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

The Insured software company applied for Information Technology Errors and Omissions insurance from the Defendant Insurers for the period of February 28, 2002 to February 28, 2003. Prior to that time, in September and October 2000, the Insured had signed a software license, implementation and maintenance agreement with the Third Party. The maintenance part of the agreement was stated to continue until September 24, 2005, or when cancelled by one of the parties. By January 20, 2003, the Insured was aware that the Third Party was not satisfied with the Insured's progress on solving a major problem with the software. Correspondence between the Third Party and the Insured, which was before the Trial Judge on the Insured's application, indicated that the Third Party was dissatisfied with the services being provided by the Insured and that problems with the software remained unsolved into 2003. 

On February 21, 2003, the Insured applied for a second policy for the period from March 28, 2003 to March 28, 2004, with a retroactive date of February 28, 2002 .  The Insured did not disclose to the Defendant Insurers that there was a potential claim from the Third Party. In April 2003, the Third Party abandoned the software agreement and retained legal counsel. The Insured notified the Insurers on January 20, 2004 of a potential claim. The Insurers took the position that the Insured had no coverage due to non-disclosure of a potential claim in the application form of February 21, 2003. The Third Party subsequently commenced an action against the Insured for misrepresentation and breach of contract.

The issue on appeal was whether the trial judge erred in finding that the Insured had failed to disclose information that was material to the insurance contract in its application for insurance on February 21, 2003.  The Court of Appeal considered two questions in the application for insurance which required the Insured to first, attach a list and status of all "claims, disputes, suits or allegations of non-performance" made during the past five years against the Insured and second, to advise whether the Insured was aware of any "facts, circumstances or situations that may reasonably give rise to a claim other than advised in the previous question". The Insured had answered in the negative to both of these questions.

After confirming that the Trial Judge had correctly stated the law regarding material non-disclosure in an application for insurance, the Court of Appeal concluded that the Insured's failure to disclose a potential claim from the Third Party constituted a material non-disclosure for the purpose of both questions at issue in the application. The Trial Judge had found that there was only a material non-disclosure in respect of the Insured's answer to the second question and not in respect of the first. The Court of Appeal held that, from the outset of its contract with the Third Party in 2000, the Insured was aware that the Third Party had complaints about deficiencies in the system and that the system was not functioning as intended. The Court of Appeal found that there was "ample" evidence that the Insured had knowledge of a "dispute" and of "allegations of non-performance" in the preceding two years arising out of its contract with the Third Party.

Accordingly, the Court of Appeal dismissed the Insured's appeal.

In March/April 2004, Brelih received an email correspondence from solicitors retained by Joseph and Jaques Bitton indicating that the Bittons were considering commencing an action against Brelih. Brelih believed that the Bittons were simply attempting to avoid payment of a portion of the commission due on a real estate transaction and, after some delay, became convinced that the Bittons were not pursuing the action. As a result, they did not report the matter to St. Paul, their errors and omissions insurer at the time.

On June 17, 2005, the Bittons commenced action against Brelih. Brelih reported the claim to his new insurer, Lloyd’s. The Lloyd’s policy had commenced on September 1, 2004. Lloyd’s denied coverage on the basis that all of the events giving rise to the claim occurred before the inception of the Lloyd’s policy and that Brelih had been aware of the potential claim before the Lloyd’s policy commenced. Brelih then reported the matter to St. Paul which denied coverage on the basis that the claim was reported outside the St. Paul policy period.

The Court reviewed the policies at issue and noted that both policies were "claims-made" policies and not "occurrence-based" policies. Condition number 3 of the St. Paul policy required the Insured to provide written notice to the Insurer as soon as practicable of any claim or any circumstances likely to give rise to a claim under the policy. The Court found that the event triggering coverage was notice and that the provision of notice was a condition precedent to the availability of rights under the Policy. Saving provisions relating to deficiencies in notice that were contained in the Policy did not apply, as these saving provisions required that the deficiency in notice be corrected either during the policy period or during the renewal of the policy. No such attempts were made by Brelih during the St. Paul policy period and, consequently, there was no coverage available under that policy.

The Court also rejected Brelih’s argument that it was not reasonably foreseeable as of the inception date of the Lloyd’s policy on September 1, 2004 that the email correspondence from the solicitor for the Bittons in March/April 2004 would result in the claim against the applicants in June 2005. The Court held that Brelih’s belief that these communications were an attempt to avoid the payment of commission rather than provide notice of a potential lawsuit was subject to an objective test. Applying this test to the circumstances of this case, the Court held that where an Insured receives communication from a solicitor alleging acts that caused damage and raised the prospect of a lawsuit, it was reasonably foreseeable that this would result in a claim. As a result, the Court found Lloyds had no obligation to provide coverage under its policy.

MWH provided design and engineering services for the design and construction for the Keenleyside 170 megawatt power plant in Castlegar, British Columbia. Lumbermens provided professional liability insurance coverage (the "Policy") for various parties involved in the design and construction of the project. On April 30, 2004, the approach channel’s concrete liner was damaged which necessitated the shutdown of the power plant.

MWH requested coverage under the Policy, arguing that Lumbermens had a duty to defend MWH upon the reporting of a "circumstance". A "circumstance" was included under the definition of "claim" in the Policy and was defined as "an event reported during the Policy Period from which the insured reasonably expects that a claim could be made". MWH argued that a "circumstance" was reported to Lumbermens in 2004. Lumbermens denied coverage on the basis that the reporting of a "circumstance" did not trigger the duty to defend which required the reporting of a "claim" against the insured seeking damages. The Policy was effective from January 1, 1999 to January 1, 2005. Notice of a claim by the operator of the power plant was not provided to the general contractor until March 31, 2005.

The Court reviewed correspondence from counsel for MWH to Lumbermens on June 10, 2004 in which Lumbermens was advised that no formal proceedings or formal claim had yet been advanced against MWH. Counsel for MWH did indicate that both the owner of the power plant and the general contractor had "intimated their claim may well be made depending on the outcome of the current investigation into the cause of the failure of the concrete approach channel".

The Court reviewed endorsement no. 6 to the policy and found that this endorsement modified the definition of "claim" to include a "circumstance". The Court noted that the title of this endorsement, "Definition of a Claim", strengthened the view that a "circumstance" was to be included as part of the definition of a "claim" throughout the Policy, including the provisions relating to providing notice of a claim.

The Court found that the June 10, 2004 letter from counsel for MWH contained all of the details required to provide notice of a potential claim, including the identity of the party, the time, place and circumstances of the failure, the name of the project, the name of the insurer and the policy number. On an objective assessment, the Court found that there was no question that the letter provided notice of a "circumstance" and therefore a "claim" under the Policy.

In the result, the Court found that Lumbermens’ coverage obligations arose from June 10, 2004 and that the duty to defend was triggered at that time.