Canada: Directors And Officer's Insurance Policies: Pay Attention To The Details

In the recent decision of Onex Corporation v American Home Assurance Company, the Ontario Court of Appeal discussed two prominent issues relevant to the interpretation of directors' and officers' (D&O) liability insurance policies.1 The first was how an insured vs. insured exclusion clause should be interpreted. The second was whether the insured had provided adequate notice of the claims against them in accordance with the policy terms.

What happened

This case revolves around an action brought by Onex Corporation ("Onex"), an Ontario-based company, and several of its officers and directors against its primary insurer (American Home Assurance Company) and excess insurers for costs associated with defending a previous action in the U.S. (the "US Action"). The U.S. Action related to a subsidiary of Onex, Magnatrax Corporation (the "US Subsidiary"), which later filed for reorganization under U.S. bankruptcy law. The U.S. Subsidiary's trustee in bankruptcy began an action in the State of Georgia, U.S., against directors and officers of Onex, resulting in millions of dollars spent on defense costs – this is what Onex sought to recover from both its primary and excess insurers.

The decision

With respect to the insured vs. insured exclusion, the Ontario Court of Appeal concluded that the exclusionary clause did not preclude coverage for derivative actions brought by a trustee in bankruptcy. The Court focused on the precise language used in the policy and noted that it should be interpreted narrowly. In addition, the Court evaluated the circumstances surrounding the adoption of the exclusion, particularly the fact that the U.S. Subsidiary faced imminent bankruptcy proceedings, and noted that: had the parties intended to exclude coverage of claims against the directors by a trustee in bankruptcy or representative asserting the U.S. Subsidiary's rights, the policy would have clearly provided as such.

With respect to adequate notice of claims in accordance with the insurance policy's reporting clause, the Ontario Court of Appeal relied on a holistic objective test to determine whether the insured had complied with the notice provision in the policy. The Court concluded that the notice provided, though not corresponding precisely with the requirements of the reporting clause, was enough to meet the specificity requirements. The key here was that Onex was providing specifics of the claims/potential claims to its insurers as such information was being received, notwithstanding that certain details may have been missing from their reports (resulting in Onex being off-side the reporting requirements based on a strict reading of the insurer's policy). Therefore, the Court concluded that, when viewed objectively as a whole, adequate notice had been provided and coverage should not be precluded.

Insured vs. insured exclusion

The insured vs. insured exclusion, included in D&O policies to prevent coverage where claims are brought by one insured party against another, has been subject to a high degree of scrutiny recently as more cases are being litigated over the scope of its application.2 In cases with receivers, it is often thought that because the receiver "stands in the shoes" of the company, the exclusion clause should operate to preclude coverage to the same degree as if the company had brought the action itself. However, as Onex Corporation v American Home Assurance Company shows, this is not always the case.

Given the recent case law on this exclusion, it is clear that all parties involved must pay close attention to the language of the policy since the wording of the exclusion clause is highly relevant in the court's analysis of whether it should be applied to exclude coverage or not. As this case illustrates, courts typically interpret exclusion clauses narrowly. Proper drafting is paramount for both directors and officers so that the scope of coverage is clear and reflects the true intentions of the parties.

Adequate notice of claims

Most insurers expect directors and officers to provide them with written notice of claims as soon as possible. In addition, depending on the specific wording of the policy, the directors and officers may also be required to notify the insurer if they become aware of any facts or circumstances that could lead to a potential claim. As is evident from this decision, an objective test is likely to be used to determine whether the insured has complied with the notice provisions in the policy.

Given these considerations, it is generally advisable that even if the specifics of the claim or potential claim are not known, directors and officers should provide their insurer with as much notice as possible, as soon as possible, to ensure coverage cannot be denied for failure to give adequate notice. Insurers, on the other hand, should keep in mind that failure to adhere to the specifics outlined in a notice clause may not necessarily preclude coverage, especially if the notice provided by the insured is nevertheless adequate based on an objective standard.

At the end of the day, it's all about drafting, and awareness

It is important for both insured's and insurers to note how significant a role the details play in D & O Insurance policy coverage. Canadian companies wishing to protect their directors and officers should ensure that the policy is drafted to reflect their true intentions. Furthermore, careful consideration should be paid to the specifics of the policy. Insured's should keep in mind that if they are faced with a potential claim, or become aware of any facts or circumstances that could lead to a potential claim, they should err on the side of caution and provide notice to their insurer. Related to this, the insurers should keep in mind that even where the exact specifics outlined in the notice clause have not been met, they may still be liable.

Also authored by: Liezl Behm, student at law

1 Onex Corporation v American Home Assurance, 2013 ONCA 117, 114 OR (3d) 161. 

2 See Markham General Insurance Co. (Liquidator of) v Bennett, [2006] O.J. No. 157 (CA), 81 OR (3d) 389. 

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2013 McMillan LLP

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