COURT FILE NOS.: CV-16-554373 and CV-16-555073 DATE: 20181029

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

CRONNOX INC. Applicant – and – LLOYD’S UNDERWRITERS, INTERNATIONAL PROGRAMS GROUP, A DIVISION OF SCM GROUP OF COMPANIES, and IAN McLELLAN Respondents

Counsel: Bruce A. Thomas, Q.C., for the Applicant Cronnox Inc. R. Lee Akazaki, for the Respondents International Programs Group, A Division of ClaimsPro and Lloyd’s Underwriters

AND BETWEEN:

INTERNATIONAL PROGRAMS GROUP, A DIVISION OF CLAIMSPRO LP AND LLOYD’S UNDERWRITERS Applicants – and – CRONNOX INC., LIBERTY INTERNATIONAL UNDERWRITERS, A Division of The Liberty Mutual Insurance Company, and DOLDEN WALLACE FOLLICK LLP Respondents

Counsel: R. Lee Akazaki, for the Applicants International Programs Group, A Division of ClaimsPro and Lloyd’s Underwriters Bruce A. Thomas, Q.C., for the Respondent Cronnox Inc. B. Robin Moodie and Bronwyn M. Martin for the Respondent Dolden Wallace Folick LLP

HEARD: August 14, 2018

REASONS FOR judgment cavanagh j.

Overview

[1] There are two applications before me, one brought by Cronnox Inc. (“Cronnox”) and one brought by Lloyd’s Underwriters and its claims administrator International Programs Group, a division of Claimspro LP.

[2] Both applications relate to whether declaratory relief should be granted to Cronnox that it is entitled to defence and indemnity coverage under a “claims-made-and-reported” policy of insurance issued by Lloyd’s as insurer to Cronnox as insured. In addition, Cronnox seeks damages against Lloyd’s for breaches of an insurer’s duties of fair dealing and good faith towards its insured.

[3] The Lloyd’s policy has a policy period of November 11, 2012 to November 11, 2013, and provides coverage for Cronnox’s liability for damages by reason of a claim made against Cronnox during the policy period and reported in writing to Lloyd’s during the policy period or within 30 days thereafter.

[4] Cronnox is an engineering company. It received correspondence in September 2013 during the period of coverage under the Lloyd’s policy in which the subrogated insurer of the owner of the Holiday Inn hotel in Oakville advised that it intended to make a claim against Cronnox arising from an explosion at the mechanical room of the hotel which occurred on May 13, 2012 that allegedly was caused by a faulty electrical cable. Cronnox was asked to notify its insurer. Cronnox responded that it was not the installing contractor and that there would be no purpose served by reporting this correspondence to its insurer. In the September 2013 correspondence, Cronnox was invited to attend an inspection of the electrical cable. Cronnox was awaiting notice of the inspection date, and took no other steps at that time.

[5] The Lloyd’s policy expired and was cancelled effective November 11, 2013. Cronnox did not report the September 2013 correspondence to Lloyd’s when it received this correspondence or at any time during the Lloyd’s policy period or within 30 days thereafter.

[6] Cronnox entered into a new policy of insurance with Liberty Mutual Insurance Company (“Liberty”) that provided coverage beginning November 11, 2013. The Liberty policy was also a “claims-made-and-reported” policy. The Liberty policy contained a “prior notice” exclusion that excluded coverage for a claim made against Cronnox for any actual or alleged act, error or omission in the performance of professional services which Cronnox’s directors or officers knew or could reasonably have expected might give rise to a claim.

[7] The subrogated insurer of the owner of the Holiday Inn hotel commenced the underlying litigation against Cronnox and other defendants in September 2013, but did not serve the statement of claim on Cronnox until February 2014. Upon receipt of the statement of claim, Cronnox, through its insurance broker, first reported the claim to Liberty. Liberty denied coverage based upon the “prior notice” exclusion in the Liberty policy.

[8] Cronnox, through its insurance broker, also reported the claim to Lloyd’s on February 10, 2014. Lloyd’s was advised that Cronnox received the statement of claim in September 2013 and that it requires representation. The insurance adjuster assigned to handle the claim did not review the policy declarations at that time. He mistakenly believed that the Lloyd’s policy was a “claims made” policy and that the coverage issue involved late reporting of a claim made within the period of coverage under the Lloyd’s policy, where the issue would be whether the insurer had suffered prejudice by the delay in reporting. The insurance adjuster also mistakenly believed that the Lloyd’s policy provided for a duty to defend.

[9] Lloyd’s insurance adjuster appointed counsel to defend Cronnox in the underlying litigation under a reservation of rights letter on February 13, 2014. In late August 2015, following a report from the insurance adjuster concerning setting of reserves, Lloyd’s began to investigate whether there was coverage for this claim under the Lloyd’s policy. In February 2016, more than two years after Lloyd’s insurance adjuster appointed defence counsel for Cronnox, Lloyd’s external counsel notified Cronnox that Lloyd’s had concluded that there is no coverage available under the Lloyd’s policy to respond to the claim against Cronnox in the underlying litigation and that Cronnox should be retaining its own lawyers to defend the action. Cronnox then retained new counsel.

[10] Cronnox sought judicial declarations of coverage against both Liberty and Lloyd’s under their respective policies. Liberty brought an application for a declaration that there was no coverage for Cronnox under the Liberty policy because of the “prior notice” exclusion. Cronnox opposed this application on the ground that the claim was covered by the Liberty policy, and there was no exclusion under the “prior notice” exclusion. Cronnox and Lloyd’s brought the applications that are before me in which they sought declaratory relief in respect of questions of coverage under the Lloyd’s policy. Cronnox, Liberty, and Lloyds agreed that the issue of coverage in relation to the Liberty policy should be determined first.

[11] In my decision released on March 7, 2018 in Liberty Mutual Insurance Company v. Cronnox Inc., 2018 ONSC 1578, I found that the claim in the underlying litigation is covered under the Liberty policy, subject to determination of whether coverage is excluded by the “prior notice” exclusion. I concluded that coverage is excluded by the “prior notice” exclusion, and that Liberty has no duty to defend or to indemnify Cronnox with respect to the underlying litigation.

[12] On these applications, Cronnox submits that as a result of the actions or omissions of Lloyd’s agent, the insurance adjuster, Lloyd’s is precluded from withdrawing from its defence of Cronnox and from denying indemnity coverage under the Lloyd’s policy by the operation of the doctrines of estoppel or waiver. Cronnox also submits that by the conduct of the insurance adjuster, Lloyd’s affirmed the Lloyd’s policy which had the legal effect of creating a new insurance contract between Lloyd’s as insurer and Cronnox as insured. Cronnox also claims that it is entitled to damages as a result of breaches of Lloyd’s duties of fair dealing and good faith towards Cronnox.

[13] Lloyd’s submits that Cronnox is precluded by operation of the doctrine of issue estoppel from seeking coverage under the Lloyd’s policy because of my finding in my decision in the Liberty application that the claim against it in the underlying litigation is covered under the Liberty policy. Lloyd’s also submits that (i) the doctrines of estoppel and waiver do not apply, (ii) Lloyd’s did not make a new contract of insurance with Cronnox, and (iii) it has no liability to Cronnox for breaches of any duties of good faith or fair dealing.

[14] For the following reasons, I conclude that Cronnox is not precluded by operation of the doctrine of issue estoppel from seeking declaratory relief on the applications that are before me that it is entitled to indemnity and defence coverage for this claim under the Lloyd’s policy. I also conclude:

a. Lloyd’s is not precluded from withdrawing from the defence of Cronnox in the underlying litigation or from denying indemnity coverage under the Lloyd’s policy by operation of the doctrines of estoppel or waiver. b. Lloyd’s did not enter into a new contract of insurance with Cronnox that provides for defence and indemnity coverage for the claims made against Cronnox in the underlying litigation. c. Cronnox is not entitled to an award of damages against Lloyd’s for breaches of any duties of fair dealing and good faith owed by Lloyd’s to Cronnox.

Factual Background

Cronnox’ liability insurance coverage from November 2012 to November 2014

[15] Cronnox is an engineering company that provides mechanical and electrical engineering and design services. Mark Peric is a professional engineer and the owner of Cronnox, its president and a director.

[16] Cronnox was named as one of four defendants in an action commenced on September 16, 2013 by Innvest Master Properties GP X Ltd. (“Innvest”). The claim arose out of an explosion at the mechanical room of a Holiday Inn Hotel in Oakville which occurred on May 13, 2012. According to Mr. Peric, Cronnox was the design engineer retained for plans to obtain a building permit 12 years earlier in 1998 or 1999.

[17] From November 11, 2012 to November 11, 2013 Cronnox was insured by Lloyds Underwriters under a professional liability policy.

[18] The Lloyd’s policy was administered by its claims administrator, International Programs Group, a division of Claimspro LP (“IPG”). The Lloyd’s policy is a “claims-made-and-reported” policy. The coverage grant under the Lloyd’s policy provides for coverage for sums which Cronnox shall become legally obligated to pay as damages by reason of a claim made against Cronnox during the policy period and reported in writing to Lloyd’s during the policy period or within 30 days after the expiration of the policy period.

[19] The Lloyd’s policy includes a provision that requires the insured to give written notice of any specific negligent act, error or omission which may reasonably be expected to give rise to a claim, whereby if the insured complies with the written notice requirements, any claim subsequently made against the insured arising out of such act, error or omission shall be treated as a claim first made on the date on which such written notice was received by Lloyd’s.

[20] Under the Lloyd’s policy, Lloyd’s was given the right, but did not have the duty, to defend Cronnox.

[21] The Lloyd’s policy had a limit of $2,000,000 and a self-insured retention of $15,000. Under the Lloyd’s policy, claims expenses for fees, costs and expenses incurred by a lawyer designated by Lloyd’s to represent Cronnox for time spent cooperating in the defence and investigation of any claim shall apply to Cronnox’s responsibility to pay the self-insured retention.

[22] I will use the name “Lloyd’s” to describe both Lloyd’s Underwriters and IPG, except where context requires them to be named separately.

[23] In September 2013, Cronnox’s insurance broker negotiated the renewal of Cronnox’s liability insurance coverage. Liberty Mutual Insurance Company (“Liberty”) agreed to provide liability insurance to Cronnox. Mr. Peric signed a Cancellation/Reinstatement Request on November 8, 2013 cancelling the Lloyd’s policy. The notice of cancellation contained the following language:

I/We agree that the policy indicated by number (above) together with any renewal certificates relating thereto are cancelled as of the date stated above [November 11, 2013] and the Insurer is relieved from all liability thereunder from said date.

[24] Insurance coverage for Cronnox under the Liberty policy became effective November 12, 2013.

Communications to Cronnox in September 2013

[25] In early September 2013, Cronnox received correspondence from lawyers representing the subrogated property insurer of the Holiday Inn Hotel concerning damage caused by the electrical explosion on May 13, 2012. Cronnox was advised that the subrogated insurer’s investigation indicated that the damage was due to an electrical explosion and that the explosion appeared to have been caused by damage to the insulation of a conductor cable during its installation by Cronnox. Cronnox was asked to contact its liability insurer and to participate in the process of further examining the cause of the loss. Cronnox responded that it was not the mechanical/electrical contractor, and that it did not carry out or sub-contract any installation work. The lawyers for the subrogated insurer replied on September 9, 2013 with an email that was stated to be “confirmation of a potential future claim” against Cronnox. The details of the September 2013 communications with Cronnox are set out in my decision in the Liberty application: Liberty Mutual Insurance Company v. Cronnox Inc., 2018 ONSC 1578 at para. 9.

[26] Cronnox did not provide written notice to Lloyd’s during the Lloyd’s policy period or within 30 days thereafter that it had received this correspondence or that it was aware of any circumstances which may give rise to a claim against Cronnox.

Service on Cronnox of Innvest statement of claim, report to Liberty, and denial of coverage by Liberty

[27] The statement of claim in the first action commenced by Innvest Master Properties GP X Ltd. (“Innvest”) was issued on September 16, 2013. Cronnox was served with this statement of claim on February 4, 2014 and Cronnox forwarded the statement of claim to Mark Stancato, its insurance broker. On the same day, Mr. Stancato notified Liberty of the claim, and transmitted a copy of the statement of claim to Liberty. Liberty then initiated coverage inquiries and, in response to one of these inquiries, Cronnox provided copies of the September 2013 correspondence to Liberty and to Mr. Stancato.

[28] Liberty denied coverage by letter dated February 14, 2014 under an exclusion in the Liberty policy.

Report by Cronnox to Lloyd’s broker and communications between Cronnox, its broker, and IPG

[29] On February 10, 2014, Mr. Stancato forwarded the statement of claim to Lloyd’s broker. Mr. Stancato advised that Cronnox received the statement of claim in September 2013 and that it requires representation.

[30] Mr. Stancato has acknowledged in his evidence that, at that time, he knew that the Lloyd’s policy was a “claims-made-and-reported” policy and that this claim did not fall within the coverage grant under the Lloyd’s policy. This is why he first sent the claim to Liberty. Mr. Stancato spoke on the phone with Mr. McLellan and he told Mr. McLellan that he knows that there is no coverage with Lloyd’s and that this claim fell outside the extended reporting period that ended 30 days after expiration of the Lloyd’s policy. Mr. Stancato asked Mr. McLellan whether there is any way that he could help Cronnox.

[31] Ian McLellan of IPG was the insurance adjuster assigned to handle the claim. After his call with Mr. Stancato, Mr. McLellan’s entered in his claim notes that the claim was first reported to Cronnox in September 2013. Mr. McLellan then spoke with Mr. Peric who informed him that the lawyers for the parties to the litigation contacted him in September 2013 and that he declined to contact his insurer at that time because he felt that they had mistaken him for the electrical contractor and he assumed the lawyers were pursuing the contractor until he was served with the statement of claim resulting in notification to his insurance broker in February 2014. Mr. McLellan’s evidence is that, in his mind, Mr. Peric’s advice that he was not actually served with the statement of claim until February was a reason militating in Cronnox’s favour, because he thought it would have been hard to fault Cronnox if an important element of the delay was the plaintiff’s delay in serving the statement of claim. Mr. McLellan’s evidence is that the fact that Cronnox was originally contacted by the subrogation lawyers in September 2013 regarding the incident meant that the claim was likely made in September 2013 and not in February 2014.

[32] Mr. McLellan’s evidence is that he mistakenly believed that the Lloyd’s policy was a “claims-made” policy (as opposed to a “claims-made-and-reported” policy) and that the coverage issue was the delay until February 2014 in reporting a claim made in September 2013 during the 2012-13 Lloyd’s policy period. Mr. McLellan believed that the date of loss (the date a claim was made against Cronnox) was sometime in September 2013. Mr. McLellan’s evidence is that he assumed at that time that the Lloyd’s policy had been renewed for the 2013-14 policy period.

Lloyd’s appointment of Dolden as counsel for Cronnox and reservation of rights letter

[33] Mr. McLellan’s evidence is that he mistakenly assumed that the Lloyd’s policy included a duty to defend by the insurer. He set out to appoint counsel for Cronnox and Matthew Miller at the law firm Dolden Wallace Folick LLP (“Dolden”) accepted the retainer.

[34] On February 13, 2014, Mr. McLellan informed Mr. Peric that Mr. Miller of the Dolden firm had been assigned as counsel to defend Cronnox.

[35] On the same day, Mr. McLellan sent a reservation of rights letter that advised that under the duty to defend and indemnity provisions, Lloyd’s reserves the right to rely on any provision of its policy that may mean either lack of coverage or an exclusion of coverage under the policy.

Communications with Dolden concerning Oakville Hydro and Electrical Safety Authority

[36] On February 18, 2014, Mr. Peric provided to Mr. Miller a written outline of his knowledge of the facts of the case. Mr. Peric stated that the Oakville Hydro and the Electrical Safety Authority, a division of Ontario Hydro (“ESA”), would not have made the final connection to their grid at the transformer pad unless their installation requirements had been satisfied. Mr. Peric stated that Cronnox was not involved in the connection or commissioning, as this was within the jurisdiction of Oakville Hydro and ESA.

Issuance of second Innvest statement of claim and acceptance of service by Dolden

[37] Innvest issued a second statement of claim against Cronnox and others on April 30, 2014. The claim in the second statement of claim was identical to the claim in the first statement of claim, except that the second statement of claim replaced a “John Doe” defendant with the name of the actual defendant. The first Innvest action was discontinued.

[38] Counsel for Innvest sent the second statement of claim to Mr. Miller by email on April 30, 2014 and on that day Mr. Miller responded by email and advised counsel for Innvest that the Dolden firm will accept service on behalf of Cronnox.

[39] Mr. Miller served the statement of defence and crossclaim of Cronnox in the second Innvest action on or about January 15, 2015.

Advice from Dolden concerning possible third party claim against Oakville Hydro and ESA

[40] On January 23, 2015, Mr. Miller provided to Mr. McLellan a report prepared by the plaintiff’s expert in the second Innvest action in which, according to Mr. Miller, the expert was “pointing the finger” at Cronnox for approving the wrong kind of cables. This report was also given to Mr. Peric for his comments who advised that the electrical contractor was responsible for turning the drawings into physical construction, with Oakville Hydro and ESA inspectors approving and inspecting as needed. Mr. Peric explained to Mr. Miller that Cronnox has no liability in the Innvest action.

[41] On June 2, 2015, Mr. Miller reported to Mr. McLellan and provided him with a copy of the proof of loss the insured plaintiff in the Innvest action had submitted to its insurer stating a figure of $2,867,284 for damages and business interruption. This information informed Mr. McLellan that the claim could be expected to exceed IPG’s authority and that he needed to report the claim to Lloyd’s underwriters and open a file and set reserves. He requested a report from Mr. Miller.

[42] Mr. Miller provided a detailed report to Mr. McLellan dated August 12, 2015. Mr. Miller reported that the total amount claimed is $3 million, subject to increase. The Lloyd’s policy limit was $2 million. Cronnox was not informed by Mr. Miller or Mr. McLellan of a potential over-limits exposure and neither recommended to Cronnox that it retain independent counsel to protect its underinsured interests.

[43] In this report, Mr. Miller noted that ESA and Oakville Hydro are “potentially liable parties”. Mr. Miller reported that Cronnox had the option of issuing a third party claim to name ESA and Oakville Hydro, and that no other defendant had taken steps to do so. Mr. Miller reported that he had recommended to counsel for a co-defendant, Crotech, that these parties would be “valid additions” to the action. In his recommendations for future handling of the case, Mr. Miller recommended awaiting the position of Crotech on issuing third party claims against ESA and/or Oakville Hydro and considering adding these parties by way of a third party claim if Crotech refuses to do so.

Lloyd’s Denial of Coverage

[44] As a result of the August 12, 2015 report from Mr. Miller, Mr. McLellan submitted an urgent report to Lloyd’s. This report triggered questions from Lloyd’s on August 26, 2015 concerning coverage under the Lloyd’s policy. Mr. McLellan reviewed the Lloyd’s policy and he advised the Lloyd’s underwriters that he appeared to have “missed the second part of the insuring agreement that requires claim to be reported in writing during the policy or 30 days after expiry of the policy”.

[45] On August 27, 2015, Mr. McLellan forwarded to Mr. Stancato his original email dated February 10, 2014 stating that the statement of claim had been received in September 2013, and Mr. McLellan asked whether there was any report of the claim from Cronnox prior to February 10, 2014, and whether Cronnox was served with the statement of claim in September 2013 or February 2014. Mr. McLellan followed up with Mr. Stancato on August 31 and asked for the reasons for Liberty’s coverage denial. On September 1, 2015 Mr. Stancato responded that full details were given to Mr. Miller about the account and what occurred around February 2014, including all details about the Liberty denial position. Mr. Stancato advised that he was made aware of the claim in February 2014 from the insured, Cronnox. Mr. Stancato did not specifically respond to Mr. McLellan’s question of whether Cronnox was served with the statement of claim in September 2013 or in February 2014.

[46] On September 1, 2015 Mr. McLellan advised Mr. Miller to place the file on hold until he hears further from Lloyd’s and that Lloyd’s is presently reviewing coverage. Mr. McLellan did not advise Cronnox that he had given this instruction or that Lloyd’s was reviewing coverage. Nor did Mr. Miller so advise Cronnox.

[47] October 15, 2015 Mr. Miller reported to Mr. McLellan that one of the defendants, he assumed Crotech, had issued a third party claim against the ESA and Oakville Hydro. On October 16, 2015 Mr. McLellan received from Mr. Miller a copy of the third party claim by Crotech against ESA and Oakville Hydro.

[48] In this timeframe, Lloyd’s retained Norton Rose Fulbright as external counsel for a legal insurance coverage opinion. On February 17, 2016 Norton Rose Fulbright issued a letter (incorrectly dated February 17, 2015) advising Cronnox that Lloyd’s had concluded that there is no coverage available under the Lloyd’s policy to respond to the Innvest claim and that Cronnox should be retaining its own lawyers to defend the action. Cronnox received this letter on February 23, 2016.

[49] Shortly thereafter, Lloyd’s reimbursed Cronnox for the $15,000 that Cronnox had made in payment of invoices from Mr. Miller and Mr. McLellan in respect of services that they had rendered. Mr. McLellan had advised Mr. Peric that these payments were in respect of the deductible under the Lloyd’s policy.

Transfer of File from Dolden to Cronnox’ new counsel

[50] Cronnox retained new counsel on March 10, 2016. On March 11, Cronnox’ new counsel asked Mr. Miller to provide his complete file. On that day, Mr. Miller informed new counsel that he would “deliver our complete file to you in the near future”. Mr. Miller reported to Mr. McLellan that Dolden would “compile everything and prepare the package to be shipped” to new counsel in the near future. Later that day, Mr. Miller reported to Mr. McLellan that “[t]he file has left our office and has been sent to new counsel”.

[51] Between March 21 and April 26, 2016, Cronnox requested and IPG provided a copy of the Lloyd’s adjusting file materials, including twelve emails. One of these emails was the email from Mr. Miller to Mr. McLellan dated October 15, 2015 reporting that one of the defendants, presumably Crotech, had issued a third party claim against ESA and Oakville Hydro.

[52] On May 16, 2016, Mr. Miller advised Mr. McLellan that he had received a letter from Cronnox’ new counsel dated May 11, 2016 asking about emails that Mr. Miller had apparently neglected to provide in the March 11 file transfer. New counsel advised that the examination for discovery of Mr. Peric was proceeding on June 2. Mr. McLellan immediately referred Mr. Miller’s email to IPG’s counsel for review and response. Counsel for IPG immediately wrote to Mr. Miller to advise him to consider joint clients as being entitled to all information and asked that the missing emails be delivered to Cronnox’ new counsel by the close of business. These emails were sent to Cronnox’ new counsel on May 18, 2016. These emails included the April 30, 2014 email from counsel for the plaintiff attaching a copy of the second Innvest statement of claim, and the reply from Mr. Miller that his firm will accept service on behalf of Cronnox.

[53] At the request of Lloyd’s, Cronnox issued a third party claim against Oakville Hydro and ESA on December 12, 2016. Pursuant to the orders of Master Jolley and Copeland J. dated September 19, 2017 and February 22, 2018, respectively, the third party claim issued by Cronnox was dismissed for having been issued after the expiry of the limitation period on April 30, 2016.

Application by Liberty and Disposition

[54] Liberty brought an application for a declaration that coverage is excluded for any loss resulting from the claims against Cronnox in the underlying Innvest litigation because of a “prior notice” exclusion provision in the Liberty policy. Liberty sought a declaration that it has no duty under the Liberty policy to defend or indemnify Cronnox with respect to this underlying litigation. Lloyd’s was also named as a respondent to this application. Cronnox opposed this application on the ground that coverage for the underlying Innvest litigation falls within the Liberty policy and that there is no exclusion of coverage.

[55] The parties agreed that the Liberty application should proceed prior to the hearing of the applications in relation to the Lloyd’s policy.

[56] In my decision released on March 7, 2018 in Liberty Mutual Insurance Company v. Cronnox Inc., 2018 ONSC 1578, I made a finding that the claim by Innvest in the underlying Innvest litigation is covered under section 1 of the Liberty policy, subject to determination of whether coverage is excluded by the “prior notice” exclusion in the Liberty policy. I concluded that coverage for the claims against Cronnox in the Innvest litigation is excluded by the “prior notice” exclusion, and that Liberty has no duty to defend or to indemnify Cronnox with respect to the Innvest litigation. I made a declaration to this effect.

Analysis

[57] The following issues arise on these applications:

a. Is Cronnox precluded by the application of the doctrine of issue estoppel (arising from my judicial finding in the Liberty application that the claim against it in the Innvest litigation is covered under section 1 of the Liberty policy) from seeking a declaration on this application that this claim is covered under the Lloyd’s policy? b. If Cronnox is not precluded from seeking such a declaration: i. Did Lloyd’s breach a duty to Cronnox to promptly investigate whether there was coverage for the claim against Cronnox and inform Cronnox within a reasonable time of its coverage situation? If so, is Lloyd’s precluded by the doctrine of estoppel from denying coverage and withdrawing from the defence? ii. Did Lloyd’s elect to waive the reporting provisions of the Lloyd’s policy and thereby extend it by accepting coverage of the claim and appointing counsel to defend Cronnox? If so, is Lloyd’s precluded from denying coverage and withdrawing from the defence of Cronnox? iii. Did Lloyd’s, by the actions of its agent, Mr. McLellan of IPG, create a contract of insurance between Cronnox as insured and Lloyd’s as insurer under which there is defence and indemnity coverage for Cronnox in respect of the Innvest litigation? c. Did Lloyd’s breach a duty of fair dealing and good faith to Cronnox, including a duty to provide a diligent defence of the Innvest claim and, if so, what is the remedy? Is Lloyd’s liable to pay damages?

[58] I address each issue in turn.

a. Is Cronnox precluded by the application of the doctrine of issue estoppel (arising from my judicial finding in the Liberty application that the claim against it in the Innvest litigation is covered under section 1 of the Liberty policy) from seeking a declaration on this application that this claim is covered under the Lloyd’s policy?

[59] In my decision in the Liberty application I made a finding that the claim by Innvest against Cronnox in the underlying litigation is covered under the Liberty policy, subject to determination of whether coverage is excluded by the “prior notice” exclusion in section 4.3 of the Liberty policy. I concluded that coverage under the Liberty policy for the claims made against Cronnox in the Innvest litigation was excluded by this exclusion.

[60] Lloyd’s submits that Cronnox is bound by my judicial finding that the claim against Cronnox in the Innvest litigation is covered by the grant of coverage in the Liberty policy and that Cronnox is precluded by operation of the doctrine of issue estoppel from claiming on these applications that the same claim is covered by the Lloyd’s policy.

[61] In Danyluk v. Ainsworth Technologies Inc., 2001 SCC 44, [2001] 2 S.C.R. 460 Binnie J. wrote at para. 20 that one aspect of the judicial policy favouring finality of judicial decisions “is the rule against collateral attack, i.e., that a judicial order pronounced by a court of competent jurisdiction should not be brought into question in subsequent proceedings except those provided by law for the express purpose of attacking it [citations omitted]”. Binnie J. went on to explain the doctrine of issue estoppel and set out the preconditions to the operation of this doctrine at paras. 24-25:

[24] Issue estoppel was more particularly defined by Middleton J.A. of the Ontario Court of Appeal in McIntosh v. Parent, [1924] 4 D.L.R. 420, at p. 422:

When a question is litigated, the judgment of the Court is a final determination as between the parties and their privies. Any right, question, or fact distinctly put in issue and directly determined by a Court of competent jurisdiction as a grant of recovery, or as an answer to a claim set up, cannot be re-tried in a subsequent suit between the same parties or their privies, though for a different cause of action. The right, question, or fact, once determined, must, as between them, be taken to be conclusively established so long as the judgment remains.

In other words, as discussed below, the estoppel extends to the material facts and the conclusions of law or of mixed fact and law (“the questions”) that were necessarily (even if not explicitly) determined in the earlier proceedings.

[25] The preconditions to the operation of issue estoppel were set out by Dickson J. in Angle, supra, at p. 254:

(1) that the same question has been decided; (2) that the judicial decision which is said to create the estoppel was final; and, (3) that the parties to the judicial decision or their privies were the same persons as the parties to the proceedings in which the estoppel is raised or their privies.

[62] On the Liberty application, the question was whether the “prior notice” exclusion in the Liberty policy applied to exclude a claim that was within the coverage grant in the Liberty policy. On the applications that are before me, the questions are different ones. Cronnox does not submit that there was a claim made and reported to Lloyd’s that falls within the coverage grant in the Lloyd’s policy. On the applications that are before me, Cronnox submits that Lloyd’s is precluded from denying that there is defence and indemnity coverage under the Lloyd’s policy by the application of the doctrines of estoppel or waiver, and that Lloyd’s acted so as to affirm the expired policy and thereby entered into a new contract of insurance with Cronnox. I am not being asked to decide the same question that was decided on the Liberty application.

[63] For this reason, I conclude that Cronnox is not precluded by the application of the doctrine of issue estoppel (arising from my judicial finding in the Liberty application that the claim against it in the Innvest litigation is covered under section 1 of the Liberty policy) from seeking a declaration on this application that this claim is covered under the Lloyd’s policy

b (i) Did Lloyd’s breach a duty of good faith owed to Cronnox to promptly investigate whether there was coverage for the claim against Cronnox and inform Cronnox within a reasonable time of its coverage situation? If so, as a result, is Lloyd’s estopped by its representations and conduct from denying coverage and withdrawing from the defence?

[64] Cronnox submits that by failing to properly investigate coverage, failing to advise Cronnox at once that coverage was not available, and taking more than two years to advise it of the coverage denial (including for a period of six months after Lloyd’s first discovered Mr. McLellan’s error), Lloyd’s breached the contractual and good faith obligations that it owed to Cronnox. Cronnox submits that, as a result, Lloyd’s is now precluded by the doctrine of estoppel from denying coverage and withdrawing from its defence of Cronnox in the Innvest litigation.

[65] In support of this submission, Cronnox relies upon Rosenblood Estate v. Law Society of Upper Canada, 1989 CarswellOnt 642 (S.C.J.), aff’d, , [1992] O.J. No. 3030 (C.A.). In Rosenblood, the plaintiff was insured under a professional liability policy. An action was brought against the insured for damages for professional negligence and a claim was made for coverage under the policy. The insurer appointed a lawyer to defend the action. The lawyer did not put his mind to coverage and defended the action, without a reservation of rights letter or a non-waiver agreement. The lawyer became aware of facts that would indicate that the insured knew the true facts in relation to the transaction in question, which gave rise to a coverage problem because of policy exclusions based upon dishonesty and failure to give notice of a possible claim. The lawyer appointed by the insurer continued to defend the action against the insured and engaged in settlement discussions that failed. The insured was notified that the insurer was denying coverage and the lawyer removed himself as counsel of record. The insured settled the claim, and sued the insurer.

[66] The trial judge concluded that there was no coverage under the policy because the policy exclusions applied. He then addressed whether the insurer was estopped from denying coverage. The trial judge concluded that the insurer had knowledge of facts giving rise to exclusions of coverage and that the insured relied upon the insurer and the lawyer that it appointed to act in its best interests in defending the action. He held that if the insured had been advised of an off-coverage position earlier, the defence could have been conducted differently and he found that prejudice from the continuing defence of the action must be presumed. The trial judge, at para. 64, declared the following duties on the part of an insurer:

When a claim is presented to an insurer the facts giving rise to the claim should be investigated. If there is no coverage than the insured should be told at once and the insurer should have nothing further to do with the claim if it wishes to maintain its off-coverage position. If coverage is questionable the insurer should advise the insured at once and in the absence of a non-waiver agreement or of an adequate reservation of rights letter defence a claim at its risk. In the present case the insurer finally took an off-coverage position but against Mr. Atlin’s advice and much too late.

The trial judge concluded that the insurer was estopped from taking an off-coverage position based upon the exclusions upon which it relied.

[67] Cronnox relies upon the principle to the same effect expressed in the following passage from a decision of the New Brunswick Court of Appeal in Parlee v. Pembridge Insurance Co., 2005 NBCA 49 at para. 12:

It is a well-established principle of insurance law that when an insurer, “with full knowledge of grounds for denial of coverage to its insured enters an appearance to the action brought against the insured and carries on the defence, it is by so doing estopped from later denying liability under the policy either to the insured or to the third party judgment creditor” … Put another way, an insurer cannot engage in such conduct “without waiving its rights under the policy as between it and the insured” [citations omitted].

Cronnox also relies upon Perri v. Allstate Insurance Co. of Canada, 1984 CarswellOnt 673 (Co. Ct.), at para. 23, for this principle.

[68] Cronnox also relies upon estoppel based upon the principle of “representation by silence” because of Lloyd’s failure to notify Cronnox in a timely way that there was no coverage under the Lloyd’s Policy: Lombard General Insurance Company of Canada v. Crosbie Industrial Services Ltd., 2006 NLCA 55 at paras. 61-63.

[69] In response, Lloyd’s submits that the principles expressed in the authorities cited by Cronnox do not apply to the facts of this case because, in those cases, there was a valid insurance policy in effect when the insurer provided coverage. In contrast, in this case, on February 10, 2014, when Lloyd’s was asked to appoint defence counsel for Cronnox, the Lloyd’s policy had been cancelled effective November 11, 2013 and Cronnox had agreed to release Lloyd’s from any liability thereunder from this date. The Lloyd’s policy provided that a claim could be reported within 30 days after expiration of the policy. I do not need to decide whether the cancellation of the Lloyd’s policy signed by Mr. Peric for Cronnox was effective to end the legal relationship on November 11, 2013, or whether a legal relationship continued for 30 days after that date, because there was no report of a claim within the 30 day period. There was, therefore, no legal relationship between Lloyd’s and Cronnox on February 10, 2014.

[70] The question that arises is, therefore, whether, absent a legal relationship between Lloyd’s and Cronnox on February 10, 2014, Lloyd’s decision at the request of Cronnox to appoint counsel to defend Cronnox in the Innvest action and to continue to provide a defence for more than two years without communicating that there was no coverage under the expired Lloyd’s policy can found an estoppel by which Lloyd’s is precluded from denying that there is coverage for Cronnox under the Lloyd’s policy.

[71] In Maracle v. Travellers Indemnity, [1991] 2 S.C.R. 50, the Supreme Court of Canada addressed the application of the doctrine of promissory estoppel to preclude an insurer from relying upon a limitation period. Sopinka J. stated the principles of promissory estoppel at p. 57:

The principles of promissory estoppel are well settled. The party relying on the doctrine must establish that the other party has, by words or conduct, made a promise or assurance that was intended to affect their legal relationship and to be acted on. Furthermore, the representee must establish that, in reliance on the representation, he acted on it or in some way changed his position. In John Burrows Ltd. v. Subsurface Surveys Ltd., [1968] S.C.R. 607, Ritchie J. stated, at p. 615:

It seems clear to me that this type of equitable defences cannot be invoked unless there is some evidence that one of the parties entered into a course of negotiation which had the effect of leading the other to suppose that the strict rights under the contract would not be enforced, and I think that this implies that there must be evidence from which it can be inferred that the first party intended that the legal relations created by the contract would be altered as a result of the negotiations.

This passage was cited with approval by McIntyre J. in Engineered Homes Ltd. v. Mason, [1983] 1 S.C.R. 641, at p. 647. McIntyre J stated that the promise must be unambiguous but could be inferred from circumstances.

Sopinka J., at p. 58, reiterated that “[t]he principles of promissory estoppel require that the promisor, by words or conduct, intend to affect legal relations”.

[72] In Myles v. Body Shop Canada, 2004 CarswellOnt 6654, Nordheimer J. (as he then was), quoted with approval at para. 19 the following passage from the decision of Lord Denning in Amalgamated Investment & Property Co. v. Texas Bank, [1982] 1 Q.B. 84 (C.A.) explaining the principle of promissory estoppel, at p. 122:

All these can now be seen to merge into one general principle shorn of limitations. When the parties to a transaction proceed on the basis of an underlying assumption - either of fact or of law - whether due to misrepresentation or mistake makes no difference - on which they have conducted the dealings between them - neither of them will be allowed to go back on that assumption when it would be unfair or unjust to allow him to do so. If one of them does seek to go back on it, the courts will give the other such remedy as the equity of the case demands.

In this passage, Lord Denning referred to the “parties to a transaction”, in other words, parties who are in a legal relationship, proceeding on the basis of an underlying assumption. This is consistent with the statements made by Sopinka J. in Maracle that the promise said to found the estoppel must be intended to affect legal relations between the parties.

[73] I conclude, relying upon the passages from Maracle that I have cited, including the passage quoted in Maracle from Burrows, that in order to found an estoppel the words or conduct on the part of the promisor that are said to give rise to an estoppel must be intended to affect legal relations that exist between the promisor and the promisee. In this case, there was no legal relationship between Lloyd’s and Cronnox on February 10, 2014 when Mr. Stancato wrote to Lloyd’s broker and reported that Cronnox received the statement of claim in the first Innvest action in September 2013 and advised that Cronnox requires representation to be provided by Lloyd’s or on February 13, 2014 when Mr. McLellan informed Mr. Peric that Mr. Miller of the Dolden firm was appointed as counsel to defend Cronnox in the Innvest litigation. As a result, the acts or omissions of Lloyd’s on these dates do not give rise to an estoppel.

[74] Cronnox submits that detrimental reliance or prejudice, a necessary requirement for estoppel, may be presumed or implied where the insured was lulled into security by the belief that the insured would indemnify him: Western Canada Accident and Guarantee Insurance Company v. Parrott at p. 603. Cronnox correctly notes that for purposes of estoppel, detriment is not the same thing as damages, and that damages are not required in order for an estoppel to arise.

[75] Cronnox submits that it also suffered actual prejudice based upon (i) the late delivery of the complete file to Cronnox’s new counsel, (ii) the expiry of the limitation period for commencement of a third party claim against Oakville Hydro and ESA (on the ground that new counsel for Cronnox was not told in a timely way that the limitation period was about to expire), (iii) costs incurred for legal expenses by Cronnox in commencing a third party claim at the request of Lloyd’s, and (iv) payment by Cronnox of $15,000 for expenses charged by Mr. McLellan and Mr. Miller (which was later reimbursed).

[76] Because of my conclusion that the acts or omissions of Lloyd’s do not give rise to an estoppel because there was no legal relationship between Lloyd’s and Cronnox when the acts or omissions said to give rise to the estoppel occurred, I do not need to decide whether detrimental reliance should be implied or whether Cronnox suffered actual prejudice in order to satisfy a requirement for the application of the doctrine of estoppel. This is not a case like Rosenblood or Western Canada Accident where the acts or omissions by the insurer that are said to give rise to an estoppel occurred during the period of coverage under a contract of insurance.

b (ii) Did Lloyd’s elect to waive the reporting provisions of the Lloyd’s policy and thereby extend it by accepting coverage of the claim and appointing counsel to defend Cronnox? If so, is Lloyd’s precluded from denying coverage and withdrawing from the defence of Cronnox?

[77] In addition to relying upon the doctrine of estoppel, Cronnox relies upon the doctrine of waiver that arises when a party to a contract elects to treat an obligation as having arisen under the contract even though before so electing the party was entitled to take the position that such obligation had not arisen. Detrimental reliance need not be shown for the doctrine of waiver to apply. Cronnox submits that by appointing counsel to defend Cronnox in the Innvest litigation and by accepting coverage for Cronnox’ liability in this litigation, Lloyd’s elected to waive the reporting provisions of the Lloyd’s policy and thereby extended it. Cronnox submits that this election, once made and communicated to Cronnox, was irrevocable.

[78] In support of this submission, Cronnox relies upon the decision of the Alberta Court of Appeal in Mitchell and Jewell Limited v. Canadian Pacific Express Company, 1974 AltaSCAD 18. In Mitchell, the carrier’s contract of carriage provided that the carrier shall not be liable for any damage unless written notice is given within 30 days from delivery. No written notice was given by the claimant within the 30 days. The question on appeal was whether notice as required under that term of the contract was waived by the carrier.

[79] In Mitchell, Prowse J.A. summarized the law of waiver in this context at para. 29:

[29] Summarizing the law as set out in the above cases I am of the opinion that waiver as used in the present context arises where one party to a contract, with full knowledge that his obligation under the contract has not become operative by reason of the failure of the other party to comply with a condition of the contract, intentionally relinquishes his right to treat the contract or obligation as at an end but rather treats the contract or obligation as subsisting. It involves knowledge and consent and the acts or conduct of the person alleged to have so elected, and thereby waived that right, must be viewed objectively and must be unequivocal.

[30] In considering the acts or the conduct of the person alleged to have made such an election the crucial time is after such party has knowledge of the failure of the other party to comply with the condition. However, the acts or conduct of that party either before, at the time of, or following the happening of the event or circumstance giving rise to the right to treat the contract or obligation at an end may be relevant in determining whether the party elected to waive compliance with the condition.

The Alberta Court of Appeal held that the carrier elected to waive the failure by the claimant to comply with the conditions of the contract by providing written notice of the loss and that the election once made and communicated to the claimant was irrevocable.

[80] The Mitchell decision is distinguishable on the same ground as the cases cited by Cronnox in support of their submission that the doctrine of estoppel applies are distinguishable. In Mitchell, the carrier and the claimant had a contractual relationship at the time that the conduct said to give rise to the waiver occurred. By its actions, the carrier was held to have clearly acknowledged that the contract subsisted. In this case, in contrast, at the time that Mr. McLellan appointed counsel to represent Cronnox, there was no legal relationship between Cronnox and Lloyd’s because the Lloyd’s policy had expired and no claim was reported by Cronnox during the term of the Lloyd’s policy or within 30 days thereafter. Cronnox had agreed in writing that the Lloyd’s policy is cancelled and it relieved Lloyd’s from all liability thereunder. The actions taken by Lloyd’s, through Mr. McLellan as its agent, could not have had the effect of acknowledging that the Lloyd’s policy was subsisting because there was no longer a legal relationship between Lloyd’s and Cronnox.

[81] The legal principles upon which Cronnox relies to support its claims for a declaration of coverage based upon estoppel or waiver have been applied in cases where there is an existing legal relationship between the insured and the insurer. In such cases, an insurer’s acts or omissions, where they have been relied upon by the insured to the insured’s detriment, may result in the insurer being estopped from denying coverage because of a policy exclusion or a breach of a condition or other term of the policy. Even where there was no detrimental reliance, it was held in Mitchell that the conduct could amount to an irrevocable election to waive the failure by a party to comply with a condition of the contract. Cronnox has not, however, cited any authority for the proposition that an insurer, which had provided insurance coverage under a valid policy in the past but is no longer in a legal relationship with the party claiming insurance coverage, may be required through the application of the doctrines of estoppel or waiver to provide insurance coverage and a defence to the claimant under an expired policy because the insurer’s acts or omissions after the legal relationship ended may have led the claimant to believe that such defence and indemnity coverage would be given.

[82] For these reasons, I conclude that Lloyd’s is not precluded by the application of the doctrine of waiver from denying insurance coverage for the liability of Cronnox in the Innvest litigation and withdrawing from the defence that was provided to Cronnox.

b (iii) Did Lloyd’s, by the actions of its agent, Mr. McLellan of IPG, create a contract of insurance between Cronnox as insured and Lloyd’s as insurer under which there is defence and indemnity coverage for Cronnox in respect of the Innvest litigation?

[83] Cronnox submits that it is no answer for Lloyd’s to say that there is no estoppel or waiver that can apply to affect Lloyd’s (because there was no contract or other legal relationship between Lloyd’s and Cronnox at the time of the conduct that is said to give rise to the estoppel or waiver) and that, in any event, a contract was created by the conduct of Mr. McLellan, Lloyd’s agent.

[84] In McCunn Estate v. Canadian Imperial Bank of Commerce, 2001 CarswellOnt 1892 the Court of Appeal addressed the question of whether a bank’s customer could take advantage of the bank’s mistake in debiting monthly insurance premiums after the insurance policy had come to an end to create a new contract of insurance. In that case, the bank’s customer obtained a personal line of credit and, at that time, the bank provided, through an insurance company and at its own expense, an insurance policy on the life of customers who had obtained credit lines. The bank changed its policy of providing insurance without cost to its credit line customers, who were notified that they were automatically enrolled in a new insurance plan “subject to the age 70 limit” unless they elected to opt out of the new plan. The bank’s customer became enrolled under the new plan and it was common ground that the coverage provided by the insurance policy terminated on the customer’s 70th birthday. Although the coverage on her life terminated on that day, the bank continued to debit monthly premiums to the line of credit for a further 16 months until the customer’s death. Monthly statements were sent to the customer reflecting the debiting of the premiums.

[85] The majority of the Court of Appeal in McCunn Estate held that the application judge was incorrect in his conclusion that a new contract of insurance had resulted from the bank’s debiting of monthly insurance premiums to the customer’s credit line subsequent to the termination of the insurance policy. The majority held, at paras. 18-21, that for the parties to have created a new contract of insurance it was necessary that the bank, with the requisite knowledge and intent, make an offer to provide insurance, and that the customer, with the requisite knowledge and intent, accept the offer. In order to create a new contract of insurance, it was necessary that there be agreement upon every material term of the contract. The majority held that the bank was in error in debiting the premiums and that to act erroneously is inconsistent with acting knowingly. The majority of the Court of Appeal concluded that “the bank cannot be seen to have knowingly intended to make an offer to extend the contract or, properly speaking, to enter into a new contract”: McCunn Estate at para. 21.

[86] Mr. McLellan’s evidence is that in February 2014 he mistakenly believed that the Lloyd’s policy was a “claims-made” policy and that the coverage issue involved the delay until 2014 in reporting a claim made in September 2013 during the period of coverage under the Lloyd’s policy. Mr. McLellan’s evidence is that he mistakenly assumed that the Lloyd’s policy included a duty to defend by the insurer. Given this evidence which I accept, Lloyd’s cannot be found to have knowingly intended to make a new contract of insurance with Cronnox because of the mistaken understanding of its agent.

[87] It is significant that Cronnox knew that the Lloyd’s policy had come to an end before February 10, 2014 when Mr. Stancato asked Lloyd’s to appoint defence counsel for Cronnox. Mr. Peric had signed a notice of cancellation of the Lloyd’s policy on November 8, 2013 in which he agreed that the policy was cancelled as of November 11, 2013. Mr. Stancato, Cronnox’s agent, also acknowledged in his evidence on these applications that he knew that the Lloyd’s policy had been cancelled when he sent his email to Lloyd’s broker on February 10, 2014 and advised incorrectly that Cronnox received the statement of claim in the first Innvest action in September 2013, during the period of coverage under the Lloyd’s policy. Mr. Stancato said that the reason he did not send the statement of claim to Lloyd’s when he first received it (and sent it to Liberty instead) was because he knew that the Lloyd’s policy was cancelled. Mr. Stancato’s evidence is that, with knowledge that the Lloyd’s policy was cancelled and that the extended 30 day reporting period had passed, he was looking for Mr. McLellan’s help and assistance. The evidence of Mr. Stancato does not permit a finding that he, as agent for Cronnox, intended to make a new contract of insurance with Lloyd’s.

[88] In addition, the doctrine of estoppel does not operate to create a legal relationship, including a contract of insurance, where one does not exist. Sometimes, in order to make this point, courts have said that promissory estoppel cannot be used as a sword to assert a cause of action. In Myles, Nordheimer J. addressed the use of promissory estoppel as cause of action:

The BSC defendants rely on the decision in Reclamation Systems Inc. v. Rae (1996), 27 O.R. (3d) 419 (Gen. Div.) as a definitive statement in Ontario that promissory estoppel cannot be used as a cause of action. Again, I repeat that the amended statement of claim to my reading does not use promissory estoppel as a cause of action but rather as an adjunct to other causes of action. It more fairly falls in the category, therefore, of the type of case referred to by Lord Justice Brandon in Amalgamated Investment & Property Co. v. Texas Bank, supra, at p. 131:

This illustrates what I would regard as the true proposition of law, that, while a party cannot in terms found a cause of action on an estoppel, he may, as a result of being able to rely on an estoppel, succeed on a cause of action on which, without being able to rely on that estoppel, he would necessarily have failed.

[89] An example of the use of estoppel in this way is found in Re Tudale Exploration Ltd. and Bruce (1978), 20 O.R. (2d) 593 (Div. Ct.). In that case, an option to explore and develop mining claims under an option agreement was required to be exercised within three years. Before the expiry of this period of time, the party that granted the option assured the other party that it would grant an extension. The contract could only be modified by instrument in writing. The extension was later refused, and the three year period had expired. The Divisional Court noted that the “sword/shield maxim” has been heavily criticized but held, in any event, that the claim to the rights under the option was set up as a defence to the assertion by the other party that the rights under the contract had expired. The Divisional Court held that where the party that granted the option had agreed to extend the time for exercising it and then repudiated the agreement upon the ground the time had expired, the party that granted the option could not deny the extension of time, or at the least it must give the other party a reasonable time to regain its position. In Re Tudale, estoppel was used to prevent a party that was in a contractual relationship with another party from insisting upon its strict legal rights.

[90] The Insurance Act, R.S.O. 1990, c. I.8 provides in s. 124:

124(1) All the terms and conditions of the contract of insurance shall be set out in full in the policy or by writing securely attached to it when issued, and, and unless so set out, no term of the contract or condition, stipulation, warranty or proviso modifying or impairing its effect is valid or admissible in evidence to the prejudice of the insured or beneficiary.

(2) Subsection (1) does not apply to an alteration or modification of the contract agreed upon in writing by the insurer and the insured after the issue of the policy.

[91] Section 131(1) of the Insurance Act addresses waiver and estoppel, and provides:

131 (1) The obligation of an insured to comply with a requirement under a contract is excused to the extent that,

(a) the insurer has given notice in writing that the insured’s compliance with the requirement is excused in whole or in part, subject to the terms specified in the notice, if any; or (b) the insurer’s conduct reasonably causes the insured to believe that the insured’s compliance with the requirement is excused in whole or in part, and the insured acts on that belief to the insured’s detriment.

[92] This provision reflects the principles with respect to waiver and estoppel in the jurisprudence, and applies where there is an insurance contract between the insured and the insurer. In this case, after November 11, 2013, there were no terms and conditions of a contract of insurance set out in a policy or by writing attached to a policy between Lloyd’s as insurer and Cronnox as insured. The Insurance Act does not allow new contractual duties to be imposed upon an insurer through the doctrines of waiver or estoppel.

[93] For these reasons, I conclude that there was no new contract of insurance created between Lloyd’s as insurer and Cronnox as insured as a result of Mr. McLellan’s acts or omissions by appointing counsel to represent Cronnox in the Innvest litigation or failing to advise Cronnox that there was no coverage under the Lloyd’s policy until February 23, 2016.

c. Did Lloyd’s breach a duty of fair dealing and good faith to Cronnox, including a duty to provide a diligent defence of the Innvest claim and, if so, what is the remedy? Is Lloyd’s liable to pay damages?

[94] Cronnox submits that where an insurer undertakes to assume the defence of its insured, the obligation remains with the insurer to provide a “diligent defence” and to instruct counsel to minimize the exposure to the insured. Cronnox submits that IPG selected Dolden to act as counsel for Cronnox and that IPG directed the conduct of Dolden in this regard. Cronnox submits that the duty to exercise reasonable care and skill in defending Cronnox was owed by its liability insurer, Lloyd’s (and its agents IPG and McLellan), as well as by defence counsel, Dolden.

[95] Cronnox submits further that in addition to the equitable remedy of estoppel, it is entitled to the alternative remedy of damages for breach of Lloyd’s extra-contractual duties of good faith and fair dealing with Cronnox in respect of Cronnox’s defence to the Innvest claim.

[96] Cronnox submits that Lloyd’s, IPG and Dolden failed to do a number of things to minimize the exposure of Cronnox:

a. They failed to bring a third party claim against Oakville Hydro and ESA within the limitation period. They failed to diarize the limitation expiration or to notify Cronnox or its new counsel of a limitation period with respect to the third party claim. This prevents Cronnox from obtaining contribution and indemnity against potential third parties responsible for the damage. b. They failed to ensure that Cronnox was represented during the inspection of the cables which resulted in an expert report that contained numerous errors of fact which Cronnox could have corrected at the time of inspection. c. They failed to report counsel’s assessment of liability and damages to Cronnox even though Mr. Miller had an obligation to report to both Cronnox and Lloyd’s from the outset. d. They failed to notify Cronnox of a potential “over limits” exposure and to recommend that Cronnox seek independent legal advice. e. Lloyd’s waited six months after discovering Mr. McLellan’s error before advising Cronnox that there was no coverage under the Lloyd’s policy and the withdrawal of the defence provided by Dolden, and it did not inform Cronnox about its review of the coverage and the possibility of loss of coverage and withdrawal from defence.

[97] Cronnox submits that if the equitable remedies of estoppel or waiver are not invoked to estop Lloyd’s from denying indemnity and defence coverage under the Lloyd’s policy, Cronnox is entitled to an alternative remedy of damages for breach of Lloyd’s extra-contractual duties of good faith and fair dealing.

[98] In support of these submissions, Cronnox relies upon a decision of the Ontario Court of Appeal in Ernst & Young Inc. v. Chartis Insurance Company of Canada, 2014 ONCA 78. In that case, the Court of Appeal confirmed that a liability insurer owes a duty of good faith to its insured in the defence of a claim and that the duty of good faith requires an insurer to act both promptly and fairly when investigating, assessing and attempting to resolve claims made by its insureds: Chartis at para. 70. The receiver of the insured submitted that the insurer had breached its duty of good faith by (i) failing to settle the litigation within the policy limits, (ii) permitting its coverage counsel to be involved in the defence of the action, (iii) having defence counsel “steer” the defence to avoid coverage, and (iv) obstructing and delaying the timely resolution of the claims and preferring its own interests over the interests of the insured. The Court of Appeal held that the receiver did not obtain a cause of action for breach of any duty of good faith owed by the insurer to the insured, but that this conclusion does not mean that the insurer could exercise the right to defend the litigation and “steer” the defence so as to avoid its insurance obligations, act to undermine its insured’s coverage, or otherwise subvert the course of justice: Chartis, at paras. 72-83.

[99] Cronnox also relies upon the decision in Whirlpool Canada Co. v. Chavila Holdings Limited, 2017 ONCA 81. The issue on the appeal was whether the application judge had erred in finding that the lawyer who the parties in the position of insurer wanted to appoint as counsel for the party in the position of the insured would not be in a prohibited conflict of interest. The Court of Appeal held that the parties were in a relation that was analogous to that between an insured and an insurer and that, under insurance law principles, the parties in the position of the insurer - and the counsel they appointed for the party in the position of the insured - must exercise reasonable care and skill in defending the actions against this party and must pursue this party’s best interests by minimizing its liability. As authority for this principle, the Court of Appeal cited Kingscourt Auto Enterprises Inc. v. General Accident Assurance Co. of Canada (1992), 8 C.C.L.I. (2d) 21 at p. 34, citing Fredrikson v. Insurance Corp. of British Columbia (1990), 44 B.C.L.R. (3d) 303 (S.C.) at p. 329. The Court of Appeal in Whirlpool also cited Shea v. Manitoba Public Insurance Corp. (1991), 55 B.C.L.R. (2d) 15 (S.C.) for the principle that “[t]he duty to defend includes a duty to attempt to minimize the amount of any damages to be assessed against the insured.” See Whirlpool at paras. 43-44.

[100] Lloyd’s submits that Dolden’s failure to (i) ensure that Cronnox was represented at the non-destructive inspection of electrical cables, (ii) report to Cronnox Mr. Miller’s assessment of liability and damages, and (iii) inform Cronnox of the over limits exposure, did not result in any actual harm to Cronnox. Lloyd’s also submits that there is no evidence that the passage of time period during which it was investigating coverage under the Lloyd’s policy resulted in any harm to Cronnox in the Innvest litigation. Lloyd’s accepts, however, that the expiry of the limitation period for a third party claim against Oakville Hydro and ESA may have caused a loss to Cronnox. Lloyd’s submits that the amount of any loss will have to be determined either by staying Cronnox’s application pending the resolution of the Innvest action, or holding a “trial within a trial”. Lloyd’s submits that there is no evidentiary basis to support a conclusion that it breached a duty of fair dealing and good faith and caused damages to Cronnox.

[101] There is no question that Dolden, upon accepting a retainer to represent Cronnox in the defence of the Innvest litigation, owed professional duties to Cronnox. An insurer does not, however, become vicariously liable for all breaches of professional duties owed by defence counsel to the insured by virtue of having appointed defence counsel, and no authority has been cited to me for this proposition. An insurer’s duty to defend (if there is one) is discharged by hiring a competent lawyer with a level of experience appropriate to the case. Thereafter, the lawyer acts for the insured in defending the litigation. The lawyer is agent for the insurer only in settlement negotiations: Shea, at paras. 120-123.

[102] The extra-contractual duties upon which Cronnox relies are those that fall within the duties of fair dealing and good faith owed by an insurer to an insured. The question before me is whether Lloyd’s, on the evidence before me, can be held liable to Cronnox for damages for breaches of duties of fair dealing and good faith.

[103] With respect to the issue involving expiry of the limitation period for a third party claim against Oakville Hydro and ESA, the evidence is that Mr. Miller reported to Lloyd’s that ESA and Oakville Hydro are “potentially liable parties”, that Cronnox had the option of issuing a third party claim to name ESA and Oakville Hydro, and that no other defendant had taken steps to do so. Mr. Miller reported that he had recommended to counsel for a co-defendant, Crotech, that these parties would be “valid additions” to the action. In his recommendations to Lloyd’s for future handling of the case, Mr. Miller recommended awaiting the position of Crotech on issuing third party claims against ESA and/or Oakville Hydro and considering adding these parties by way of a third party claim if Crotech refuses to do so.

[104] Mr. McLellan’s evidence is that he instructed Mr. Miller to proceed with the third party claim if Crotech did not issue one, and that he relied upon the advice given by Mr. Miller that the filing of a court document citing the third parties was sufficient to protect all defendants, including Cronnox. On October 15, 2015, Mr. Miller reported to Mr. McLellan that a third party claim against Oakville Hydro and the ESA had been issued, and on October 16, 2015 Mr. McLellan received a copy of this third party claim that had been issued by Crotech. His evidence is that he reviewed the third party claim and noted in his claim notes for October 16 that it appeared to be in order.

[105] Cronnox also relies upon Dolden’s failure to deliver the complete file to its new counsel upon its appointment on March 10, 2016. On March 11, 2016 Mr. Miller advised that the firm would deliver its complete file to Cronnox’s new counsel in the near future. Some materials were made available on March 11, 2016, including pleadings and some correspondence. On May 11, 2016, new counsel wrote to Mr. Miller requesting emails not included in the documents that had been made available, and advising that the discovery of Mr. Peric was scheduled for June 2, 2016. Mr. Miller provided a second secure link of Dolden documents on May 18, 2016, providing access to 205 emails. Included among the emails was an email dated April 30, 2014 from counsel for Innvest attaching a copy of the second statement of claim, and the reply of Mr. Miller advising that Dolden will accept service. This was held by Master Jolley in a decision dated September 19, 2017 to be the effective date for service of Innvest’s second statement of claim and the date of commencement of the running of the limitation period for the commencement of a third party claim against Oakville Hydro and ESA. Cronnox submits that it could not have reasonably known of the limitation period for issuance of a third party claim until it received this correspondence on May 18, 2016 and, by this time, the limitation period had expired.

[106] It was reasonable for Lloyd’s to assume that Cronnox’s interests were protected when Mr. Miller reported that Crotech had brought a third party claim, and Lloyd’s did not act in breach of a duty of fair dealing and good faith by accepting this legal advice, even if it was not correct.

[107] In addition, the evidence does not support a finding that Lloyd’s breached a duty of fair dealing and good faith in relation to the transfer of Mr. Miller’s file to Cronnox’s new counsel. The evidence is that Mr. Miller informed Mr. McLellan that he was transferring his entire file to the new defence lawyers, and Mr. McLellan did not know until May 16, 2016 that Mr. Miller had not done so. Mr. McLellan immediately referred the matter to IPG’s counsel who promptly wrote to Mr. Miller to advise him that he should consider Cronnox, as a joint client, as being entitled to all information. IPG’s counsel asked that the missing emails be sent to Cronnox’s new counsel by close of business that day, and they were made available the following day.

[108] On the evidence before me on these applications, I conclude that Lloyd’s is not vicariously liable for the advice given by Mr. Miller or for his actions in relation to the transfer of the file to Cronnox’s new counsel. I conclude that Lloyd’s did not act, or fail to act, in ways that were in breach of a duty of fair dealing and good faith towards Cronnox in relation to the issuance of a third party claim.

[109] Cronnox also submits that it suffered damages that were caused by Lloyd’s breach of a duty of fair dealing and good faith because it was not informed of or allowed to participate in the testing of electrical cables that took place on July 28, 2014. Counsel for Innvest had notified defence counsel, including Mr. Miller, of testing to be conducted on the electrical cables by an expert hired by Innvest, and asked if the defendants wish to participate. On June 5, 2014, Mr. McLellan instructed Mr. Miller to have a representative expert present at the joint testing, and recommended an engineer to attend and prepare a report. Mr. Miller did not send anyone to represent Cronnox at the testing held on July 28, 2014.

[110] Mr. Peric was not informed of the proposed testing of the cables nor was he asked if he wished to attend. His evidence is that he would have instructed Mr. Miller of his intention to personally participate in the cable testing to explain the involvement and position of Cronnox to the other experts, had he been so informed. The report of Innvest’s electrical expert concluded that the use of inappropriate insulation cable was a cause of the explosion, and the report identified all of the defendants, including Cronnox, as parties sharing in the responsibility.

[111] There is no evidence that Lloyd’s instructed Mr. Miller not to send anyone to represent Cronnox at the testing of the electrical cable on July 28, 2014. The evidence appears to be to the contrary. According to the report from Innvest’s experts, the testing that occurred on July 28, 2014 was non-destructive. Cronnox is able to inspect the cables on another date. I conclude that the failure to invite Cronnox to the testing of the electrical cable on July 28, 2014 was not caused by a breach of a duty of fair dealing and good faith by Lloyd’s towards Cronnox.

[112] Cronnox also submits that Lloyd’s is liable in damages for (i) Mr. Miller’s failure to report his assessment of liability and damages to Cronnox, and (ii) Mr. Miller’s failure to notify Cronnox of the potential “over limits” exposure and to recommend that it seek independent legal advice. These were matters within Mr. Miller’s professional responsibilities as defence counsel for Cronnox. Lloyd’s is not vicariously liable for any breaches of Mr. Miller’s professional duties in respect of these matters. On the evidence before me, I conclude that Lloyd’s did not breach a duty of good faith and fair dealing towards Cronnox in respect of these matters.

[113] Cronnox also submits that Lloyd’s waited six months after discovering Mr. McLellan’s error before notifying Cronnox that there was no coverage under the Lloyd’s policy and, during this time, Lloyd’s did not disclose to Cronnox that it was reviewing coverage and that there was the possibility of loss of coverage and withdrawal from the defence of Cronnox. Mr. McLellan’s evidence is that on September 1, 2015 he decided that it would be prudent to inform defence counsel that he should be putting the defence on hold because Lloyd’s was trying to determine whether it should now decline coverage. Mr. Miller, as counsel for Cronnox, had a professional obligation to protect Cronnox’s interests during this period of time, regardless of any instructions given by Lloyd’s. There is no evidence that Cronnox suffered any damages from September 1, 2015 to February 23, 2016 while the file was in abeyance. I am unable to find that Cronnox suffered any damages as a result of a breach by Lloyd’s of a duty of good faith and fair dealing towards Cronnox in respect of the Innvest litigation during the period of time that the file was placed in abeyance.

[114] For these reasons, I conclude that Lloyd’s is not liable to Cronnox for damages for breach of a duty of fair dealing and good faith towards Cronnox.

Disposition

[115] For the foregoing reasons:

a. Cronnox’s application is dismissed. b. Lloyd’s application is granted and I declare that (i) the Lloyd’s policy does not provide coverage to Cronnox in relation to claims made against it by Innvest in the Innvest litigation, and (ii) the Lloyd’s policy does not give rise to a duty to defend Cronnox.

[116] If the parties are unable to resolve costs, Lloyd’s and Dolden may make written submissions within 20 days. Cronnox may make responding submissions in writing within 20 days thereafter. Lloyd’s and Dolden, if so advised, may make brief reply submissions within 10 days thereafter.

Cavanagh J.

Released: October 29, 2018

COURT FILE NOS.: CV-16-554373 and CV-16-555073 DATE: 20181029

ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: CRONNOX INC. Applicant – and – LLOYD’S UNDERWRITERS, INTERNATIONAL PROGRAMS GROUP, A DIVISION OF SCM GROUP OF COMPANIES, and IAN McLELLAN Respondents AND BETWEEN: INTERNATIONAL PROGRAMS GROUP, A DIVISION OF CLAIMSPRO LP AND LLOYD’S UNDERWRITERS Applicants – and – CRONNOX INC., LIBERTY INTERNATIONAL UNDERWRITERS, A Division of The Liberty Mutual Insurance Company, and DOLDEN WALLACE FOLLICK LLP Respondents REASONS FOR JUDGMENT Cavanagh J.

Released: October 29, 2018