COURT OF APPEAL FOR ONTARIO

CITATION: Lloyds Syndicate 1221 (Millennium Syndicate) v. Coventree Inc., 2012 ONCA 341

DATE: 20120524

DOCKET: C54323

O’Connor A.C.J.O., Armstrong and Watt JJ.A.

BETWEEN

Lloyds Syndicate 1221 (Millennium Syndicate)

Respondent (Appellant)

and

Coventree Inc.

Applicant (Respondent in Appeal)

Eric A. Dolden and Paul Dawson, for the respondent (appellant)

Geoffrey D.E. Adair, Q.C., and Jennifer King, for the applicant (respondent)

Heard: February 9, 2012

On appeal from the order of Justice Lederer of the Superior Court of Justice, dated September 13, 2011, reported at 2011 ONSC 4788.

O’Connor A.C.J.O.:

[1] The issue on this appeal is whether a director’s and officer’s insurance policy provided coverage for a claim when notice of the potential for that claim had been provided to a previous insurer. The application judge, Lederer J., considered the language of the policy as well as circumstances underlying the negotiation and issuance of the policy. He concluded that the policy afforded coverage. I see no basis to interfere with his conclusion.

BACKGROUND

[2] The respondent (“Coventree”) was a major participant in the asset backed commercial paper (“ABCP”) market in Canada. In August 2007, the ABCP market experienced a severe disruption. Coventree’s business was devastated and its share price dropped significantly. Soon after, Coventree wound up its business.

[3] Prior to the collapse of the ABCP market, Coventree and its directors and senior officers had been insured under a policy issued by Great American Insurance Company (“Great American”) with a coverage limit of $1 million.

[4] Shortly after the collapse of the market, Great American informed Coventree that it would not renew its directors’ and senior officers’ policy, which was due to expire on October 17, 2007. The Great American policy included coverage for claims made after the expiration of the policy if Coventree had given notice of the potential claims during the policy period.

[5] The management of Coventree considered that there was the potential for claims against the company and its directors and officers arising from the market disruption. As a result, on October 16, 2007, Coventree gave notice to Great American of all of the potential claims it could envision relating to the market collapse (the October 16, 2007 notice). Coventree cast the October 16, 2007 notice as broadly as possible in order to maximize the coverage.

[6] Coventree obtained extended coverage from Great American in the amount of $1 million for claims made between October 17, 2007 and October 17, 2008 which were based upon acts alleged to have occurred before October 17, 2007.

[7] In addition, Coventree obtained a new directors and officers insurance policy from the appellant, Lloyds Syndicate 1221 (“Lloyds”) for the period October 17, 2007 to October 17, 2008 (the Lloyd’s 2007 policy). The Lloyd’s 2007 policy provided coverage in the amount of $10 million, but expressly excluded “prior act coverage” – that is coverage for any claim based upon an alleged wrongful act that occurred before October 17, 2007.

[8] In March 2008, Coventree requested Lloyds to provide excess coverage to that provided by Great American for the period up to October 17, 2008. Lloyds declined.

[9] In September 2008, Coventree set about to acquire coverage for the period following October 17, 2008. Although it had not received any claims relating to the collapse of its business, Coventree was aware that there was an ongoing investigation being conducted by the Ontario Securities Commission (“OSC”) and that there was the potential for a claim for costs in relation to an OSC hearing.

[10] On September 18, 2008, Coventree applied to Lloyds for directors and officers coverage for the period beginning October 17, 2008. A number of discussions, exchanges of documents and negotiations ensued. Eventually, Lloyds issued a policy in the amount of $10 million for the period from October 17, 2008 to April 17, 2010 (the Lloyds 2008 policy). Coverage for “prior acts” was capped at the first $5 million of the $10 million limit. The Lloyds 2008 policy was a claims-made policy – meaning it covered claims made during the policy period. The policy provided coverage to Coventree and its directors and officers for among other matters defence costs for proceedings against the insureds. The exclusion for prior acts coverage in the Lloyds 2007 policy was removed.

[11] In July 2009, the OSC issued a notice of hearing and statement of allegations against Coventree and two of its senior officers. That notice related to matters referred to in Coventree’s October 16, 2007 notice to Great American. In the course of responding to the OSC notice, Coventree and its two senior officers incurred legal fees in excess of $12 million. In time, Great American accepted that its policy responded to the claim and paid its limits of $1 million. Coventree claimed against Lloyds for reimbursement for defence costs under the Lloyds 2008 policy. Lloyds denied coverage. Coventree brought the application underlying this appeal.

[12] On the application, it was common ground that the Lloyds 2008 policy was a claims-made policy and that Coventree made the claim for reimbursement of the OSC related defence costs within the policy period. It was also agreed that absent an exclusion provision, the costs incurred in defending the OSC proceeding were properly the subject of a claim under the policy. In addition, it was agreed that if the Lloyds 2008 policy responded to the claim, it did so only to the extent of the first $5 million of the policy limits.

[13] Lloyds argued, however, that there were three provisions in the Lloyds 2008 policy that excluded coverage for acts referred to in the October 16, 2007 notice. In particular, Lloyds referred to (i) a carve out clause in the application for insurance submitted by Coventree; (ii) section VI.B; and (iii) section IV.B of the Lloyds 2008 policy.

[14] The application judge found that the Lloyds 2008 policy provided coverage for the “prior acts” referred to in the October 16, 2007 notice to the extent of the first $5 million of the $10 million policy limits. He based this conclusion on a careful analysis of the provisions in the policy and the circumstances relating to the negotiation and issuance of the policy, including Endorsement 24 to that policy which addressed exclusions for prior acts. He concluded that none of the exclusion clauses relied upon by Lloyds applied to matters referred to in the October 16, 2007 notice.

ANALYSIS

(a) The Legal Principles

[15] The Supreme Court of Canada has set out the general principles to be used in interpreting insurance policies. In Reid Crowther & Partners Ltd., 1993 150 (SCC), [1993] 1 S.C.R. 252, at p. 269, the court said:

In each case, the courts must interpret the provisions of the particular policy at issue in light of general principles of interpretation of insurance policies, including but not limited to: (i) the contra proferentem rule; (2) the principle that coverage provisions should be construed broadly and exclusion clauses narrowly; and (3) the desirability, at least where the policy is ambiguous, of giving effect to the reasonable expectations of the parties.

[16] When interpreting the terms of a contract, including an insurance contract, the aim is to determine the intentions of the parties viewed objectively at the time they entered into the contract. The analysis begins with an examination of the text of the written agreement. The aim is to determine the objective intentions of the parties from the words they have used.

[17] However, the words of a contract alone may not be determinative of the objective intention of the parties. Contracts are not to be looked at in a vacuum. Rather, it is “perfectly proper, and indeed may be necessary, to look at the surrounding circumstances in order to ascertain what the parties were really contracting about”: Hill v. Nova Scotia (Attorney General), 1997 401 (SCC), [1997] 1 S.C.R. 69, at para. 20. The court’s search for the intention of the parties may be aided by reference to the surrounding circumstances or factual matrix at the time of the negotiation and execution of the contract, as viewed objectively by a reasonable person: see also Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust et al., 2007 ONCA 205, 85 O.R. (3d) 254.

[18] Words used in a contact are often better understood when the context of their use is understood. The purpose of the context is to determine what a reasonable person in the context of the surrounding circumstances would have understood the agreement to be. The subjective intentions of the parties are not relevant. Consideration of the surrounding circumstances is generally restricted to the circumstances known to both parties at the time of the execution of the contract. These circumstances include facts that were known or reasonably capable of being known by the parties when they entered into the contract. See: Dumbrell v. Regional Group of Companies Inc., 2007 ONCA 59, 85 O.R. (3d) 616, at paras. 50, 53 and 56; Ventas, at para. 24; and King v. Operating Engineers Training Institute of Manitoba Inc., 2011 MBCA 80, 341 D.L.R. (4th) 520, at paras. 69-73.

(b) The Carve Outs

[19] On September 18, 2008, Coventree delivered an application for insurance to an agent for Lloyds. The application was in the standard form used by Lloyds for parties applying for insurance. Question 6(c) in the application asked the following question:

6(c) Has anyone for whom this insurance is intended given notice under the provisions of any other previous or current insurance policy of any facts or circumstances which may give rise to a claim being made against the Company and/or any Director and/or Officer? If Yes, provide details.

This question was followed by what is described as a “carve out provision”. It stated as follows:

IT IS UNDERSTOOD AND AGREED THAT IF ANY SUCH CLAIMS EXIST, OR ANY SUCH FACTS OR CIRCUMSTANCES EXIST WHICH COULD GIVE RISE TO A CLAIM, THEN THOSE CLAIMS ARISING FROM SUCH FACTS OR CIRCUMSTANCES ARE EXCLUDED FROM THE PROPOSED INSURANCE. [Emphasis in original].

[20] Coventree answered question 6(c) in the affirmative. In response to the request for details, it referred to Appendix 6(c). Coventree attached the October 16, 2007 notice to Great American as Appendix 6(c).

[21] Coventree’s evidence was that in applying to Lloyds, it was specifically seeking coverage for matters referred to in the October 16, 2007 notice. Following the ABCP market disorder, Coventree was winding down its operations. Its business activities were limited to providing administrative services to certain market participants. It was not conducting any new business. It was concerned, however, that the coverage with Great American was limited to $1 million for acts relating to the market disruption which occurred before October 17, 2007. Its objective in applying to Lloyds in 2008 was to obtain full prior acts coverage, including most particularly those potential claims referred to in the October 16, 2007 notice. When it answered question 6(c) in the affirmative, it did not know whether Lloyds would be agreeable to providing prior act coverage or not. Answering question 6(c) in the affirmative and providing the October 17, 2007 notice ensured that Lloyds was aware of the potential for claims being made during the policy period relating to the matters set out in the October 17, 2007 notice.

[22] Question 7 in the application form asked if anyone for whom the insurance was intended had any knowledge of any act or omission which may give rise to a claim which may fall within the scope of the proposed insurance. Question 7 was followed by a similar carve out to that which followed question 6. Coventree answered question 7 in the negative.

[23] On September 30, 2008, the parties had a telephone conversation to allow the senior vice-president of Lloyds’ agent to assess the risks involved in insuring Coventree. The main topic of conversation concerned the potential litigation risks that were the subject of the October 16, 2007 notice.

[24] A back and forth process ensued. On October 3 and 14, Lloyds’ agent sent a document to Coventree’s brokers variously referred to as a “quote”, a “proposal” or a “binder”. There are two important aspects of these documents. First, each was subject to Lloyds accepting an application “with original signature”. Second, each of these documents contained the phrase:“waive questions number 6 and 7”.

[25] On October 16, 2008, Coventree’s broker emailed Lloyds’ agent stating in part: “Please bind coverage effective 10/17/08 - 4/17/10 ... for a limit of 10M (of which 5M will have full prior act coverage) and a premium of $535,000”. [Emphasis added.]

[26] On October 17, 2008, the senior vice-president of Lloyds’ agent sent a temporary binder providing coverage with the same language as referred to in para. 25 above waiving the answers to questions 6 and 7.

[27] Pausing in the narrative here, the application judge found that Lloyds intended to waive the answers to clauses 6(c) and 7 in the application form as well as the carve outs that followed these questions. Specifically, the application judge found that Lloyds intended to waive the carve outs in the applications as they applied to matters referred to in the October 17, 2007 notice.

[28] In my view, the application judge’s conclusion that Lloyds had waived the carve out provisions as of October 17, 2008 was supported by the evidence. Lloyds knew about the October 16, 2007 notice. It had a copy of it. Coventree, through its brokers, had made it clear that it wanted “full prior act coverage” and on October 17, 2008, Lloyds issued a binder providing temporary coverage in which it waived the answer to questions 6 and 7. I accept that waiving an answer to a question does not necessarily imply waiver of the carve out that followed. However, it makes little sense in these circumstances that if Lloyds wished to exclude the matters referred to in the October 16, 2007 notice, it would have waived the answers to questions 6 and 7. Prior to including the words “waive questions number 6 and 7” in its temporary binder, Lloyds had received an application on September 18 in which the questions had been answered. Further, Lloyds waived the answer to those questions in the face of Coventree’s express request on October 16, 2008 for full prior act coverage.

[29] In addition, I am satisfied that, as of October 17, 2008, a reasonable person viewing these circumstances objectively would have understood that the parties had agreed that Lloyds would provide full prior acts coverage to the extent of $5 million, at least for the matters included in the October 16, 2007 notice. I recognize that a temporary binder is not part of the final policy of insurance when issued. That said, I think that the temporary binder is part of the factual matrix and is therefore relevant to what the objectively viewed intention of the parties was as they proceeded forward after October 17, 2008.

[30] Lloyds relies heavily on the next series of events arguing that they show that the parties did not intend to include full prior act coverage in the issued policy.

[31] In the weeks following October 17, 2008, Coventree submitted three further applications to Lloyds electronically. In each, it answered question 6(c) as it had done in its original application of September 18.

[32] On November 20, Lloyds issued the 2008 policy. The policy provided that Coventree’s application for insurance forms a part of the policy. Lloyds appended a copy of Coventree’s application with question 6(c) answered in the affirmative, but without the October 17, 2007 notice appended. Lloyds argues that as a result, the issued insurance policy includes the carve out which became operative when question 6(c) was answered in the affirmative.

[33] I do not accept this argument. It would be more than a little surprising if once Coventree obtained a temporary binder to cover the prior acts referred to in the October 17, 2007 notice, it then forewent that coverage in submitting the further applications.

[34] Moreover, despite the issuance of the policy on November 20, 2008, the parties did not finally settle the wording of the endorsement that dealt with what prior acts were excluded from coverage until Lloyds issued Endorsement 24 later in 2009.

[35] In my view, the events following November 20, 2008 refute the argument that the parties intended to exclude the matters referred to in the October 16, 2007 notice. On November 21, 2008, Coventree’s broker emailed the agent for Lloyds expressing concern about Endorsement 21 to the issued policy, which excluded coverage for prior acts from the first $5 million coverage rather than the second $5 million as Coventree’s broker understood the agreement to be. In his email, he said:

... as it is the second $5M that will not provide full prior act coverage before 10/17/07. The first $5M will have full prior act coverage ... [Emphasis added.]

[36] Thus, Coventree continued to take the position that it was purchasing full prior act coverage. Lloyds did not take issue with this assertion.

[37] On December 10, 2008, Coventree’s broker forwarded to Lloyds’ agent a new application with questions 6(c) and 7 unanswered. Lloyds’ binder of October 17, 2008 required Coventree to submit an application with an original signature. The application forwarded on December 10, 2008 had an original signature and was the only one submitted with an original signature.

[38] The senior vice-president of Lloyds’ agent testified that frequently the final application comes in late in the day. Lloyds did not respond to receiving the December 10, 2008 application. Moreover, in December 2008, the parties had yet to finalize the wording of the endorsement to the policy that specifically dealt with prior act coverage.

[39] Later in 2009, Lloyds issued what turned out to be the final version of the endorsement dealing with prior act coverage. Endorsement 24 amends the exclusion provisions of the policy by adding:

It is agreed that Section IV; Exclusions, is amended by adding the following:

based upon, arising out of, relating to, directly or indirectly resulting from or consequence of, or in any way involving any Wrongful Acts or related Wrongful Acts where all or any part of such acts were committed, attempted or allegedly committed or attempted prior to October 17, 2007, applies only to the $5,000,000 excess of $5,000,000 limit of liability.

[40] The effect of Endorsement 24 is that the second $5 million of $10 million coverage does not apply to acts committed prior to October 17, 2007. Implicitly, however, the first $5 million coverage does apply. Had Lloyds intended to exclude coverage for the acts referred to in the October 16, 2007 notice, it would have been logical to have done so in the endorsement specifically addressing exclusions for prior acts. Instead, it worded the endorsement to implicitly provide $5 million prior act coverage for acts committed before October 17, 2007.

[41] Given the history of the dealings between the parties, I am satisfied that, objectively viewed, the intention of the parties was that the 2008 insurance policy cover the matters referred to in the October 16, 2007 notice.

(c) Section VI.B

[42] Lloyds argues that section VI.B of the 2008 policy operates to exclude coverage for the acts referred to in the October 17, 2007 notice. Section VI(B) reads as follows:

B. More than one Claim involving the same Wrongful Act or Related Wrongful Acts of one of more Insureds shall be considered a single Claim, and only one Retention shall be applicable to such single Claim. All such Claims constituting a single Claim shall be deemed to have been made on the earlier of the following dates: (1) the earliest date on which any such Claim was first made; or (2) the earliest date on which any such Wrongful Act or Related Wrongful Act was reported under this Policy or any other policy providing similar coverage.

[43] I do not accept Lloyds’ argument. Section VI.B deals with the subject of retention – the amount of loss the insured is responsible for before the insurer has to begin paying up to the policy limits (somewhat akin to a deductible). On the face of it, s. VI.B does not purport to exclude coverage for claims that would otherwise be covered under the policy. In any event, having concluded that the parties intended the Lloyds’ 2008 policy to cover acts referred to in October 16, 2007. I do not interpret s. VI.B – a retention clause – to alter that specific agreement relating to coverage.

(d) Section IV.B

[44] Lloyds argues that s. IV.B excludes coverage of matters referred to in the October 17, 2007 notice. Section IV.B is a general exclusion clause for claims for which notice was previously given to another insurer. The applicable part reads as follows:

The Insurer shall not be liable to make any payment for Loss for any Claim made against any Insured based upon, arising out, relating to, directly or indirectly resulting, in consequence of, in any way involving, or in connection with:

B. any Wrongful Act or related Wrongful Act or any fact, circumstance or situation which has been the subject of any notice or Claim given under any other policy of which this Policy is a renewal or replacement.

[45] Lloyds argues that the Lloyds’ 2008 policy was a renewal or replacement of the Great American policy and that clause s. IV.B, therefore, excludes coverage. Coventree takes the opposite position. I do not find it necessary to resolve this issue. I agree with the application judge that once one concludes that the parties intended the Lloyds’ 2008 policy to cover the matters referred to in the October 17, 2007 notice, it would make no sense to interpret the general exclusion clause as intending to refer to matters set out in that notice.

[46] The Supreme Court of Canada in the case of Reid Crowther set out the principle that in interpreting insurance contracts, exclusion clauses should be narrowly construed. See also: Derksen v. 539938 Ontario Ltd., 2001 SCC 72, [2001] 3 S.C.R. 398, at para. 49. It follows that a generally worded exclusion clause, as in the case of Section IV.B, should give way to an agreement to cover a specific matter. Having found that the parties intended to cover the matters referred to in the October 16, 2007 notice, I do not accept that s. IV.B overrules that specific agreement.

CROSS-APPEAL ON COSTS

[47] Coventree cross-appeals from the award of costs on a partial indemnity scale. Coventree claims that the application judge erred in not awarding costs on a full indemnity scale because this case involved an insured applying for a declaration regarding the obligation to pay defence costs. Both parties agree that the application judge inadvertently omitted $12,805.63 in disbursements.

[48] Cost awards are discretionary and should not be lightly interfered with. A judge of first instance is in the best position to determine the entitlement, scale and quantum of any such award: McNaughton Automobile Ltd. v. Co-operators General Insurance Co., 2008 ONCA 597, 298 D.L.R. (4th) 86, at para. 27.

[49] The application judge in this case did acknowledge that costs on a full indemnity scale have been awarded in cases involving the duty of the insurer to provide a defence to a claim. However, he found that this case was one where the costs of the defence were claimed as an item insured under the policy, and not one based on the duty of the insurer to provide a defence to a claim that may fall within the insurance policy. Lloyds had a legitimate question with respect to the interpretation of this policy and it should have been able to raise this question without incurring an exposure to substantial indemnity costs. I see no reason to interfere with the application judge’s findings on costs.

[50] Therefore, Coventree’s cross appeal on costs is dismissed but the costs award below is increased by $12,805.63 to reflect the application judge’s inadvertent oversight of Coventree’s claimed disbursements.

DISPOSITION

[51] In the result, I would dismiss the appeal with the respondent’s costs on the appeal fixed in the amount of $15,000 and the appellant’s costs on the cross appeal fixed in the amount of $5,000. The net amount owing to the respondent is $10,000, inclusive of disbursements and applicable taxes. In addition, and as the parties agreed, the costs award below in favour of Coventree is increased by $12,805.63.

RELEASED: “DOC” “MAY 24 2012”

“D. O’Connor A.C.J.O.”

“I agree Robert P. Armstrong J.A.”

“I agree David Watt J.A.”