Canada: Ontario Court Of Appeal Considers Reporting Clause In A D&O Policy

Onex Corporation v. American Home Assurance Company, 2013 ONCA 117

In the unanimous decision in Onex Corporation v. American Home Assurance Company, released on February 25, 2013, the Ontario Court of Appeal has provided new guidance as to the effects and consequences that directors and officers face in notifying D&O insurers of circumstances which may give rise to a claim under a D&O policy.

This large D&O coverage dispute arose out of a series of events and transactions that eventually resulted in an Ontario lawsuit being commenced by Onex Corporation ("Onex") and several of its current or former officers and directors against their primary D&O insurer, American Home Assurance Company ("American Home") as well as several excess insurers (the "Excess Insurers") to that primary policy for the policy period of November 2004 to November 2005. The Plaintiffs claimed they were entitled to be advanced defence costs pursuant to the primary and excess D&O policies incurred with respect to litigation commenced against them (and others) in the state of Georgia in May 2005 (the "Georgia Action"). The Georgia Action was started by the litigation trustee of Magnatrax Corporation ("Magnatrax"), a former Onex subsidiary, and alleged, amongst other things, that the Plaintiffs' actions or omissions as either directors and officers or de facto directors and officers of Magnatrax had caused the company to become bankrupt in 2003. Specifically, Magnatrax argued that the Plaintiffs had breached their fiduciary and other duties by engaging in a series of transactions which benefitted Onex at the expense of the company. The Plaintiffs claimed that the costs in defending the Georgia Action by the 2004-2005 D&O policy (with limits of $15 million) as well as the five excess policies thereto (with additional limits of $75 million).

In addition, prior to its bankruptcy, Onex had considered selling off its subsidiary Magnatrax and had taken steps to put a "run-off" D&O policy in place from American Home in that event. However, no such sale took place. Instead, Magnatrax filed for bankruptcy protection in the United States and in Canada at the same time its brokers were asked to bind coverage for a run-off D&O policy on an urgent basis. Accordingly, a run-off policy was issued to Magnatrax (with limits of $15 million) and the Plaintiffs also sought coverage pursuant to the terms of this policy.

American Home took the position that only the Magnatrax run-off D&O policy responded to the Georgia Action and paid defence costs pursuant to that policy up to its limits. The Plaintiffs then moved for summary judgment in the Ontario action seeking a declaration that the Onex 2004-2005 Policy, as well as the excess policies for that policy period, provided coverage for the claims asserted in the Georgia Action.

The Excess Insurers moved for cross-summary judgment on the basis that the issues in the Georgia Action were a pre-existing claim which had been reported to insurers in the early policy period of 2002 to 2003 and, therefore, was excluded from coverage during the November 2004-2005 policy period, or any period thereafter. The D&O policies in issue were "claims made and reported" policies which also had a "notice of circumstance" clause which permitted the insureds to report circumstances arising during the policy period which may give rise to a claim in the future, thereby obtaining coverage under the policy for any such claims which ultimately do materialize, in legal proceedings, even if such claim is first asserted after the expiry of the relevant policy period. Such clauses are generally viewed as a provision to protect directors and officers from losing coverage particularly where there has been a change in insurance carrier over successive policy period.

In this case, the prior notice consisted of an August 1, 2003 letter written to Magnatrax's counsel by counsel or the Magnatrax Creditors' Committee asserting that Magnatrax had various claims against Onex and its affiliates and the officers and directors of both Onex and Magnatrax (the "Notice Letter"). In particular, the Notice Letter alleged that there were possible claims of breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment and other yet to be identified causes of action which ought to be brought against the Onex and Magnatrax directors and officers. The Notice Letter was ultimately provided to American Home, pursuant to the notice of circumstances of a possible claim provision in the Onex 2002-2003 Policy.

The Plaintiffs argued that the Notice Letter did not satisfy the specificity requirements contained in the policy to constitute a proper notice of circumstance giving rise to a claim. Onex asserted that, in order to fit within the notice provision in the Onex 2002-2003 Policy, Onex would have had to provide full particulars as to the dates, persons and entities involved in the potential claim, including describing the commercial transactions which may give rise to a claim.

At first instance, and after a lengthy summary judgment hearing, Justice Pattillo rejected Onex's arguments and agreed with the Excess Insurers' argument that the Georgia Action had been reported to Onex's insurers by letter in 2003 and, accordingly, that the Notice Letter constituted a notice of claim or notice of circumstances giving rise to a claim sufficient to preclude the Georgia Action from being covered in the later policy period. Rather, Justice Pattillo concluded that an objective test should be applied to determine whether a notice of an insured to an insurer is sufficient, having regard to the wording of the policy in issue and sufficient particularity had been included in the Notice Letter to constitute a notice under the Onex 2002-2003 Policy. In result, the Court dismissed the Plaintiffs' claims in their entirety against the Excess Insurers and granted the cross-motions for summary judgment brought by the Excess Insurers.

The Plaintiffs appealed the ruling dismissing their action against the Excess Insurers on the prior notice issue and the appeal was heard by the Ontario Court of Appeal on June 20, 2012. In reasons released February 25, 2013, the Court dismissed Onex's appeal and upheld the lower court's ruling on the prior notice issue. In rejecting Onex's arguments that a notice of circumstance clause in a D&O policy requires a significant degree of specificity as to the nature of the possible claim to be triggered, the Court said this:

What is important is that Onex, through Aon, provided American Home with the specifics of the threatened litigation as those specifics were provided to it. It was not necessary for the insured to speculate about the names of the individual directors or officers who might be named in the threatened litigation..when viewed objectively, as a whole, the [notice] contains sufficient particulars to the dates, person and entities involved to comply clause 7(c) of the Onex 2002-2003 Policy.

The case is of particular importance to Canadian insureds and insurers as it marks the first time an appellate court has grappled with the scope and application of a prior notice clause found in a D&O insurance policy. From a practical perspective, this case is a reminder of the importance of reporting claims and potential claims in the appropriate policy period(s).

Alan L.W. D'Silva Mark Walli and  Ellen M. Snow of Stikeman Elliott LLP represented the Excess Insurers involved in the Appeal.

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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