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

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.

Alofs was a director of KremeKo Inc. until his resignation on June 25, 2003. At that time, Alofs had completed the sale of his shares in a transaction with a number of shareholders. The directors of KremeKo were insured under a Directors and Officers Liability Policy issued by, among others, Temple Insurance Company ("Temple Insurance").

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.