COURT OF APPEAL FOR ONTARIO

2015 ONCA 573

DATE: 20150814

DOCKET: C59844

Juriansz, Lauwers and Huscroft JJ.A.

BETWEEN

Onex Corporation, Gerald W. Schwartz, Christopher A. Govan, Mark Hilson and Nigel Wright

Plaintiffs/Defendants by Counterclaim

(Respondents)

and

American Home Assurance Company, Brit Syndicates Ltd. (Lloyd’s Syndicate 2987) and Heritage Managing Agency Limited (Lloyd’s Syndicate 3245), XL Insurance Company Limited, Liberty Mutual Insurance Company, Lloyd’s Underwriters Syndicates No. 2623, 0623, 0033, AIG Europe (UK) Limited and Houston Casualty Company

Defendant/Plaintiff by Counterclaim

(Appellant)

Ronald G. Slaght Q.C., Glenn A. Smith and Jaclyn Greenberg, for the appellant

Geoffrey D.E. Adair Q.C. and Valarie A. Hogan, for the respondents

Heard: June 4, 2015

On appeal from the judgment of Justice Mary M. Sanderson of the Superior Court of Justice, dated December 5, 2014, with reasons reported at 2014 ONSC 6918

Juriansz J.A.:

A. INTRODUCTION

1This appeal is the second time this dispute comes before this court. The appellant, American Home Assurance Company (“American Home”), disputes its liability for defence costs under a directors’ and officers' (“D&O”) liability insurance policy it issued to the corporate respondent, Onex Corporation (“Onex”). The personal respondents were directors or officers of Onex at the relevant time.

2The dispute first came before this court when American Home appealed the summary judgment granted in the respondents’ action claiming reimbursement for defence costs in an action pursuant to certain D&O policies issued by American Home. Contrary to the finding of the motion judge, this court found ambiguity in an endorsement to one of the relevant policies. It allowed American Home's appeal, set aside the order of the motion judge, and returned the matter to the Superior Court to hear evidence to resolve the ambiguity.

3The trial judge granted judgment in favour of the respondents against American Home in the amount of US$15 million. American Home appeals this judgment. For the reasons that follow, I would dismiss the appeal.

B. Background

4The history and background to this litigation is discussed extensively in the reasons of the trial judge, and there is no reason to repeat her discussion. I will, therefore, only refer to those matters material to this appeal.

(i) The D&O policies

5Onex is a private equity firm incorporated under the laws of Ontario. Magnatrax Corporation (“Magnatrax”) was an Onex subsidiary that went into bankruptcy in May 2003.

6In 2002, Onex purchased a D&O liability policy from American Home (the “2002-2003 Onex Policy”). The 2002-2003 D&O Policy covered officers and directors of Onex and its subsidiaries in respect of liability for claims first made against them and reported during the policy period. It had an aggregate limit of liability for all loss, including defence costs, of US$15 million. Onex also purchased excess insurance, giving it D&O liability coverage of US$60 million for the period from November 29, 2002 to November 29, 2003.

7In May 2003, as Magnatrax was filing for bankruptcy, Aon Reed Stenhouse (“Aon”), an insurance broker who acted as agent and broker for Onex and Magnatrax, asked American Home to bind coverage for a run-off D&O policy for Magnatrax. On May 12, 2003, American Home issued a temporary and conditional binder of coverage for Executive and Organization Liability Policy number 350 35 03, for the period May 12, 2003 to May 12, 2009, with a limit of US$15 million (the “Run-Off Policy”). The binder indicated that certain endorsements were to be manuscripted¹ and added to the Run-Off Policy and the 2002-2003 Onex Policy.

8Ultimately, Endorsement #14, a specific entity subsidiary exclusion, was added to the 2002-2003 Onex Policy (“Endorsement #14”). Endorsement #16, a coordination of limits endorsement (“Endorsement #16”), and Endorsement #4, a co-defendant carve-out endorsement (“Endorsement #4”), were added to the Run-Off Policy.² The interpretation of Endorsement #14 to the 2002-2003 Onex Policy and Endorsement #16 to the Run-Off Policy are at the heart of the disputed coverage and this appeal.

9Endorsement #14 provides that American Home is not liable for any “Loss alleging, arising out of, based upon or attributable to or in connection with any Claim brought by or made against” Magnatrax. It further provides that American Home is not liable to make payment for any “Loss in connection with any Claim made against an Insured alleging, arising out of, based upon or attributable to any breach of duty, act, error or omission” of Magnatrax or its executives.

10Endorsement #16 (coordination of limits endorsement) deals with coordinating of limits between the Run-Off Policy and other American Home polices. Endorsement #4 (co-defendant carve-out endorsement) provides coverage for Onex executives in certain circumstances.

11The 2003-2004 and 2004-2005 Onex Policies each also contained specific entity subsidiary exclusions, which were identical to Endorsement #14 found in the 2002-2003 Onex Policy. In July 2005, the parties agreed to remove the specific entity subsidiary exclusion from the 2004-2005 Onex Policy and replace it with a prior acts exclusion (“Endorsement #13”), which did not remove or exclude any coverage for Onex executives for acts in relation to Magnatrax in their capacity as Onex executives.

(ii) The Georgia Action

12On May 10, 2005, the Trustee for the Magnatrax Litigation Trust commenced an action in the US Federal Court of the State of Georgia alleging that the respondents caused the bankruptcy of Magnatrax for the benefit of Onex and its executives (the “Georgia Action”). The Georgia Action described the individual respondents as executives of both Onex and Magnatrax. Mark Hilson and Nigel Wright were officers and directors of both Magnatrax and Onex. Gerald W. Schwartz and Christopher A. Govan were officers and directors of Onex and were alleged to also be de facto directors and officers of Magnatrax.

13The Georgia Action was settled for US$9.25 million. The settlement and the costs for the defence of the action totaled US$33,344,081 and CDN$103,440.

14American Home paid US$13,881,991.90 to the respondents in respect of defence costs incurred in the Georgia Action pursuant to the Run-Off Policy. The remaining US$1,118,008.10 of the US$15 million limit was paid to Robert C. Blackmon Jr. and Robert T. Ammerman, officers and directors of Magnatrax.

(iii) The Onex action against American Home

15On October 10, 2008, Onex commenced an action against American Home seeking reimbursement for outstanding defence costs in the Georgia Action pursuant to the 2002-2003 Onex Policy.³ Onex claimed the individual respondents were covered by the policy for wrongful acts committed in their capacity of Onex executives.

16American Home denied coverage under the 2002-2003 Onex Policy. It relied on Endorsement #14 (specific entity subsidiary exclusion), which it submitted excluded coverage for any Magnatrax-related claims. In the alternative, American Home claimed that any monies owing under the 2002-2003 Onex Policy could be set off against the monies already paid out under the Run-Off Policy pursuant to Endorsement #16 (coordination of limits endorsement).

17Both parties moved for summary judgment. The motion judge held that the 2002-2003 Onex Policy provided coverage for Onex and its executives for defence costs incurred in connection with the Georgia Action and denied American Home’s claim for set off pursuant to Endorsement #16. American Home was ordered to pay the US$15 million limit to Onex and the individual respondents.

18On appeal, this court considered the wording of the 2002-2003 Onex Policy, focusing on the meaning of the word “Claim” in both the first and second paragraphs of Endorsement #14 (specific entity subsidiary exclusion).

19As noted above, the first paragraph of Endorsement #14 provides that American Home has no liability “for any Loss alleging, arising out of, based upon or attributable to or in connection with any Claim brought by or made against” Magnatrax. The second paragraph provides there is no coverage for “any Loss in connection with any Claim made against an Insured alleging, arising out of, based upon or attributable to any breach of duty, act, error or omission of MAGNATRAX Corporation, or any director, officer, member of the board of managers or employee thereof.”

20This court found that the wording of Endorsement #14 is ambiguous because the word “Claim” is susceptible to more than one meaning. On the one hand, “Claim” can be interpreted to encompass only an entire civil proceeding without differentiating between the allegations or specific “claims” within that proceeding. On the other hand, “Claim” can be construed to refer to each of the several bases for relief made within a single civil proceeding. The question whether coverage is excluded turns on this distinction because the Georgia Action – one “claim” in the “civil proceeding” sense – asserts several “claims” in the “claim for relief” sense.

21This court concluded it was not in a position to resolve the ambiguity de novo because it lacked the evidence necessary to determine which interpretation reflected the parties’ reasonable expectations or intentions in adopting Endorsement #14. The court set aside the summary judgment and sent the matter back to the Superior Court so factual findings would be made to resolve the dispute.

C. The Trial Judge’s DECISION

22The trial judge heard four days of evidence and granted judgment in favour of the respondents against American Home in the amount of US$15 million. American Home appeals her judgment.

23The trial judge recognized the narrow and specific task assigned by this court. At the outset of her reasons, she reviewed the procedural history of the dispute, and she explained that “[t]he Court of Appeal concluded it was unable to resolve which interpretation of ‘Claim’ reflected the parties' reasonable expectations or intentions at the time when they put the [Run-Off Policy] into place and when they amended the Onex 2002-2003 Policy by adding Endorsement #14, the Specific Entity Endorsement”: at para. 18.

24This court’s reasons, at paras. 170-172, contain the specific direction to the Superior Court, which the trial judge set out at para 21:

We have examined the record carefully. Regrettably, we find that we are not in a position to decide the factual issues that need to be determined in order to resolve the interpretative dispute. Having found that Endorsement 14 was unambiguous, the motion judge did not make findings of fact with respect to the issues we consider relevant to the resolution of the interpretation exercise.

In arguing the appeal, the parties each took the position that the interpretation they urged on the court was unambiguous. That being the case, they paid little attention to the issues that we now find must be determined -- what were the reasonable expectations or intentions of the parties in adopting Endorsement #14 of the Onex 2002-2003 Policy?

Given the disposition we would make of this appeal, we will not express an opinion on the body of evidence that may be relevant to determining that issue. Suffice it to say that there is evidence of discussions and correspondence that took place in January 2003, and again at the time of the issuance of the Magnatrax Run-Off Policy and the issuance of Endorsement #14.

25The trial judge correctly identified her task – to hear evidence required to determine the reasonable expectations or intentions of the parties in adopting Endorsement #14. She also recognized this court’s direction at para. 172 that “evidence of discussions and correspondence that took place in January 2003 and again at the time of the issuance of the Magnatrax Run-Off Policy and the issuance of Endorsement #14” would be relevant to the analysis.

26The trial judge then identified certain matters about which the parties agreed, namely:

(a) The Onex 2002-2003 Policy is the relevant Onex Policy.

(b) Of the wrongful acts mentioned in the Georgia Action with respect to Magnatrax, some were alleged to have been committed by Onex directors in their capacity as directors of Onex. Others were alleged to have been committed by Onex directors in their capacity as directors of Magnatrax.

(c) The allegations made in the Georgia Action of wrongful acts committed by Onex directors in their capacity as Onex directors, fell within the grant of coverage in the 2002-2003 Onex Policy.

(d) None of the claims advanced in the Georgia Action were claims by Magnatrax.

27The trial judge reviewed the chronology of Onex’s incorporation of Magnatrax and the liability policies it purchased. Hano Pak, an underwriter for American Home, gave evidence that Onex wanted to keep Magnatrax-related claims in a separate policy so it would not impact Onex’s limits with respect to other business going forward. According to Pak, American Home wanted everything to do with Magnatrax to be on one policy so that only one policy limit would respond to any claim in connection with Magnatrax. Jonathan Ashall, a vice president at Aon, gave evidence that he wanted full coverage for the Onex executives and was concerned about possible gaps in coverage. He was trying to find solutions to protect Onex and its executives. Andrew Brown of Aon also gave evidence about several different versions of policy wordings that had been circulated.

28The trial judge found that the wording of the Run-Off Policy and the Onex policies was not finalized until July 2005. While there was a tentative agreement in January 2003 to keep everything Magnatrax-related in the Run-Off Policy, this was never finalized or included in an agreement. In January 2003, the parties did not discuss the meaning of the word “Claim”, nor did they discuss the “dual capacity” issue, that is, whether both policies could be triggered if Onex executives were sued in two different capacities (as executives of Magnatrax and as executives of Onex).

29Having reviewed all the evidence surrounding the negotiations, the trial judge concluded that when the wording of the policies was finally settled in July 2005, all parties mutually agreed that Endorsement #4 (co-defendant carve-out endorsement) of the Run-Off Policy would not cover Onex executives acting in their capacity as Onex executives, and that Endorsement #14 of the 2002-2003 Onex Policy would not exclude coverage for Onex executives acting as such in relation to Magnatrax. The Run-Off Policy would, however, cover Onex executives acting in their capacity as Magnatrax executives before May 2003; the Onex Policy would not.

30The trial judge found that Pak confirmed this mutual intention and did not add any qualifications or say that the Onex Policy would not provide coverage if the executives were sued in both capacities in the same action. This was because all parties understood that the two policies provided different coverage for Onex executives for different wrongful acts committed in different capacities.

31The trial judge also noted that Pak agreed to remove the specific entity subsidiary exclusion from the 2004-2005 Onex Policy and replace it with a prior acts exclusion that would not exclude coverage for Onex executives acting in their capacity as such. Pak explained that the parties did not remove Endorsement #14, the specific entity subsidiary exclusion, from the 2002-2003 Onex Policy because they regarded that policy as obsolete. Both parties assumed the 2004-2005 Onex Policy would respond to the Georgia Action because Aon sent a copy of the complaint in that action to American Home as notice of a claim under the 2004-2005 Onex Policy. The parties failed to recognize that notice of the claim was made on November 28, 2003, the day before the 2002-2003 Onex Policy expired, when Aon forwarded a letter from the firm Foley & Lardner, counsel for the Magnatrax Creditors’ Committee, to American Home (the “Foley Letter”).⁴

32The trial judge concluded that the term, “Claim”, as defined in the 2002-2003 Onex Policy, need not encompass the entirety of a civil proceeding. It is broad enough to encompass multiple claims within a single proceeding. It can mean any allegation triggering coverage, whether alone or included in a larger action.

33The trial judge found that American Home had not satisfied the onus of showing that Endorsement #14 (specific entity subsidiary exclusion) plainly and unequivocally removed coverage under the 2002-2003 Onex Policy for Onex executives acting in their capacity as Onex executives. Furthermore, American Home drafted Endorsement #14. While not necessary in these circumstances, if the evidence did not resolve the ambiguity in the endorsement, the doctrine of contra proferentem would apply.

34The trial judge concluded that the Onex 2002-2003 Policy provides coverage to the Onex executives in their capacity as such, and the plaintiff is entitled to the US$15 million limit of the policy.

35The trial judge went on to conclude that Endorsement #16 (coordination of limits endorsement) did not entitle American Home to set off the monies paid under the Run-Off Policy against monies payable under the 2002-2003 Onex Policy.

D. issues

36This appeal raises two issues:

1. Did the trial judge err in concluding that Endorsement #14 (specific entity subsidiary exclusion) of the 2002-2003 Onex Policy does not exclude coverage for the respondents’ defence costs in connection with the Georgia Action?

2. Did the trial judge err in concluding that Endorsement #16 (coordination of limits endorsement) of the Run-Off Policy does not entitle American Home to set-off amounts owing under the 2002-2003 Onex Policy against payments made under the Run-Off Policy?

E. analysis

(1) Standard of Review

37The issues in this case arise from clauses in insurance contracts that both parties had a real hand in negotiating. The trial judge, as directed by this court, heard evidence of the extensive discussions and correspondence between the parties during those negotiations and made findings accordingly. Issues of contractual interpretation in these circumstances are issues of mixed fact and law that ordinarily attract review on a deferential standard. Extricable errors of law, however, remain subject to the correctness standard: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633. American Home characterizes the new issues it raises as extricable errors of law.

(2) ISSUE 1: Endorsement #14 of the 2002-2003 Onex Policy

38American Home advanced careful and comprehensive arguments as to why it should be concluded that Endorsement #14 (specific entity subsidiary exclusion) of the 2002-2003 Onex Policy excludes any coverage for the Georgia Action. In my view, many of these arguments are repetitions of submissions previously advanced before this court when American Home appealed from summary judgment.

39It must be remembered that when this matter was remitted for trial, the trial judge did not have to start from scratch in considering the interpretation of Endorsement #14. That is because this court did not leave the entire interpretive exercise to the trial judge. Rather, this court resolved many of the issues and sent the matter back for the Superior Court judge to determine the meaning of the ambiguous term “Claim” in Endorsement #14 in light of extrinsic evidence.

40Certainly the extrinsic evidence of the reasonable expectations of the parties had to be considered with due regard to the words in the policies, read as a whole, bearing in mind their purposes and the surrounding circumstances. However, to the extent that American Home’s arguments did not rely on the extrinsic evidence led at trial, they are merely repetitions of arguments previously advanced before this court. The summary of these arguments in the court’s previous decision satisfies me that they are the same arguments, perhaps refined, that are advanced before us in this appeal. In my view, this court has already disposed of these arguments, and I find it unnecessary to consider them anew.

41I will briefly summarize these arguments and show that this court has already addressed them. I will then address the new arguments that rely on extrinsic evidence and explain why there is no basis to conclude that the trial judge erred in concluding that Endorsement #14 (specific entity subsidiary exclusion) does not exclude coverage for the respondents’ defence costs in the Georgia Action.

(1) Appellant’s arguments previously advanced before this court

(i) “Claim” is a defined term in the 2002-2003 Onex Policy, and its meaning is not ambiguous

42American Home presented detailed argument as to why the definition of “Claim” in the 2002-2003 Onex Policy is the best evidence of the meaning and use of the word “claim" in other parts of the policy, and that the definition makes evident that the word “Claim” in Endorsement #14 should be understood to mean an entire “civil proceeding”. The argument focuses on the words in the policies and does not rely on the extrinsic evidence.

43I need not address this argument because this court has already concluded that the way the term "Claim" as used elsewhere in the policy does not resolve the ambiguity. This court noted that the definition of “Claim” was important to the appeal. Nevertheless, it described as tenable the motion judge’s conclusion, at para. 54, that “the “definition of Claim is broad enough to also encompass multiple individual claims within an action or proceeding as well. It is not restricted to mean solely an action or proceeding". In taking that view, this court reviewed the wording of the entire policies at issue, and said at paragraph 156:

In assessing the reasonableness of the competing interpretations of the term "Claim" in Endorsement #14, it is necessary to consider if each interpretation is consistent with the use of that term elsewhere in the Onex 2002-2003 Policy. We have reviewed the language of the policy, and in particular have examined Endorsements #5 and #9. American Home contended that the language of these endorsements supports its interpretation of Endorsement #14. We conclude that the way the term "Claim" is used elsewhere in the policy does not assist in determining which interpretation of the use of that term in Endorsement #14 is the correct one. There are reasonable arguments pointing in both directions. [Emphasis added.]

(ii) The D&O insurance industry uses the term “Claim” to refer to a civil proceeding

44The appellant reviewed the evidence of Ashall to support its submission that the term “Claim” was widely used in the insurance industry to refer to a lawsuit or “civil proceeding”. While Ashall’s evidence may not have been before the court on the summary judgment appeal, American Home did advance the argument that the meaning given to the word “Claim” should not deviate from the meaning of the term most commonly used in the D&O insurance industry.

45This court considered this argument but concluded it did not resolve the ambiguity as to the meaning of “Claim” in Endorsement #14 (specific entity subsidiary exclusion). I need not consider the argument afresh. Ashall’s evidence to which we were taken was far from robust in any event.

(iii) The objective factual matrix supports the conclusion that “Claim” refers to a civil proceeding

46American Home submitted that the objective factual matrix in which the policies were negotiated makes evident that the intention was that coverage for Magnatrax-related claims be excluded under the 2002-2003 Onex policy. Before the Run-Off Policy was purchased, there was US$15 million in coverage under the 2002-2003 Onex Policy for all wrongful acts and claims against all executives and subsidiaries, including Magnatrax. The parties arranged the Run-Off Policy and added Endorsement #14 to the Onex policy because of Magnatrax’s impending bankruptcy. According to American Home, the purpose of these arrangements was to isolate claims against Magnatrax in order to preserve the US$15 million coverage of the Onex policy for all other ventures. The expectation was that at the time of the bankruptcy, Onex would have no further connection with Magnatrax and any potential claims against Magnatrax would crystallize as of the date of bankruptcy. To give effect to this, coverage under the Run-Off Policy commenced as of the bankruptcy and continued for six years until limitation periods would expire. Onex never took up excess insurance for Magnatrax. Endorsement #14 (specific entity subsidiary exclusion) was added to properly mirror the coverage that had previously been available for Magnatrax-related claims under the Onex policy when Magnatrax was an Onex subsidiary.

47This court was alive to this argument and was persuaded it put forward a reasonable view as to what the parties to the negotiations were trying to accomplish. However, it was not the only reasonable view supported by the objective factual matrix. The court specifically stated it had considered the factual matrix and that commercially reasonable arguments could be made to support both of the competing interpretations. At paras. 132 and 165 the court said:

We have considered the language of Endorsement #14 of the Onex 2002-2003 Policy in the context of the surrounding circumstances or the factual matrix. In our view, the language viewed in that context is ambiguous. It is open to two reasonable interpretations: the one urged by American Home and the one adopted by the motion judge.

… The factual matrix in this case does not resolve which interpretation of Endorsement #14 of the Onex 2002-2003 Policy reflects the parties' reasonable expectations or intentions in putting in place the Magnatrax Run-Off Policy and amending the Onex 2002-2003 Policy by adding Endorsement #14.

48At paragraph 166 the court added, “Viewed objectively, either interpretation of Endorsement #14 would produce a commercially sensible result.”

49The argument about what intended purpose and meaning should be inferred from the surrounding objective facts of the commercial context in which the policy was issued was advanced before us without relying on specific extrinsic evidence introduced at trial. I do not propose to reconsider the argument. The court has already decided that the factual matrix of surrounding objective facts of the commercial context also supports Onex’s position. For example, the court observed at para. 162 that American Home's interpretation of Endorsement #14 (specific entity subsidiary exclusion) would leave a potential gap in coverage for Onex Executives:

… American Home’s interpretation of these paragraphs in Endorsement #14 of the Onex 2002-2003 Policy leaves a potential gap in coverage for Onex Executives. On American Home's interpretation, Onex Executives would be covered by the Magnatrax Run-Off Policy for their Wrongful Acts in relation to Magnatrax provided they were sued along with Magnatrax or a Magnatrax Executive. However, they would not be afforded coverage under either policy if they were sued on their own in their capacity as Onex Executives for the same Wrongful Acts. [Emphasis added.]

50I turn to the appellant’s fresh arguments arising from the trial itself.

(2) Appellant’s submissions pertaining to use of extrinsic evidence

(a) The appellant submits the trial judge erred in beginning contractual interpretation by considering the extrinsic evidence

51The appellant submits that the trial judge approached the exercise of interpreting Endorsement #14 (specific entity subsidiary exclusion) backwards. The appellant says that the correct approach to contract interpretation is to begin with the language of the agreement and then resort to further evidence only when necessary. Instead, the trial judge started her contractual interpretation with a consideration of extrinsic evidence.

52This argument has no merit. As explained above, the trial judge was not tasked with considering the matter afresh. The Court of Appeal had already made findings about the wording of the policies read as a whole in the context of the surrounding circumstances and factual matrix.

53In addition, American Home had agreed before the trial judge that the allegations made in the Georgia Action with respect to wrongful acts of Onex executives committed within their capacity as Onex executives fell within the grant of coverage in the 2002-2003 Onex Policy. The trial judge had the narrow task of considering whether the conceded coverage was excluded by Endorsement #14 in light of extrinsic evidence, especially evidence of the discussions and correspondence that took place in January 2003 and again at the time of the issuance of the Run-Off Policy and Endorsement #14.

54At para. 20 of her reasons, the trial judge set out what she considered to be the specific question that this court directed her to resolve: “Does Endorsement #14 … to the Onex Policy exclude from coverage, those claims advanced in the [Georgia Action] alleging wrongful acts on the part of the Onex directors said to have been committed in their capacity as Onex Directors?” I agree that that is precisely the exercise this court assigned to her. In that exercise, the burden of proof was on American Home to establish that the exclusion plainly removed the claim from coverage. The trial judge cited ample authority for this well-established principle at para. 212 of her reasons.

(b) The appellant submits the trial judge erred in giving effect to what she found were the subjective intentions of the parties, and thereby granted “rectification by interpretation”

55American Home submits that the trial judge used direct evidence of the parties’ subjective intentions to overwhelm the language of the policy, and in effect, granted rectification by giving effect to those subjective intentions. The appellant notes that the respondents did not seek rectification in this case and, in any event, submits they could not have possibly satisfied the strict test for rectification.

56American Home’s argument centres on the evidence of Pak and the trial judge’s treatment of that evidence. Pak negotiated the Run-Off Policy and several Onex policies on behalf of American Home. The wording of the policies was not finalized until July 2005. At that time, Pak agreed with Brown that a specific entity subsidiary endorsement identical to Endorsement #14 (specific entity subsidiary exclusion) had been mistakenly added to successive versions of the Onex policy. Pak, in contradiction to the submission of counsel for American Home, testified that Endorsement #4 (co-defendant carve-out endorsement) of the Run-Off Policy did not provide coverage for Onex executives acting in their capacity as Onex executives when sued in connection with Magnatrax. As well, Brown and Pak agreed the specific entity subsidiary exclusion in the Onex policies could potentially be construed to exclude coverage under the Onex policy for Onex executives acting in their capacity as Onex executives in relation to Magnatrax. In an email dated July 5, 2005 that Brown sent to Pak confirming the changes they discussed, Brown indicates the concern that “Excluding claims against the specified entity and “any insureds thereof” might have been misinterpreted to mean that this individual was excluded altogether”. As the trial judge found, Pak agreed with this and consequently, in July 2005, he and Brown removed the specific entity subsidiary exclusion from the 2004-2005 Onex Policy then in force and replaced it with a prior acts endorsement (Endorsement #13) that did not remove or exclude any coverage from the Onex policy for Onex executives acting in their capacity as Onex executives in relation to Magnatrax.

57Pak gave evidence that when the specific entity subsidiary exclusion was deleted from the 2004-2005 Onex Policy, he and Brown did not discuss revising the 2002-2003 Onex Policy to replace the specific entity subsidiary exclusion in that policy with the prior acts exclusion (Endorsement #13) because they mistakenly believed that the 2002-2003 Onex Policy was spent. The 2002-2003 Onex Policy (like the other Onex D&O policies) is a “claims made” policy, that is, it provides coverage for claims first made against an insured party during the policy period and reported to the insurer within the time frame defined in the policy. Pak and Brown assumed the 2002-2003 Onex Policy was spent because they did not believe any claims were made during the policy period. They had failed to recognize that a notice of claim had been provided by way of the Foley Letter in 2003.

58The trial judge placed great weight on Pak’s testimony and the evidence about the agreement to remove the specific entity subsidiary exclusion from the 2004-2005 Onex Policy, agreeing with the respondents that this evidence “‘changed the landscape’ of the interpretive exercise”. Based on this evidence, she concluded that the specific entity subsidiary exclusion “was not intended to be included in successive Onex primary policies, including the Onex 2002-2003 Policy, after May 12, 2003.”

59Thus, American Home submits that the trial judge, in effect, used Pak’s direct evidence of the parties’ subjective intention to read Endorsement #14 (specific entity subsidiary exclusion) out of the 2002-2003 Onex Policy thereby granting “rectification by interpretation”. American Home further submits that the fact that the parties replaced the specific entity subsidiary exclusion in the 2004-2004 Onex Policy with the prior acts exclusion shows that they both regarded the wording of Endorsement #14 in the 2002-2003 Onex Policy to exclude coverage for Onex executives acting in the capacity as such in relation to Magnatrax. American Home says the trial judge erred by giving effect to what she found was the parties’ mutual subjective intention rather than giving effect to the wording of the policy.

60I do not accept the submission. This court had already ruled that Endorsement #14 was ambiguous and directed the trial judge to resolve the ambiguity after hearing evidence that included the “discussions and correspondence that took place in January 2003 and again at the time of the issuance of the Magnatrax Run-Off Policy and the issuance of Endorsement #14.” The trial judge did not use the extrinsic evidence to give effect to the parties’ mutual subjective intention; rather, she used it to resolve the ambiguity in the language of the endorsement.

61The trial judge expressly considered Endorsement #14 as properly included in the 2002-2003 Onex Policy and concluded that, in light of the extrinsic evidence relating to the circumstances and discussions leading to the finalization of the policies, American Home’s position as to how the ambiguous word “Claim” should be interpreted was simply not tenable. The extrinsic evidence revealed that the parties’ mutually intended for the 2002-2003 Onex Policy to cover Onex executives for wrongful acts committed in their capacity as Onex executives. It was, therefore, “objectively unreasonable” to conclude that “Claim” referred only to an entire civil proceeding such that Endorsement #14 (specific entity subsidiary exclusion) would preclude Onex executives from receiving coverage for wrongful acts committed in their capacity as Onex executives contrary to the parties’ stated mutual intention.

62Finally, the trial judge stated that had there been any lingering ambiguity in the meaning of “Claim”, she would have resolved it by applying the doctrine of contra proferentem, choosing the meaning resisted by the party who drafted the contract, American Home.

63As the trial judge points out, American Home conceded at the outset that the wrongful acts of Onex executives acting as Onex executives alleged in the Georgia Action fell within the grant of coverage of the Onex Policy and would be covered unless excluded by Endorsement #14. The onus was on American Home to show that the endorsement clearly and unequivocally removed coverage. The trial judge found that American Home had not satisfied that onus.

64I have not been persuaded that there is any basis to interfere with the trial judge’s conclusion.

(3) ISSUE 2: Is American Home entitled to set off the monies dues under the 2002-2003 Onex Policy against the monies paid under the Run-Off Policy?

65The second question on appeal is whether Endorsement #16 (coordination of limits endorsement) of the Run-Off Policy entitles American Home to set off the US$15 million payable under the 2002-2003 Onex Policy against the monies it already paid under the Run-Off Policy.

66Endorsement #16 provides:

In consideration of the premium charged, it is hereby understood and agreed that, with respect to any Claim under this policy for which coverage is provided by one or more other policies issued by the Insurer or any other member of the American International Group (AIG), (or would be provided but for the exhaustion of the limit of liability, the applicability of the retention/deductible amount or coinsurance amount, or the failure of the Insured to submit a notice of a Claim), the Limit of Liability provided by virtue of this policy shall be reduced by the limit of liability provided by said other AIG policy.

Notwithstanding the above, in the event such other AIG policy contains a provision which is similar in intent to the foregoing paragraph, then the foregoing paragraph will not apply, but instead:

1. the Insurer shall not be liable under this policy for a greater proportion of the Loss than the applicable Limit of Liability under this policy bears to the total limit of liability of all such policies, and

2. the maximum amount payable under all such policies shall not exceed the limit of liability of the policy that has the highest available limit of liability.

Nothing contained in this endorsement shall be construed to increase the limit of liability of this policy. [Emphasis added.]

67American Home submits that the trial judge made an extricable legal error by using an incorrect interpretive approach in deriving the meaning of this endorsement. American Home points out that in its previous decision this court did not find that Endorsement #16 was ambiguous. The trial judge should, therefore, have begun by considering the wording of the endorsement, instead of immediately resorting to the extrinsic evidence as American Home submits she did.

68I do not accept the argument.

69It is true that the trial judge’s analysis began with a reference to the extrinsic evidence. She did so to highlight what both counsel had agreed before her: “that [the] parties intended that whatever coverage for Onex directors was provided by the [Run-Off Policy] would be taken away from the Onex 2002-2003 Policy.” This agreed proposition was the springboard for the trial judge’s analysis of the wording of Endorsement #16.

70In addressing the wording, the trial judge noted that the word "Claim" in Endorsement #16 was not used in isolation but was part of the phrase "claim under this policy." In her view, American Home chose this wording so that Endorsement #16 applied to “allegations of wrongful acts limited to wrongful acts covered under the [Run-Off Policy] i.e., wrongful acts committed by Magnatrax or Magnatrax directors [including those of Onex directors acting in their capacity as Magnatrax directors]” (emphasis in original): Onex (S.C. 2014), at para. 258. She added, at para. 258:

It would strain the wording of "claim under this policy" to interpret "claim under this policy" to extend beyond wrongful acts covered under the [Run-Off Policy] to include allegations of wrongful acts covered under the [Run-Off Policy] AND wrongful acts not covered under the [Run-Off Policy] [e.g., allegations of wrongful acts made against Onex directors acting in their capacity as Onex directors]. [Emphasis in original.]

71It seems to me American Home’s failure on this issue follows from its failure on the first issue. In order for Endorsement #16 (coordination of limits endorsement) to entitle American Home to a set off, the “dual capacity” interpretation would have to be rejected and the word “Claim” would have to be taken to mean a “civil proceeding” and not each allegation made within a civil proceeding.

72Given the meaning of “Claim” adopted under Issue 1 above, it follows that the trial judge’s reading of the language of Endorsement #16 is correct. The phrase “claim under this policy” indicates that Endorsement #16 has no application to allegations not covered at all under the Run-Off Policy.

Conclusion

73For these reasons, I would dismiss the appeal.

74I would fix the respondents costs in the amount of $35,000 all-inclusive as agreed by counsel.

Released: August 14, 2015 (RGJ)

“R.G. Juriansz J.A.”

“I agree P. Lauwers J.A.”

“I agree Grant Huscroft J.A.”

Appendix “A”

1. 2002-2003 Onex Policy

Coverage A: EXECUTIVE LIABILITY INSURANCE

This policy shall pay the Loss of any Insured Person arising from a Claim (including, but not limited to, an Employment Practices Claim, an Oppressive Conduct Claim, a Canadian pollution Claim and a Statutory Claim) made against such Insured Person for any Wrongful Act of such Insured Person, except when and to the extent that an Organization has indemnified such Insured Person. Coverage A shall not apply to Loss arising from a Claim made against an Outside Entity Executive.

2. DEFINITIONS

(c) “Claim” means:

(1) a written demand for monetary, non-monetary or injunctive relief,

(2) a civil, criminal, administrative, regulatory or arbitration proceeding for monetary, non-monetary or injunctive relief which is commenced by: (i) service of a Writ of Summons, Statement of Claim or similar originating legal document; (ii) return of a summons, information, indictment or similar document (in the case of a criminal proceeding); or (iii) receipt or filing of a notice of charges; or

(3) a civil, criminal, administrative or regulatory investigation of an Insured Person:

(i) once such Insured Person is identified in writing by such investigating authority as a person against whom a proceeding described in Definition (c)(2) may be commenced; or

(ii) in the case of an investigation by any PSC or similar foreign securities authority, after the service of a subpoena upon such Insured Person.

The term “Claim” shall include any Securities Claim, Employment Practices Claim, Oppressive Conduct Claim, Canadian Pollution Claim and Statutory Claim.

(h) “Defence Costs” means reasonable and necessary fees, costs and expenses consented to by the Insurer (including premiums for any appeal bond, attachment bond or similar bond arising out of a covered judgment, but without any obligation to apply for or furnish any such bond) resulting solely from the investigation, adjustment, defence and/or appeal of a Claim against an Insured, but excluding any compensation of any Insured Person or any Employee of an Organization.

(l) “Executive” means any:

(1) past, present and future duty elected or appointed director, officer, trustee or governor of a corporation, management committee member of a joint venture and member of the management board of a limited liability company (or equivalent position), including a de facto director, officer, trustee, governor, management committee member or member of the management board of such entities;

(2) past, present and future person in a duty elected or appointed position in an entity organized and operated in a Foreign Jurisdiction that is equivalent to an executive position listed in Definition (l)(1); or

(3) past, present and future General Counsel and Risk Manager (or equivalent position) of the Named Entity.

(p) “Insured” means any:

(1) Insured Person; or

(2) Organization, but only with respect to a Securities Claim, an Oppressive Conduct Claim or a Canadian Pollution Claim.

(q) “Insured Person” means any:

(1) Executive of an Organization;

(2) Employee of an Organization; or

(3) Outside Entity Executive.

(r) “Loss” means damages (including aggravated damages), settlements, judgments (including pre/post-judgment Interest on a covered judgment), Defence Costs and Crisis Loss; however, “Loss” (other than Defence Costs) shall not include: (1) civil or criminal fines or penalties; (2) taxes; (3) punitive or exemplary damages; (4) multiplied portion of multiplied damages; (5) any amounts for which an Insured is not financially liable or which are without legal recourse to an Insured; and (6) matters which may be deemed uninsurable under the provincial or state law pursuant to which this policy shall be construed.

(w) “Organization” means:

(1) the Named Entity;

(dd) “Subsidiary” means: (1) any for-profit entity that is not formed as a partnership of which the Named Entity has Management Control (“Controlled Entity”) on or before the inception of the Policy Period either directly or indirectly through one or more other Controlled Entities and (2) a not-for-profit organization as defined in Section 149.1(b) of the Income Tax Act, R.S.C., 1985 (5th Supp.) sponsored exclusively by the Named Entity.

(ee) “Wrongful Act” means:

(1) any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act or any actual or alleged Employment Practices Violation:

(i) with respect to any Executive of an Organization, by such Executive in his or her capacity as such or any matter claimed against such Executive solely by reason of his or her status as such;

(ii) with respect to any Employee of an Organization, by such Employee in his or her capacity as such, but solely in regard to any: (a) Securities Claim; or (b) other Claim so long as such other Claim is also made and continuously maintained against an Executive of an Organization; or

(iii) with respect to any Outside Entity Executive, by such Outside Entity Executive in his or her capacity as such or any matter claimed against such Outside Entity Executive solely by reason of his or her status as such; or

(2) with respect to an Organization, any actual or alleged breach of duty, neglect, error, misstatement, mis-leading statement, omission or act by such Organization, but solely in regard to: (a) any Securities Claim or Oppressive Conduct Claim; or (b) a Canadian Pollution Claim so long as such Canadian Pollution Claim is also made and continuously maintained against an Executive of an Organization.

4. EXCLUSIONS

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against an Insured:

(i) which is brought by or on behalf of an Organization or any Insured Person, other than an Employee of an Organization; or which is brought by any security holder or member of an Organization, whether directly or derivatively, unless such security holder’s or member’s Claim is instigated and continued totally independent of, and totally without the solicitation of, or assistance of, or active participation of, or intervention of, any Executive of an Organization or any Organization, provided, however, this exclusion shall not apply to:

(1) any Claim brought by an Insured Person in the form of a cross-claim or third-party claim for contribution or indemnity which is part of, and results directly from, a Claim that is covered by this policy;

(2) any Employment Practices Claim brought by an Insured Person, other than an Insured Person who is or was a member of the Board of Directors (or equivalent governing body) of an Organization;

(3) in any bankruptcy proceeding by or against an Organization, any Claim brought by the examiner, trustee, receiver, receiver manager, liquidator or rehabilitator (or any assignee thereof) of such Organization, if any;

(4) any Claim brought by any past Executive of an Organization who has not served as a duty elected or appointed director, officer, trustee, governor, management committee member, member of the management board, General Counsel or Risk Manager (or equivalent position) of or consultant for an Organization for at least four (4) years prior to such Claim being first made against any person; or

(5) any Claim brought by an Executive of an Organization formed and operating in a Foreign Jurisdiction against such Organization or any Executive thereof, provided that such Claim is brought and maintained outside Canada, the United States, or any other common law country (including any territories thereof);

ENDORSEMENT #14

SPECIFIC ENTITY/SUBSIDIARY EXCLUSION

(Claims brought by or made against)

In consideration of the premium charged, it is hereby understood and agreed that the Insurer shall not be liable for any Loss alleging, arising out of, based upon or attributable to or in connection with any Claim brought by or made against the Entity listed below and/or any Insureds thereof.

1. MAGNATRAX Corporation (Including any subsidiary or affiliate thereof)

It is further understood and agreed that the Definition of Subsidiary shall not include MAGNATRAX Corporation. Further, the Insurer shall not be liable to make any payment for Loss in connection with any Claim made against an Insured alleging, arising out of, based upon or attributable to any breach of duty, act, error or omission of MAGNATRAX Corporation, or any director, officer, member of the board of managers or employee thereof.

2. Run-Off Policy

ENDORSEMENT #4

DEFINITION OF ORGANIZATION AMENDED TO INCLUDE ENTITY

(CO-DEFENDANT ONLY)

In consideration of the premium charged, it is hereby understood and agreed that the term “Organization” is amended to include the following entity, subject to the terms, conditions and limitations of this endorsement and this policy.

ENTITY

Onex Corporation

Coverage as is afforded under this policy with respect to a Claim made against Onex Corporation or any Insured Persons thereof shall only apply if: (1) such Claim relates to a Wrongful Act committed by an Insured (other than Onex Corporation or an Insured Person thereof); and (2) an Insured (other than Onex Corporation or an Insured Person thereof) is and remains a defendant in the Claim along with Onex Corporation or any Insured Person thereof.

In all events coverage as is afforded under this policy with respect to a Claim made against Onex Corporation or any Insured Person thereof shall only apply to Wrongful Acts committed or allegedly committed prior to May 12, 2003.

ENDORSEMENT #16

COORDINATION OF AIG LIMITS

In consideration of the premium charged, it is hereby understood and agreed that, with respect to any Claim under this policy for which coverage is provided by one or more other policies issued by the Insurer or any other member of the American International Group (AIG), (or would be provided but for the exhaustion of the limit of liability, the applicability of the retention/deductible amount or coinsurance amount, or the failure of the Insured to submit a notice of a Claim), the Limit of Liability provided by virtue of this policy shall be reduced by the limit of liability provided by said other AIG policy.

Notwithstanding the above, in the event such other AIG policy contains a provision which is similar in intent to the foregoing paragraph, then the foregoing paragraph will not apply, but instead:

(1) the Insurer shall not be liable under this policy for a greater proportion of the Loss than the applicable Limit of Liability under this policy bears to the total limit of liability of all such policies, and

(2) the maximum amount payable under all such policies shall not exceed the limit of liability of the policy that has the highest available limit of liability.

Nothing contained in this endorsement shall be construed to increase the limit of liability of this policy.

3. 2004-2005 Onex Policy

4. EXCLUSIONS

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against an Insured:

(d) alleging, arising out of, based upon or attributable to the facts alleged, or to the same or related Wrongful Acts alleged or contained in any Claim which has been reported, or in any circumstances of which notice has been given, under any policy of which this policy is a renewal or replacement or which it may succeed in time;

ENDORSEMENT #13

PRIOR ACTS EXCLUSION FOR LISTED ENTITIES

In consideration of the premium charged, it is hereby understood and agreed that the term Subsidiary is amended to include the entity(ies) listed below, but only for Wrongful Acts committed by such entity(ies) and/or any Insureds thereof which occurred subsequent to such entity’s respective acquisition/creation date listed below and prior to the time the Named Entity no longer maintains Management Control of such entity(ies), respectively, either directly or indirectly through one or more other Subsidiaries. Loss arising from the same or related Wrongful Act shall be deemed to arise from the first such same or related Wrongful Act.

ENTITY(IES) ACQUISITION/CREATION DATE

1. MAGNATRAX Corporation [...] May 12, 2003

For the purpose of the applicability of the coverage provided by this endorsement, the entities listed above and the Organization will be conclusively deemed to have indemnified the Insureds of [...] each respective entity to the extent that such entity or the Organization is permitted or required to indemnify such Insureds pursuant to law or contract or the charter, bylaws, operating agreement or similar documents of an Organization. The entity and the Organization hereby agree to indemnify the Insureds to the fullest extent permitted by law, including the making in good faith of any required application for court approval.

Footnotes

1. 1“To Be Manuscripted” means that the wording of the endorsements had not been finalized.
2. 2The full text of these endorsements can be found at Appendix “A” to this decision.
3. 3The claim that the individual respondents were covered by the 2002-2003 Onex Policy was made in the alternative. Onex’s primary claim was that the respondents were covered by the D&O liability insurance policy for the period 2004-2005. At the motion for summary judgment, the motion judge held that the 2002-2003 Onex Policy applied to the claims made in respect of the Georgia Action because the claim was made and reported prior to the expiration of the 2002-2003 policy period.
4. 4The letter was originally sent to counsel for Magnatrax, and it indicated that Magnatrax and its subsidiaries had various causes of action against Onex and its executives. The letter requests that Magnatrax and its subsidiaries prosecute these claims, and if they do not intend to do so, to provide confirmation to the Creditors’ Committee so it may prosecute the claims on their behalf.