An insured may be entitled to defence costs for acts occuring after the expiration of an insurance policy.
The applications by Frank Dunn ("Dunn") and Douglas Beatty ("Beatty") against Chubb Insurance Co. of Canada ("Chubb") for a defence cost allocation was allowed and Chubb was ordered to pay 90% of the defence costs of Dunn and Beatty to the policy limits.
Dunn v. Chubb Insurance Co. of Canada, [2010] O.J. No. 1669, April 23, 2010, Ontario Superior Court of Justice, D.R. Cameron J.
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.