A subsequent insurer may be liable for a loss declared to a previous insurer

Coventree Inc. ("Coventree") was successful in obtaining a declaration that an insurance policy issued by an insurer ("Lloyds") was operative despite the fact that notice of the claim had been provided to an earlier D&O insurer where the Court held that Lloyds had waived the right to rely on the earlier notice.

Coventree Inc. v. Lloyds Syndicate 1221 (Millenium Syndicate) [2011] O.J. No. 4036, September 13, 2011, Ontario Superior Court of Justice, T.R. Lederer J.

Coventree was a major participant in the asset-backed commercial paper ("ABCP") market in Canada. On August 13, 2007 the ABCP market experienced a severe disruption as part of a global credit crisis. At that time, Coventry held a policy insuring its directors and officers with the Great American Insurance Company ("Great American"). Shortly after the collapse of the market, Great American indicated that they would not renew the policy and Coventree negotiated with Lloyds for the issuance of a new directors' and officers' liability policy (the "Lloyds 2007 Policy"). This policy had limits of $10,000,000 and expressly excluded "prior acts coverage" - coverage for any claim based upon a wrongful act said to have occurred before October 17, 2007. In the ensuing year, a further policy was negotiated between Coventree and Lloyds (the “Lloyds 2008 policy") which took effect on October 17, 2008 and ran to April 17, 2010. The exclusion for prior acts found in the Lloyds 2007 policy was removed and replaced.

On August 29, 2007, the Ontario Securities Commission ("OSC") sent a letter to Coventree advising that the company had been selected for a full review of its disclosure record. Enforcement Notices were issued by the OSC on July 22, 2009 and a Notice of Hearing was issued on December 7, 2009. Upon being served with the Notice of Hearing and the Statement of Allegations, Coventree and its directors and officers reported the claim to both Great American and to Lloyds, the latter under the Lloyds 2008 policy. The claim was for indemnification of defence costs incurred as a result of the investigation and hearing into the allegations made by the OSC. Great American paid out its policy limits of $1,000,000 to Coventree. Coventree asserted that the Lloyds 2008 policy should also respond but Lloyds denied coverage.

In reviewing the D&O policies at issue, the Court noted that there are two circumstances in which notice may be given and a claim initiated. The first reflected a claim being made where notice was provided to the insurer. The second circumstance related to notice provided by an insured when it became aware of a specific "wrongful act" which occurred during the policy period. Both policies contained a provision that "any claim arising out of such wrongful act which is subsequently made against the insured shall be deemed to have been made at the time the insurer received such written notice from the insured." In the circumstances, Lloyds argued that if notice had been given for a possible future claim and that claim is subsequently made, the notice given at the earlier time is deemed to apply. The Court agreed that this was typically the case. However, the Court further found that this was not a "typical" situation and that given the wordings of the Lloyd 2008 policy, Lloyds had waived the right to rely on the earlier notice provided to Great American.

On August 16, 2007 Coventry had provided notice to Great American that a large number of potential claims could be made against its company and directors given the collapse of the ABCP market. The application for insurance to obtain the Lloyds 2008 policy contained a number of "carve-out provisions" which required Coventry to answer whether or not it had given notice under the provisions of any other previous or current similar insurance policy of any facts or circumstances which may give rise to a claim. However, during the course of negotiations, various versions of the completed applications were delivered between Coventry and a broker for Lloyds containing the phrase "waive question #6 & 7", the questions on the application which contained the "carve-out provisions" with respect to notices provided to earlier insurers. The final version of the insurance application was delivered on December 10, 2008 at which point there were no answers to questions 6 and 7 on the application form. In the circumstances, the Court found that Lloyds had waived questions 6 and 7 and by doing so had waived any ability to rely on the "carve-out provisions".  The Court stated that it was important to note that it was only after Lloyds had already received applications which did contain the answers that it had agreed to this waiver, and therefore Lloyds was very aware of the earlier notices. The prior acts coverage had been specifically excluded from the Lloyds 2007 policy as part of the negotiations with Coventry and its inclusion in the Lloyds 2008 policy was a significant and substantive change.

The Court rejected Lloyds' alternative argument that a provision in the policy should apply to exclude coverage for claims arising from wrongful acts which had been the subject of "any notice or claim given under any other policy of which this policy is a renewal or replacement". The Court held that the Lloyds 2008 policy was not a renewal or a replacement of the earlier Great American policy. The Great American policy had responded to the claims and remained operative. It was not "replaced" and, consequently, the exclusion did not apply.

In the result, Coventree’s application was granted and a declaration was made that the Lloyds 2008 policy was operative and must respond to the claim.

This case was digested by Jonathan D. Meadows and edited by David W. Pilley of Harper Grey LLP.

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