In the recent decision, Furtado v. Lloyd's Underwriters, 2023 ONSC 5803, the Ontario Superior Court of Justice has provided insight on the issue of when an insured under a Directors and Officers' Liability Policy may be precluded from seeking coverage for his legal costs due to a delay in notifying the insurer.
The insured was covered by a Director and Officers' Liability Policy issued by the respondent. He made a claim under the policy for defence costs related to an Ontario Securities Commission ("OSC") investigation and receivership proceeding. The respondent denied coverage on the basis that the applicant did not provide notice of the claims in accordance with the terms of the policy.
The policy included a suspension clause that acknowledged that there are some circumstances such as regulatory investigations, when an insured cannot give notice to the insurer and provides for a suspension of the obligation to give notice. The applicant was aware of the OSC investigation between 2019 and 2021. In 2019, the Securities Act prohibited the disclosure of orders to anyone except for legal counsel, however, in 2020, a change to the Securities Act provided a mechanism for a person to notify their insurer of an investigation. The applicant's legal counsel then took steps to notify the insurer in 2022.
Is Relief from Forfeiture Available?
The applicant argued that his failure to notify the insurer of the claim was imperfect compliance with the policy, from which the respondent had suffered no prejudice. The applicant sought relief from forfeiture with respect to the lack of compliance and an order directing the respondent to indemnify him for his legal costs related to the two ongoing proceedings.
The respondent took the position that in a claims-made policy, failure to notify in accordance with the policy's terms amounts to non-compliance with a condition precedent, for which relief from forfeiture is not available.
The threshold issue the court needed to determine was "whether the applicant's breach constitutes imperfect compliance or non-compliance with a condition precedent, which involves determining whether the breach is substantial and prejudices the insurer."
The disagreement among the parties involved the amendment in the Securities Act related to when the obligation to report arose and whether the breach in failing to promptly notify the insurer was a substantial breach that prejudiced the insurer. The applicant argued that the suspension clause in the policy did not contemplate a change in legislation and did not alter the suspension of the obligation to notify the insurer. The court disagreed, stating the obligation to report the investigation arose when the legislation changed to permit disclosure to the insurer. The applicant should have disclosed the investigation to the insurer in 2021.
The court relied on the Ontario Court of Appeal decision, Stuart v. Hutchins, 1998 CanLII 7163 (ON CA), to find that delaying until a year to give notice is a "substantial breach in a claims-made policy, where notice is the triggering event for coverage." The applicant argued that the insurer suffered no prejudice, but the court stated to find the delay in notifying the insurer as only imperfect compliance is to rewrite the bargain the parties made to ensure notice as early as possible. The court cites Stuart to state that allowing the extension of around a year of reporting time after the obligation to report arose, would be tantamount to an extension of coverage the insured had not bargained for. The court dismissed the insured's application for relief from forfeiture.
This decision demonstrates the importance of providing notice as early as possible for a claim that arises under a Directors and Officers' Liability Policy. The court highlighted how notice a year after it is required in a claims-made policy, causes prejudice to the insurer. This decision will be of great interest to insurance institutions and to many of those who are covered under Directors and Officers' Liability Policies or indeed any insurance policies that require prompt notice of claims to be provided to an insurer.
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