Court File and Parties
COURT FILE NO.: 17-73224 GARNISHMENT NO.: 04700cv20a010320-46 DATE: 2022-02-24 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: 1770650 Ontario Inc. and 1062484 Ontario Inc., Creditors AND Paul McEnery, Debtor AND Lawyers’ Professional Indemnity Company, Garnishee
BEFORE: The Honourable Mr. Justice Marc Smith
COUNSEL: Justin Papazian, Counsel for the Creditors No appearance for the Debtor Valerie A. Edwards, Counsel for the Garnishee
HEARD: December 2, 2021 by video conferencing
Reasons for Decision
M. Smith J
Overview
[1] 1770650 Ontario Inc. (“177 Ontario”) and 1062484 Ontario Inc. (“106 Ontario”) (collectively referred to as the “Creditors”) move pursuant to r. 60.08 (16) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (the “Rules”) for a determination of their entitlement to the proceeds of a policy of insurance issued by the Lawyers’ Professional Indemnity Company (“LawPro” or “Garnishee”) in favour of Mr. Paul McEnery (“McEnery” or “Debtor”). The Creditors seek an order that the Garnishee pays out the proceeds of the policy in satisfaction of the debt owed.
[2] On February 7, 2020, R. Bell J. rendered a summary judgment against McEnery in favour of 177 Ontario and 106 Ontario, in the amounts of $241,000 and $380,000, respectively, plus interest and costs: see 1062484 Ontario Inc. v. Williams McEnery, 2020 ONSC 825.
[3] The total sum owing to 177 Ontario by McEnery is $265,434.53.
[4] The total sum owing to 106 Ontario by McEnery is $419,440.52.
[5] LawPro is an insurance company providing professional liability insurance to lawyers in Ontario. McEnery was a lawyer in Ontario and was an insured person under LawPro policy 2015-001 (the “Policy”). McEnery practiced law under the banner Williams McEnery (the “Firm”).
[6] In April 2018, McEnery was disbarred after the Law Society of Ontario (“LSO”) found that he had wrongfully and intentionally misapplied or misappropriated approximately $2,500,000 in trust funds.
[7] The Policy provided for coverage up to a limit of $1,000,000 per claim and a limit of $2,000,000 in the aggregate. However, it is conceded by the Creditors that because of McEnery’s dishonesty, Endorsement No. 5 of the Policy is triggered. This means that the limits fall to a “sublimit” of $500,000.
[8] The limits under the Policy are reduced by payments made for defence counsel, experts, investigators, and indemnity.
[9] The entire $500,000 sublimit has been exhausted through the investigation expenses and defence costs of the two (2) law firms retained by McEnery and Williams McEnery. An indemnity payment was made to the Creditors in the amount of $27,123.63.
[10] The issues to be determined are: a. Is the sublimit of $500,000 the aggregate limit or does the Policy provide for coverage of $500,000 per claim? b. Did LawPro erode the Policy limits?
[11] For reasons that follow, I find that the Policy provides for coverage of $500,000 in the aggregate and LawPro did not erode the Policy limits.
The Relevant Policy Provisions
[12] The relevant Policy provisions are set out below:
Part I INSURANCE COVERAGE
A. DAMAGES To pay on behalf of the INSURED all sums which the INSURED shall become legally obligated to pay as DAMAGES arising out of a CLAIM, provided the liability of the INSURED is the result of an error, omission or negligent act in the performance of or the failure to perform PROFESSIONAL SERVICES for others.
B. Defence, settlement, expenses:
- Subject to subparagraph no. 2 herein, the INSURER will, in respect of such coverage as provided by this POLICY: a) Defend any CIVIL SUIT against the INSURED; b) Investigate any CLAIM against the INSURED and have the right to make such settlement of any CLAIM in the INSURER’S sole and absolute discretion, after giving notice of its intention to settle to the INSURED; c) pay, i. all expenses incurred by the INSURER for investigation and defence; ii. all costs awarded against the INSURED in any CIVIL SUIT defended by the INSURER; iii. in any CIVIL SUIT, premiums on required appeal bonds and premiums on bonds to release attachments, for bond amounts not exceeding the applicable LIMIT OF LIABILITY, AGGREGATE LIMIT OF LIABILITY or SUBLIMIT(S) OF LIABILITY of this POLICY, provided that the INSURER shall not have any obligation to apply for or furnish any such bonds; and iv. pay all reasonable expenses, other than loss of earnings, incurred by the INSURED at the INSURER’S request.
Part III EXCLUSIONS TO THE INSURED’S COVERAGE This POLICY does not apply: a) to any CLAIM in any way relating to or arising out of any DISHONEST, fraudulent, criminal or malicious act or omission of an INSURED.
Part IV GENERAL CONDITIONS
A. LIMIT OF LIABILITY The INSURER’S LIMIT OF LIABILITY shall be governed by this Condition.
With respect to such insurance as is afforded under Part I Coverages A and B of this POLICY, the LIMIT OF LIABILITY stated in the Declarations as ITEM 5, inclusive of DEDUCTIBLE, is the total limit of the INSURER’S liability per CLAIM per POLICY PERIOD, except where coverage is afforded under Endorsement Nos. 5, 6, 7, 11 and 14, in which case the applicable SUBLIMIT OF LIABILITY is the total of the INSURER’S liability in respect of that coverage per CLAIM per POLICY PERIOD. In regard to Endorsement No. 8, the LIMIT OF LIABILITY is $250,000 per claimant per POLICY PERIOD.
With respect to such insurance as is afforded under Part I Coverage C of this POLICY, a SUBLIMIT OF LIABILITY of $100,000 applies, inclusive of DEDUCTIBLE, and is the total limit of the INSURER’S liability per CLAIM per POLICY PERIOD in respect of that coverage.
The inclusion of more than one INSURED in this POLICY shall not operate to increase the INSURER’S LIMIT OF LIABILITY or SUBLIMIT(S) OF LIABILITY per CLAIM, except where one or more CLAIM(S) arising out of the same or RELATED ERROR(S), OMISSION(S) OR NEGLIGENT ACT(S) were made jointly and severally against two or more INSUREDS who were members of different LAW FIRMS at the time that the earliest error(s), omission(s) or negligent act(s) took place, then the LIMIT OF LIABILITY or SUBLIMIT(S) OF LIABILITY shall apply separately in respect of each LAW FIRM.
C. DEDUCTIBLE: The INSURER’S obligation to pay on behalf of the INSURED applies only to those amounts in excess of the INSURED’S DEDUCTIBLE as defined in Part V Definition (j), as applicable to each CLAIM, subject to the following additional provisions:
Part V DEFINITIONS d) CLAIM(S) means: i) a written or oral demand for money of services; or ii) a written or oral allegation of breach in the rendering of or failure to render PROFESSIONAL SERVICES; received by the INSURED and resulting from a single error, omission or negligent act or RELATED ERROR(S), OMISSION(S) OR NEGLIGENT ACT(S) in the performance of or failure to perform PROFESSIONAL SERVICES.
ALL CLAIMS, or circumstance of an error, omission or negligent act which any reasonable LAWYER or LAW FIRM would expect to subsequently give rise to a CLAIM, which arise from a single error, omission or negligent act or RELATED ERROR(S), OMISSION(S) OR NEGLIGENT ACT(S), shall be deemed a single CLAIM regardless of the number of INSUREDS or the number of persons or organizations making a CLAIM or the time or times the error(s), omission(s) or negligent act(s) took place.
(hh) RELATED ERROR(S), OMISSION(S) OR NEGLIGENT ACT(S) means error(s), omission(s) and/or negligent act(s) that have any common facts, circumstances, situations, events, transactions, causes and/or series of causally or otherwise connect facts, circumstances, situations, events, transactions, and/or causes.
Endorsement No. 5 INNOCENT PARTY COVERAGE & LEVY SURCHARGE A. Coverage Subject to the SUBLIMIT OF LIABILITY, exclusions and other terms and conditions contained herein, any DISHONEST, fraudulent, criminal or malicious act or omission (hereinafter referred to as an “OTHERWISE EXCLUDED ACT(S) OR OMISSION(S)”) of an INSURED, or the INSURED’S vicarious or other liability for the OTHERWISE EXCLUDED ACTS OR OMISSIONS of others, arising out of the provision of PROFESSIONAL SERVICES for others, is deemed to be an “error, omission, or negligent act” as referred to in Part I Coverage A and throughout the POLICY, notwithstanding Part III Exclusion (a) of the POLICY.
i) SUBLIMIT OF LIABILITY The amount of coverage provided with respect to this endorsed coverage shall be as set out in ITEM 8 of the INSURED’S Declarations as the SUBLIMIT OF LIABILITY. For greater clarity, this SUBLIMIT OF LIABILITY is included within the LIMIT OF LIABILITY and AGGREGATE LIMIT OF LIABILITY of the INSURER, as set out in ITEMS 5 and 6 of the Declarations. This SUBLIMIT OF LIABILITY is also included within the SUBLIMIT OF LIABILITY for Endorsement No. 8.
[13] On October 10, 2014, LawPro provided the Declarations to McEnery. The relevant portions of the Declarations are set out below:
DECLARATIONS
ITEM 5. LIMIT OF LIABILITY $1,000,000 per CLAIM, subject to Part IV Condition A and any POLICY endorsement(s) that apply to the INSURED.
ITEM 6. AGGREGATE LIMIT OF LIABILITY $2,000,000 per POLICY PERIOD, subject to Part IV Condition B and any POLICY endorsement(s) that apply to the INSURED.
ITEM 8. MODIFICATIONS TO COVERAGE Innocent Party Coverage – SUBLIMIT OF LIABILITY of $500,000 per CLAIM and in the aggregate per POLICY PERIOD, shall apply pursuant to Endorsement No. 5.
Issue #1: Is the sublimit of $500,000 the aggregate limit or does the Policy provide for coverage of $500,000 per claim?
Legal Principles
[14] In Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, the Supreme Court of Canada provides the general principles of insurance policy interpretation, at paras. 21 to 24. These principles can be summarized as follows: a. When the language of the policy is unambiguous, the court should give effect to clear language, reading the policy as a whole. b. Where the language of the policy is ambiguous, the court relies on general rules of contract construction. Courts should avoid interpretations that would give rise to an unrealistic result or that would not have been in the parties’ contemplation at the time the policy was concluded. c. When the rules of contract interpretation fail to resolve the ambiguity, courts will construe the policy contra proferentem, being against the insurer.
Position of the parties
[15] The Creditors say that there are two (2) distinct and unrelated claims. The claims of 177 Ontario and 106 Ontario each resulted from a single error, omission, or negligent act. As such, there are two (2) claims as defined in the Policy.
[16] The Creditors argue that Part IV A of the Policy provides a sublimit of $500,000 per claim, referring to the wording in the Policy that says: "the applicable SUBLIMIT OF LIABILITY is to the total of the INSURER'S liability in respect of that coverage per Claim per POLICY PERIOD."
[17] LawPro responds that it is irrelevant if the claims are separate and unrelated. It is not necessary to make that determination because the issue is whether the $500,000 sublimit is the aggregate limit.
[18] LawPro argues that the limits of the Policy are not set out in the text of the Policy. It is necessary to turn to the Declarations. Item 8 of the Declarations clearly sets out that it is an aggregate amount: "SUBLIMIT OF LIABILITY of $500,000 per CLAIM and in the aggregate per POLICY PERIOD".
Analysis
[19] I do not find the Policy to be ambiguous. I reach this conclusion for the following reasons.
[20] First, I agree with the Creditors that they each have separate and distinct claims within the meaning of the Policy. The claims advanced by 177 Ontario and 106 Ontario have different fact patterns and are unrelated to one another. The only common denominator is their dealings with McEnery.
[21] Second, even if there are two (2) separate claims arising from two (2) separate errors, omissions, or negligent acts, the Creditors are nonetheless subject to the limits of the Policy.
[22] Third, because McEnery committed a dishonest act, Endorsement No. 5 is triggered. Paragraph A (i) clearly states that the available amount coverage is set out in item 8 of the Declarations. There is no ambiguity in this wording.
[23] Fourth, item 8 of the Declarations refers to the Innocent Party Coverage of $500,000 that was increased from the mandatory sublimit of $250,000. While the wording specifies that the sublimit of $500,000 is "per Claim" it is immediately followed by the words "in the aggregate". Unlike items 5 and 6 of the Declarations that specify two (2) amounts, namely $1,000,000 of limits and $2,000,000 in the aggregate, item 8 has but one amount, namely $500,000. On its plain reading, the maximum coverage available for all claims is limited to $500,000.
[24] Fifth, if the Creditors' position was accepted, it would give rise to an absurd result. Say that there were ten (10) separate and distinct claims, and that the insured committed a dishonest act, the available coverage would increase to $5,000,000, being the sublimit of $500,000 multiplied by ten (10) claims. This would effectively remove all together the aggregate. The Creditors' response is that the aggregate is not removed. The Creditors argue that the aggregate limit of liability has already been fixed at $2,000,000 in accordance with the Policy. I disagree. That argument is flawed because the $2,000,000 aggregate limit of liability pertains to a negligent lawyer, not a dishonest one. As soon as Endorsement No. 5 is triggered, the available coverage, including the aggregate, must be the limits that are set out in item 8 of the Declarations and not items 5 and 6 of the Declarations.
[25] The Creditors advance a further ambiguity argument. They state that at the beginning of Part IV General Conditions of the Policy, it reads "The INSURER'S LIMIT OF LIABILITY shall be governed by this Condition." The Creditors say that in this Condition, there is no reference to the wording "per claim and in the aggregate", while in the Declarations, it does use these terms. Therefore, the Creditors say an ambiguity exists, and it must be construed against the insurer.
[26] I fail to see the ambiguity. There are no competing limits set out between Part IV General Conditions and the Declarations. Part IV General Conditions uses clear language to say that the limits of liability are those stated in the Declarations. That is not confusing. To the contrary, it is quite clear that to determine the limits, one must turn to the Declarations.
[27] In summary, I am satisfied that when reading the Policy as a whole, the sublimit of $500,000 is in the aggregate. Otherwise, the absurd result would be that a dishonest lawyer's coverages would be significantly higher than a negligent lawyer's coverages.
Issue #2: Did LawPro erode the Policy limits?
Legal Principles
[28] A creditor that has an order for payment or recovery of money may, pursuant to r. 60.08 of the Rules, enforce it by garnishment of debts. The law is clear that an insurer’s obligation to pay insurance monies to its insured is a debt that can be garnished: see Abuzour v. Heydary, 2014 ONSC 6229 at paras. 18 to 29.
[29] It is mandatory for lawyers in Ontario who practice in a firm to carry innocent party coverage. Mandatory insurance policies should be interpreted in a way that compliments their public policy and remedial nature: see Abuzour v. Heydary, at paras. 26 and 27.
[30] When dealing with an eroding policy, an insurer and its counsel owe a duty of faith to its insured to settle the claim within the policy and cannot simply erode the limits on defence costs: see Aecom Canada Ltd. v. Fisher, 2019 SKQB 198 at paras. 32 and 33.
[31] In garnishment proceedings, a creditor stands in the shoes of the insured. Therefore, the creditor’s rights can be no greater than the insured’s rights: see Caputo v. Novak and Lawyers Professional Indemnity Company, 2019 ONSC 1283, at paras. 6 and 28.
Position of the parties
[32] The Creditors say that there is no evidence to support erosion of the Policy limits. The innocent party coverage insurance is mandatory for lawyers in Ontario and it exists for the protection of the public. The Creditors argue that it is not reasonable to interpret the Policy in a manner that would result in the entire $500,000 sublimit being eroded by defence costs with no consideration being given to the interest of the members of the public it is meant to protect.
[33] The Creditors submit that LawPro’s costs expended in defending their actions and motion for summary judgment were excessive, especially when there was little chance of success. LawPro should have settled the matters, rather than spending the entirety of the Policy limits.
[34] The Creditors argue that McEnery’s defence costs should not have been more than $10,000, considering the following: that McEnery filed a seven (7) paragraph statement of defence, McEnery did not file any responding materials on the Creditors’ motion for summary judgment, and the other legal proceedings against McEnery resolved without many steps taken being taken in those matters. Regarding the Firm, the Creditors say that the defence costs should not have exceeded $75,000.
[35] LawPro recognizes that its insurance program protects both the lawyers and the public. However, LawPro says that the Courts have recognized that an insurer does not owe a general duty of care to a third party who sues an insured person.
[36] LawPro reminds the Court that the frauds committed by McEnery were overwhelming and complicated, requiring a massive investigation. Importantly, McEnery had no recollection of any improper transactions and at no time, did he ever admit taking the money. McEnery claimed that his memory loss was due to a stroke. LawPro owed a duty to McEnery and they proceeded to defend him on that basis.
Analysis
[37] On the evidentiary record before me, I am satisfied that LawPro did not erode the Policy limits.
[38] The unique facts of this case must be considered. Once it was reported by one of the partners in the Firm that McEnery may have committed fraud, LawPro wrote to McEnery that it did not have sufficient information to determine its coverage position, but it was reserving its right to rely on the dishonesty exclusion in the Policy. LawPro appointed counsel to defend McEnery as well as separate counsel to defend the Firm.
[39] In my opinion, given the serious allegations against McEnery, appointing two (2) separate counsel was reasonable and necessary because the Firm was clearly adverse in interest to McEnery. R. Bell J. expressed the same view in her Costs Endorsement (1062484 Ontario Inc. v. Williams McEnery, 2020 ONSC 3861), where the Creditors argued that McEnery and the Firm should not have been separately represented. In rejecting this submission, R. Bell J. found that McEnery and the Firm were in a conflict of interest, necessitating separate representation.
[40] There were nine (9) proceedings commenced against McEnery and the Firm. Some claims were straightforward while others were complex. McEnery was not helpful in the defence of these claims because he had no memory of what had transpired. At one point, the Public Guardian and Trustee needed to be appointed as litigation guardian. McEnery was not able to explain or provide context regarding any of the claims made against him or advise what happened to the funds that had been advanced by the clients. This caused a significant challenge for defence counsel.
[41] I am mindful that only two (2) of the nine (9) matters proceeded to discoveries and/or motions, but the efforts expended by counsel over five (5) years cannot be trivialized. The work undertaken by counsel was necessary and significant. To properly defend McEnery and the Firm, counsel needed to fully investigate the fraud perpetrated by McEnery. The steps taken by counsel, included, amongst other things, the following: a. Retrieval of McEnery’s financial records, documents, emails, and voicemails. It was discovered that there were nine (9) separate bank accounts, in nine (9) different financial institutions. A motion was brought to compel McEnery and his family to produce, or authorize others to produce, copies of the financial records. Counsel received bank or visa records relating to approximately 18 separate accounts and numbering over 2000 pages of entries. b. Review and consider the analysis of the bank records by the forensic accountants to assist in the tracing of client funds. c. McEnery’s files were seized by LSO. As the claimants came forward, the relevant files had to be retrieved from LSO and analyzed thoroughly. d. As is customary, counsel for McEnery and the Firm were required to report to LawPro and address the issues of liability, damages, and loss prevention. Understandably, some of these reports were comprehensive and time consuming. e. Although there were some similarities in the various legal proceedings, the factual matrix was complicated and differed from case to case. Counsel needed to familiarize themselves with each unique claim, which ranged from bridge loan financing, administration and the release of estate funds, direct loans to McEnery, misapplication of funds payable to a mortgagee, transfer of title into McEnery’s own name, and distribution of trust funds arising out of a real estate transaction. f. In addition to the allegations against McEnery for misallocation or misapplication of funds, counsel needed to address specific claims made against the Firm, including failure to properly supervise McEnery, failure to ensure that proper mechanisms were in place to ensure the proper handling of funds, and failure to identify McEnery’s mishandling of funds. g. Numerous pleadings were prepared in relation to the various legal proceedings. Claims were initiated by the Firm against third parties and a financial institution, for contribution and indemnity. h. Eight (8) of the plaintiffs prepared affidavits of documents in their respective matters. Counsel needed to prepare affidavits of documents for these matters. i. Counsel were required to maintain and engage in continuous email communication with LawPro, representatives of the Firm, opposing counsel (at least seven (7) lawyers), third parties and third-party professionals. j. 177 Ontario and 106 Ontario brought motions for summary judgment. Counsel for McEnery and the Firm prepared and attended at these motions. Judgment was obtained against McEnery but not against the Firm.
[42] There were 152 invoices submitted to LawPro by various professionals. Between January 2016 until May 2018, ClaimsPro, the adjusting company, billed a total of $12,151.40. Ms. Treacy Sorel was the Firm’s office manager and she provided administrative services that amounted to $10,988.12. Matson Driscoll & Damico Ltd. billed $22,852.56 for their forensic accounting work. The largest expenditure by far, were the legal costs. Collectively, counsel for McEnery and the Firm billed $426,714.79 between June 2016 until the end of year 2020, inclusive of H.S.T. and disbursements.
[43] The legal fees may appear to be significant, but this was not a simple case to bring to a quick resolution. Determining if a dishonest act was committed by McEnery could not have been accomplished without considerable investigation. Such an investigation was time consuming and costly. To suggest that LawPro should have been able to conclude at the initial stages of its involvement that McEnery was a dishonest lawyer, not only ignores LawPro’s duty towards McEnery but it is not supported in the evidence.
[44] The Creditors suggest that LawPro acted unreasonably in not settling the claims. Unlike the Aecom Canada Ltd. v. Fisher case, there is no expert evidence before me that LawPro fell below the standard of care, such that they improperly conducted themselves in the investigation and defence of the claims against McEnery and the Firm.
[45] Furthermore, there is no evidence before me that the Creditors or the other plaintiffs made an offer to settle. More specifically, there is no evidence that the Creditors and/or the plaintiffs were prepared to globally settle the claims within the Policy limits.
[46] The added difficulty is that, until recently, the parties disagreed about the available limits under the Policy. The Creditors were taking the position that McEnery and the Firm were each entitled to $1,000,000 coverage. To my understanding, approximately one (1) week before this motion, the Creditors conceded that the Endorsement No. 5 was properly triggered because of McEnery’s dishonest act. By the time that the Creditors made this concession, the entire $500,000 sublimit had been expended. On these facts, I fail to see that there was a reasonable opportunity to settle.
[47] While I am empathetic to the Creditors’ situation that they are unable to fully recover their losses, I do not find that it is because of LawPro’s conduct. In the unique and complex circumstances of this case, LawPro acted reasonably in defending McEnery’s interests. I am not satisfied on the evidence before me that LawPro fell below the standard of care.
Conclusion
[48] For the reasons described above, the Policy limits are reduced to one $500,000 sublimit and because the sublimit has been exhausted through defence costs and an indemnity payment to the Creditors, there are no more insurance proceeds payable under the Policy. The Creditors’ motion is dismissed.
[49] I encourage the parties to agree on the costs of this motion. If not, LawPro may serve and file written costs submission of no more than three (3) pages (excluding the Bill of Costs and Offers to Settle), within 30 days of the release of this decision. The Creditors may serve and file their responding costs submission, with the same page restriction, within 30 days thereafter.
