British Columbia Insurance Blog : Canada Insurance Lawyer & Attorney : Michael Thomas of Harper Grey Law Firm : British Columbia, Vancouver

This application related to proceedings that involved alleged wrongdoing that occurred in both 2000-2001 (the "2001 Misconduct") and 2002-2003 (the "2003 Misconduct") relating to actions of directors or officers of Nortel.  The Ontario Court of Appeal affirmed the Superior Court of Justice's determination that the 2001 Misconduct and the 2003 Misconduct did not involve the same or Interrelated Wrongful Acts and that the 2003 Misconduct occurred after the policy period of the 2001 Primary Directors' and Officers' insurance Policy (the "Policy").  This decision can be found at [2009] O.J. No. 2726 (Ont.C.A.).  The Court of Appeal also held that neither the allocation provision applicable to claims based on Securities Transactions nor the allocations provisions applicable to other types of claims applied to these proceedings.  In the absence of an applicable allocation provision, it was appropriate for Chubb to pay 50% of the defence costs incurred by Dunn and Beatty in these proceedings.  However, the Court of Appeal also found that the allocation provision in Endorsement 3 of the policy may be ambiguous and ordered a hearing to determine the proper interpretation of the Endorsement and indicated that extrinsic evidence related to the factual matrix and reasonable expectation of the parties should be gathered to assist in the interpretation of this Endorsement.

Chubb argued that Dunn and Beatty provided no extrinsic evidence that the parties intended any provision of the 2001 policy, including Endorsement 3, to extend coverage for claims based on the 2003 Misconduct that occurred after the expiration of the policy.  However, the court also noted that there was no evidence that the parties did not intend that coverage be so extended.  Therefore, the language of the policy had to be considered closely.  Endorsement 3 was intended to apply only "if Loss covered by this coverage section and loss not covered by the coverage section are incurred".  Chubb's position was that "Loss" is defined to mean those amounts that the insured becomes legally obligated to pay "on account of each Claim and for all Claims in each Policy Period…".  The court noted that the proceedings at issue did contain some allegations regarding the 2001 Misconduct which were interrelated to the allegations made in certain lawsuits brought while the Policy was in effect.  However, the within proceedings were not themselves Claims made in the Policy Period because the proceedings were brought after the Policy Period.  Accordingly, the within proceedings did not appear to involve both "Loss covered by this coverage section and loss not covered by this coverage section".

Dunn and Beatty were successful in their argument that the definition of Loss had to be considered in the context of the overall policy and the expansion of coverage caused by section 8 of the Policy which provided:

For the purposes of this coverage section, all Loss arising out of the same Wrongful Act and all Interrelated Wrongful Acts…shall be deemed one Loss, and such Loss shall be deemed to have originated in the earliest Policy Period in which a Claim is first made against any Insured Person alleging any such Wrongful Act or Interrelated Wrongful Acts.

Dunn and Beatty submitted that if you incorporated the narrow definition of Loss into the terms of the Policy and ignored the effect of section 8, there could never be coverage for Claims outside the Policy Period.  However, Chubb had previously acknowledged that section 8 did apply and did trigger some coverage for the within proceedings.  In doing so, the court held that Chubb acknowledged that the definition of Loss was modified by section 8 of the policy.  Given Chubb's admission pursuant to which it has been making payments on account of Loss, the court held that there was Loss in the within proceedings thereby triggering the allocation set out in Endorsement 3 (as there was also uncovered loss in the proceedings).  Endorsement 3 provided for 90% coverage of Defence Costs.

In the result, the court ordered that Chubb pay 90% of the defence costs of Dunn and Beatty to the policy limits.

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

Dunn and Beatty, were executives at Nortel during the period of 1999 through 2003. They were charged with falsification of books and records and publishing false prospectus contrary to the Criminal Code in 2008. The allegations of fraud and misconduct were made in respect of activities that took place in the period of 2000 - 2001, as well as misconduct allegations in respect of activities that took place in the period of 2002 - 2003. Indemnity for defence costs incurred in the defence of claims is included in the coverage for Wrongful Acts, as well as Inter-related Wrongful Acts which originate in the policy. The policy states that where there is a loss that is covered by the policy and a loss that is not covered, 90% of defence costs are to be allocated to the covered costs.

In adopting the ruling made in the case of Hanis v. Tevan [2008] ONCA 678, the Judge held that defence costs covered by the 2001 policy are related exclusively to the defence of covered claims, therefore allocation of costs is required. The Judge found that the language of this policy did not contain express language providing for the payment of defence costs relating to uncovered claims. Therefore in order to give rational meaning to the terms of Wrongful Act and Inter-related Wrongful Act, the Judge held they must be in respect of a claim made during the policy period in 2001. A claim made with respect to 2003 financial statements was not a claim that was made during the 2001 policy.

Chubb allocated 50% of the defence costs to the 2001 policy, and 50% to the 2003 policy. Chubb had rescinded and denied coverage under the 2003 policy period with respect to Dunn and Beatty. The Judge found that since defence costs under the 2001 policy can only relate to claims under that policy, allocation was appropriate and dismissed Dunn’s claim.

This case was originally summarized by Neil J. MacDonald and originally edited by David W. Pilley.

The plaintiff and now respondent mining company Boliden, indemnified the directors and officers for legal costs incurred in a class action lawsuit by shareholders.

Boliden sold shares on the Canadian market, and had mining operations in Spain, where a tailings dam broke causing pollution damage to nearby lands. Shareholders who had purchased their shares in the initial public offering commenced a class action in Ontario and British Columbia courts alleging misrepresentation in the offering prospectus, as no mention of potential environmental damage was made in that prospectus.

The main issue concerns an exclusion clause found in the D&O policy. The exclusion reads: Liberty shall not be liable under this policy to make any payment for loss respecting a claim for and in respect of a pollution loss. Under the heading of pollution loss coverage, it reads: The exclusion does not apply to defence costs incurred in relation to a claim respecting a pollution loss made against any director or officer in a derivative action. The Court of Appeal upheld the lower court's ruling that the exclusion clause applied to some but not all of the losses to be paid on each allegation of misrepresentation found in the Amended Statement of Claim. Alleged misrepresentation in the Statement of Claim included that environmental protection and pollution prevention were priorities at Boliden, and that Boliden believed it would become the fifth largest zinc producer in the Western world.

The insurer appealed from an order requiring it to defend the former director of an association. The policy provided coverage to the former director for all of his actions as a director of the association, but also contained an exclusion clause for actions brought on behalf of the association, which was an insured.

The judge in the court below concluded that the insurer owed a duty to defend. In allowing the appeal, the Court of Appeal held that the application judge erred in concluding that a duty to defend was owed in the circumstances. The Court of Appeal noted that in each of the American authorities referred to, the court had concluded that the exclusion clause was ambiguous with respect to whether the party bringing the underlying action was an "insured" within the meaning of the policy.

In the case at bar, the exclusion clause was unambiguous. The court had an obligation to give effect to the language of the contract unless to do so would defeat the main object of the contract or virtually nullify the coverage. The exclusion clause did not have the effect of virtually nullifying the coverage under the policy. In the result, the insurer did not have a duty to defend the former director in the underlying action.

Hollinger International Inc. ("International") and its primary insurers brought applications for declaratory relief authorising the funding of a settlement reached in a derivative action commenced in the State of Delaware for the sum of US $50 million dollars. The issue before the court was whether International and the primary insurers reasonably and fairly concluded the settlement taking into consideration the potential rights and entitlements of other insureds as well as excess insurers.

The primary insurance policies afforded a total limit of US $50 million dollars. A further US $80 million dollars coverage was available under the policies issued by the excess insurers.

The excess insurers were aware of, but not directly involved in, the mediation/settlement process. The excess insurer submitted that under recent appellate authority in the Delaware Court, a motion for summary judgment brought on behalf of the outside directors would likely succeed, thereby rendering the payment under the settlement in effect improvident.

The court held that the process of the settlement met the test of procedural reasonableness. The court accepted that the conclusion reached by the parties to the mediation that there was risk that the summary judgment motion would not succeed, was reasonable. This was not a case of an improvident settlement.

The mere fact that other insureds had, or may have, claims that were not finally determined, could not operate to prevent those otherwise entitled to indemnity from receiving it. The court chose not to follow the American decisions that questioned the "first pass the post" principle given that those cases were not in accord with authorities in, or adopted in, Canada.

In the result, the court granted the declaratory relief authorising the funding of the settlement.

St. Paul Guarantee Insurance. Co. ("St. Paul") issued liability insurance that provided coverage to Mr. Zaghloul only when he was acting solely as a director or officer of Wi-Lan Inc. The policy specifically excluded coverage for actions arising from Mr. Zaghloul activities arising from his relationship with any company but Wi-Lan Inc.

Mr. Zaghloul, Wi-Lan Inc., and several other companies, were sued by a Plaintiff over a real estate transaction. The Statement of Claim alleged that there was a breach of contract by Mr. Zaghloul for failing to convey some property to the Plaintiffs that they had contracted for. St. Paul refused to provide coverage to Mr. Zaghloul and Wi-Lan Inc. on the basis that the allegations appeared to be solely against Mr. Zaghloul, or in the alternative that they arose from Mr. Zaghloul’s activities with uninsured companies, and that the allegations were therefore not covered by the policy of insurance. Mr. Zaghloul and Wi-Lan Inc. filed a Statement of Defence. Wi-Lan Inc. pled that it had no involvement in any of the matters relating to the proceedings.

Mr. Zaghloul and Wi-Lan Inc. commenced an action against St. Paul for a declaration that they were entitled to a defence under their policy of insurance. The Chambers judge reviewed both the Statement of Claim and the Statement of Defence filed by Wi-Lan Inc. and determined that there was no entitlement to a defence under the policy of insurance.

The matter was appealed to the Alberta Court of Appeal. In examining the pleadings, the Court of Appeal noted that the Statement of Claim contained allegations which had the potential for the following results, depending on the evidence at the future trial:

1. No defendants performed any of the acts alleged against them;
2. Defendants other than Mr. Zaghloul and Wi-Lan Inc. performed the allegations alleged;
3. Mr. Zaghloul performed the allegations alleged against him, while acting in his own capacity;
4. Mr. Zaghloul performed the actions alleged against him in his capacity as a director of Wi-Lan Inc. and additional companies; and
5. Mr. Zaghloul performed actions alleged against him solely acting in his capacity as a director of Wi-Lan Inc.

The Court of Appeal noted that there was a possibility, based upon the pleadings contained in the Statement of Claim, that Mr. Zaghloul and Wi-Lan Inc. would be entitled to coverage under the policy of insurance that they had with St. Paul.

The Court of Appeal was critical of the Chambers Judge’s reliance upon the Statement of Defence filed by Wi-Lan Inc. in determining whether a duty to defend the allegations existed. The Court of Appeal noted that the underlying principle is that the Insurer should defend any claim by the Plaintiff which could possibly lead to a judgment which the Insurer would have to pay. Asking what is the "true claim" or "real nature of the suit" departs from that basic principle. Such a question invites either looking at ‘outside’ evidence of liability and guessing who will win the later trial, or speculating as to what evidence the Plaintiff would call at trial. The duty to defend should depend upon the nature of the claim made, not upon the judgment which later results. Therefore, the Court of Appeal noted that it was wrong in principle to examine the Statement of Defence in determining whether a duty to defend existed.

The Court of Appeal put no weight on the Statement of Defence that had been filed by Wi-Lan Inc. in coming to its conclusion that St. Paul owed a duty to defend to Mr. Zaghloul and Wi-Lan Inc. The appeal was allowed.

Horkins J. determined that even though the exclusion was clear and unambiguous, it should not be applied if its application would defeat the objective of the insurance contract. Therefore it was appropriate to look at the underlying policy reasons behind the exclusion in determining whether the exclusion applied. In addition, Horkins J. noted that the U.S. cases demonstrate that, for purposes of determining the applicability of the exclusion clause, the Court must first consider the status of the officer when the claim is asserted. If the action does not present itself as a collusive suit between the Corporation and the Director, the exclusion clause does not apply. In this situation, Horkins J. determined that it was clear that the parties were truly adverse. Horkins J. determined that to apply the exclusion and declare that no duty to defend exists would be inconsistent with the main purpose of the exclusion as stated by the U.S. Courts. As a result, he found that St. Paul had a duty to defend Kohanski in the action pursuant to the terms of the Policy.

MIA is an organization that represents employees in the insulation industry and labour relations matters. Michael Kohanski ("Kohanski") operates a business in the insulation industry. On January 19, 1994, Peter Woloszanskyj was hired to be the manager of MIA. His wife, Anna Woloszanskyj, was hired in April 2000 to be an administrative assistant. In February 2002, Peter and Anna Woloszanskyj entered into new employment agreements with MIA. The employment contract was signed by Kohanski on behalf of MIA. On March 2, 2002, Kohanski resigned as President of MIA and from the Board of Directors. On October 3, 2002, Peter and Anna Woloszanskyj allege that MIA terminated them without cause. They issued a Statement of Claim against MIA seeking damages for breach of contract, wrongful dismissal and defamation. MIA delivered a Statement of Defence and Counterclaim in the action. MIA denied the allegations in the Statement of Claim, including the validity and enforceability of the February 2002 employment contract signed by Kohanski. MIA issued a Counterclaim against Peter and Anna Woloszanskyj and Kohanski. In the Counterclaim, MIA sought contribution and indemnity from Kohanski for any amount that may be found owing to Peter and Anna Woloszanskyj. MIA alleged that Kohanski never disclosed to MIA the existence of the new employment contracts. MIA also alleged that the agreements were secured by fraud, dishonesty and constituted a conspiracy between Peter and Anna Woloszanskyj and Kohanski; and that Kohanski did not have authority to enter into the contracts on behalf of MIA.

Kohanski was insured by St. Paul Guarantee Insurance Co. ("St. Paul") through a Directors and Officers Liability Insurance policy (the "Policy"). Kohanski notified the insurer of the Counterclaim that was brought against him and requested that he be provided with a Defence. His request was denied, and he commenced an action seeking a declaration that St. Paul was required to defend him pursuant to the terms of the Policy.

The Policy contained an exclusion known as the "insured vs. insured" exclusion. This exclusion states:

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Directors and Officers:

…

(7) which is brought by or at the behest of the Corporation, or any affiliate of the Corporation, or by any security holder of the Corporation whether directly or derivatively except where such security holder bringing such Claim is acting totally independently of, and totally without the solicitation of, or assistance of, or participation of, or intervention of, any Director or Officer, or the Corporation or any affiliate of the Corporation.

There was no dispute that the claim made against Kohanski would fall within coverage of the Policy if it was not excluded by this clause. However, St. Paul argued that it is plain and obvious that the exclusion applied and that it owed no duty to defend Kohanski. The Counterclaim was a claim made against a director brought by the Corporation. Kohanski relied upon on a body of case law in the United States that discussed the general policy reasons underlying the exclusion clause. These cases included Re Buckeye Countrymark Inc., 251 B.R. 835 (Bkrtcy. S.D. Ohio 2000), Cigna Insurance Company v. Gulf United States Corp., 1997 WL 1878757 (D.Idaho), Conklin Co v. National Union Fire Ins. Co., 1987 WL 108957 (D.Minn.), and Township of Center v. First Mercury Syndicate, 117 F. (3d) 115 (3rd Circ. 1997). The U.S. cases clearly established that the purpose behind the exclusion clause was to prevent a Corporation and a Director of the corporation from bringing a collusive suit in order to trigger coverage from the policy of insurance. St. Paul argued that given the plain and obvious wording of the clause that Horkins J. should not look behind the exclusion clause and consider its purpose in determining whether the clause applied.

The Insured was a Defendant in the underlying defamation action. The Insured applied for a declaration that its Insurers (Cooperators and Encon) owed it a duty to defend in the circumstances.

The Co-Operators Policy, the primary policy, excluded coverage for injury arising out of advertising, publishing, broadcasting or telecasting done by or for the Insured. It expressly excluded coverage for injury arising out of oral or written publication of material, if done by or at the direction of the Insured with knowledge of its falsity.

The court referred to the so-called "pleadings rule" and found that it was evident from the pleadings that a large proportion of the allegations made against the Insured appeared to be covered by the Co-Operators Policy. The Court noted that only one allegation, which dealt with material disseminated on a website maintained and controlled by the Insured, appeared to fall within the exclusions. Co-Operators had a duty to defend. Because the claim was seamless as pleaded, it was not possible to distinguish between the Defence costs that might be attributable to the allegations that might be covered by the policy and those that were excluded. As such, the court held that Co-Operators would bear the cost of defending the action.

The court held that even though Co-Operators had appointed separate coverage counsel and defence counsel, the Insured was entitled to appoint its own counsel at the expense of Co-Operators. The court noted that the issue of whether or not there was publication or broadcasting by or on behalf of the Insured may well become an important evidentiary component of the trial. Thus, even though the trial counsel appointed by the Insurer would not be retained to canvass coverage issues, it would be too substantial a conflict to ignore.