Cronos Group Inc. v. Assicurazioni Generali S.P.A., 2021 ONSC 1704

Court File No.: CV-20-00643614-00CL Date: 2021-03-16 Ontario Superior Court of Justice

Between: CRONOS GROUP INC., Applicant – and – ASSICURAZIONI GENERALI S.P.A., Respondent

Counsel: Andrea Laing, Doug McLeod and Justin Manoryk, for the Applicant George Karayannides and Mark Mandelker, for the Respondent

Heard: December 17, 2020

Reasons for Decision

DIETRICH J.

Overview

[1] The applicant Cronos Group Inc. held a primary Executive and Corporate Securities Insurance Policy (the “Primary Policy”) issued by AXA XL.

[2] It also held a secondary Excess Directors’ and Officers’ Liability Policy (the “Excess Policy”) issued by the respondent Assicurazioni Generali S.P.A.

[3] The Primary Policy included an “Optional Extension Period” (“OEP”) option that allowed the insured to extend the period of coverage beyond the expiration date of the Primary Policy within 30 days of its expiry.

[4] The applicant asserts that the same option to extend applied to the Excess Policy even though it was not expressly included in the Excess Policy.

[5] The Excess Policy is subject to the same terms, conditions, limitations and exceptions as are contained in the Primary Policy with certain exceptions. The exceptions are set out in the Conditions of the Excess Policy, and do not specifically exclude the OEP option.

[6] The applicant/insured attempted to avail itself of the OEP option under the Excess Policy and made a payment to trigger the OEP. The respondent refused to honour the exercise of the option. It denied coverage on the basis that the applicant/insured had no right to exercise the OEP option under the Excess Policy, and that even if it did, the amount required for the OEP premium was not defined in the Excess Policy, and the amount paid by the applicant/insured was insufficient.

[7] The applicant asserts that the respondent’s refusal to confirm coverage or even engage in a dialogue with the applicant regarding the OEP option is unsupportable as a matter of insurance contract interpretation and the good faith duty of insurers.

[8] For the reasons that follow, I find that the applicant had a contractual right to exercise the OEP option under the terms of the Excess Policy. It was commercially reasonable for it to pay the premium it paid based on the terms of the Primary Policy. Further, the amount was consistent with a representation made by the respondent’s lead underwriter. The respondent did not propose or request any other premium.

Factual Background

The Policies

[9] The applicant is a global cannabinoid company that manufactures and markets cannabis and cannabis-derived products.

[10] The applicant was the named insured under the Primary Policy, an Executive and Corporate Securities Insurance Policy issued by AXA XL for the period February 27, 2019 to February 27, 2020. The Primary Policy provided coverage to the applicant’s directors and officers on a claims-made basis during the policy period up to a maximum aggregate liability of US$5,000,000.

[11] The applicant was also the named insured under the Excess Policy, an excess directors’ and officers’ liability policy issued by the respondent for the same policy period. The Excess Policy covered sums owing on claims for which the applicant was liable to pay in accordance with the terms of the Primary Policy in excess of the Primary Limit up to a further maximum aggregate of liability for US$5,000,000.

[12] Under the Primary Policy, if the insured or insurer did not agree to renew the policy, the insured could, within 30 days from the expiry of the policy, exercise the OEP option.

[13] Under the OEP coverage, the extension would allow the insured, whose policy was not renewed, to notify the insurer of claims made against the insured after the expiry of the policy, but for conduct within the original term. Coverage limits of the expired policy would remain available to cover the loss.

[14] The terms of the OEP option in the Primary Policy specifically provided that: “If … the insurer does not renew this Policy, … any Insured Person shall be entitled, upon payment of an additional premium set forth in ITEM 5 of the Declarations, to an extension of this Policy …”

[15] ITEM 5 of the Declarations states that the Policy Premium is USD$750,000.00 and the OEP Premium is USD$1,500,000.00, being twice the Policy Premium.

Attempts to Renew Both Policies

[16] In January 2020, the applicant sought to renew both the Primary Policy and the Excess Policy through its newly appointed broker Aon Reed Stenhouse Inc. and its U.K. affiliate (collectively “Aon”).

[17] On February 11, 2020, following a meeting among representatives of each of the applicant, the respondent, Aon and AXA XL, Aon provided the applicant with quotes from both insurers to renew both Polices.

[18] During these negotiations, Aon, who had not been involved in the negotiating the Excess Policy, sought to substitute Aon’s standard Excess Policy wording. The new policy wording, among other things, specified that the cost of the OEP in the Excess Policy would be twice the original premium paid by the insured for the Excess Policy. While the respondent objected to some of the proposed changes to the Excess Policy wording, it accepted the changes regarding the OEP. It did not alter the terms relating to the calculation of the premium. The respondent’s lead underwriter, Phillip Perkins, indicated, at that time, that 200% of the policy premium for the OEP was the “norm”, to which the respondent was agreeing at the time.

[19] On February 24, 2020, the applicant announced that it would delay its 2019 fourth quarter and full-year earnings releases. In response, the respondent and AXA XL withdrew their quotes to renew the Policies, which would expire days later on February 27, 2020.

[20] Aon scheduled a call for February 26, 2020 among the applicant, the respondent, AXA XL and Aon to discuss both Policies. The respondent did not attend because Mr. Perkins and his colleagues were not available.

[21] Following the call, the applicant and AXA XL negotiated an extension of the Primary Policy, in lieu of renewal, in consideration of an additional premium of $1,500,000. The result was an extension of the Primary Policy to March 27, 2021. Unlike the exercise of the OEP option, this extension afforded the applicant/insured coverage for claims premised on wrongful acts occurring after the expiry of the original policy. The Primary Policy was extended for an additional thirteen months.

[22] Aon asked the respondent for a seven-day extension of the Excess Policy to allow for further discussion before the Excess Policy expired. The respondent advised Aon that the respondent could not communicate with Aon’s representatives, and that the applicant would need to deal with the respondent’s representatives in the U.K. Unfortunately, Aon’s requests to confirm the extension also went unanswered by Aon’s representatives in the U.K. Notwithstanding this, the applicant provided the respondent with further information regarding the delayed financials in a phone call on February 28, 2020 and in an email on March 2, 2020. On March 4, 2020, Aon arranged a call between the applicant and the respondent to discuss the delay in the earnings release.

[23] Mr. Perkins, on behalf of the respondent, participated in the March 4, 2020 call. However, unbeknownst to the applicant, he had, two days earlier, on March 2, 2020, sent an internal email directing that the applicant’s account be cancelled for “not meeting underwriting criteria.” The applicant was not apprised of this decision until March 5, 2020.

[24] Retrospectively, Mr. Perkins attempted to justify his decision based on insufficient responses by the respondent on the March 4, 2020 call and a review of the insured’s Form 12b issued on March 3, 2020. However, during his cross-examination, Mr. Perkins admitted that, in fact, the decision to cancel the policy had been made prior to both of these events.

Claims Commenced

[25] On March 11 and 12, 2020, two securities class action claims were commenced in the State of New York, in the United States, naming the applicant and two of its officers as defendants. The wrongful acts alleged relate to the restatement of the 2019 financial statements, which issues pre-dated the expiry of the Excess Policy. A similar class action was commenced in Ontario on June 3, 2020.

[26] On March 12, 2020, Aon raised the possibility that the applicant would exercise the OEP option and asked what the respondent would be prepared to accept as an additional premium. Aon’s internal record from that meeting shows that Mr. Perkins, on behalf of the respondent, took the position that the OEP was either unavailable under the Excess Policy, or that the respondent could set the additional option premium at whatever level it chose. The respondent relied on Conditions 2 and 8 of the Excess Policy and concluded that it “makes up its own mind with respect to significant matters” and that it was not bound to any OEP. The respondent never suggested any price as acceptable for an additional premium.

[27] On March 17, 2020, the applicant announced that its financial statements for the first three quarters of 2019 would be restated and reissued.

[28] The applicant notified AXA XL of the US Claims, and on March 19, 2020, through Aon, the applicant notified the respondent of the US Claims.

[29] The respondent replied by advising that the US Claims did not fall within the Excess Policy. It communicated that the US Claims were made after the Excess Policy had expired and that it was unaware that an extension period had been purchased by the applicant, and further that there was no OEP option in the Excess Policy.

[30] In light of the 30-day period during which the applicant/insured was required to exercise the OEP option, and the fact that the respondent would not engage in a discussion about the option and the premium, on March 25, 2020, the applicant provided the respondent with written notice that it was formally electing to exercise the OEP option.

[31] On March 26, 2020, the applicant delivered a bank draft to the respondent in the amount of CAD$704,700. This payment represented the Canadian dollar equivalent of twice the annual premium for the Excess Policy, being US$243,000. The applicant calculated this premium in the same way that the OEP premium was calculated in the Primary Policy; that is, twice the Policy Premium.

[32] On March 27, 2020, Mr. Perkins advised Aon of the respondent’s position: there was no language in the Excess Policy to support the applicant’s right to elect the OEP.

[33] On March 30, 2020, Aon advised the respondent of the applicant’s position: it had taken all necessary steps to acquire the OEP option for the Excess Policy. It also sent further written notice of the US Claims.

[34] On March 31, 2020, the respondent again rejected the US Claims on the basis that there was no language in the Excess Policy to support the applicant’s right to elect the OEP. Subsequently, the respondent destroyed the bank draft provided by the applicant to pay the premium.

Issues

[35] The issues in this matter are:

1. Did the applicant/insured have an option right to extend the term of the Excess Policy, which would not be renewed?
2. If yes, did the applicant/insured successfully exercise its option?

Positions of the Parties

[36] The applicant asserts that the Excess Policy unambiguously provides for the OEP option. It is specifically referred to in the Primary Policy, and the option is then detailed across four dedicated subsections comprising their own section of the Primary Policy headed “Optional Extension Period.”

[37] The applicant argues that the Excess Policy, in turn, follows form with respect to the OEP option. Condition 2 of the Excess Policy states that the Policy is subject to the same terms, conditions, limitations and exceptions as are contained in the Primary Policy, with the sole exceptions of “the premium, the amount and limits of liability, any deductible or self-insurance provision, the obligation to investigate and defend and the renewal agreement (if any).” Condition 2 does not purport to exclude the “Optional Extension Period” option from following form. Accordingly, the OEP option is incorporated into and forms part of the Excess Policy.

[38] The applicant also asserts that the respondent failed to negotiate the existence of the extension, or the price for the extension, in good faith.

[39] The respondent/insurer submits that the applicant/insured did not have a contractual right to an optional extension period. It asserts that the OEP option set out in the Primary Policy is not repeated in or incorporated by reference into the Excess Policy. Further, it submits that even if such an option could be so incorporated by reference, the optional extension could only be purchased in accordance with, and not contrary to, other provisions of the Excess Policy, including: a) that the correct price be paid (as stipulated in the supposedly incorporated provision); b) that the respondent provide written consent to the amendment of the Primary Policy; and c) that the underlying policy (the Primary Policy) be maintained.

[40] The respondent further asserts that if the applicant had the right to exercise the OEP option, the respondent had the right to set the correct price, which it did not do.

Excess Policy Conditions

[41] The Excess Policy includes the following conditions:

1. Condition 2 This Policy is subject to the same terms, conditions, limitations and exceptions (except as regards the premium, the amount and limits of liability, any deductible or self-insurance provision, the obligation to investigate and defend and the renewal agreement (if any) ) as are contained in the Primary Policy. The Primary and Underlying Policy will be maintained in full effect during the currency of this Policy , except for any reduction of the aggregate limits contained therein solely by payments of claims made within the terms and conditions of the Primary and Underlying Policy. This Policy shall not automatically follow the settlements in discharge of the limits of liability of the Primary and/or Underlying Policy. (emphasis added)
2. Condition 8 No amendment to the Primary or Underlying Policy during the Period of Insurance, in respect of which the primary or underlying insurers require an additional premium or a deductible, shall be effective in extending the scope of cover of this Policy unless and until agreed in writing by the Company.

Analysis

1. Did the applicant/insured have an option right to extend the term of the Excess Policy?

[42] The respondent asserts that the Excess Policy had no OEP option and that such option could not be incorporated into the Excess Policy by reference to the Primary Policy. I disagree. The respondent’s submission is not supported by a plain reading of the terms of the Primary Policy and the Excess Policy. The OEP in the Primary Policy clearly states that if the Policy is not renewed, the insured shall be entitled to the extension upon payment of the additional premium.

[43] The OEP is referred to on page 1 of the Declarations of the Policy and described in detail, in four subsections, at paragraph VI. (F) of the Primary Policy.

[44] The Excess Policy follows form with the Primary Policy “(except as regards the premium, the amount and limits of liability, any deductible or self-insurance provision, the obligation to investigate and defend and the renewal agreement (if any)).” Notably, Condition 2 of the Excess Policy does not exclude the OEP option. Accordingly, I find that the OEP is included in the Excess Policy. Absent the specific exclusion of the OEP, it would have been in the reasonable expectations of both parties that if either Policy were not renewed, the applicant/insured would have the right to exercise the OEP option.

[45] The respondent argues that, in accordance with Condition 2, the Excess Policy does not follow form with respect to the premium, and that the absence of an explicit payment term creates an ambiguity that permits it to exclude the entire OEP option from the Excess Policy. Under this interpretation, the applicant would be denied access to the additional coverage available through the OEP.

[46] As set out by the Supreme Court of Canada in Non-Marine Underwriters, Lloyd’s London v. Scalera, 2000 SCC 24, 1 S.C.R. 551 at para. 71, citing Consolidated Bathurst Export Ltd. v. Mutual Boiler & Machinery Insurance Co., [1980] 1 S.C.R. 888 at p. 901, contracts are to be interpreted so as to give effect to their terms, and in a commercially reasonable manner. To deny the applicant access to the OEP coverage would be to deny the applicant an important component of the insurance for which it contracted.

[47] This approach was adopted in Re Canada 3000 Inc., [2002] 35 C.B.R. (4th) 37 (Ont. SCJ). In that case, this court was asked to determine whether an OEP option had been properly exercised, and to determine the amount of the applicable premium. In Canada 3000, the excess insurer appears to have agreed that the OEP was available. The issue was, therefore, whether the provisions relating to the calculations of the premium under the Primary Policy extended to the Excess Policy. However, in interpreting the policies generally, Justice Ground held at para. 10, that, based on the language used in the policies, “[e]xcept as regards the premium, and the amounts and limits of liability” the excess policy was “subject to the same insuring clauses, definitions, terms, conditions, exclusions and other provisions as those set forth in the Primary Policy.”

[48] A similar analysis should apply in this case. Condition 2 of the Excess Policy does not exclude the OEP. It excludes “the premium, the amounts and limits of liability, any deductible or self-insurance provision, the obligation to investigate and defend and the renewal agreement (if any).” The respondent could have included the OEP in the list of exclusions, but it did not.

[49] The respondent also argues that the OEP option results in a policy renewal, and a renewal is a specific exception covered by Condition 2. Therefore, it asserts, the OEP is excluded under Condition 2 on this basis also. I do not agree that the extension afforded by the OEP is a renewal. The OEP merely extends the discovery period. A policy renewal, by contrast, creates a new policy on new terms, with potentially fresh limits, and, unlike an OEP, would cover claims for wrongful conduct following the termination of the expiring policy. In this case, the applicant was specifically denied the chance to renew both the Primary Policy and the Excess Policy. It was the non-renewal event that triggered the right to exercise the OEP.

[50] The respondent also submits that Condition 8 is relevant because the Primary Policy was amended. The amendment required an additional premium and expanded the scope of cover to claims made for wrongful acts after the original term of insurance. It asserts that Condition 8 prohibits the applicant/insured from unilaterally electing to extend coverage and that such extension can only be obtained with written consent of the respondent/insurer, which was not sought or provided.

[51] The respondent further asserts that this amendment of the Primary Policy resulted in a change to Primary Policy contrary to Condition 2. Condition 2 requires that the Primary Policy “be maintained in full effect during the currency of this Policy.” I do not agree that the Primary Policy was amended in a way that affects the excess coverage to be provided by the respondent through the Excess Policy as a consequence of the applicant’s exercise of the OEP option. In my view, the Primary Policy is being maintained during the currency of the Excess Policy, but its term has been extended by thirteen months.

[52] While the extension of the Primary Policy creates additional coverage for the insured under the Primary Policy, in my view, the amendment does not and cannot change the scope of the cover to be provided by the Excess Policy. Condition 8 specifically provides that the scope of cover cannot be changed without the written consent of the insurer.

[53] It is undisputed that the respondent did not provide its written consent to the amendment to the Primary Policy. Therefore, it did not agree to any change to the scope of the cover, and it would not be bound by any such change. The coverage under the OEP to be provided by the respondent would continue to be limited to wrongful conduct that occurred prior to the expiry of the Primary Policy; but the discovery period for those claims would be extended by an additional twelve months. Any effect of the amendment to the Primary Policy that could, potentially, expand the scope of cover of the respondent could not be unilaterally imposed on the respondent. It was not a party to the amendment and it did not agree to the amendment or any impact on its coverage as a consequence of such amendment.

[54] The applicant conceded that only losses from claims arising from wrongful conduct that occurred prior to the expiry of the Excess Policy on February 27, 2020 should erode the Primary Policy limits for the purposes of determining when the Excess Policy limits are engaged.

[55] I note that the terms of the extension of the terms of the Primary Policy were disclosed to the respondent on February 26, 2020. The respondent raised no objection to the extension at that time. At no time during the discussions between the parties did it assert this extension somehow invalidated the OEP option.

2. Did the applicant/insured successfully exercise its option?

[56] A helpful discussion on the determination on this point is included in Justice Ground’s decision in Canada 3000. Justice Ground found at para. 11, that the term “premium” in the list of exclusions did not exclude the OEP option or the formula for determining the additional premium amount in the primary policy, nor did it provide its own formula for determining the additional premium amount payable. Justice Ground further found at para.18, that the exclusion of “premium” related only to the “specific quantum of the premium that the insured originally paid to acquire the primary coverage” and that if the insurer had intended to exclude the provisions of the primary policy as they related to the discovery period, the additional premium and the formula for calculating the premium, it could have addressed these matters in the excess policy. Justice Ground therefore applied the formula for the OEP in the primary policy, which was capped at 225% of the full annual policy, to the excess policy.

[57] I find that the same analysis should apply in the case at bar. While there is no “formula” per se in the Primary Policy, the premium for the OEP is stated to be “USD$1,500,000.00”, being twice the Policy Premium, which is stated to be “USD$750,000.00.”

[58] The respondent argues that the word “premium” in Condition 2 is ambiguous. Specifically, the respondent argues that because “premium” is included as an exclusion, the calculation of the premium for the OEP under the Excess Policy cannot follow form with the Primary Policy.

[59] I do not find an ambiguity in the use of the word “premium” as set out in Condition 2. The term is singular, which leads to the logical conclusion that it refers to the original premium paid at the time the Excess Policy was purchased. If the language was intended to also include the premium related to the OEP option, the word “premiums” would have been the more appropriate term to include in Condition 2. If the respondent had intended to also exclude the additional premium payable for the extension, it could have included that exclusion in Condition 2, but it did not.

[60] The respondent asserts that even if the OEP provision is included by reference in the Excess Policy, the respondent should have the right to fix the premium. It asserts that this must be the case, especially in light of the Claims of which it became aware following the expiry of the Excess Policy.

[61] I disagree. The premium is determined at the time the policy is written, not when the loss arises. The respondent had the opportunity to assess the risk for the February 27, 2019 to February 27, 2020 period when it negotiated the Excess Policy. The OEP extends the period during which claims may be made, but the wrongdoing must have occurred during that initial term. That risk was priced into the Excess Policy when it was written. The OEP does not alter this risk.

[62] Further, the factual context for the discussion of the premium for the Excess Policy during the policy renewal phase does not favour the respondent’s position. At that time, when Aon was seeking to include a provision in the new policy stipulating that the cost of the OEP in the Excess Policy would be twice the original premium paid by the insured for the Excess Policy, Mr. Perkins made no objection. In fact, he stated that 200% of the policy premium was the “norm” for the cost of the OEP to which the respondent was agreeing at that time.

[63] As early as March 12, 2020, the applicant alerted the respondent that it was considering its right to exercise the OEP option. At that time, it made a request for the premium the respondent would charge. It got no reply.

[64] Nearing the end of the period during which the applicant could exercise its option, on March 25, 2020, the applicant gave the written notice it was required to give to exercise its OEP option to extend the discovery period. Again, there was no response from the respondent.

[65] Accordingly, based on the applicant’s interpretation of the OEP formula in the Primary Policy, carried forward to the Excess Policy, it applied the same 1:2 ratio to determine the premium for the OEP in the Excess Policy. The applicant doubled the original premium paid on the Excess Policy (USD$243,000) and converted that amount to Canadian dollars. It delivered a bank draft in the amount of CAD$704,700 in payment of the premium to the respondent before the expiration of the 30-day prescribed period. This approach was consistent with the only input the applicant had had from respondent on the quantum of the premium, being Mr. Perkins’ representation made in the context of the renewal of the policies. In my view, in all of the circumstances, the applicant’s payment of a CAD$704,700 premium to the respondent was commercially reasonable.

[66] The respondent made no attempt to negotiate for a higher premium upon delivery of the bank draft.

[67] The applicant further submits that if the respondent believed that there was an ambiguity in the Excess Policy with respect to the premium required to exercise the OEP, it had a duty to negotiate with the applicant to resolve the ambiguity and determine the additional amount to be paid, which it failed to discharge.

[68] As noted, the Supreme Court of Canada has emphasized the importance of considering commercial reality and the “desirability of giving effect to the reasonable expectations of the parties”: Non-Marine Underwriters at p. 901. The court should prefer an interpretation that promotes a sensible commercial result over one that defeats the intentions of the parties and their objective in entering into the transaction: Consolidated Bathurst Export Ltd v. Mutual Boiler and Machinery Insurance Co. (1979), [1980] 1 S.C.R. 888 at para. 71.

[69] For the applicant, the OEP offered an important set of coverage rights at a time when its insurance coverage would not be renewed.

[70] The Supreme Court of Canada recognized the principle of good faith in contractual performance in Bhasin v. Hrynew, 2014 SCC 71, 3 S.C.R. 494. In accordance with this principle, a contracting party is to have regard to the legitimate contractual interests of the contracting partner. In Bhasin, the Supreme Court of Canada also recognized that insurance contracts are a class of relationship that calls for a duty of good faith to be implied by law because the relationship between the parties is more than a transactional exchange. It is in the nature of a long-term contract of mutual consideration.

[71] In Usanovic v. Pencorp Life Insurance Company, 2017 ONCA 395, 138 O.R. (3d) 462 at para. 27, the Ontario Court of Appeal held that because an insurance claim will typically be made by someone in a vulnerable situation, the potential for an insurer to exploit this reliance and vulnerability has led courts to affirm that an insurer must give as much consideration to the welfare of the insured as to its own interests.

Disposition

[72] For the reasons given, I declare that the applicant Cronos Group Inc. had the right to exercise the Optional Extension Period option under the terms of the Excess Policy. The right was enforceable against the respondent Assicurazioni Generali S.P.A., and the applicant successfully exercised that right by complying with each of the option requirements, including all applicable notice requirements.

[73] I also declare that the cost of the Optional Extension Period is to be calculated at twice the original premium for the Excess Policy (USD$243,000), applying the 1:2 ratio as set out in the Primary Policy.

Costs

[74] The applicant has succeeded in this application and is entitled to its costs. The parties are strongly encouraged to agree on the matter of costs. If they are unable to do so, they may arrange a 9:30 am chambers appointment to schedule a hearing on the matter of costs.

Dietrich J.

Released: March 16, 2021