British Columbia Insurance Blog

Coverage may not be denied if the insurer had knowledge of acts and aquieced to the conduct

The court of appeal upheld the trial decision that the insured had specifically sought to obtain prior act coverage under a directors and officers liability policy in relation to certain known potential claims and that the insurer had waived certain “carve out” provisions in the policy relating to known facts or circumstances that might give rise to a claim and could not therefore deny coverage to the insured in relation to those claims.

Coventree Inc. v. Lloyds Syndicate 1221 (Millennium Syndicate), [2012] O.J. No. 2287, May 24, 2012, Ontario Court of Appeal, D.R. O'Connor A.C.J.O., R.P. Armstrong and D. Watt JJ.A.

This was an appeal from a decision holding that the appellant insurer, Lloyds Syndicate 1221 (“Lloyds”), was required to provide coverage to the respondent insured, Coventree Inc. (“Coventree”), for defence costs in relation to a notice of hearing and statement of allegations issued against Coventree by the Ontario Securities Commission (the “OSC notice”).

Coventree had been a major participant in the asset-backed commercial paper market in Canada until there was a disruption of that market in August 2007. Coventree had a policy issued by Great American Insurance Company with a limit of $1 million and a policy period that expired on October 17, 2007. This policy included coverage for claims made after the expiration of the policy if Coventree gave notice of the potential claims during the policy period. Great American had advised Coventree that it would not be renewing the policy and on October 16, 2007 Coventree gave written notice to Great American of all the claims against it that could potentially arise from the market disruption (the “October 16, 2007 notice”). Coventree then obtained a policy from Lloyds with a policy period from October 17, 2007 to October 17, 2008 that expressly excluded “prior act coverage”. Coventree obtained a subsequent policy from Lloyds with a policy period from October 17, 2008 to April 17, 2010 with $10 million in coverage (the “2008 policy”) that did not have a prior act exclusion. Coventree claimed against Lloyds for coverage under the 2008 policy for defence costs for the OSC notice, which related to 2007 market disruption. Lloyds argued that coverage was excluded on the basis of a “carve out” clause in the application for insurance submitted by Coventree for the 2008 policy.

During the course of negotiating the 2008 policy Coventree made it clear to Lloyds that it was seeking “full prior act coverage” in relation to the 2007 market disruption and provided Lloyds with a copy of the October 16, 2007 notice. The 2008 policy included an endorsement to the effect that the second $5 million of $10 million coverage did not apply to acts committed prior to October 17, 2007, which implied that the first $5 million coverage did apply to prior acts, including the acts referred to in the October 16, 2007 notice. The Court of Appeal held that the intention of the parties, objectively viewed, was that the 2008 insurance policy would cover the matters referred to in the October 16, 2007 notice. Furthermore, a retention clause and a general exclusion clause contained in the policy could not be relied upon to alter or override the specific agreement between the parties relating to coverage. In the result, the appeal with dismissed.

This case was digested by Emily M. Williamson and edited by David W. Pilley of Harper Grey LLP.

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