Dunn v. Chubb Insurance Company of Canada et al. Beatty v. Chubb Insurance Company of Canada et al. [Indexed as: Dunn v. Chubb Insurance Co. of Canada]
105 O.R. (3d) 63
2011 ONCA 36
Court of Appeal for Ontario,
Goudge, Lang and Karakatsanis JJ.A.
January 18, 2011
Insurance -- Liability insurance -- Interpretation and construction -- Respondents seeking reimbursement of their defence costs in respect of proceedings commenced against them in 2003 and 2004 arising in part out of their conduct in 2001 -- Insurer taking position that proceedings were not claims made in 2001 policy period -- Endorsement 3 to policy providing for payment of 90 per cent of defence costs if both covered loss and uncovered loss are incurred because claim against insured includes both covered and uncovered matters -- Definition of "claim" in 2001 policy not requiring that claim be made within policy period -- Endorsement 3 applying.
The respondents applied for a declaration that they were entitled to reimbursement of their defence costs by the appellant insurers under a directors' and officers' liability insurance policy (the "2001 Policy"). Civil proceedings were commenced against the respondents in 2001 and 2002 (the "2001 Proceedings"), and the appellants acknowledged that the 2001 Proceedings triggered coverage under the 2001 Policy. In 2004 and subsequent years, other civil proceedings and regulatory proceedings (the "Hybrid Proceedings") were brought against the respondents. All of those proceedings included allegations made against the respondents by reason of their conduct in 2001 (the "2001 Conduct") as well as their conduct in 2003 and 2004 (the "2003 Conduct"). Endorsement 3 of the 2001 Policy provided that "[i]f both Loss covered by this coverage section and Loss not covered by this coverage section are incurred . . . because a Claim against an Insured Person includes both covered and uncovered matters . . . the Insureds and the Company shall allocate such amount as follows: (a) with respect to Defence Costs . . . , 90% of all Defence Costs which must otherwise be allocated as described above shall be allocated to covered Loss and shall be advanced by the Company on a current basis". The respondents' application was dismissed. The Court of Appeal allowed the respondents' appeal, found that Endorsement 3 was ambiguous and referred the matter to the application judge to resolve the ambiguity. Fresh evidence tendered on the application clarified that the second use of "Loss" in Endorsement 3 should have been lower-case "loss", not the defined term "Loss". The application judge ordered the appellants to pay 90 per cent of certain defence costs. The appellants appealed, arguing that Endorsement 3 did not apply to the Hybrid Proceedings because those proceedings were not Claims made in the 2001 Policy Period. [page64 ]
Held, the appeal should be dismissed.
The definition of "Claim" in the 2001 Policy was not time limited. A "claim" could be a "Claim" even if not made in the 2001 Policy Period. Nothing in the wording of the 2001 Policy or in Endorsement 3 itself required that the Endorsement was operative only when the Claim concerned was made in the 2001 Policy Period. The application judge was correct to find that Endorsement 3 applied to the Hybrid Proceedings.
APPEAL from the orders of D.R. Cameron J., [2010] O.J. No. 1669, 2010 ONSC 2166 (S.C.J.) and on June 15, 2010 requiring the appellants to pay 90 per cent of certain defence costs.
Alan L.W. D'Silva, Elizabeth Pillon and Ellen M. Snow, for appellant Chubb Insurance Company of Canada. Marcus B. Snowden, for American Home Assurance Company. Kathryn Podrebarac, for Douglas Beatty. Kurt K. Pereira, for Liberty International Underwriters. Thomas G. Heintzman, Q.C., and William G. Scott, for Frank Dunn.
The judgment of the court was delivered by
GOUDGE J.A.: -- Introduction
[1] This is an appeal from the order of the application judge, Cameron J., requiring the appellant insurers (referred to collectively as "Chubb") to pay 90 per cent of certain defence costs of the respondents Dunn and Beatty, pursuant to a directors' and officers' liability insurance policy. That policy covered the period from 1999 to 2001 and will be referred to as the "2001 Policy". At that time, the respondents were executives covered by the 2001 Policy.
[2] The application before Cameron J. has a relatively unusual history. It was ordered by this court to resolve the ambiguity in Endorsement 3 of the 2001 policy and hence its applicability to the circumstances of this case.
[3] The application judge resolved the ambiguity and held that Endorsement 3 applies. For the reasons that follow, I agree and would therefore dismiss the appeal.
The Genesis of the Application
[4] The application before Cameron J. began with companion applications by the two respondents each seeking a declaration of entitlement to reimbursement by Chubb of certain defence costs (a defined term referred to as "Defence Costs" in the 2001 [page65 ]Policy) that they incurred in respect of specific civil actions and regulatory proceedings. At first instance, their claims for Defence Costs beyond those already being paid by Chubb were dismissed.
[5] On appeal this court described the relevant circumstances as follows, at paras. 8-11:
The insurance policy in issue (the "2001 Policy") was one of many issued by Chubb to Northern Telecom Limited (now Nortel Networks Corporation). It covered the Policy Period from 1999 to 2001 (the "Policy Period"). The 2001 Policy is a variant of a "claims made" policy.
During the Policy Period, the [respondents] participated in certain conduct that became the subject of civil proceedings commenced in 2001 and 2002 (the "2001 Proceedings"). Chubb acknowledges that the 2001 Proceedings triggered coverage under the 2001 Policy.
In 2004 and subsequent years, further proceedings were brought against the [respondents]. These proceedings include civil cases as well as regulatory proceedings by the Ontario Securities Commission and the United States Securities and Exchange Commission. All of these proceedings include allegations against the [respondents] by reason of their conduct in 2001 (the "2001 Conduct") as well as their conduct in 2003 to 2004 (the "2003 Conduct"). Counsel refer to these 2004 and subsequent civil and regulatory proceedings as the Hybrid Proceedings. All of the Hybrid Proceedings were commenced after the expiration of the Policy Period.
Chubb acknowledges that the 2001 Conduct pleaded in the Hybrid Proceedings triggers coverage under the 2001 Policy because a claim was made regarding the [respondents'] 2001 Conduct during the Policy Period. Thus, Chubb accepts that it is responsible for 100 percent of the Defence Costs incurred by the [respondents] in the Hybrid Proceedings to the extent that those proceedings relate to the 2001 Conduct. However, Chubb takes the position that it is not responsible for the [respondents'] Defence Costs in the Hybrid Proceedings to the extent that those costs relate exclusively to the [respondents'] 2003 Conduct. As a result of taking the above position, Chubb has been paying 50 percent of the [respondents'] Defence Costs for the Hybrid Proceedings.
[6] This court allowed the appeal from the dismissal of the respondents' applications. It concluded that Endorsement 3 of the 2001 Policy, the general allocation mechanism for Defence Costs, which would make Chubb liable to pay 90 per cent of those costs of the Hybrid Proceedings if it applied, is ambiguous as written. As a consequence, it could not determine the applicability of Endorsement 3 to these circumstances. It therefore remitted the applications back to the Superior Court of Justice to be heard together as a single application to resolve the issue. The result was the order by Cameron J. presently under appeal.
[7] In its reasons, this court addressed a number of other issues. It found that Endorsement 10, the special allocation mechanism for Defence Costs arising from a "Securities Transaction" has no [page66 ]application to the circumstances of this case. It also concluded that the 2001 Conduct and the 2003 Conduct are not "Interrelated Wrongful Acts" as that term is used in the 2001 Policy. Finally, it concluded that absent an applicable allocation provision in the 2001 Policy the approach of allocating 50 per cent of the Defence Costs of the Hybrid Proceedings to the 2001 Policy was appropriate. These determinations finally settled these various issues, and need not be considered in this appeal.
The Decision Appealed From
[8] Before outlining the reasons of Cameron J., it is helpful to set out the relevant provisions of the 2001 Policy. The applicable ensuring clause is s. 1, which underlines the basic "claims made" nature of the Policy:
Insuring Clauses
Executive Liability Coverage -- Insuring Clause 1
- The Company shall pay on behalf of each of the Insured Persons all Loss for which the Insured Person is not indemnified by the Insured Organization and which the Insured Person becomes legally obligated to pay on account of any Claim first made against him, individually or otherwise, during the Policy Period or, if exercised, during the Extended Reporting Period, for a Wrongful Act committed, attempted, or allegedly committed or attempted by such Insured Person before or during the Policy Period. (Emphasis in original)
[9] The relevant parts of the Definitions section of the 2001 Policy are as follows:
Definitions
Claim means: @7 . . . . .
(ii) a civil proceeding commenced by the service of a complaint or similar pleading, @7 . . . . .
against any Insured Person for a Wrongful Act . . .
Defense Costs means that part of Loss consisting of reasonable costs . . . incurred in defending or investigating Claims . . . @7 . . . . .
Loss means the total amount which any Insured Person becomes legally obgligated to pay on account of each Claim and for all Claims in each Policy Period and the Extended Reporting Period, if exercised, made against them for Wrongful Acts for which coverage applies, including, but not limited to, damages, judgements, settlements, costs and Defense Costs . . . @7 . . . . . [page67 ]
Wrongful Acts means any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted, by an Insured Person, individually or otherwise, in his Insured Capacity, or any matter claimed against him solely by reason of his serving in such Insured Capacity. (Emphasis in original)
[10] Section 8 is also important. The relevant part is as follows:
Limit of Liability, Deductible and Coinsurance
- For the purposes of this coverage section, all Loss arising out of the same Wrongful Act and all Interrelated Wrongful Acts of any Insured Person shall be deemed one Loss, and such Loss shall be deemed to have originated in the earliest Policy Period in which a Claim is first made against any Insured Person alleging any such Wrongful Act or Interrelated Wrongful Acts. (Emphasis in original)
[11] Finally, Endorsement 3 is central. It was effective as of August 31, 1998 and replaced the previous general allocation provision in the Policy, namely, s. 12. As written, Endorsement 3 reads, in part: @7 EXECUTIVE PROTECTION POLICY
ENDORSEMENT
Coverage Section: EXECUTIVE LIABILITY
Company: CHUBB INSURANCE COMPANY OF CANADA
Effective date of this endorsement: AUGUST 31, 1998
Endorsement No. 3
Issued to: NORTHERN TELECOM LIMITED
To be attached to and form part of Policy No. 8156-36-67
It is agreed that: 1. This endorsement shall not apply to an Employment- Related Claim. 2. In consideration of the premium paid, it is agreed that subsection 12, Allocation, is deleted in its entirety and the following is inserted:
Allocation
- If both Loss covered by this coverage section and Loss not covered by this coverage section are incurred, either because a Claim against an Insured Person includes both covered and uncovered matters or because a Claim is made against both an Insured Person and others, including the Insured Organization, the Insureds and the Company shall allocate such amount as follows:
(a) with respect to Defense Costs, to create certainty in determining a fair and proper allocation of Defense Costs, 90% of all Defense Costs which must otherwise be allocated as described above shall be allocatd to covered Loss and shall [page68 ]be advanced by the Company on a current basis; provided, however, that no Defense Costs shall be allocated to the Insured Organization to the extent the Insured Organization is unable to pay by reason of Financial Impairment.
This Defense Cost allocation shall be the final and binding allocation of such Defense Costs and shall not apply to or create any presumption of any other Loss[.] (Emphasis in original)
[12] The ambiguity found by this court arose because of the second use of "Loss" in the first line of Endorsement 3. Simply put, given the definition of "Loss", can there be a "Loss" that is not covered, as that first line suggests? It was this conundrum that led this court to direct a new hearing.
[13] The fresh evidence tendered on the application directed by this court clarified that the second use of "Loss" in the first line of Endorsement 3 was simply a typographical error, unintended and unnoticed by the parties to the 2001 Policy. It should have been lower case "loss" not the defined term "Loss". That is not now disputed by Chubb.
[14] The importance of the possible application of Endorsement 3 in the 2001 Policy is clear. After the 2001 Policy, Chubb continued for some years to provide Nortel with directors' and officers' liability on much the same terms as the 2001 Policy. As Chubb acknowledged in its factum, a loss arising from the 2003 Conduct would have potentially been covered under the 2003 Policy. However, Chubb rescinded that policy with respect to the respondents. Thus, the extent of coverage of their Defence Costs of the Hybrid Proceedings must be determined under the 2001 Policy alone.
[15] The application judge concluded that Endorsement 3 in the 2001 Policy applied to these circumstances and therefore ordered Chubb to pay 90 per cent of the respondents' Defence Costs to defend the Hybrid Proceedings.
[16] He found that the Hybrid Proceedings are Claims, and, as acknowledged by Chubb, there is Loss included in them, namely, the Loss (particularly for Defence Costs) arising from the 2001 Conduct. Since a Claim for the 2001 Conduct was first made in the 2001 Policy Period, s. 8 requires that the Claim for the same Conduct in the Hybrid Proceedings is deemed to have originated in that earlier Policy Period. That is, it is deemed to be a Claim under the 2001 Policy, and therefore covered.
[17] The application judge also found that the Hybrid Proceedings include uncovered loss, namely, that arising from the 2003 Conduct, which is unconnected to the 2001 Conduct and was not the subject of a Claim in the 2001 Policy Period. [page69 ]
[18] As a consequence, the application judge applied Endorsement 3 to the Hybrid Proceedings to order that 90 per cent of the Defence Costs of those Proceedings be allocated to the covered loss and that Chubb be required to pay them.
[19] Finally, the application judge turned to the costs of the application and of the steps leading up to it. This court left that issue to him, but set out the costs it would have awarded to the respondents for the appeal had it granted the declaration they sought. Since the conclusion reached by the application judge now does that, and also effectively reverses the result reached on the original companion applications, the application judge awarded costs to the respondents for that original hearing, for the appeal to this court, and for the application remitted to him. He substantially discounted the total amounts sought by the respondents. Having in mind the amounts set out for costs of the appeal by this court, he awarded the respondent Dunn a total of $250,000 and the respondent Beatty a total of $110,000.
The Appellant's Position in this Court
[20] The appellant acknowledges that the substitution of "loss" for the second use of "Loss" in the first line of Endorsement 3 of the 2001 Policy resolves the ambiguity found by this court.
[21] Nonetheless, it maintains the position that Endorsement 3 does not apply to the Hybrid Proceedings because those Proceedings are not Claims made in the 2001 Policy Period. Its position is encapsulated in its factum, at para. 57:
- By its terms, Endorsement No. 3 only applies to allocate between covered Loss and uncovered loss in Claims made in the 2001 Policy Period in respect of Wrongful Acts for which coverage applies. Endorsement No. 3 would only be engaged where a Claim made during the Policy Period contains allegations that would give rise to coverage under the 2001 Policy (e.g. allegations of Wrongful Acts committed before or during the Policy Period by an Insured in his capacity as a director or officer of Nortel) as well as allegations which are excluded from coverage (e.g. allegations of wrongful conduct engaged in by an Insured in some other capacity). (Emphasis in original)
[22] The appellant says this in light of the language of Endorsement 3, the "claims made" nature of the 2001 Policy Period, the time-limited definition of "Loss", which provides only for Claims made in the Policy Period, and the unreasonable commercial consequences of applying Endorsement 3 to proceedings like the Hybrid Proceedings. In addition, it criticizes the application judge for mischaracterizing the Hybrid Proceedings as being an "Interrelated Claim", a term not used at all in the 2001 Policy. [page70 ]
Analysis
[23] Endorsement 3 in the 2001 Policy is the mechanism by which Defence Costs are to be allocated between covered Loss and uncovered loss. It applies if both "Loss" covered by the Policy and "loss" not covered by the Policy are incurred because a "Claim" includes both covered and uncovered matters. This is clear now that the ambiguity caused by the first line of Endorsement 3 has been resolved by recognizing that it uses both "Loss" and "loss".
[24] To reiterate, the appellants' position in this court is that Endorsement 3 only applies where a Claim for covered Loss and uncovered loss is made within the 2001 Policy Period.
[25] I disagree. The definition of "Claim" in the 2001 Policy is not time limited. It does not require that to be a Claim it must be made within the Policy Period. This is supported by the definition of "Loss" which refers to "all Claims in each Policy Period", to distinguish them from Claims made outside the Policy Period. Only a Claim made within the Policy Period attracts coverage. Thus the Policy clearly contemplates that there can be Claims made within the Policy Period, which are covered, and Claims made outside the Policy Period, which are not.
[26] In the 2001 Policy as a whole, a "claim" can be a "Claim" even if not made in the 2001 Policy Period. There is nothing in the language of Endorsement 3 itself that would suggest that "Claim" means something different there than in the rest of the Policy.
[27] I would therefore conclude that nothing in the wording of the 2001 Policy or in Endorsement 3 itself requires that the Endorsement is operative only when the Claim concerned is made in the 2001 Policy Period. On the plain meaning of the language there is no such limitation.
[28] Nothing in the "claims made" nature of the 2001 Policy or in the definition of "Loss" alters this conclusion. There is no doubt that both the Insuring Clause and the definition of Loss require a Claim to be made during the 2001 Policy Period for there to be coverage. Both the insuring clause and the definition of "Loss" are fully operative without the limitation to "Claim" being advanced by the appellant.
[29] Nor does this produce a commercially unreasonable result. Chubb's concern is that it could be held to account for 90 per cent of Defence Costs in a proceeding many years after the expiration of the 2001 Policy where only 1 per cent of the allegations relate to misconduct first reported during the 2001 Policy Period. This concern ignores the applicability of limitations periods to a proceeding brought so long after the fact. More [page71 ]importantly, Endorsement 3 is explicitly designed to create certainty in the allocation of Defence Costs where a Claim includes both covered and uncovered matters. That is an entirely commercially reasonable objective for Endorsement 3, and a full justification for the presence of such a provision.
[30] In my view, therefore, the application judge was correct to find that Endorsement 3 of the 2001 Policy applies to the Hybrid Proceedings. The 2001 Conduct included in them is as acknowledged by Chubb to be a covered matter. This is because of s. 8 of the Policy. Since the Claim for the Loss the 2001 Conduct caused was first made during the 2001 Policy Period, s. 8 deems the Loss found in the Hybrid Proceedings to arise out the 2001 Conduct to be a Loss originating in the 2001 Policy Period. On the other hand, the 2003 Conduct included in the Hybrid Proceedings is an uncovered matter because it was in no way a Claim made within the 2001 Policy Period.
[31] In these circumstances, Endorsement 3 dictates that 90 per cent of all Defence Costs for the Hybrid Proceedings be allocated to the covered Loss. Chubb must therefore pay this allocation.
[32] I conclude that the application judge discharged the task mandated by this court. He was presented with fresh evidence that resolved the ambiguity in Endorsement 3 and, based on that, he determined its application to these circumstances. He did so correctly and without contradicting any prior findings of other courts. His passing reference in describing s. 8 to "Interrelated Claims" is of no moment either to his reasoning or to the validity of his conclusion.
[33] I would therefore dismiss the appellant's argument concerning Endorsement 3.
[34] I would award costs of the various proceedings in this matter on the basis agreed to by the parties: (a) Costs of the prior appeal to this court to the respondent Dunn in the amount of $35,000 and costs to the respondent Beatty in the amount of $15,000. (b) Costs of this appeal to the respondent Dunn in the amount of $40,000 and to the respondent Beatty in the amount of $10,000. (c) All costs awards are inclusive of disbursements and applicable taxes.
[35] The appeal is dismissed.
Appeal dismissed.