Court File and Parties
Court File No.: CV-22-688655-0000 Date: 2023-10-17 Superior Court of Justice - Ontario
Re: Oscar Furtado, Applicant And: Lloyd’s Underwriters, Respondent
Before: J.T. Akbarali J.
Counsel: Gordon McGuire, for the applicant Eric Dolden and Paul C. Dawson, for the respondent
Heard: October 10, 2023
Endorsement
Overview
1The applicant was covered by what amounts to a Director and Officers’ Liability Policy issued by the respondent. He has made a claim under the policy for, among other things, defence costs related to two ongoing proceedings commenced by the Ontario Securities Commission (“OSC”). The respondent has denied coverage on the basis that the applicant did not provide notice of the claims in accordance with the terms of the policy such that a condition precedent to coverage has not been met.
2The applicant seeks relief from forfeiture with respect to what he argues is his imperfect compliance with the terms of the insurance policy, and an order directing the respondent to indemnify him for his defence costs and other loss with respect to the two ongoing proceedings.
3The respondent argues that relief from forfeiture is not available for what it describes as the applicant’s non-compliance with a condition precedent in the policy. In the alternative, the respondent argues that the court ought not to exercise its discretion to grant relief from forfeiture, because the applicant behaved unreasonably in failing to give notice pursuant to the terms of the policy.
Background
4The applicant is the directing mind of a real estate development business known as Go-To Developments Holdings Inc. (“Go-To”).
5The respondent is a syndicate of the Lloyd’s insurance marketplace carrying on business as Neon Syndicate (“Neon”).
6Neon issued a series of insurance policies, in the nature of Directors’ and Officers’ insurance, to Go-To, effected through Miller Insurance Services LLP (“Miller”). The policies were in effect during consecutive periods from October 6, 2016, through to November 10, 2021. Thereafter, Go-To purchased insurance through a different syndicate of the Lloyd’s insurance marketplace, also effected through Miller.
7The policies issued by Neon are claims-made policies; that is, they provide coverage for “Claims” alleging a “Wrongful Act” that are first made during the “Policy period” (capitalized terms are defined terms in the policy). The policy limit each year was $5,000,000.
8The policy at issue in this case had a policy period of October 6, 2018 to October 25, 2019. That policy includes a section entitled “How to Give Notice and Report a Claim, Loss or Circumstance”, which is central to the issues in this litigation. It provides that the insurer’s liability under the policy is conditional on receiving notice of a Claim during certain specified timeframes:
The Insured shall, as a condition to liability of the Insurer, give written notice of any Claim to the Insurer as soon as practicable either:
i) During the Policy period or within 30 days after the expiry of the Policy period; or
ii) If applicable, during the Discovery period.
9The section also contains what is referred to as a notice of circumstances clause, which has the effect of allowing an insured to report to the insurer a fact or circumstance that may give rise to a Claim or allegation of a Wrongful act in the future. Pursuant to the policy, having done so, any future Claim or allegation of a Wrongful act related to a fact or circumstance reported during the Policy period will be considered to be a Claim or allegation of a Wrongful act first made during the Policy period. In other words, reporting a fact or circumstance during the Policy period that later gives rise to a Claim allows an insured to protect its claim for coverage related to such a Claim under the policy extant when the circumstance first arose:
If during the Policy period, or if applicable, the Discovery period:
- the Insured becomes aware of any fact or circumstance which may reasonably be expected by the Insured to give rise to a Claim or an allegation of a Wrongful act and the Insured gives notice in writing to the Insurer of the fact or circumstance … then any Claim or allegation of Wrongful act which is subsequently made against the Insured and reported in writing to the Insurer based upon …a common nucleus of facts or circumstances contained in such fact or circumstance notification shall be considered a Claim first made against the Insured and/or notice of a Wrongful act having been first reported to the Insurer at the time the written notice of the fact or circumstance was first given to the Insurer.
10Also important for purposes of this case is the clause contained in the same section of the policy, which I will refer to as the suspension clause. This clause acknowledges that there are some circumstances, such as during certain regulatory investigations, when an insured cannot give notice to the insurer in accordance with the policy, and provides for a suspension of the obligation to give notice under certain circumstances. It also provides that any Claim arising out of such an investigation that is subsequently made will be considered to have been made during the applicable Policy period when the investigation was first started. It states, in part:
…should the Insured be involved in an investigation by a Regulator, the above requirement to notify Claim [sic] or notice of an alleged Wrongful act may be suspended whilst communication or notification is prohibited by confidentiality orders imposed by law enforcement agencies or such Regulator. The Insured undertakes to obtain consent for disclosure of the Claim or notice of an alleged Wrongful act to its professional advisers and Insurer and the Insured shall give written notice of any Claim or notice to the Insurer as soon as practicable thereafter…
Any Claim or allegation of Wrongful act which is subsequently made shall be considered a Claim first made against the Insured and/or notice of a Wrongful act into the applicable Policy period when the investigation was first started.
11In this case, the applicant first received correspondence from the OSC on March 29, 2019, in which the OSC made an inquiry regarding certain of Go-To’s business activities and sought production of information and documents in response.
12On April 18, 2019, aided by Go-To’s longstanding counsel, Go-To sent a response.
13Shortly thereafter, on May 2, 2019, counsel received a summons under s. 11 of the Securities Act, R.S.O. 1990, c. S. 5, requiring the applicant to attend an examination at the OSC’s offices and produce additional documents. By this time, if not earlier in 2019, the OSC had opened an investigation.
14The May 2, 2019 letter warned the applicant that there was a “high degree of confidentiality” associated with the investigation, and brought to his attention s. 16(1) of the Securities Act, which prohibits a person subject to an order under s. 11 of the Securities Act from disclosing the nature of content of the order, and related information, to anyone except his or her counsel.
15Go-To’s counsel warned the applicant not to disclose the OSC summons to any third parties, including Go-To’s auditors. The applicant’s evidence is that he understood the seriousness of the prohibition, and he did not disclose it as instructed, including to the respondent.
16Between November 7, 2019, and June 7, 2021, counsel received eight additional summonses requiring the applicant to attend various examinations and to produce additional documents.
17On December 6, 2021, the OSC issued an order under s. 126 of the Securities Act freezing all funds in the applicant’s primary investment account. The same day, the OSC commenced a receivership application against Go-To, the applicant, and 22 affiliated Go-To entities, alleging that they had breached the Securities Act in multiple ways. The receivership application was granted shortly thereafter.
18The day after the receivership proceeding was commenced, the OSC advised by way of letter that it intended to commence an enforcement proceeding against the applicant and various Go-To entities for alleged breaches of securities laws. The enforcement proceeding was commenced in the Capital Markets Tribunal on March 30, 2022.
19On January 5, 2022, Go-To’s insurance brokerage, Arthur Gallagher, emailed Go-To’s head of accounting and operations about the proceedings. This was the first contact between Go-To and its broker. The applicant explains that Go-To had been consumed dealing with the receivership proceeding, the threatened enforcement proceeding, and the receiver itself.
20Go-To’s counsel then began the process set out under s. 16(1.1) of the Securities Act, which came into force on December 1, 2020, and provides a mechanism by which a person subject to an order under s. 11 of the Securities Act can notify their insurer of the investigation. All steps were completed by February 18, 2022, by which time Miller was notified of the Claim.
21The respondent was not notified of the claim in February 2022. Miller first provided notice to the syndicate that insured the applicant after November 10, 2021. After that syndicate denied coverage, the respondent was notified of the Claim in July 2022. However, from the perspective of the applicant, notice had been given to the respondent in February 2022 because the policy at issue provided that notice to the respondent be given by way of notice to be given to Miller.
Issues
22The issues raised on this application are:
a. Is relief from forfeiture available?
b. If relief from forfeiture is available, should it be granted?
Is relief from forfeiture available?
23The parties disagree whether, as a threshold question, relief from forfeiture is available in the circumstances of this case.
24The applicant argues that his failure to notify the insurer of the Claim in accordance with the terms of the policy is imperfect compliance with the policy’s terms, from which the respondent has suffered no prejudice. As a result, relying on recent case law, the applicant argues that relief from forfeiture is available.
25The respondent argues that in a claims-made policy like the one at issue here, failure to notify in accordance with the policy’s terms amounts to non-compliance with a condition precedent, for which relief from forfeiture is not available. The respondent argues that the applicant has misconstrued the case law on which he relies.
26I turn to the key cases in the area to determine how to interpret the applicant’s failure to notify the insurer of the investigation and subsequent claims in accordance with the policy terms.
27The relevant line of authority begins with Stuart v. Hutchins, 1998 CarswellOnt 3540, 40 O.R. (3d) 321 (C.A.). There Moldaver J.A., as he then was, reviewed the law and noted that existing jurisprudence held that failure to promptly notify an insurer of a claim amounted to imperfect compliance, from which relief from forfeiture was available. However, he observed that the case law to that effect had all arisen in the context of occurrence policies, and not in the context of “claims-made and reported” policies. The policy at issue in Stuart was a claims-made policy. Moldaver J.A. distinguished the two types of policies, noting that occurrence policies were originally developed to insure against events that were easy to ascertain, such as collision, fire, or war. Underwriters came to realize that occurrence policies were unrealistic in the case of professional liability claims because the injury and the negligence that caused it were often not discoverable until years after the tortious act or omission. As a result, the claims-made policy was developed, under which the event that invoked coverage was the transmittal of notice of the claim to the insurer: Stuart, at paras. 12-13.
28In the circumstances of Stuart, a claims-made policy, Moldaver J.A. found that the terms of the contract specified in plain language that coverage extended to actual and potential claims made and reported in writing to the insurer during the policy period, such that notice formed an integral part of the event triggering coverage. He found that in such cases, when the triggering event (the notice) occurs after the policy has lapsed, late notice is not imperfect compliance, but rather, a “clear-cut case of no coverage”: Stuart, at para. 21.
29Moldaver J.A. went on to find that to treat the failure to give notice on a claims-made policy as imperfect coverage would “distort the plain meaning of the contract and require the insurer to provide coverage for an event outside the scope of the policy which it had not agreed to cover and for which it had received no remuneration”: Stuart, at para. 22.
30The applicant argues that the Court of Appeal limited the application of Stuart in a more recent decision, Kozel v. The Personal Insurance Company, 2014 ONCA 130, 119 O.R. (3d) 55. There, an insured had failed to comply with a statutory condition in that she failed to renew her driver’s licence, which had expired at the time she was involved in an accident that injured a motorcyclist. The insurer denied coverage, arguing that the appellant was in breach of the statutory condition in her policy because she was not authorized to drive at the time of the accident. The applicant sought relief from forfeiture.
31In Kozel, the court noted that relief from forfeiture refers to the power of a court to protect a person against the loss of an interest or a right because of a failure to perform a covenant or condition in an agreement or contract: Kozel, at para. 28. It is an equitable remedy and purely discretionary: Kozel, at para. 29. In insurance cases, “the purpose of the remedy is to prevent hardship to beneficiaries where there has been a failure to comply with a condition for receipt of insurance proceeds and where leniency in respect of strict compliance with the condition will not result in prejudice to the insurer”: Kozel, at para. 30.
32The insurer in Kozel relied on Stuart to argue that the statutory condition that the insured be authorized to drive is a fundamental provision of an automobile contract such that the violation of the condition constituted non-compliance with a condition precedent rather than imperfect compliance with a policy term. The insurer argued that, as a result, relief from forfeiture was not available to the insured.
33The Court of Appeal held that prior to considering whether to grant relief from forfeiture, the court had to decide two threshold questions, the first of which is relevant here: does the breach constitute imperfect compliance with a policy term or non-compliance with a condition precedent to coverage, calling the distinction “crucial for the purposes of the relief against forfeiture analysis”: Kozel, at para. 39-40.
34However, in the context of relief from forfeiture, unintuitively, the determination of whether a breach is imperfect compliance or non-compliance with a condition precedent “does not engage with the contracts jurisprudence on conditions precedent. Rather, the focus is on whether the breach of the term is serious or substantial. Where the term is incidental, its breach is deemed to be imperfect compliance; where the provision is fundamental or integral, its breach is cast as non-compliance with a condition precedent”: Kozel, at para. 41.
35The Court of Appeal considered Stuart, and found that the import of the relevant contract provision – and thus the scale of the breach – was an important factor in determining whether the breach constituted imperfect compliance or non-compliance with a condition precedent, and referred to Moldaver J.A.’s analysis about the difference between occurrence policies and claims-made policies: Kozel, at para. 44.
36The Court of Appeal concluded that the insured’s breach of condition in Kozel was imperfect compliance. In reaching this conclusion, the court held that the strict holding in Stuart should be applied narrowly going forward: “A court should find that an insured’s breach constitutes non-compliance with a condition precedent only in rare cases where the breach is substantial and prejudices the insurer”: Kozel, at para. 50.
37The Court of Appeal has subsequently repeated its ruling in Kozel in Lavoie v. T.A. McGill Mortgage Services Inc., 2014 ONCA 257, and more recently in Monk v. Farmers’ Mutual Insurance Company (Lindsay), 2019 ONCA 616.
38The threshold question, then, that I must determine is whether the applicant’s breach constitutes imperfect compliance, or non-compliance with a condition precedent, which involves determining whether the breach is substantial and prejudices the insurer.
39I begin by noting that the parties agree on certain things:
a. The investigation that commenced in 2019 was not a Claim nor an allegation of a Wrongful act. It was, however, a circumstance that, if reported during the Policy period, would have led to a subsequent Claim arising out of the investigation being covered.
b. The receivership proceeding and the enforcement proceeding are both Claims within the meaning of the policy.
c. The suspension clause, although drafted to suspend the requirement to give notice of a “Claim or notice of an alleged Wrongful act”, also operates to suspend the requirement to give notice of a circumstance. Apart from being agreed to by the parties, this interpretation of the clause makes sense when one recalls that the paragraph immediately following the operative suspension clause contemplates a “Claim or allegation of Wrongful act which is subsequently made [i.e. after the investigation has begun], and which will be considered a Claim first made in the applicable Policy period when the investigation was first started.” In other words, the policy itself contemplates that a Claim may arise from an investigation which is subject to confidentiality requirements, and the Claim shall be considered to have been made at the time the investigation began.
d. The suspension clause is subject to the undertaking contained in the clause which requires an insured to obtain consent to disclose the “Claim or notice of an alleged Wrongful act” to the insurer. By its plain wording, it does not impose on an insured the obligation to obtain consent to disclose a circumstance that may give rise to a Claim or allegation of a Wrongful act in the future.
e. There is no disagreement that the provisions of the Securities Act imposed a duty of confidentiality on the applicant and Go-To that prohibited disclosure of the investigation to the insurer, at least at the outset.
40Where the parties diverge is on when the obligation to report arose, and whether the breach in failing to promptly notify the insurer is a substantial breach that prejudices the insurer.
41Much of this disagreement centres around the change to the legislation that I have earlier mentioned. At the time the investigation began in 2019, there was a mechanism in s. 17 of the Securities Act that allowed a person to seek an order from the OSC Tribunal authorizing the disclosure to any person or company of the nature or content of an order under section 11 or 12. The respondent argues that the applicant could have taken that step, although, as I have just reviewed, the undertaking in the suspension clause does not go so far as to require the applicant to have done so. It required the applicant to obtain consent to disclose a Claim, but no Claim arose until December 6, 2021.
42However, by December 1, 2020, the Securities Act had been amended to add s. 16(1.1) which provides that disclosure of an order under s. 11 is permitted if it is to the person’s insurer and certain steps are first taken, such as providing notice to the OSC of the intended disclosure to the insurer.
43Three summonses were delivered to the applicant after the amendment to the Securities Act, each of which, on their face, drew the applicant’s attention to the change in legislation. They said:
The person or company identified in subsection 16(1) of the Act may disclose the information associated with this matter to the legal counsel, insurer or insurance broker as applicable, and only in accordance with subsection 16(1.1) of the Act.
44The applicant argues that the suspension clause does not contemplate a change in legislation, such that the addition of s. 16(1.1) to the Securities Act does not alter the suspension of the obligation to notify of a circumstance contained in the policy.
45I disagree. The suspension of notice clause suspends the notice obligation “whilst communication or notification is prohibited by confidentiality orders imposed by law enforcement agencies or [the regulator]”. In my view, the obligation to report the circumstance of the investigation arose when the legislation changed to permit disclosure of the investigation to the insurer on taking the steps laid out in s. 16(1.1) because at that time, disclosure was permitted as long as the person followed the steps set out in the legislation. At the very latest, the applicant should have started the process to disclose the investigation to the respondent when he received the February 16, 2021 summons that expressly drew his attention to his ability to disclose the investigation to the insurer.
46It was nearly a year later when notice was finally given to Miller. In my view, this delay is a substantial breach in a claims-made policy, where notice is the triggering event for coverage, as explained by Moldaver J.A. in Stuart.
47The applicant argues that the breach must be viewed as imperfect compliance only, because, even if the breach is substantial, the insurer is not prejudiced. To that end, he argues that the insurer wrote a policy that expressly contemplated that an investigation subject to a confidentiality obligation could have begun during the Policy period, and it would not have notice of it as a result of the suspension clause until some time in the future. Thus, he states that the delay was contemplated, and the insurer has been reimbursed for the risk it covered.
48The applicant also states that the insurer has pointed to no actual prejudice from the delay in notice. The insurer has no right to run the defence under the policy, and in any event, has not pointed to anything it would have done differently in defending the proceedings or responding to the investigation.
49The insurer argues it might not have renewed the policy after October 2019 had it been aware of the investigation. However, no claims have been made on the policy in force between October 2019 and November 2021, so there is no actual prejudice to the insurer arising from the policy renewal.
50The real question of prejudice arises from the respondent’s argument that, to find the delay in notifying it is only imperfect compliance is to rewrite the bargain the parties had made. The bargain the respondent contracted for was to have notice as early as possible, of particular import in a claims-made policy where, for example, an insurer would take an accounting reserve for losses it might have to pay out.
51The applicant argues that this is rhetorical prejudice only. There is no evidence about the impact of the respondent’s inability to take a reserve one year earlier, or why that is prejudicial.
52In effect, the question comes down to this: does prejudice accrue to the respondent on a failure to provide timely notice because of the nature of the policy as a claims-made policy in which notice is a condition of coverage?
53In my view, when notice comes around a year after it is required in a claims-made policy where notice is a condition of coverage, the delay causes prejudice to the insurer. I adopt the words quoted by Moldaver J.A. in Stuart, at para. 22, from Gulf Ins. Co. v. Dolan, Fertig and Curtis (Fla. 1983), 433 So. 2d 512 and 515:
If a court were to allow an extension of reporting time after the end of the policy period, such is tantamount to an extension of coverage to the insured gratis, something for which the insurer has not bargained. This extension of coverage, by the court, so very different from a mere condition of the policy, in effect rewrites the contract between the two parties. This we cannot and will not do. [Emphasis in original]
54To cast that quote in terms of the policy before me, I find that, were I to allow an extension (of about a year in this case) of the reporting time after the obligation to report a circumstance arose because the terms of the suspension clause became exhausted, such would be tantamount to an extension of coverage to the insured gratis, something for which the respondent did not bargain. Nor is it something for which the respondent has been remunerated. In my view, doing so would cause prejudice to the respondent.
55As a result, I conclude that the breach at issue is non-compliance with a condition precedent, because it is a substantial breach and it has caused prejudice to the insurer.
56It follows that relief from forfeiture is not available.
57In these circumstances, it is not necessary to consider whether I would have exercised my discretion to grant relief from forfeiture were it available.
Costs
58At the hearing, the parties advised me that they have reached an agreement on costs. In the event that the respondent was the successful party, as it has been, the parties agreed that costs of $29,251.00 all inclusive shall be paid by the applicant to the respondent.
Conclusion
59In summary, I make the following orders:
a. The applicant’s application for relief from forfeiture is dismissed;
b. The applicant shall pay the respondent its costs of $29,251.00 all inclusive within sixty days.
J.T. Akbarali J.
Date: October 17, 2023