"Limited Judicial Discretion: The Superior Court Refuses to Compel an Insurer to Renew to Provide Coverage in the Context of Liquidation"
Can a court compel an insurer to renew a fixed-term contract of insurance with a company that is undergoing liquidation? According to Justice Robert Mongeon of the superior court of Quebec, the answer to this question is "no."
On June 4, 2013, Justice Mongeon held that to force the Chartis Insurance Company of Canada ("Chartis") to extend coverage to Penson Financial Services Canada Inc. ("PFSC") after its policy terminated "would be tantamount to writing a new agreement" and to requiring that the insurer assume unwanted risk. An overview of the facts and legal considerations of this case will explain how Justice Mongeon reached this conclusion.
II. The Facts
PFSC is an indirect, wholly-owned subsidiary of Penson Worldwide Inc., a company which until mid-2012, provided a broad range of critical securities and futures processing infrastructure products and services to a global market. On January 11, 2013, PWI and some its subsidiaries filed for voluntary proceedings under Chapter 11 of Title 11 of the United States Bankruptcy Code.
On February 1, 2013, Ernst & Young was appointed Liquidator ("Liquidator") of PFSC in accordance with sections 207 and following of the Canada Business Corporations Act ("CBCA"). Prior to ceasing the majority of its operations, PFSC provided securities and clearing services and, in accordance with IIROC Rule 400, had taken out an insurance policy to secure its ongoing operations, specifically a Financial Institution Bond or FIB Form 14 ("FIB"). Chartis provided that FIB.
III. The Effects of Non-renewal
The fixed-term policy provided by Chartis expired on May 30, 2013. It was on a "claims made and reported" basis, and contained no renewal provision. There was no "tail" coverage once the contract was terminated. Hence, claims filed after May 30th, 2013 concerning events that occurred during the term of the policy would not be covered.
Chartis' refusal to renew its insurance policy with PFSC lies at the heart of this case. The Liquidation Order required, among other things, that PFSC's insurance coverage be neither "discontinued, altered, repudiated, terminated nor cancelled." Though the Liquidator found alternative coverage from Trisura Guarantee Insurance Company ("Trisura") for a comparable premium, that proposal failed to cover claims relating to events that occurred prior to May 30, 2013. A gap between the Chartis coverage and the Trisura proposal thus became a real possibility.
The Liquidator claimed that the compelled renewal of the Chartis contract was its only viable option. Chartis disagreed, arguing that the simple lapse of its policy did not violate the Liquidation Order. In addition, to renew its coverage, PFSC would have had to submit a new application and provide updated financial information. There is no automatic renewal of a FIB and the issuance of a new bond is discretionary and subject to a complete underwriting of the risk. For Chartis, the forced renewal of the insurance contract under such circumstances would be akin to ordering a new contract of insurance, and would result in the Court exceeding its discretionary power. Finally, Chartis insisted that the Trisura proposal would meet IIROC Rule 400 requirements, and allow PFSC to continue to operate as a Dealer Member.
IV. Analysis by the Court
Justice Mongeon first considered whether the Court could compel Chartis to renew its insurance coverage.
The preamble of section 217 of the CBCA sets out the discretionary powers that the Court may exercise in connection with either a liquidation or a dissolution. Although this section enumerates a series of elements that may be included in a court order, it is, nevertheless, silent with regard to the imposition of new contractual terms and conditions on a third party dealing at arm's length.
Justice Mongeon then considered three cases. He began by distinguishing the current case from Re: Village Green Lifestyle Community Corporation, in which Justice Pepall refused leave to cancel a valid insurance policy affecting an Ontario retirement community under receivership. According to Justice Mongeon, the Ontario case simply suggested that, where necessary, a court can require an insurer to abide by the terms of its commitment to cover until the end of its undertaking.
Re: Les Boutiques San Francisco and Re: Bock Inc., two insolvency matters, proved more interesting. In Re: Les Boutiques San Francisco, Justice Gascon, then of the superior court, found that he could not impose the terms and conditions of a renewal contract created after the Initial Order. He could, however, require two insurers to abide by the terms of their offers that were still open for acceptance at time of the Initial Order. In Re: Bock Inc., Justice Lalonde ordered the reinstatement of a distributorship agreement under a temporary Safeguard Order. He based his "unprecedented" decision on a finding of bad faith in the unilateral resiliation of the distributorship agreement by the supplier. In denying leave to appeal, Justice Marie-France Bich, J.C.A., nonetheless felt compelled to address the issue of the discretionary power of the judge to order the cancellation of a notice of termination, and to order the specific performance of the agreement. Drawing from Justice Bich's comments, Justice Mongeon wrote, "the 'revival' of an extinguished contract may, in law, cause serious legal issues which may one day have to be seriously debated before an Appelate Court." In short, the question of forcefully reviving a contract is still very much alive, and its resolution is likely closely connected to the legal considerations and particular facts of a case.
Justice Mongeon thus ended his analysis by considering the factual and legal issues of the case at hand. The facts suggested that though PFSC would be placed in the uncomfortable position of assuming the risks related to a gap in coverage, it could nevertheless carry on its business under the Trisura proposal as a Member Dealer in accordance with IIROC Rules. According to Justice Mongeon, the terms of Justice Gouin's Initial Order indicated a concerted effort to maintain a contractual status quo. That said, the Initial Order stopped short of mentioning renewals not otherwise part of contracts coming to term. As Justice Mongeon stated, "[t]here is a good reason for this: courts are not there to impose new contractual terms. ... [I]f the Court would agree to renew the FIB on a 'claims made reported' basis, the question becomes '...for how long?..'." Theoretically, such a scenario could extend well past the date of a dissolution order. Clearly, such a situation would be untenable.
Without an existing legal framework on which to base an order extending FIB coverage, the Court cannot impose such an obligation on a non-consenting party dealing at arm's length. In the Chartis case, the insurance policy did not include a renewal clause, and had reached the end of its term. To force Chartis to extend coverage in the circumstances would not only be tantamount to writing a new agreement and forcing the insurer to assume unwanted risk, but it would also exceed the discretionary powers mentioned in section 217 of the CBCA. Justice Mongeon therefore dismissed the motion with costs against PFSC.
Though insurance law tends to be fact-specific, the outcome of the Chartis case is noteworthy. Justice Mongeon clarifies the roles of both the Court and the insurer in the context of a liquidation order. A court cannot compel a third party to act against its will and to renew an insurance contract. As a consequence, the insurer need not assume an active role insofar as providing new coverage once a fixed-term policy terminates. Simply put, to allow a contract to lapse is not the same thing as cancelling or otherwise terminating it. The insurer is free to make that decision.
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