Canada: The Ontario Court Of Appeal Gives Guidance On The Specifics, Or Lack Thereof, To Satisfy "Notice Of Circumstance" Clause In D&O Insurance Policy

A recent decision of the Ontario Court of Appeal in Onex Corporation v. American Home Assurance Company, [2013 ONCA 117], considers the obligations directors and officers have in notifying D&O insurers of circumstances which may give rise to a claim under a D&O policy. Both insureds and insurers can look to this recent decision for guidance when considering the scope and application of prior notice clauses found in D&O insurance policies.

Onex Corporation ("Onex") is a corporation that regularly acquired operating businesses with a view to retaining or disposing of them. Onex incorporated Magnatrax Corporation ("Magnatrax") in 1999 and purchased several U.S. and Canadian manufacturing companies through Magnatrax and/or its subsidiaries.

Magnatrax ultimately sought bankruptcy protection in early 2003. In an action brought in Georgia (the "Georgia Action"), the litigation trustee of Magnatrax alleged that directors and officers of Magnatrax used their control of the company to enrich themselves at the expense of the company and ultimately caused Magnatrax and its subsidiaries to declare bankruptcy. The Georgia Action settled for $9.25 million USD and resulted in $35 million USD in defence costs on behalf of Onex and the individual defendants.

Prior to Magnatrax's bankruptcy, Onex had considered selling off Magnatrax. With this in mind, Onex inquired about putting a "run-off" policy in place from American Home Assurance Company ("American Home"). However, the sale did not ultimately happen.

Magnatrax ultimately notified its insurer it was going to file for bankruptcy protection in the US and Canada. The brokers were asked to bind coverage for a run-off D&O policy on an urgent basis. The run-off policy was bound, with limits of liability of $15 million USD. Coverage was then sought pursuant to this policy when the Georgia Action was commenced.

American Home agreed that the Magnatrax run-off policy was applicable to the Georgia Action and paid the policy limits towards the defence costs in that action. However, American Home denied coverage under a 2002-2003 D&O policy as well as a 2004-2005 policy.

This ultimately led Onex and several of its current and former directors and officers to bring suit in Ontario against American Home and for reimbursement of the defence costs under the 2004-2005 D&O policy (with limits of $15 million) as well as the five excess policies (with additional limits of $75 million). The main issue before the Ontario Court of Appeal was whether Onex was entitled to reimbursement for defence and settlement costs related to the U.S. litigation under various D&O policies.

The D&O policies in question were generally "claims made and reported policies" and each of them included a "notice of circumstances" clause which allowed the insured to report circumstances arising during a policy period which may give rise to a claim in the future.

On August 1, 2003, counsel for the Magnatrax Creditors' Committee provided a letter to Magnatrax's counsel (the "Notice"), wherein it asserted that Magnatrax had claims against Onex and the directors and officers of both Onex and Magnatrax. The Notice included allegations of claims arising from breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment and other possible causes of action. The insurance broker provided the letter as a Notice of Circumstances to American Home one day before the Onex 2002-2003 policy expired.

It was argued that the Notice did not satisfy the specific requirements of the 2002-2003 policy. Specifically, the Insureds argued that the Notice failed to set out full particulars as to dates, persons and entities involved and provided no specifics as to the commercial transactions which may give rise to a claim.

In a motion for Summary Judgment brought by the Excess Insurers to the 2004-2005 policy, the motions Judge determined that the Notice constituted sufficient notice of a claim or notice of circumstances giving rise to claim. As such, the Georgia Action was not covered under the 2004- 2005 policy. The motion justice confirmed the correct test is whether the insured objectively complied with the notice provision in the policy. The motions judge concluded that the Notice contained sufficient particulars to meet the requirements of the policy. The motions judge also found that the Notice set out the "specific transactions and agreements involved, the dates of the transactions and the claims which are alleged to exist and the entities and individuals involved". As such, the Plaintiffs' claim against the Excess Insurers to the 2004-2005 policy was dismissed entirely.

The Plaintiffs appealed this ruling to the Court of Appeal who released their decision in February 2013. The Court of Appeal dismissed Onex's appeal and concurred with the lower Court's decision.

The Court of Appeal stated:

What is important here is that Onex, through [its broker], 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.

The Court of Appeal found that when viewed objectively as a whole, the Notice contained sufficient particulars of dates, persons and entities involved to comply with the 2002-2003 D&O policy requirements.

This case provides the first instance of appellate court consideration as to the possible range and application of a prior notice clause in a D&O insurance policy.

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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