), claiming that the insurance policy issued by The Sovereign (the “Policy”) provides coverage for these costs.
The Sovereign, however, denies coverage, asserting that the Policy issued to Aylo is null ab initio, due to Aylo’s alleged failure to disclose important facts when the Policy was underwritten in 2019. More specifically, it alleges that Aylo failed to inform The Sovereign of numerous “Take Down Notices” – requests to remove pornographic content uploaded without the consent of the individuals depicted.
In this context, Aylo applied to the Court for an order to split the proceedings into two (2) phases: first, to determine whether insurance coverage exists under the Policy; and second, if coverage is established, to determine the scope and extent of that coverage.
Positions of the Parties
In support of its application to split the case, Aylo argued that the question to be addressed in the first phase is straightforward. It also claimed that the issues of insurance coverage and the scope of coverage are distinct. Additionally, Aylo submitted that splitting the case would enhance procedural efficiency, especially if the first phase leads to a finding that the Policy is void, which would effectively end the dispute. Finally, Aylo pointed out that few resources had been invested at that stage, and that splitting the case would not prejudice either party.
The Sovereign opposed the split. It first argued that the matter was not urgent, noting that Aylo had waited over four (4) years before seeking reimbursement. It further argued that an insurer’s duty to defend must normally be assessed promptly but conceded that a “Wellington-type” application (which typically presupposes the existence of a policy) would not be appropriate since the very existence of the policy is in dispute. Moreover, The Sovereign noted that significant costs had already been incurred. It also argued that both phases relied on the same factual background, leading to unnecessary duplication. Finally, The Sovereign claimed that the proposed split had not been provided for in the case protocol.
Analysis
Although the unity of proceedings remains the general rule, procedural decisions must also align with the principles of proportionality, cooperation between the parties, and judicial efficiency. The Court reiterated that a split of proceedings may be ordered even in the absence of exceptional circumstances, provided certain criteria are met.
- The simplicity of the issues raised;
- The distinction between the two (2) questions;
- The possibility that the outcome of the first phase could resolve the dispute entirely;
- The extent to which the parties have already invested resources in the litigation;
- The scheduled dates and deadlines.
These criteria are indicative and serve to guide the court in exercising its discretion.
Decision
The Court ordered the proceedings to be split so that the insurance coverage dispute between the parties would proceed in two (2) phases.
The judge found that, even though both questions arose from the same underlying (and “sensational”) facts, they were indeed distinct.
The Court placed significant weight on the potential benefits of splitting the case. If the first phase confirmed that the insurance policy is null ab initio, the second phase—regarding the extent of coverage—would become irrelevant.
Additionally, the Court viewed the split as a more efficient path and noted it could facilitate settlement discussions between the parties.
The Court ultimately found that proceeding in this manner would be in The Sovereign’s own interest, as it could eliminate certain issues from the dispute altogether.
The Sovereign’s argument concerning a judicial contract was also rejected.
Conclusion
Despite the general principle that cases should not be split, the Court ruled that this insurance coverage dispute would be split, allowing the questions of coverage and scope of coverage to be decided separately.
While the decision may seem surprising, the Court held that, given the nature of the underlying lawsuits, it was essential to proceed efficiently and promptly, respecting the principles of proportionality and cooperation. The Court was of the view that a decision on the existence of insurance coverage would have a meaningful impact on the ongoing related matters.
