Court of Appeal for Ontario

Date: 2022-07-06 Docket: C69740

Strathy C.J.O., Sossin and Favreau JJ.A.

Between:

EPCOR Electricity Distribution Ontario Inc. and Edwin Houghton Applicants (Respondents)

And:

Municipal Electric Association Reciprocal Insurance Exchange Respondent (Appellant)

Counsel: Alan Mark and Kirby Cohen, for the appellant William Scott and Gabrielle Schachter, for the respondents

Heard: May 19, 2022

On appeal from the judgment of Justice Mohan Sharma of the Superior Court of Justice, dated July 16, 2021, with reasons reported at 2021 ONSC 5033, and from the costs order, dated July 16, 2021, with reasons reported at 2021 ONSC 5680.

Strathy C.J.O.:

A. Overview

[1] This appeal involves a dispute between an insurer and its insureds concerning the interpretation of a comprehensive liability insurance policy.

[2] The respondents sought coverage from the appellant for legal costs incurred in two proceedings. The application judge found in their favour. The appellant appeals from that finding. For the following reasons, I would allow the appeal in part and vary the judgment below.

B. The Parties

[3] The appellant, Municipal Electric Association Reciprocal Insurance Exchange (“MEARIE”), is an insurance reciprocal. Its subscribers are electricity distribution utilities in Ontario. In 2018, MEARIE issued the Comprehensive Liability Insurance Policy (the “Policy”) at issue in this appeal.

[4] The respondent, EPCOR Electricity Distribution Ontario Inc. (“EPCOR”), is an electricity distributor that provides electrical supply to municipalities. It operated the utility company that supplied power to the Town of Collingwood (“Collingwood”). EPCOR was insured under the Policy.

[5] The respondent, Edwin Houghton (“Mr. Houghton”), is the former President and CEO of the utility company acquired by EPCOR. He is also the former acting Chief Administrative Officer of Collingwood. As an officer of EPCOR’s predecessor, he was also insured under the Policy.

C. Background Facts

The Share Sale Transaction

[6] Prior to 2012, Collingwood was the sole shareholder of a local electrical utility, then known as Collingwood Utility Services Corporation. Mr. Houghton was the President and CEO of the utility. In March 2012, Collingwood sold 50% of its shares to PowerStream Holdings Inc. After the sale, the utility became Collus PowerStream Corporation (“CPS”) and Mr. Houghton continued to serve as its President and CEO from 2012 until 2016. In 2018, EPCOR Utilities Inc. indirectly acquired 100% of the shares of CPS, and CPS changed its name to EPCOR.

[7] Between April 2012 and 2013, Mr. Houghton also served as Collingwood’s acting Chief Administrative Officer. He maintained his position as President and CEO of the utility during this time.

[8] In June 2013, the Collingwood Town Council approved the use of funds from the sale of the utility to upgrade certain recreational facilities, including an arena and a pool. Mr. Houghton supported this decision in his capacity as acting Chief Administrative Officer.

[9] Beginning in 2013, public concerns were raised about Collingwood’s sale of shares in the utility and the disbursement of the sale proceeds. In 2014, the Ontario Provincial Police began investigating the allocation and expenditure of funds from the sale, but no criminal charges were laid.

[10] In June 2016, Mr. Houghton resigned from his position at CPS. Other officers resigned around the same time.

The Public Inquiry

[11] In February 2018, in response to the public concerns about the sale of the utility, Collingwood passed a resolution requesting a public judicial inquiry under s. 274(1) of the Municipal Act, 2001, S.O. 2001, c. 25 (the “Inquiry”). In April 2018, Associate Chief Justice Frank Marrocco was designated the Commissioner of the Inquiry.

[12] The scope of the Inquiry was “to inquire into … any matter related to a supposed malfeasance, breach of trust, or other misconduct” by any involved person. The terms of reference included “investigation and inquiry into all relevant circumstances pertaining to the [share sale transaction]” and “investigation and inquiry into the relationships, if any, between the existing and former elected and administrative representatives of the Town of Collingwood, Collingwood Utility Services Corporation and PowerStream Inc.”.

Mr. Houghton’s Participation

[13] Mr. Houghton applied to participate in the Inquiry, given his role in the share sale transaction, his prior role as President and CEO of the utility, and as Collingwood’s former acting Chief Administrative Officer. He was granted standing, given his “substantial and direct interest” in the issues that would be addressed in the Inquiry. He was also granted procedural rights, including advance notice of proposed evidence, the opportunity to suggest and cross-examine witnesses, and the right to make closing submissions.

[14] On May 31, 2019, counsel for the Inquiry sent a “conduct letter” to Mr. Houghton’s lawyer advising that the Inquiry might make “a finding of misconduct” against his client.

[15] Mr. Houghton participated in two phases of the Inquiry. By the end of his involvement in the process in October 2019, he had incurred $591,115.31 in legal fees.

MEARIE Denies Coverage to Mr. Houghton

[16] On July 10, 2018, Mr. Houghton’s counsel wrote to MEARIE, requesting that it fund Mr. Houghton’s participation in the Inquiry and asking for confirmation of the nature of the insurance available to Mr. Houghton and for copies of the relevant policies.

[17] On August 20, 2018, counsel for MEARIE advised it would deny coverage, stating that there was “no claim against Mr. Houghton to which any policy of insurance issued by MEARIE responds” and “no coverage under any such policy for legal fees incurred by Mr. Houghton in connection with representation before the Inquiry.” The letter did not set out the relevant terms of the Policy, referred to below, nor did it explain why MEARIE had determined that there was no coverage. It is not apparent that the Policy was sent to Mr. Houghton’s counsel in response to his request.

EPCOR Denies Indemnity to Mr. Houghton

[18] On August 9, 2018, Mr. Houghton’s counsel wrote to EPCOR seeking indemnity for Mr. Houghton’s legal expenses. Section 7.01(1) of EPCOR’s corporate bylaws (the “Bylaw”) provided that the corporation would indemnify directors and officers against, among other things, costs and expenses reasonably incurred in respect to any civil, criminal or administrative actions or proceedings to which the individual was made a party by reason of having been a director or officer of the corporation.

[19] By letter dated September 20, 2018, EPCOR’s counsel responded that the Inquiry did not fall within the scope of the Bylaw because there was no risk of a finding against Mr. Houghton, a judgment or penalty being ordered against him, or a settlement being paid on his behalf.

Mr. Houghton’s Application Against EPCOR

[20] In July 2019, after the completion of the first phase of the Inquiry, Mr. Houghton commenced an application in the Superior Court of Justice claiming indemnity from EPCOR for his incurred and anticipated legal costs. By this time, Mr. Houghton had received formal notice from the Inquiry that his conduct was under scrutiny and that there might be findings of misconduct made against him.

[21] On September 16, 2019, Koehnen J. held that EPCOR was required to indemnify Mr. Houghton for his legal costs pursuant to the Bylaw. He found that it was “clear from the outset” that the Inquiry was a “proceeding” contemplated by the Bylaw, given the potential for findings of misconduct against Mr. Houghton.

[22] EPCOR was thus ordered to advance funds for Mr. Houghton’s legal expenses for the remainder of the Inquiry. Costs related to the earlier part of the Inquiry were to be determined at a future date. EPCOR and Mr. Houghton later reached a settlement of his legal expenses, relating both to the Inquiry and his application for coverage under the Bylaw.

MEARIE Denies Coverage to EPCOR

[23] EPCOR’s counsel initially wrote to MEARIE on August 6, 2019, requesting coverage for its own legal expenses in responding to the Bylaw application commenced by Mr. Houghton. On August 15, 2019, MEARIE denied coverage to EPCOR on two bases: first, that the application had incorrectly named EPCOR, and the incorrectly named party was not an Insured; and second, that the exclusion found in art. 3.19 of the Policy excluded coverage. Article 3.19 excludes coverage where an Insured is subject to a “[c]laim for expenditures, compensation, damages or any other amounts that are payable pursuant to statute or regulation” (emphasis added). MEARIE’s position was that the exclusion applied because the application against EPCOR had been commenced under s. 136(5) of the Business Corporations Act, R.S.O. 1990, c. B.16, and rr. 14.05(3)(d) and (h) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.

[24] After this denial, EPCOR’s counsel provided MEARIE with further documentation, including the order of Koehnen J. directing that EPCOR indemnify Mr. Houghton, in which EPCOR was a correctly named party and clearly an Insured.

[25] On October 8, 2019, EPCOR’s counsel proposed to MEARIE that it would attempt to settle with Mr. Houghton. EPCOR’s counsel sought a response on two issues: (i) EPCOR’s outstanding claim for indemnity for its own legal expenses under the Policy; and (ii) whether EPCOR had MEARIE’s consent to settle Mr. Houghton’s application.

[26] On October 17, 2019, MEARIE restated its position denying coverage and that Mr. Houghton’s claims against EPCOR did not engage the Policy. Accordingly, MEARIE took no position on the settlement.

Settlement Agreement & Assignment Between EPCOR and Mr. Houghton

[27] Pursuant to a settlement agreement dated December 6, 2019, EPCOR paid Mr. Houghton $400,000 for his costs for the Inquiry and $75,000 for his costs for the Bylaw application. EPCOR’s position is that the settlement reflects a balance between Mr. Houghton’s Inquiry costs, which amounted to $591,115.31, and his legal costs on the application, which amounted to $117,008.40. EPCOR itself incurred $215,000 in legal costs defending itself on the application.

[28] EPCOR also settled with its excess insurer, Liberty Mutual Insurance Company (“Liberty”), in the amount of $112,500, representing partial indemnity for the amount that EPCOR had paid to Mr. Houghton for his Inquiry costs. As part of that settlement, EPCOR has an obligation to reimburse Liberty if it is made whole by MEARIE.

[29] As part of the settlement agreement between EPCOR and Mr. Houghton, Mr. Houghton agreed to assign to EPCOR all claims which he might have against MEARIE or Liberty.

[30] In November 2020, EPCOR and Mr. Houghton brought an application against MEARIE in the Superior Court of Justice, seeking declaratory orders for coverage under the Policy.

D. The Policy

[31] Before addressing the decision below granting EPCOR’s application against MEARIE, it is useful to set out an overview of the Policy and its most relevant provisions.

[32] The Policy insured EPCOR as an additional named insured and also covered any officer or director or employee while performing duties for an additional named insured. Mr. Houghton was therefore an Insured under the Policy.

[33] Section 1 of the Policy provided eight different coverages, including such matters as bodily injury liability, property damage liability, and environmental impairment liability.

[34] The two coverages called into play in this appeal are “Coverage E”, Directors and Officers and Errors and Omissions Liability, and “Coverage G”, Legal Expenses.

[35] Coverage E insured liabilities arising from “Wrongful Acts” of the Insured:

COVERAGE E – DIRECTORS AND OFFICERS AND ERRORS AND OMISSIONS LIABILITY

To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as compensatory damages arising out of Operations Covered, for any Claim made against the Insured because of a Wrongful Act, provided that the Claim is first made against the Insured during the Policy Period or Other Notice of Claim First Received by the Insured occurred during the Policy Period and provided that coverage is not provided by Coverages A.1, A.2, B, C or D. [Emphasis added.]

[36] A “Wrongful Act” was defined in the Policy as “any actual or alleged error, misstatement, misleading statement, act, omission or neglect” of the Insured, but “does not include any matter claimed against an Insured arising out of breach of contract, negotiation of a contract, tenders for contracts, selection and/or awarding of a contract or failure to proceed with a contract.”

[37] Coverage G insured against certain legal expenses:

COVERAGE G – LEGAL EXPENSES

To pay on behalf of the Insured costs or expenses incurred in the defence of a proceeding brought against the Insured during the Policy Period under any statute enacted by the Parliament of Canada or the Legislature of the Province of Ontario, except the Highway Traffic Act or the Acts referred to in Coverage F hereof, provided that:

a) the Reciprocal has been notified promptly in writing of the commencement of such proceeding under such Statute;

b) the Reciprocal has approved the selection of counsel to defend such proceeding;

c) the Reciprocal has approved the nature and amount of the costs and expenses incurred in the defence of such proceeding;

d) should the Insured be found, in such proceeding, to be guilty of any offence by final judicial judgment or order from which no appeal may be taken, or in respect of which all time periods for appealing have passed without any appeal having been taken the Insured shall repay the Reciprocal all costs or expenses paid hereunder; and

e) [the limit of liability, which under Endorsement No. 5 of the Policy, was increased to $1 million, as of January 1, 2018.]

[Emphasis added.]

[38] Section 2 of the Policy contained additional insuring agreements in relation to some of the coverages. These included defence costs and expenses incurred by the Insured in defending a suit or other proceeding that was insured under certain coverage, including Coverage E. It also covered costs assessed against the Insured in any such proceeding. This additional coverage did not apply to Coverage G, which provided specific, stand-alone coverage for costs or expenses incurred in the defence of a “proceeding” brought under a statute. The relevant language of s. 2 of the Policy was as follows:

2.0 ADDITIONAL INSURING AGREEMENTS

With respect to Claims or suits alleging liability and seeking damages, costs or expenses which are covered under Coverages A.1, A.2, B, C, D and E under Insuring Agreements 1.1 to 1.6, inclusive, hereof, and which are not excluded under sections 3.1 to 3.28, inclusive, hereof, the Reciprocal shall:

2.1 DEFENCE – SETTLEMENT

Subject to Section 8.5 of this policy, defend any Claim, suit or other proceeding against the Insured alleging liability and seeking compensatory damages on account thereof, even if such Claim, suit or other proceeding is groundless, false or fraudulent, or where the Reciprocal is prevented by law or otherwise from defending the Insured as aforesaid, the Reciprocal will reimburse the Insured for defence costs and expenses which have been incurred with the consent of the Reciprocal.

2.3 SUITS COSTS, INTEREST EXPENSES

2.3.1 Pay all expenses incurred by the Reciprocal and all costs assessed against the Insured in any suit or proceeding that do not exceed the Limit of Liability of this policy.

[39] Section 3 of the Policy contained various exclusions from coverage. MEARIE relies on two exclusions. First, the “Willful or Intentional Acts Exclusion” in art. 3.11, which stipulated that the Policy did not apply “[t]o any Claims for damages, losses or injury to any person or property where it was the intention of any Insured to cause damage, loss or injury to such person or property or where damage, loss or injury resulted from acts by or on behalf of any Insured which were intended to cause damage, loss or injury.” Second, the “Non-Compensatory Damages Exclusion” in art. 3.19, which made clear the Policy did not apply “[t]o any fines or penalties, or to punitive or exemplary damages or to any Claim for expenditures, compensation or damages that are payable pursuant to statute or regulation.”

[40] Section 6 contained definitions for various terms, including “Claim”, “Insured”, and “Wrongful Act”.

E. Decision Below

Coverage G

[41] After summarizing the principles applicable to the interpretation of insurance policies, set out in the decision of this court in Le Treport Wedding & Convention Centre Ltd. v. Co-operators General Insurance Company, 2020 ONCA 487, 151 O.R. (3d) 663, at para. 19, leave to appeal refused, [2020] S.C.C.A. No. 333, the application judge first considered whether Mr. Houghton was entitled to recovery of his legal expenses under Coverage G, noting that this determination would frame the balance of the issues. He observed that the only issue in dispute was whether Mr. Houghton’s costs of participation in the Inquiry were “costs or expenses incurred in the defence of a proceeding brought against the Insured”, within the meaning of Coverage G.

[42] The application judge found that Coverage G was unambiguous and covered the legal expenses incurred by Mr. Houghton in defending his interests at the Inquiry – a proceeding in which a finding of misconduct could have been made against him. He referred to Markevich v. Canada, 2003 SCC 9, [2003] 1 S.C.R. 94, in which the Supreme Court observed, at para. 24, that “[a]lthough the word ‘proceeding’ is often used in the context of an action in court, its definition is more expansive.”

[43] The application judge rejected MEARIE’s argument that “proceeding” in Coverage G was meant to limit its operation to criminal or quasi-criminal proceedings. The Inquiry had been struck under the Municipal Act and it was therefore a proceeding under a statute.

[44] The application judge also rejected MEARIE’s argument that subparagraph (d) of Coverage G, which required repayment of defence costs “should the Insured be found, in such proceeding, to be guilty of any offence” restricted the scope of coverage to proceedings in which a finding of guilt could be made. He found that this proviso only became operative after the insurer had paid the legal expenses and “cannot be interpreted as pre-condition to entitlement of legal expenses in defence of a proceeding in the first place.”

[45] He concluded, at paras. 92-93, that even if there were ambiguity in Coverage G, it would be commercially unreasonable to interpret the language as excluding public inquiries:

To the extent there is ambiguity, I find that the commercial realities of public utility providers in Ontario and their insurer are such that it would have been a reasonable expectation of the parties that legal costs related to an Inquiry of this nature would be covered under the Policy. Public utilities, due to their public nature, are not infrequently the subject of public inquiries. When the acts or omissions of directors and officers of public utilities garner public attention or criticism, as occurred in this case, governments often call inquiries to investigate and address those concerns. Since such public inquiries are not uncommon, it would be commercially unreasonable to interpret the Policy as not covering the legal expenses involved in responding to them. In other words, it would not result in a windfall to the insurer or an unanticipated recovery to the insured to interpret [C]overage G as including legal expenses incurred in responding to an inquiry such as the one in this case.

For these reasons, I find that Coverage G is not ambiguous and that it does cover legal expenses arising from participation in a public inquiry in which a finding of misconduct may be made against an Insured covered by the Policy. To the extent there is any ambiguity, the commercial realities of this type of insurance contract favour an interpretation where the reasonable expectations of the parties would have these legal expenses covered. If I am wrong in this conclusion, and the insurance contract is ambiguous and cannot be resolved, contra proferentem requires an interpretation against the Insurer.

[46] Finally, the application judge turned to MEARIE’s submission that although there was no applicable exclusion in the Policy, Mr. Houghton had suffered no loss because he had been reimbursed for his legal expenses by EPCOR. The application judge rejected this argument as “circular”, found that it ignored the events that unfolded and “improperly assigns insured risks to EPCOR who was not the insurer.”

[47] As to the sequence of events, the application judge noted that Mr. Houghton was entitled to be indemnified by MEARIE pursuant to Coverage G, he had made a request that was denied, and his legal expenses were an insurable loss for which MEARIE was contractually liable. The fact that Mr. Houghton obtained compensation from EPCOR after MEARIE denied coverage was irrelevant to MEARIE’s responsibility as an insurer, which was to make Mr. Houghton whole.

[48] The application judge observed, however, that Mr. Houghton was not entitled to a windfall due to the events that unfolded after MEARIE denied coverage: Mr. Houghton had assigned his claim to EPCOR. Accordingly, he turned to consideration of the impact of the settlement agreement between EPCOR and Mr. Houghton, whether EPCOR was entitled to indemnity under Coverage E, and the effect of EPCOR’s payment of $475,000 to Mr. Houghton.

Coverage E

[49] As noted above, Coverage E provided insurance for “all sums which the Insured shall become legally obligated to pay as compensatory damages arising out of Operations Covered, for any Claim made against the Insured because of a Wrongful Act”.

[50] The application judge accepted EPCOR’s argument that its denial of indemnity to Mr. Houghton under the Bylaw was an “error” and a “Wrongful Act” within the meaning of Coverage E. He rejected MEARIE’s submissions that EPCOR’s obligation to indemnify Mr. Houghton arose under the Bylaw and s. 136 of Ontario’s Business Corporations Act, and that if the denial of indemnity were a Wrongful Act, it would convert an uninsured obligation into an insured obligation by “the simple artifice of denying the obligation and thus forcing the counterparty to sue.” MEARIE had argued that “insurance is intended to provide coverage for errors or accidents”, not for the Insured’s failure to honour its legal obligations. The application judge rejected those arguments, including MEARIE’s submission that the “Willful or Intentional Acts Exclusion” in art. 3.11 of the Policy should apply, and concluded the following, at para. 117:

Moreover, in my view, it is not appropriate to consider Coverage E in a vacuum without regard to MEARIE’s obligation under Coverage G. As I concluded in the previous section, MEARIE was required to indemnify Mr. Houghton for his legal expenses arising from the Inquiry under Coverage G. These are the same expenses that EPCOR is also claiming under Coverage E. There is no concern that EPCOR, as the insured, is converting an uninsurable loss into an insurable loss when MEARIE had a duty to indemnify Mr. Houghton for his legal expenses in the first instance. In other words, these legal expenses were always an insurable loss for which MEARIE was always responsible; there has been no conversion of an uninsurable loss.

[51] He also rejected MEARIE’s submission that the claim was excluded by art. 3.19 of the Policy, which excluded recovery for “any fines or penalties”, “punitive or exemplary damages”, or any claim “for expenditures, compensation or damages that are payable pursuant to statute or regulation.” He found that Koehnen J.’s decision that EPCOR was required to pay Mr. Houghton’s legal expenses was based on the Bylaw and not on statute or regulation, and therefore, those expenses were not excluded from coverage.

F. Issues on Appeal

[52] The submissions of the parties, discussed below, raise the following issues:

(a) the applicable standard of review; (b) the relevant interpretive principles; (c) the interpretation of Coverage G; (d) the interpretation of Coverage E; (e) the quantum recoverable under EPCOR’s claim as assignee; and (f) the costs appeal.

[53] I will address the parties’ submissions in the “Analysis” section that follows.

G. Analysis

(a) The standard of review

[54] The parties agree that the Policy is a contract of adhesion, and a correctness standard of review applies to its interpretation: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23, at paras. 24, 46. The standard form applies to all policy holders, there is no significant factual matrix to assist the interpretation process, and the interpretation will have precedential value.

[55] I agree with the parties’ submission concerning the standard of review. That said, Ledcor makes it clear that “factors such as the purpose of the contract, the nature of the relationship it creates, and the market or industry in which it operates” are appropriate considerations in the interpretation of a standard form contract: Ledcor, at para. 31. These are generally not fact specific and will usually be the same for all parties to the contract.

(b) Principles of interpretation

[56] The principles of interpretation applicable to insurance policies are not in dispute and can be briefly summarized.

[57] The first principle is that when the language of the policy is unambiguous, the court should give effect to the clear language, reading the insurance contract as a whole: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at para. 22, referring to Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, at para. 71.

[58] The instruction that the contract must be read as a whole is frequently expressed but equally frequently ignored by both insurers and insureds as they focus on the coverage or exclusion at issue. Insurance policies, like the one at issue in this appeal, often contain multiple, sometimes overlapping coverages, exclusions, conditions, and endorsements. Reading the policy as a whole informs the exercise of ascertaining the intention of the parties. Reading the policy as a whole, and searching for harmony rather than discord, is often helpful in reconciling apparent ambiguities or inconsistencies.

[59] Where the language of the policy is ambiguous – where the meaning is not clear, and there are competing reasonable interpretations – the general rules of contract interpretation come into play. Courts can give preference to an interpretation that is consistent with the reasonable expectations of the parties, as long as that interpretation is supported by the language of the policy: Progressive Homes, at para. 23. Courts should avoid an interpretation that would give an unrealistic result or that would not have been in the contemplation of the parties when the contract was made: Progressive Homes, at para. 23; Ledcor, at para. 78.

[60] When these rules of construction fail to resolve the ambiguity, the court will construe the policy contra proferentem, against the insurer. This gives rise to the principle that coverage provisions are to be interpreted broadly and exclusions are to be construed narrowly: Progressive Homes, at para. 24; Scalera, at para. 70.

[61] With these principles in mind, I turn to the interpretation of the coverages at issue. I begin with Coverage G, rather than Coverage E, where the appellant begins, because in my view the former is largely determinative of the outcome of the appeal.

(c) The interpretation of Coverage G

[62] Coverage G contained an undertaking by MEARIE to pay the Insured’s costs or expenses in defence of a “proceeding” brought “against the Insured … under any statute”. The appellant submits that the trial judge erred in finding that Coverage G insured Mr. Houghton’s costs of participating in the Inquiry.

[63] The appellant conceded in oral argument that the Inquiry was a “proceeding”. This is supported by the case law, which indicates that “proceeding” has a very wide meaning: Markevich, at para. 24. Had MEARIE wished to restrict the scope of the coverage, there was a thesaurus of more restrictive terms available: “action”, “suit”, “charge”, “prosecution” or “claim”, to mention a few. Indeed, some of the additional insuring agreements contained in s. 2 of the Policy use the expression “Claim, suit or other proceeding”, which suggests that “proceeding” was intended to have a broad meaning, encompassing more than these restrictive terms.

[64] The appellant makes three submissions, however. First, it submits that the Inquiry was not “a proceeding brought against the Insured … under any statute” (emphasis added). Second, it submits that the “clawback” provision in subparagraph (d) of Coverage G, which provides that any costs paid by the insurer must be repaid if the Insured is found “guilty of any offence”, indicates that only the costs of proceedings of a criminal nature are within the scope of Coverage G. Finally, the appellant contrasts the language of an excess Directors and Officers Liability policy, purchased by EPCOR from Liberty. It submits that had the parties intended to contract for such coverage in the MEARIE Policy, they would have included similar language as exists in the Liberty policy.

[65] The application judge rejected the first two submissions. He noted that although the Inquiry was not directed solely at Mr. Houghton, the conduct letter issued by the Inquiry stated that it might make findings of misconduct against Mr. Houghton, and Collingwood’s resolution and the Inquiry’s terms of reference made it clear that his conduct was a focus of the Inquiry. The extensive procedural fairness given to Mr. Houghton at the Inquiry was similar to that afforded to a litigant in a criminal or quasi-criminal proceeding. The Inquiry was established under the Municipal Act and clearly met the requirement of “a proceeding … under any statute.”

[66] As to the second submission, the application judge found that the use of the term “guilty” in subparagraph (d) of Coverage G was not determinative because even in criminal and quasi-criminal proceedings there could be findings other than guilt. In any event, he said, the provision only operated after the insurer had paid legal expenses to the insured “and cannot be interpreted as pre-condition to entitlement of legal expenses in defence of a proceeding in the first place.”

[67] I am in substantial agreement with the reasons of the application judge that the Inquiry was a “proceeding” falling within Coverage G. Having regard to the wide meaning of “proceeding”, the fact that the Inquiry sent the conduct letter to Mr. Houghton, and that he had reputational interests and potentially civil or criminal liability at stake following the Inquiry, I agree that the Inquiry constituted under the Municipal Act fell within the broad language of a “proceeding brought against the insured … under any statute” (emphasis added). The Municipal Act plainly fell within the term “any statute”.

[68] I would also reject the appellant’s submission with respect to the “clawback” clause, G(d), but for slightly different reasons than the application judge. While that clause would apply to “proceedings” in which a finding of guilt was an outcome, it cannot be read as limiting the broad scope of Coverage G to only such proceedings. It would have taken more express language to limit the scope of “a proceeding … under any statute” to apply only to proceedings in which a finding of guilt could be an outcome.

[69] The appellant’s third submission points to the policy of excess insurance obtained by EPCOR from Liberty, which provided that a “claim” would include a “formal inquiry, investigation, commission or hearing conducted or appointed pursuant to statute.” It submits that if the parties to the Policy had intended to contract for such coverage, they would have used similar language.

[70] I reject that submission. In the first place, a contract between EPCOR and another insurer is irrelevant to the interpretation of the Policy. In the second place, all of the expressions used in the Liberty policy (“formal inquiry, investigation, commission or hearing conducted or appointed pursuant to statute”) can properly be described as “proceedings”. The use of the broad term “proceeding” in the Policy clearly includes a public inquiry and made more specific language unnecessary.

[71] For the sake of completeness, although the points were not raised in relation to Coverage G, the exclusions for willful or intentional acts (art. 3.11) and non-compensatory damages (art. 3.19) quite obviously have no application.

[72] Finally, I fully agree with the application judge’s observations with respect to the role of the reasonable expectations of the parties in the interpretation of the Policy, to the extent there was ambiguity. It bears noting that the Policy is one of reciprocal insurance, contemplated by Part XIII of the Insurance Act, R.S.O. 1990, c. I.8. It is underwritten by the Municipal Electric Association Reciprocal Insurance Exchange. Although there is no evidence before us concerning the operation of that entity, it can be inferred that it consists of operators of municipal electric facilities, like EPCOR, which collectively insure and reinsure their risks. It makes complete sense that they would expect to insure themselves, their officers, and directors against risks that were particular to their industry – namely, the costs of public inquiries under the Municipal Act. The commercial realities behind this type of insurance contract properly informed the application judge’s findings concerning the reasonable expectations of the parties.

[73] In the result, I would affirm the application judge’s conclusion that MEARIE had an obligation to indemnify Mr. Houghton for his Inquiry costs. As I will explain, as the assignee of Mr. Houghton’s claim against MEARIE, EPCOR is entitled to enforce that claim to its full extent, without reduction for the amounts paid by EPCOR pursuant to the Bylaw.

[74] I turn to EPCOR’s claim under Coverage E.

(d) The interpretation of Coverage E

[75] The claim under Coverage E related to the amount EPCOR paid to Mr. Houghton for his legal costs of the Inquiry, pursuant to the Bylaw, and the legal costs incurred by both EPCOR and Mr. Houghton in relation to Mr. Houghton’s application under the Bylaw. To some extent, therefore, there was an overlap with the claim under Coverage G for indemnity for Mr. Houghton’s costs of the Inquiry.

[76] The application judge determined that EPCOR’s decision not to indemnify Mr. Houghton for his legal costs was an “error” and, as such, it was a “Wrongful Act” as that term was defined in the Policy. It did not fall within either the exclusion for willful or intentional acts (art. 3.11) or the exclusion of non-compensatory damages (art. 3.19). The amounts were payable because of the Bylaw, not based on a statute or regulation. In the result, he found that EPCOR was entitled to indemnity from MEARIE under Coverage E of the Policy for the amount that EPCOR paid to Mr. Houghton to settle his legal costs arising from the Inquiry.

[77] The application judge also determined that EPCOR was entitled to coverage for its own legal costs in defending Mr. Houghton’s application and for Mr. Houghton’s legal costs of bringing the application.

[78] Respectfully, the application judge’s interpretation of Coverage E was plainly wrong.

[79] The Bylaw provided that EPCOR would indemnify a director or officer “against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or officer of the Corporation”. It contained a proviso that the director or officer must have been acting honestly and in good faith with a view to the best interests of the corporation.

[80] In the application brought by Mr. Houghton for indemnity from EPCOR for his legal fees, Koehnen J. found that it was “clear from the outset” that the Inquiry fell within the term “proceeding” in the Bylaw. He ordered EPCOR to advance Mr. Houghton’s legal fees for Part II of the Inquiry, subject to an obligation to repay the fees if he were ultimately found not to have acted honestly, in good faith and in the best interests of the corporation. Although Koehnen J. found that Mr. Houghton was entitled to indemnity for his legal fees for Part I of the Inquiry, he said that he would determine at a later date whether those fees were reasonable.

[81] The upshot was that under the Bylaw as interpreted by Koehnen J., Mr. Houghton had a legal entitlement to payment of his Inquiry costs by EPCOR, subject only to meeting the conditions of acting honestly, in good faith and in the best interests of the corporation.

[82] Had EPCOR indemnified Mr. Houghton for his Inquiry costs, as it was legally bound to do, it would have had no claim to recover those costs from MEARIE under the Policy, because the Policy did not insure EPCOR for the performance of its legal obligations.

[83] Under the application judge’s analysis, however, EPCOR’s refusal to perform its legal obligation was a “Wrongful Act”, which resulted in a “Claim” by Mr. Houghton.

[84] This interpretation turned an uninsured liability (EPCOR’s obligation to indemnify a corporate officer under the Bylaw) into an insured liability solely because EPCOR refused to honour its obligation. Had EPCOR fulfilled its obligation, and indemnified Mr. Houghton at the outset, it would have had no claim under Coverage E for something that was simply a cost of doing business. But under the application judge’s interpretation, EPCOR was better off to refuse to perform its legal obligation because it could then recover its costs from the insurer, based on its own “Wrongful Act”.

[85] This runs contrary to the underlying economic rationale for insurance, as expressed by the Supreme Court of Canada in Scalera, at para. 68. Quoting from Craig Brown and Julio Menezes, Insurance Law in Canada, 2nd ed. (Scarborough: Carswell, 1991), at pp. 125-26, Iacobucci J. noted that “[i]nsurance is a mechanism for transferring fortuitous contingent risks.” It follows, then, that a policy generally does not cover losses that arise from the inherent nature of the subject matter insured; nor does it cover losses that are intentionally caused by the insured.

[86] EPCOR’s responsibility for Mr. Houghton’s legal costs was not the result of a fortuity. It was the natural and intended consequence of EPCOR’s legal obligation imposed by the Bylaw.

[87] The issue can also be considered as one of causation. EPCOR’s liability to Mr. Houghton was not caused by a “Wrongful Act”, within the meaning of the Policy. It was caused by the operation of the Bylaw.

[88] As there was plainly no coverage under “Coverage E” for Mr. Houghton’s claim under the Bylaw, there is also no coverage for EPCOR’s costs of defending that claim. Section 2 of the Policy only insures the cost of defending claims that are covered by the Policy.

[89] For these reasons, I would set aside the judgment to the extent it reflects the application judge’s determination that EPCOR’s claim was insured under Coverage E.

[90] That does not end the matter, however, as it is necessary to resolve the quantum recoverable by EPCOR as the assignee of Mr. Houghton’s claim.

(e) The quantum recoverable under EPCOR’s claim as assignee

[91] Paragraph 1 of the Superior Court’s formal judgment provided that EPCOR was entitled to indemnity from MEARIE under the Policy for $215,000, for the costs it incurred in defending Mr. Houghton’s application under the Bylaw. Paragraph 2 provided that EPCOR was also entitled to indemnity for the $475,000 it paid to Mr. Houghton under the settlement, for a total of $690,000.

[92] Paragraph 3 of the judgment provided that Mr. Houghton was entitled to indemnity from MEARIE for the sum of $591,115.31, for the legal costs he incurred in the Inquiry. However, paragraph 4 of the judgment provided that this sum was not payable by MEARIE because it would result in overcompensation.

[93] The appellant submits that Mr. Houghton’s recovery should be limited to his actual loss, namely $191,115.31, representing the difference between what he received from EPCOR as indemnity for his Inquiry costs ($400,000) and his total legal fees of $591,115.31.

[94] I do not accept that submission. When Mr. Houghton settled the Bylaw application with EPCOR, he assigned his claim against MEARIE to EPCOR. EPCOR therefore stands in his shoes and can advance the full amount of his claim against MEARIE: see Douglas v. Stan Fergusson Fuels Ltd., 2018 ONCA 192, 139 O.R. (3d) 721, at para. 81, leave to appeal refused, [2018] S.C.C.A. No. 141, referring to John Birds, Ben Lynch and Simon Milnes, MacGillivray on Insurance Law, 13th ed. (London: Thomson Reuters (Professional) UK Ltd., 2015), at para. 24-011. The point is that an assignee’s entitlement to recovery is distinct from that of an insurer acting in subrogation.

[95] EPCOR is therefore entitled to recover $591,115.31 from MEARIE.

[96] There is no overcompensation or double recovery because I conclude that EPCOR had no claim for indemnity under the Policy for the amounts it paid Mr. Houghton pursuant to the Bylaw or for its costs of the Bylaw proceedings.

[97] I do not accept MEARIE’s submission that this result is precluded because EPCOR failed to cross-appeal. The judgment found that Mr. Houghton was entitled to indemnity for his legal costs. EPCOR, as his assignee, is entitled to enforce and collect the judgment.

(f) The costs appeal

[98] In the court below, the respondents had claimed costs of $291,052.22 on a full indemnity basis. The application judge found that this amount was unreasonable and unfair to the unsuccessful party. He found that the respondents were entitled to “reasonable costs incurred in enforcing their right to coverage on a full indemnity basis.” He awarded costs of $140,000, all-inclusive.

[99] It is not clear to me why the application judge used the words “on a full indemnity basis”, both in his reasons and in the judgment. The costs ultimately awarded were less than half the amount claimed on a full indemnity basis. In reducing the costs claimed, the application judge noted that several lawyers, with high hourly rates, had worked on the file and that it would be unfair to pass on all those charges to the unsuccessful party.

[100] I am not persuaded that the award of costs reflects an error in principle or that it is unreasonable. In awarding enhanced costs, the application judge cited to authority of this court that, to use his words, “where an insurer denies coverage and the insured is successful in its claim for indemnity under the insurance policy, then the insured is entitled to full indemnity costs”: referring to Godonoaga (Litigation guardian of) v. Khatambakhsh (2000), 50 O.R. (3d) 417 (C.A.), at para. 4; M.(E.) v. Reed (2003), 49 C.C.L.I. (3d) 57 (Ont. C.A.), at paras. 22, 24, leave to appeal refused, [2003] S.C.C.A. No. 334.

[101] The insurer’s response to Mr. Houghton’s request for coverage was to bluntly state that there was no coverage. It did not explain why there was no coverage. It did not set out the provisions of the Policy it relied upon. I agree with the application judge’s observation that the appellant’s reasons for its initial denial of coverage were “vague”. Further reasons were not provided until days before the hearing. As the application judge noted, this was inconsistent with the obligations of an insurer to an insured, and “[a]n insured should not be left in the unenviable position of not fully appreciating why an insurer is denying coverage, and only receiving a detailed and full rationale days before a court hearing.”

[102] I am in complete agreement with these observations.

[103] Even if the application judge awarded “full indemnity” costs, and I am not convinced that he did, there was a firm basis for the award and the amount was reasonable in all the circumstances.

[104] I would therefore dismiss the costs appeal.

H. Disposition

[105] For these reasons, I would allow the appeal, in part, and set aside paragraphs 1, 2 and 4 of the judgment. I would vary paragraph 3 of the judgment, by adding at the end, “such sum to be paid, together with any applicable prejudgment and post-judgment interest, to EPCOR as Houghton’s assignee.”

[106] There were no submissions as to costs. If the parties are unable to agree on costs, they may make written submissions, addressed to the panel in care of the Registry. The appellant shall file and serve its submissions within 15 days of the release of these reasons. The respondents shall have 15 days to respond. The submissions shall not exceed five double-spaced pages, excluding costs outlines and other appendices.

Released: July 6, 2022 “G.R.S.” “George R. Strathy C.J.O.” “I agree. Sossin J.A.” “I agree. L. Favreau J.A.”