Canada: Observations Concerning An Increase In Fraud Claims And Claims Against Financial Advisors And Agents

Last Updated: January 28 2013
Article by Don McGarvey, Q.C.

An interesting (and perhaps troubling) decision was recently issued by the Ontario Court of Appeal in a case regarding directors and officers liability coverage. The Ontario Court of Appeal resorted to the context and circumstances of policy negotiation to interpret the policy language. With all due respect to the Ontario Court of Appeal, the decision seems to run somewhat contrary to recent authority out of the Supreme Court of Canada.

In Lloyd's Syndicate 1221 (Millennium Syndicate) v. Coventree Inc., the Ontario Court of Appeal was faced with the question of whether a directors and officers liability policy provided coverage when Notice of Circumstances of a potential claim had been provided to a previous insurer.

Coventree was a major participant in the asset backed commercial paper ("ABCP") market in Canada. That market experienced a severe disruption in the latter half of 2007 and Coventree's business suffered rather dramatically.

At the time of the collapse of the ABCP market in 2007, Coventree was insured under a directors and officers liability policy issued by Great American Insurance Company ("Great American") with a limit of liability of $1 million.

The Great American policy was set to expire on October 17, 2007 but included coverage for claims made after the expiration of the policy if Coventree gave notice of potential claims during the policy period.

On October 16, 2007, the day before the Great American policy was set to expire, Coventree gave a broadly worded Notice of Circumstances with respect to all potential claims it could envision with respect to the market collapse. Coventree obtained extended coverage from Great American in the amount of $1 million for claims made between October 17, 2007 to October 17, 2008 based upon acts alleged to have occurred before October 17, 2007.

Coventree also obtained a new directors and officers liability policy from Lloyd's Syndicate 1221 for the policy period October 17, 2007 to October 17, 2008, with a limit of liability of $10 million (the "2007 Lloyd's Policy") but an express Exclusion for "prior act coverage". Therefore, the 2007 Lloyd's Policy did not provide coverage for any claim based upon an alleged wrongful act that occurred prior to October 17, 2007.

In March 2008, Coventree requested Lloyd's to provide excess coverage to the coverage provided by Great American for the period up to October 17, 2008 but Lloyd's declined. Coventree was aware that there was an ongoing Ontario Securities Commission investigation and in September 2008, set about to acquire coverage for the policy period following October 17, 2008 when the 2007 Lloyd's Policy was set to expire. Coventree applied to Lloyd's for that further coverage for the period commencing October 17, 2008 and eventually, Lloyd's issued a policy in the amount of $10 million covering the period October 17, 2008 to April 17, 2010 (the "2008 Lloyd's Policy"). Coverage under the 2008 Lloyd's Policy was available for "prior acts" but was capped at the first $5 million of the $10 million limit. Further, it was a claims made policy, covering only claims made during the policy period. In addition, the Exclusion for prior acts coverage in the 2007 Lloyd's Policy was removed.

In July 2009, the Ontario Securities Commission issued a Notice of Hearing and a Statement of Allegations against two of Coventree's senior officers. The Notice of Hearing issued by the Ontario Securities Commission related to matters referred to in Coventree's Notice of Circumstances issued on October 16, 2007 to Great American.

Coventree and its two senior officers who were the subject of the Notice of Hearing incurred defence expenses in excess of $12 million defending the Ontario Securities Commission charges and Great American accepted that its policy responded to the claim and paid its limits of $1 million. Coventree claimed against Lloyd's for reimbursement of defence costs under the 2008 Lloyd's Policy but Lloyd's denied coverage arguing that there were three provisions in the 2008 Lloyd's Policy that excluded coverage for acts referred to in the October 16, 2007 Notice of Circumstances.

In upholding the lower Court's decision that the 2008 Lloyd's Policy provided coverage for the "prior acts" referred to in the October 16, 2007 Notice to the extent of the first $5 million of the $10 million policy limits, the Ontario Court of Appeal held that the words of the insurance contract alone may not be determinative of the objective intention of the parties. The Court found that it was "perfectly proper, and indeed may be necessary, to look at the surrounding circumstances in order to ascertain what the parties were really contracting about".

This runs somewhat counter to the Supreme Court of Canada decision in Progressive Homes v. Lombard where the Court reinforced the importance of the policy language and that the primary rule of interpretation of insurance contracts is the ordinary meaning of the words used in the policy. The meaning of those words may be informed by the commercial purpose for which the policy is written but should not be overwhelmed by a contextual analysis.

By refusing to look at the pure policy language, which seemed unambiguous, and further, by resorting to context and surrounding circumstances in which those words were used and details concerning the negotiations leading to placement of the 2008 Lloyd's Policy, the Ontario Court of Appeal appears to have avoided applying the principles set forth recently by the Supreme Court of Canada.

There has been much debate about the correctness of the Ontario Court of Appeal's decision in Coventree which, to some, appears to be a result based decision as opposed to one reached on the basis of the usual principles of insurance contract interpretation.

Unfortunately, the decision in Coventree may provide further uncertainty to parties who enter into insurance contracts. It remains to be seen what the fallout will be from the Coventree decision but again, it can likely only breed uncertainty when the clear meaning of a contract is informed by surrounding circumstances and particulars of contract negotiation rather than the commercial purpose of the contract and the words used in that contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Don McGarvey, Q.C.
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