Ernst & Young Inc. v. Chartis Insurance Company of Canada, formerly known as AIG Commercial Insurance Company of Canada et al.

[Indexed as: Ernst & Young Inc. v. Chartis Insurance Co. of Canada]

Ontario Reports

Court of Appeal for Ontario,

Cronk, Pepall and Strathy JJ.A.

January 29, 2014

118 O.R. (3d) 740 | 2014 ONCA 78

Case Summary

Insurance — Insurer's duty of good faith — Plaintiff receiver suing trustee for breach of trust — Court order providing that any "proceeds from insurance coverage" arising out of judgment or settlement of action belonged to plaintiff — Trustee's insurer defending action — Judgment granted in favour of plaintiff but insurer refusing to pay on basis that claim was excluded under trustee's errors and omissions policy — Plaintiff bringing action against insurer for breach of duty of good faith — Court order assigning to plaintiff "proceeds from insurance coverage" arising out of judgment or settlement of action to plaintiff not assigning cause of action for breach of duty of good faith owed by insurer to trustee — Plaintiff having no claim for breach of direct duty of good faith owed to it as insurer owes no duty to person asserting claim against its insured.

Insurance — Liability insurance — Exclusions — CGT taking over from IW as trustee of certain trusts — IW subsequently placed in receivership — Receiver bringing action against CGT for breach of trust — CGT's insurer defending action — Judgment granted in favour of receiver — Insurer refusing to pay judgment on basis that claim was excluded under CGT's errors and omissions policy — Receiver suing for indemnity — Motion judge not erring in granting summary judgment dismissing claim on basis that CGT's conduct fell within exclusion for dishonest acts — CGT acting dishonestly in committing deliberate breach of trust by paying IW moneys to which it was not entitled under terms of trust with knowledge that breach was contrary to interests of beneficiaries. [page741]

After taking over from IW as trustee of certain trusts, CGT withdrew money from the trusts and paid it to IW for its own use, and made a loan to IW which was promptly repaid out of trust funds paid to IW. IW was subsequently placed in receivership. E & Y, in its capacity as IW's receiver, brought an action against CGT in Alberta for breach of trust. An Ontario court order (the "Houlden order") subsequently provided that "any proceeds from insurance coverage" arising out of a judgment or a settlement of the Alberta action belonged to E & Y. Chartis, CGT's insurer, defended the action. Judgment was granted in favour of E & Y. Chartis refused to pay the judgment on the basis that the claim was excluded by the terms of the policy. E & Y sued Chartis for indemnity and for breach of the duty of good faith. On motions for partial summary judgment, the motion judge found that the indemnity claim was excluded by the policy and granted summary judgment dismissing it. The bad faith claim was permitted to proceed to trial. E & Y appealed, and Chartis cross-appealed.

Held, the appeal should be dismissed; the cross-appeal should be allowed in part.

The motion judge did not err in finding that Chartis could rely on an exclusion in the policy for dishonest acts. What is required to show dishonesty in the case of a professional trustee is (i) a deliberate breach of trust; (ii) committed by a professional trustee (a) who knows that the deliberate breach is contrary to the interests of the beneficiaries; or (b) who is recklessly indifferent whether the deliberate breach is contrary to their interests or not; or (c) whose belief that the deliberate breach is not contrary to the interests of the beneficiaries is so unreasonable that, by any objective standard, no reasonable professional trustee could have thought that what he did or agreed to do was for the benefit of the beneficiaries. CGT committed deliberate breaches of trust by paying IW moneys to which it was not entitled under the terms of the trusts. It misappropriated for its own benefit moneys it had paid to IW in breach of trust. It knew that the "surplus" in the trusts, relied upon by IW to justify the withdrawals, was merely a projected surplus. It must have known that those projections might turn out to be inaccurate and that, in withdrawing funds from the trusts, it was placing the trusts at risk. There was no way the withdrawals could have benefited the beneficiaries, and there were no circumstances that could have grounded a defence that CGT honestly believed the withdrawals were in the best interests of the beneficiaries, or that a reasonable trustee could have considered them to be in the beneficiaries' best interests.

The Houlden order did not assign to E & Y a cause of action for breach of a duty of good faith owed by Chartis to GCT. While Chartis clearly owed CGT a duty of good faith in the defence of the Alberta action, the Houlden order did not assign to E & Y anything other than the right to the proceeds of CGT's insurance. That did not mean that E & Y would be without recourse if Chartis had deliberately frustrated the spirit and intent of the Houlden order. If there was any evidence that Chartis intentionally misled the court or subverted the course of justice, it was open to E & Y to move for appropriate relief. There was no evidentiary record before the court -- and there was none before the motion judge -- that would permit the court to determine whether any such relief should have been granted to E & Y. E & Y should be given the opportunity to make submissions to the motion judge on the issue whether any other remedy was available.

The motion judge did not err in finding that Chartis did not owe a separate duty of good faith to E & Y in either the Alberta action or in this action. An insurer owes no duty to a person asserting a claim against its insured.

Fattal v. Walbrook Trustees (Jersey) Ltd., [2010] EWHC 2767 (Ch.), apld [page742]

Perry v. General Security Insurance Co. of Canada (1984), 1984 CanLII 2146 (ON CA), 47 O.R. (2d) 472, [1984] O.J. No. 3300, 11 D.L.R. (4th) 516, 4 O.A.C. 209, 7 C.C.L.I. 231, [1984] I.L.R. Â1-1800 at 6922, 26 A.C.W.S. (2d) 418 (C.A.), consd

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(2d) 212, 19 E.T.R. (2d) 1, 74 A.C.W.S. (3d) 899, affg (1995), 1995 CanLII 1256 (ON CA), 25 O.R. (3d) 601, [1995] O.J. No. 3156, 129 D.L.R. (4th) 152, 86 O.A.C. 116, 9 E.T.R. (2d) 93, 58 A.C.W.S. (3d) 1005 (C.A.); Harris v. Glaxosmithkline Inc. (2010), 106 O.R. (3d) 661, [2010] O.J. No. 5546, 2010 ONCA 872, 272 O.A.C. 214, 78 C.C.L.T. (3d) 52; Law, Union & Rock Insurance Co. v. Moore's Taxi Ltd., 1959 CanLII 81 (SCC), [1960] S.C.R. 80, [1959] S.C.J. No. 74, 22 D.L.R. (2d) 264, [1959] I.L.R. Â1-343 at 682; McIntosh v. Parent (1924), 1924 CanLII 401 (ON CA), 55 O.L.R. 552, [1924] O.J. No. 59, [1924] 4 D.L.R. 420 (C.A.); Ontario v. Kansa General Insurance Co. (1994), 1994 CanLII 626 (ON CA), 17 O.R. (3d) 38, [1994] O.J. No. 177, 111 D.L.R. (4th) 757, 69 O.A.C. 208, 21 C.C.L.I. (2d) 262, 13 C.E.L.R. (N.S.) 59, [1994] I.L.R. Â1-3031 at 2719, 45 A.C.W.S. (3d) 744 (C.A.); R. v. Buckingham, [2008] N.J. No. 98, 2008 NLTD 55, 274 Nfld. & P.E.I.R. 194, 77 W.C.B. (2d) 752 (T.D.); R. v. 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General Accident Assurance Co. of Canada (2000), 2000 CanLII 26948 (ON CA), 47 O.R. (3d) 407, [2000] O.J. No. 410, 183 D.L.R. (4th) 424, 129 O.A.C. 313, 17 C.C.L.I. (3d) 270, [2000] I.L.R. I-3824, 95 A.C.W.S. (3d) 158 (C.A.); Toronto (City) v. Canadian Union of Public Employees (C.U.P.E.), Local 79, [2003] 3 S.C.R. 77, [2003] S.C.J. No. 64, 2003 SCC 63, 232 D.L.R. (4th) 385, 311 N.R. 201, J.E. 2003-2108, 179 O.A.C. 291, [2003] CLLC Â220-071, 17 C.R. (6th) 276, REJB 2003-49439, 59 W.C.B. (2d) 334; Walker v. Stones, [2001] Q.B. 902, [2001] 2 W.L.R. 623 (C.A.); Wayne Tank and Pump Co. v. Employers' Liability Assurance Corp., [1973] 3 All E.R. 825, [1974] Q.B. 57, [1973] 3 W.L.R. 483 (C.A.); Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 595, [2002] S.C.J. No. 19, 2002 SCC 18, 209 D.L.R. (4th) 257, 283 N.R. 1, J.E. 2002-405, 156 O.A.C. 201, 20 B.L.R. (3d) 165, 35 C.C.L.I. (3d) 1, [2002] I.L.R. I-4048, REJB 2002-28036, 111 A.C.W.S. (3d) 935, revg (1999), 1999 CanLII 3051 (ON CA), 42 O.R. (3d) 641, [1999] O.J. No. 237, 170 D.L.R. (4th) 280, 117 O.A.C. 201, 32 C.P.C. (4th) 3, [1999] I.L.R. I-3659, 85 A.C.W.S. (3d) 1149 (C.A.)

Statutes referred to

Insurance Act, R.S.O. 1990, c. I.8, s. 132, (1)

Winding-up Act, R.S.C. 1985, c. W-11

Authorities referred to

Billingsley, Barbara, General Principles of Canadian Insurance Law, 1st ed. (Markham, Ont.: LexisNexis Canada, 2008)

Brown, Craig, and Thomas Donnelly, Insurance Law in Canada, looseleaf, vol. 1 (Toronto: Carswell, 2013)

Ewart, Douglas J., Criminal Fraud (Toronto: Carswell, 1986)

Halsbury's Laws of England, vol. 15, 3rd ed. (London: Butterworths, 1956)

APPEAL AND CROSS-APPEAL from the order of Lederer J., [2012] O.J. No. 4399, 2012 ONSC 5020 (S.C.J.) on motions for partial summary judgment.

Lawrence G. Theall, Michael Foulds and Bevan Brooksbank, for appellant.

Hillel David, Howard B. Borlack and David Elmaleh, for respondent.

The judgment of the court was delivered by

[1] STRATHY J.A.: — This appeal concerns claims for indemnity and bad faith under a trustee's errors and omissions insurance policy (the "Policy") issued by the respondent, Chartis Insurance Company of Canada ("Chartis"). On motions for partial summary judgment, the motion judge found the indemnity claim was [page744] excluded by the Policy and granted summary judgment dismissing it. The bad faith claim was permitted to proceed to trial.

A. The Facts

[2] The appellant, Ernst & Young Inc. ("E & Y"), is the receiver of International Warranty Company Limited ("IW"). IW sold extended warranties to car buyers under agreements with various importers. The premiums paid by the car buyers were placed in trusts to secure the funds for future warranty payments by IW. The trust agreements contemplated that IW would draw on the trust funds as needed to reimburse itself as warranty work was undertaken. At the end of five years, any balance in the applicable trust was to be turned over to IW.

[3] In early 1987, after discussions with IW, Central Guaranty Trust Company ("CGT") took over as trustee of the trusts, then valued at approximately $23 million. In those discussions, IW implied that CGT would get the business if it loaned $1.5 million to IW, something the previous trustee had refused to do.

[4] Between June and the end of December 1987, four things happened that spawned breach of trust claims against CGT. First, IW stopped depositing some of the warranty premiums into the trusts. Second, CGT withdrew money from the trusts and paid it to IW for its own use. Third, CGT made the $1.5 million loan to IW, which was promptly repaid out of trust funds paid to IW. Fourth, IW went out of business in December 1987 and was placed in receivership. At that time, there was about $18 million in the trusts. This was insufficient to fund IW's warranty obligations.

[5] The trust instruments did not permit CGT as trustee to withdraw money from the trusts and pay it to IW for purposes other than the payment of warranty claims. The withdrawals were justified by IW to CGT on the basis that there was an "actuarially projected surplus" in the trusts. That is, it was anticipated that after the withdrawals there would be sufficient funds remaining in the trusts to honour all future warranty payments.

[6] E & Y, in its capacity as IW's receiver, claimed CGT had breached the trusts in making these withdrawals. It was authorized by the Court of Queen's Bench of Alberta to bring an action against CGT. That action was commenced in 1992 (the "Alberta action"). Shortly thereafter, CGT was placed in liquidation under the Winding-up Act, R.S.C. 1985, c. W-11, and the Alberta action was stayed. The stay was lifted on October 6, 1993 by Houlden J.A., sitting as a judge of the Ontario Court, General Division. His order (the "Houlden order") provided that CGT's liquidator was not required to defend the Alberta action, but [page745] that Chartis, CGT's insurer, could do so. The Houlden order also provided that "any proceeds from insurance coverage arising out of a judgment or a settlement of the [Alberta] Action belong to [E & Y] and are free from any claims by the Provisional Liquidator [of CGT]".

[7] Chartis defended the Alberta action. In a decision dated May 31, 2004, Wilson J. of the Court of Queen's Bench of Alberta found the trusts were invalid and dismissed the claim against CGT: Ernst & Young Inc. v. Central Guaranty Trust Co., [2004] A.J. No. 600, 2004 ABQB 389, 29 Alta L.R. (4th) 269. This decision was set aside by the Court of Appeal and a new trial was ordered: [2006] A.J. No. 1413, 2006 ABCA 337, 66 Alta. L.R. (4th) 231, leave to appeal to S.C.C. refused [2007] S.C.C.A. No. 9.

[8] A second trial was held before MacCallum J. of the Court of Queen's Bench of Alberta. He gave judgment in January 2010, and held that CGT had breached the trusts. He granted judgment in favour of E & Y against CGT for $3,139,642.42, plus prejudgment interest and costs, for a total award of over $10 million: [2010] A.J. No. 58, 2010 ABQB 26, 479 A.R. 202.

[9] Chartis refused to pay the judgment, taking the position that the claim was excluded by the terms the Policy. This action resulted.

B. The Summary Judgment Decision

[10] E & Y brought a motion for summary judgment. Chartis brought a cross-motion. The parties agreed some issues would require a trial, but there was no dispute other issues were suitable for summary judgment.

[11] The issues before the motion judge, and his conclusions, were as follows [at para. 27]:

(a) Standing: E & Y had standing under the Houlden order, which had the effect of assigning CGT's cause of action under the Policy to E & Y. Chartis was not permitted to make a collateral attack on the Houlden order.

(b) Coverage: The Policy insured CGT for breaches of duty, neglect and other errors in the "operations of the trust department" and (subject to exclusions, discussed below) provided coverage for E & Y's claim.

(c) Exclusions: The claims by E & Y under the Policy were not insured because CGT's conduct fell within exclusions for "dishonest . . . acts" (Exclusion 7) and "gaining . . . of any profit or advantage to which one is not legally entitled" (Exclusion 13). [page746]

(d) Restitution: Given the record on the motion and because he found the exclusions applied, the motion judge was not prepared to deal with Chartis' alternative argument that E & Y's claim was restitutionary and was therefore not insured by the Policy.

(e) Policy limits: If coverage were available (i) prejudgment interest would erode the limits; (ii) defence costs would erode the limits, subject to the issue whether Chartis breached its duty of good faith in providing a defence; (iii) as the breaches of duty were interrelated, there was only one deductible of $750,000; and (iv) the issue whether excess insurance was available would be left to trial.

(f) Good faith claims: Chartis owed a duty of good faith to CGT in the defence of the Alberta action. That cause of action had been assigned to E & Y by the Houlden order as part of the "proceeds from insurance coverage arising out of a judgment". However, Chartis did not owe an independent duty of good faith to E & Y in the Alberta action or in this proceeding. The parties had agreed E & Y's claim against Chartis for breach of its duty of good faith owed to CGT in the Alberta action was an issue that required a trial. Any remedy would stand to the benefit of E & Y.

[12] The formal order provided that, on consent, there would be a trial of the issue whether Chartis had breached its duty of good faith to CGT. E & Y would have the right to argue at trial that Chartis' breach of the duty of good faith precluded it from relying on the Policy exclusions or from alleging that prejudgment interest and defence costs fell within the limits. This disposition had been the subject of a previous order, dated March 2, 2012, that the summary judgment motion would not determine the issue "whether Chartis had breached its duty of good faith . . . to CGT and/or [E & Y] and any consequential relief, including relief with respect to Chartis's defences based upon the Policy wording". Nor would the summary judgment motion determine the issue of punitive damages.

C. The Appeal

[13] E & Y appeals from the motion judge's decision. It says he erred in finding that the claim fell within the Policy exclusions and in finding that prejudgment interest and defence costs eroded the Policy limits. It also asks this court to determine that restitutionary payments were not excluded under the Policy. Finally, it asserts that the motion judge erred in finding Chartis [page747] did not owe a duty of good faith to E & Y in responding to the claim after the judgment in the Alberta action.

[14] Chartis cross-appeals. It asks for a determination that (a) E & Y had no standing to bring this action; (b) the claims were for restitutionary and non-fortuitous losses, neither of which was insured by the Policy; and (c) the Houlden order did not have the effect of giving E & Y the right to sue for extra-contractual or punitive damages or damages for breach of the duty of good faith.

D. Discussion

[15] For the reasons that follow, I would dismiss the appeal, allow the cross-appeal in part and vary the order below. In summary, assuming E & Y had standing to bring this action by virtue of the Houlden order, I agree with the motion judge that Exclusion 7 applied, because the claim arose out of dishonest acts committed by CGT or by persons for whom it was legally responsible. I respectfully disagree with the motion judge on the issue of good faith. The Houlden order did not, in my view, assign a cause of action for breach of a duty of good faith Chartis owed to its insured, CGT. This does not mean there was no remedy available to E & Y if it could prove that Chartis deliberately frustrated the operation of the Houlden order by steering or manipulating CGT's defence to avoid coverage. In the particular circumstances of this case, fairness requires that E & Y be given an opportunity to adduce an evidentiary record on this issue, if so advised.

[16] These conclusions make it unnecessary to consider the other aspects of Chartis' cross-appeal in relation to standing and its assertions that there was no coverage for restitution or non-fortuitous acts. Nor is it necessary to consider whether prejudgment interest and defence costs erode the Policy limits.

(1) The policy exclusions

[17] The Policy consists of a declaration page, two main forms (directors and officers liability and corporation reimbursement) and 20 endorsements. The Policy period is March 31, 1987 to March 31, 1988; the limit of liability is $5 million for each Policy year; and there is a $750,000 self-insured retention.

[18] The endorsement applicable to this proceeding is the Canadian Trust & Mortgage Company Errors and Omissions Endorsement ("Endorsement #10"). It recites that:

In consideration of the premium charged, it is hereby understood and agreed that this policy of Directors and Officers Liability and Corporation Reimbursement Insurance does not apply to any claim or claims arising [page748] from the operations of the trust department of the Named Insured [CGT] except to the extent provided by this endorsement.

[19] Endorsement #10 provides coverage of $5 million for "each wrongful act or series of continuous, repeated or interrelated wrongful acts", with an aggregate of $5 million for each Policy year. The Policy period and the deductible are the same as indicated on the declaration page.

[20] The insuring agreement provides in part:

TRUST DEPARTMENT ERRORS AND OMISSIONS

To indemnify the Insured for all sums which the Insured shall become legally obligated to pay as loss (as herein defined) resulting from any claim or claims first made against the Insured and reported to the Insurer during the currency of this endorsement for any wrongful act (as herein defined) of the Insured or of any other person for whose actions the Insured is legally responsible, but only if such wrongful act first occurs subsequent to the retroactive date and results from the rendering of or failure to render services solely in the Insured's capacity as:

A. Executor or administrator of estates, administrator of guardianships, or trustee under personal or corporate trust agreements.

[21] The definition section describes "wrongful act" and "loss" as follows:

Wrongful Act means any breach of duty, neglect, error, misstatement, misleading statement or omission committed in any capacity stated in the Insuring Agreement, parts A & B.

Loss means any amount that the Insured shall be legally obligated to pay because of judgments rendered against the Insured, for settlements negotiated with the written consent of the Insurer, for attorneys' fees, court costs, costs of attachment, appeal or similar bonds and other legal expenses normally incurred in the investigation and defense of claims or suits but shall not include the salaries of any employees of the Insured or any loss of earnings.

[22] The relevant exclusions are Exclusions 7 and 13:

The Insurer shall not be liable to make any payment in connection with any claim made against the Insured for or arising out of:

7. Dishonest, fraudulent, criminal or malicious acts or omissions committed by the Insured or by any person for whose actions the Insured is legally responsible.

8. Conflict of interest, acting in bad faith, gaining in fact of any profit or advantage to which one is not legally entitled, or intentional, non-compliance with any statute or regulation committed by the Insured or by any person for whose actions the Insured is legally responsible. [page749]

(a) Preliminary issues

[23] Before turning to the exclusions, there are two preliminary issues.

[24] First, before the motion judge, E & Y's counsel took the position that Chartis was unable to rely on the full wording of Exclusion 7 and none of Exclusion 13, because there had been an admission by Chartis' representative on discovery that coverage was being denied on the ground of fraud. The motion judge held that Chartis was not restricted to relying only on fraud to deny coverage. He found there was no definitive admission that fraud was the only ground relied upon, all the relevant facts were contained in the Policy wording and the decision of MacCallum J., and there was no prejudice to E & Y that could not be addressed by further discovery, adjournments or costs. I see no error in this conclusion.

[25] Second, in this court, E & Y argued that the motion judge erred in relying on the findings made by MacCallum J. in the Alberta action to determine whether the claim was excluded from coverage. It makes two submissions. The first is the reasons of MacCallum J. do not address the issues of coverage or the operation of the Policy exclusions and the findings of fact in the breach of trust action cannot be applied to the issue whether there was insurance coverage. The second submission is Chartis cannot rely on findings in an action in which it allegedly breached its duties to its insured and "steered" the defence to avoid coverage. I will address the second submission later in these reasons.

[26] On the first submission, E & Y says the Alberta action was dispositive only of whether breaches of trust occurred. Any comments made by the trial judge in that action concerning CGT's conduct, which might result in such conduct being labelled as "dishonest" and falling within an exclusion in the Policy, were ancillary to the decision and did not address the issue before this court.

[27] Chartis concedes coverage was not in issue in the Alberta action, but says it is entitled to rely on the findings of fact in the Alberta action on issues that are common to both actions.

[28] Under s. 132(1) of the Insurance Act, R.S.O. 1990, c. I.8, where a person incurs a liability for "injury or damage to the person or property" of another, and is insured for that liability, the judgment creditor has a direct cause of action against the person's insurer, "subject to the same equities as the insurer would have if the judgment had been satisfied". [page750]

[29] The challenge facing E & Y in this case is the decision of this court in Perry v. General Security Insurance Co. of Canada (1984), 1984 CanLII 2146 (ON CA), 47 O.R. (2d) 472, [1984] O.J. No. 3300 (C.A.). In that case, this court held (with Houlden J.A. dissenting) that s. 132(1) does not permit a direct cause of action against an insurer under a policy of lawyers' professional liability insurance. The decision has been taken to mean that s. 132(1) does not apply to claims for economic losses unrelated to loss or damage to persons or property.

[30] The appellant asks us to find that Perry was wrongly decided. In that case, both MacKinnon A.C.J.O. and Arnup J.A. made pleas for legislative action to correct what they perceived to be an injustice, at least in the context of errors and omissions claims against lawyers.

[31] No legislative action has been taken and Perry remains good law -- it has been followed in other cases. As it has stood and been relied upon by the insurance industry for over 25 years, I would be disinclined to overrule it, even if it were open to us to do so in these proceedings. As I will explain, it is not necessary to address the issue in this case, because the claim is excluded by the Policy.

[32] It is instructive, however, to note that it has been held that in an action against an insurer under s. 132 of the Insurance Act and its predecessors the judgment creditor does not have to prove, all over again, the underlying liability of the insured for the loss. It can rely on the judgment in which the insured was found liable.

[33] This flows from the judgment of the Supreme Court of Canada in Global General Insurance Co. v. Finlay, 1961 CanLII 11 (SCC), [1961] S.C.R. 539, [1961] S.C.J. No. 32, which was applied by this court in Stoyka v. General Accident Assurance Co. of Canada (2000), 2000 CanLII 26948 (ON CA), 47 O.R. (3d) 407, [2000] O.J. No. 410 (C.A.). In Global General, at p. 552 S.C.R., the Supreme Court cited Halsbury's Laws of England, vol. 15, 3rd ed. (London: Butterworths, 1956), at p. 395, para. 706, in support of the proposition that "a final judgment pronounced by a court of competent jurisdiction . . . constituted conclusive evidence against all the world of its existence, date and legal consequences".

[34] At the next page in Halsbury's, at p. 396, para. 708, entitled "Judgments as estoppels or evidence", the authors state:

A judgment in personam or inter partes operates as an estoppel or conclusive evidence against parties and privies of the truth of the facts upon which such judgment is based.

[35] In this case, in which Chartis defended the action on which E & Y bases its claim, it is a "privy" within the meaning of [page751] the above extract. In the words of Lander J. of the British Columbia Supreme Court in Sedam v. Simcoe & Erie General Insurance Co., 1983 CanLII 392 (BC SC), [1983] B.C.J. No. 1809, 147 D.L.R. (3d) 159 (S.C.), at p. 164 D.L.R., "[i]t would strike anyone as an absurd requirement to prove again what has already been proven in earlier proceedings at a great cost of time and money without a compelling reason for it".

[36] The doctrine of issue estoppel prevents the relitigation of an issue decided by a court in a previous proceeding. In the leading case of Danyluk v. Ainsworth Technologies Inc., [2001] 2 S.C.R. 460, [2001] S.C.J. No. 46, 2001 SCC 44, at para. 24, Binnie J. cited with approval the definition given by Middleton J.A. in McIntosh v. Parent (1924), 1924 CanLII 401 (ON CA), 55 O.L.R. 552, [1924] O.J. No. 59, [1924] 4 D.L.R. 420 (C.A.), at p. 422 D.L.R.:

When a question is litigated, the judgment of the Court is a final determination as between the parties and their privies. Any right, question, or fact distinctly put in issue and directly determined by a Court of competent jurisdiction as a ground of recovery, or as an answer to a claim set up, cannot be re-tried in a subsequent suit between the same parties or their privies, though for a different cause of action. The right, question, or fact, once determined, must, as between them, be taken to be conclusively established so long as the judgment remains.

[37] The words "[a]ny right, question or fact distinctly put in issue" are important. They respond to E & Y's point that the issue of coverage was not an issue before the court in the Alberta action. They indicate the importance of focusing on what was in issue in the Alberta action.

[38] The requirements of issue estoppel were set out by Dickson J. in Angle v. M.N.R., 1974 CanLII 168 (SCC), [1975] 2 S.C.R. 248, [1974] S.C.J. No. 95, at p. 254 S.C.R., and were adopted by Binnie J. in Danyluk, at para. 25:

(1) that the same question has been decided;

(2) that the judicial decision which is said to create the estoppel was final; and,

(3) that the parties to the judicial decision or their privies were the same persons as the parties to the proceedings in which the estoppel is raised or their privies.

[39] These requirements are met here: (1) the findings of fact in the Alberta action on the issue whether CGT breached the trusts are the same facts underlying Chartis' reliance on the exclusions; (2) the judgment of MacCallum J. in the Alberta action was final; and (3) E & Y, in its capacity as IW's receiver, was the plaintiff in both actions and Chartis was privy to, [page752] and responsible for, the defence of its insured, CGT, in the Alberta action.

[40] Issue estoppel applies here, with the qualification that it applies to findings of fact on matters in issue in the Alberta action, but not to the characterization of those findings: see Raywalt Construction Co. v. Allstate Insurance Co. of Canada, [2010] A.J. No. 1237, 2010 ABCA 320, 493 A.R. 287. As Lord Justice Roskill explained in Wayne Tank and Pump Co. v. Employers' Liability Assurance Corp., [1973] 3 All E.R. 825, [1973] 3 W.L.R. 483 (C.A.), at p. 833 All E.R.:

It was agreed that the relevant facts should be taken to be those found by John Stephenson J and by the Court of Appeal in the original proceedings. This sensible agreement had the result (perhaps inevitably) of both learned counsel avidly selecting phrases in the four judgments in the earlier proceedings as pointing to one result or the other in the present case. With respect, this is not the right approach. None of the judges was concerned with the present issue -- that of causation under a policy of insurance, and it would be quite wrong to take phrases used in an alien context and to seek to turn them to advantage in the present litigation one way or the other. What matters are the primary facts found -- not the language in which such findings were recorded.

(Citation omitted)

[41] I turn to the findings of fact in the Alberta action.

(b) Findings of fact in the Alberta action

[42] MacCallum J.'s findings of fact in the Alberta action were based entirely on a paper record, including a statement of agreed facts and the evidentiary record before Wilson J. in the first trial. I will set out the findings pertinent to the issues in this action.

[43] In October 1986, representatives of CGT and IW discussed the trusteeship of the trusts, previously administered by Royal Trust. It was agreed that if CGT made a loan of $1.5 million to IW, CGT would obtain trusteeship of the trusts, the value of which was expected to increase from $21 million to $65 million by the end of the fifth year.

[44] In February 1987, CGT replaced Royal Trust as trustee. CGT understood at the time that the balance remaining in each trust at the end of five years would be turned over to IW. Commencing in June 1987, CGT, at the request of IW, made withdrawals from the trusts and paid them to IW. It did so on the basis of certificates stating that there was an actuarially determined surplus in the trusts and the funds withdrawn were surplus. The withdrawals were not permitted by the trust instruments because they were for IW's own purposes, rather than for payment of warranty claims. CGT's lawyers had refused [page753] to provide an opinion concerning IW's ability to withdraw actuarially projected surplus from the trusts.

[45] In about August 1987, IW failed to pay premiums of almost $600,000 into the trusts. Although the terms of the trust did not permit CGT to make payments if IW was in default of payment of premiums, CGT continued to pay funds out of the trusts to IW.

[46] On October 23, 1987, CGT signed a commitment for the $1.5 million loan to IW. The initial plan was that, as security for the loan, IW would assign to CGT its residual interest in the surpluses in the trusts on their termination. CGT made the $1.5 million loan on October 28, 1987. However, the security arrangements were changed. Instead of assigning its interest in the surplus to CGT, IW used approximately $1.23 million, which CGT had withdrawn from the trusts the preceding day, together with approximately $266,000 previously withdrawn from the trusts, to purchase deposit certificates totalling $1.5 million, which it pledged to CGT as security for the loan. On November 9, 1987, a further $70,182 was withdrawn from the trusts, as actuarially projected surplus, in order to service the loan.

[47] On December 7, 1987, CGT attached the deposit certificates and repaid its loan. MacCallum J. found in doing so CGT had misappropriated the sum of $1,570,182 to repay the debt owing to it by IW (at para. 36).

[48] MacCallum J. also found the total sum of $2,606,430.50 was withdrawn in breach of trust as actuarially projected surplus while the 1986 trust agreements were in force (at para. 39).

[49] In late November or early December 1987, CGT and IW amended the trust agreement, without the knowledge or consent of the automobile importers. They changed the trust beneficiary (which had previously included the buyers of warranties) to IW and provided that IW could remove actuarially projected surplus during the term of the trusts. MacCallum J. held "[t] his self-serving ratification of what had passed could not undo the breaches of trust" (at para. 39).

[50] After IW went out of business, the balance in the trusts was insufficient to meet the claims of warranty holders.

[51] MacCallum J. found CGT was a participant in a deliberate breach of trust. He found that, "knowing the funds received were intended to be trust funds for the benefit of [the car buyers], [CGT] paid large sums from those trusts to IW for IW's own use, and some for [CGT's] own benefit, contrary to the trusts' purposes" (at para. 11).

[52] After reviewing the reasons of MacCallum J., the motion judge concluded, at para. 102: [page754]

In summary, the findings of Mr. Justice MacCallum indicate that [CGT] deliberately breached the trusts. It misappropriated funds and engaged in subversion and complicity for its own benefit. [CGT], knowing that it was in breach of the trusts, transferred significant amounts of money from the trusts to IW. [CGT] misappropriated $1,570,182 to re-pay the debt owed to it by IW. This was both dishonest and done for the illegal advantage of [CGT].

l08,12,00(c) Trustees' dishonesty

[53] After finding that the claim fell generally within the coverage under the Policy, the motion judge found Chartis could rely upon both Exclusion 7 and Exclusion 13 of the Policy. With respect to the former, he referred to judicial and dictionary definitions of "dishonest", at para. 97:

"'Dishonest' is a word of such common use that I should not have thought that it would give rise to any serious difficulty, but in construing even plain words, regard must be had in the context and circumstances in which they are used." (see: West Coast Securities Limited v. Continental Insurance Co., 1975 CanLII 1592 (BC SC), 1975 CarswellBC 215 at para. 31, 66 D.L.R. (3d) 278 (B.C.S.C.) referring to Can. Indemnity Co. v. Andrews & George Co. Ltd., 1952 CanLII 25 (SCC), [1953] 1 S.C.R. 19 at 24). In common parlance, "dishonesty" refers to "a lack of integrity or straightforwardness" (see: The New Shorter Oxford English Dictionary, Oxford University Press 1993). "'Dishonest' is normally used to describe an act where there has been some intent to deceive or cheat. To use it to describe acts which are merely reckless, disobedient or foolish is not in accordance with the popular usage or the dictionary meaning" (see: Lynch & Co. v. United States Fidelity & Guaranty Co., 1970 CarswellOnt 826, at para. 23, 1 O.R. 28 (H.C.)). In the context of an exclusion provision, the court, in Juno Estate v. Saskatchewan Government Insurance, supra, at para. 14, stated that the dishonesty exclusion denoted "an act or omission that is wilful and deliberate". Being negligent is not being dishonest.

[54] With respect to Exclusion 13, he concluded, at paras. 98-99, that CGT had clearly "gain[ed] . . . [an] advantage to which [it] was not legally entitled" when it appropriated trust funds to repay its loan.

[55] For the reasons that follow, I agree with the motion judge's conclusion concerning the applicability of Exclusion 7. As a result, it is unnecessary to consider Exclusion 13.

[56] In Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., 1993 CanLII 150 (SCC), [1993] 1 S.C.R. 252, [1993] S.C.J. No. 10, at p. 269 S.C.R., McLachlin J. referred to the following general principles of interpretation of insurance policies:

(1) 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. [page755]

[57] In interpreting the exclusions, in the context of the reasonable expectations of the parties, one should bear in mind that Endorsement #10 insures liability for (among other things) breach of duty as a trustee. Thus, in interpreting the exclusion for "dishonest" acts or omissions, it is appropriate to consider the meaning of that word, as applied to trustees. The abuse of a position of trust has frequently been considered to be dishonesty:

. . . obtaining something to which there is no entitlement, misusing a position of trust or responsibility, and taking advantage of the weakness of another -- are the cornerstones of the concept of dishonesty in the new law of fraud.

(J. Douglas Ewart, Criminal Fraud (Toronto: Carswell, 1986), at p. 95, quoted in R. v. Long, 1990 CanLII 5405 (BC CA), [1990] B.C.J. No. 2239, 51 B.C.L.R. (2d) 42 (C.A.), at para. 22; and R. v. Buckingham, [2008] N.J. No. 98, 2008 NLTD 55, 274 Nfld. & P.E.I.R. 194 (T.D.), at para. 48.)

[58] The authorities dealing with the liability of third parties for another person's breach of trust are helpful in understanding the definition of dishonesty. This is because third parties who participate in a trustee's breach of trust can be held liable as constructive trustees if they "assist with knowledge in a dishonest and fraudulent design on the part of the trustees": Air Canada v. M & L Travel Ltd. (1993), 1993 CanLII 33 (SCC), 15 O.R. (3d) 804, [1993] 3 S.C.R. 787, [1993] S.C.J. No. 118, at p. 811 S.C.R., quoting Barnes v. Addy (1874), L.R. 9 Ch. App. 244 (C.A.), at p. 252 L.R. 9 Ch. App.

[59] In Air Canada, at p. 826 S.C.R., Iacobucci J. held that "the taking of a knowingly wrongful risk resulting in prejudice to the beneficiary" would amount to "a dishonest and fraudulent breach of trust". In Gold v. Rosenberg (1995), 1995 CanLII 1256 (ON CA), 25 O.R. (3d) 601, [1995] O.J. No. 3156 (C.A.), at p. 604 O.R., affd (1997), 1997 CanLII 333 (SCC), 35 O.R. (3d) 736, [1997] 3 S.C.R. 767, [1997] S.C.J. No. 93, Laskin J.A. described Iacobucci J.'s decision and summarized the case law defining "fraudulent and dishonest design" as confirming "[f]raudulent and dishonest amount to the same thing and they include taking risks trustees know they have no right to take". See, more recently, Laskin J.A.'s decision in Enbridge Gas Distribution Inc. v. Marinaccio, [2012] O.J. No. 4558, 2012 ONCA 650, 355 D.L.R. (4th) 333, at para. 27.

[60] The meaning of "dishonest", when applied to a trustee, has also been considered in a line of cases from the United Kingdom dealing with trust agreement clauses exculpating a trustee from liability for all breaches of trust other than those that are fraudulent or dishonest. The leading case on the definition of "dishonest breach of trust" in this context is Armitage v. Nurse, [1998] Ch. 241 (C.A.). Millett L.J. began by noting, at p. 251 Ch., [page756] that an intentional breach of trust is not always a dishonest breach of trust:

By consciously acting beyond their powers (as, for example, by making an investment which they know to be unauthorised) the trustees may deliberately commit a breach of trust; but if they do so in good faith and in the honest belief that they are acting in the interest of the beneficiaries their conduct is not fraudulent. So a deliberate breach of trust is not necessarily fraudulent.

[61] He went on to conclude, however, where a trustee intentionally breaches the trust, and does not honestly believe its action is in the best interests of the beneficiaries, the trustee has committed a dishonest breach of trust. He added, at p. 251 Ch., it is irrelevant whether the trustee benefitted from its actions:

It is the duty of a trustee to manage the trust property and deal with it in the interests of the beneficiaries. If he acts in a way which he does not honestly believe is in their interests then he is acting dishonestly. It does not matter whether he stands or thinks he stands to gain personally from his actions. A trustee who acts with the intention of benefiting persons who are not the objects of the trust is not the less dishonest because he does not intend to benefit himself.

Later authority clarified that to avoid liability a trustee's honest belief its actions are in the beneficiaries' interests must also be reasonable: Walker v. Stones, [2001] Q.B. 902, [2001] 2 W.L.R. 623 (C.A.), at p. 939 Q.B.

[62] The approach in the United Kingdom to determining dishonesty in this context has recently been summarized as follows, in Fattal v. Walbrook Trustees (Jersey) Ltd., [2010] EWHC 2767 (Ch.), at para. 81:

. . . what is required to show dishonesty in the case of a professional trustee is:

i) [a] deliberate breach of trust;

ii) [c]ommitted by a professional trustee:

a) [w]ho knows that the deliberate breach is contrary to the interests of the beneficiaries; or

b) [w]ho is recklessly indifferent whether the deliberate breach is contrary to their interests or not; or

c) [w]hose belief that the deliberate breach is not contrary to the interests of the beneficiaries is so unreasonable that, by any objective standard, no reasonable professional trustee could have thought that what he did or agreed to do was for the benefit of the beneficiaries.

[63] In my view, this position is consistent with the Canadian authorities referred to above, and it is appropriate to apply it to the circumstances of this case. [page757]

(d) Application to the present case

[64] MacCallum J.'s findings of fact support the following conclusions. First, CGT committed deliberate breaches of trust by paying IW moneys to which it was not entitled under the terms of the trusts. Second, CGT misappropriated for its own benefit (repayment of the loan) moneys it had paid to IW in breach of trust. Third, CGT knew that the "surplus" in the trusts, relied upon by IW to justify the withdrawals, was merely a projected surplus. Fourth, CGT must have known that these projections might turn out to be inaccurate and that, in withdrawing funds from the trusts, it was placing the trusts at risk. Fifth, there is no way the withdrawals could have benefitted the beneficiaries. Sixth, there are no circumstances that could have grounded a defence that CGT honestly believed the withdrawals were in the best interests of the beneficiaries or that a reasonable trustee could have considered them to be in the beneficiaries' best interests.

[65] MacCallum J.'s findings of fact therefore amply support the conclusion that, based on the tests described above, each of the withdrawals was a "dishonest" breach of trust that would fall within Exclusion 7. This conclusion is not inconsistent with the motion judge's finding that CGT did not intend to harm the beneficiaries.

[66] E & Y further submits that the motion judge erred in failing to give effect to the words "for or arising out of", preceding the Policy exclusions. It says this expression requires a "continuous chain of causation" between the excluded event and the claim made: see Law, Union & Rock Insurance Co. v. Moore's Taxi Ltd., 1959 CanLII 81 (SCC), [1960] S.C.R. 80, [1959] S.C.J. No. 74. See, also, Ontario v. Kansa General Insurance Co. (1994), 1994 CanLII 626 (ON CA), 17 O.R. (3d) 38, [1994] O.J. No. 177 (C.A.), on which Chartis relies. E & Y says the withdrawals from the trusts, which were admitted to be breaches of trust, predated the dishonest "misappropriation", which occurred when CGT attached the deposit certificate and repaid its loan. It says actions subsequent to the breaches of trust cannot be used to ground a finding that the claims arose out of dishonest acts.

[67] I do not agree with this characterization of the claim. E & Y's claim "arose out of" CGT knowingly breaching the trusts by making payments to IW for its own use, rather than for the purposes of the trusts. CGT knew those payments could not possibly benefit the beneficiaries. Its actions were not slips or mistakes. They were intentional and carried a real risk of harm to the beneficiaries. These acts were dishonest and they preceded and [page758] caused the losses giving rise to the claim. CGT's subsequent actions, in scooping the deposits to repay the loan and rewriting the trust instruments to legitimize what it had done, were confirmatory of its dishonesty, but the dishonest acts had already occurred.

[68] For these reasons, in my view, the motion judge correctly found E & Y's claim falls within the exclusion for dishonest acts.

(2) Breach of the duty of good faith

[69] In a previous order, the motion judge had directed that one of the issues on the motion for summary judgment would be whether Chartis owed a duty of good faith to CGT in the Alberta action and to E & Y in that action and in this action. Any issue whether such a duty had been breached and, if so, any remedies, would be determined at a trial.

[70] There is no doubt that a liability insurer owes a duty of good faith to its insured in the defence of a claim. Before the motion judge and in this court, Chartis acknowledged it owed a duty of good faith to CGT in the defence of the Alberta action. In 702535 Ontario Inc. v. Non-Marine Underwriters, Lloyd's of London, 2000 CanLII 5684 (ON CA), [2000] O.J. No. 866, 184 D.L.R. (4th) 687 (C.A.), leave to appeal to S.C.C. refused [2000] S.C.C.A. No. 258, this court stated, at para. 27:

The relationship between an insurer and an insured is contractual in nature. The contract is one of utmost good faith. In addition to the express provisions in the policy and the statutorily mandated conditions, there is an implied obligation in every insurance contract that the insurer will deal with claims from its insured in good faith: Whiten v. Pilot Insurance Co. (1999), 1999 CanLII 3051 (ON CA), 42 O.R. (3d) 641 (Ont. C.A.). The duty of good faith requires an insurer to act both promptly and fairly when investigating, assessing and attempting to resolve claims made by its insureds.

[71] As this court noted in 702535, relying on Whiten v. Pilot Insurance Co. (1999), 1999 CanLII 3051 (ON CA), 42 O.R. (3d) 641, [1999] O.J. No. 237 (C.A.), revd [2002] 1 S.C.R. 595, [2002] S.C.J. No. 19, 2002 SCC 18,[^1] the duty to act in good faith is separate from the duty to compensate for the loss covered by the policy. It gives rise to a separate and independent cause of action, as noted at paras. 31-32:

A breach of the duty to act in good faith gives rise to a separate cause of action from an action for the failure of an insurer to compensate for loss [page759] covered by the policy. In Whiten v. Pilot Insurance, Laskin J.A. made the point at p. 650:

[I]n every insurance contract an insurer has an implied obligation to deal with the claims of its insureds in good faith. [cites omitted] That obligation to act in good faith is separate from the insurer's obligation to compensate its insured for a loss covered by the policy. An action for dealing with an insurance claim in bad faith is different from an action on the policy for damages for the insured loss. In other words, breach of an insurer's obligation to act in good faith is a separate or independent wrong from the wrong for which compensation is paid.

(See, also, the Supreme Court's decision in Whiten, at para. 79.)

[72] Before the motion judge, and in this court, E & Y submitted that by granting it the "proceeds from insurance coverage", the Houlden order had the effect of assigning to it CGT's claim against Chartis for breach of the duty of good faith. It argues that Chartis breached that duty by (1) failing to settle within the Policy limits; (2) permitting its coverage counsel to be involved in the defence of the action; (3) having defence counsel "steer" the defence to avoid coverage; and (4) obstructing and delaying the timely resolution of the claims and preferring its own interests over the interests of its insured.

[73] The motion judge referred to case law establishing that an insured may assign its cause of action for breach of the duty of good faith: Shea v. Manitoba Public Insurance Corp., 1991 CanLII 616 (BC SC), [1991] B.C.J. No. 711, 55 B.C.L.R. (2d) 15 (S.C.); Fredrickson v. Insurance Corp. of British Columbia, 1986 CanLII 1066 (BC CA), [1986] B.C.J. No. 366, 3 B.C.L.R. (2d) 145 (C.A.), affd 1988 CanLII 38 (SCC), [1988] 1 S.C.R. 1089, [1988] S.C.J. No. 54.

[74] He then found the Houlden order had the effect of assigning the claim for damages for breach of good faith, because it fell within the language "proceeds from insurance coverage arising out of a judgment". In support of this conclusion, he noted it would be "incongruous" if E & Y were left with no recourse if the insurer, in defending the action, could breach its duty to its insured with impunity; he reasoned, at paras. 147-48:

To my mind, it would be incongruous to permit [E & Y] to proceed against [CGT] on the basis that it could only look to insurance to satisfy any judgment, allow the insurer to provide the defence and then leave [E & Y] without recourse if that insurer failed to satisfy the duty of good faith it owed to its insured. As counsel for [E & Y] noted, the order of Mr. Justice Houlden indicated that ". . . any proceeds from insurance coverage arising out of a judgment . . . belong to the [Ernst & Young]". This is not limited to proceeds payable under the policy. It is broader than that. It would include damages arising from a breach of duty of good faith. Such damages would properly be described as "proceeds from insurance coverage arising out of a judgment".

In this situation, the duty of good faith, which was owed by Chartis to [CGT], has been assigned, by the order of Mr. Justice Houlden, to [E & Y]. The privity of contract with which we are concerned arises from the insurance agreement [page760] between the insurer and the insured. The right to sue for breach of the duty of good faith now belongs to [E & Y]. The alleged breach of the duty arises from the suggestion that Chartis did not fulfill its responsibilities in the way the defence of [CGT] was conducted in the Alberta action. It is the duty of good faith owed with respect to that action that is of concern.

[75] The motion judge concluded a trial was required to determine whether the duty of good faith had been breached. He held that "[a]ny remedy arising from such a breach would stand to the benefit of [E & Y]" (at para. 155).

[76] Chartis concedes there may have been a remedy for the breach of the duty of good faith, but says it does not arise from the Houlden order and it does not inure to the benefit of E & Y. It says any claim for bad faith was vested in CGT's liquidator, which might have exercised it at any time between 1993 and 2010. E & Y might have purchased that right, but it failed to do so. Alternatively, it says, E & Y should have specifically requested that the Houlden order include an assignment of the bad faith claim.

[77] For the reasons that follow, I conclude that while Chartis clearly owed CGT a duty of good faith in the defence of the Alberta action, the Houlden order did not assign to E & Y anything other than the right to the proceeds of CGT's insurance. It did not assign the Policy or any other contractual rights to E & Y.

[78] The term "proceeds from insurance coverage" used in the Houlden order was, in my view, used advisedly. "Proceeds of insurance" refers to a particular type of assignment, which is to be distinguished from an assignment of the insurance contract itself. Assignment of the contract substitutes the assignee as the party to the contract. In contrast, assigning the "proceeds of insurance" merely assigns the right to the moneys payable under an insurance policy to the assignee: see Barbara Billingsley, General Principles of Canadian Insurance Law, 1st ed. (Markham, Ont.: LexisNexis Canada, 2008), at p. 291. Billingsley describes assignment of the proceeds of insurance, at p. 290-91:

By assigning the proceeds of an insurance contract, the insured promises a third party that, if some or all of the proceeds of an insurance contract become payable to the insured, payment will instead be made to the third party assignee. The assignment only deals with who will receive the payment of insurance funds: the insurance contract remains exclusively between the insured and the insurer. This means that the third party's ability to recover insurance proceeds is entirely dependent upon the insurer's contractual obligation to pay the insured. So, for example, if the insured has forfeited its right to coverage by breaching the insurance contract, the insurer has no obligation to pay the third party or the insured.

(Citations omitted) [page761]

(See, also, Craig Brown and Thomas Donnelly, Insurance Law in Canada, looseleaf, vol. 1 (Toronto: Carswell, 2013), at pp. 15-8-5-10.)

[79] In Ferme Gérald Laplante & Fils Ltée. v. Grenville Patron Mutual Fire Insurance Co. (2002), 2002 CanLII 45070 (ON CA), 61 O.R. (3d) 481, [2002] O.J. No. 3588 (C.A.), leave to appeal to S.C.C. refused [2002] S.C.C.A. No. 488, Charron J.A. observed, at para. 78:

A breach of the duty to act fairly and in good faith gives rise to a separate cause of action that is distinct from the cause of action founded on the express terms of the policy and that is not restricted by the limits in the policy. Hence, it may result in an award of consequential damages distinct from the proceeds payable under the policy.

(Emphasis added)

[80] Laskin J.A. used similar language in Whiten, at p. 650 O.R., to describe the distinction between damages for breach of the duty of good faith and proceeds of insurance:

A breach of the duty of good faith may result in an award of damages which is distinct from the proceeds payable under the policy for the insured loss and which are not restricted by the limits in the policy.

[81] Because "proceeds payable" under an insurance policy are distinct from a cause of action for breach of the duty of good faith, assignment of the "proceeds of insurance" does not, in my view, include damages for breach of the independent contractual duty of good faith owed to an insured. Accordingly, E & Y did not obtain a cause of action for any breach of the duty of good faith Chartis owed to CGT.

[82] This conclusion does not, however, mean that Chartis was entitled to flaunt the purpose of the Houlden order. It could not exercise the right to defend E & Y's action against its insured and "steer" the defence so as to avoid its insurance obligations. Nor does it mean that E & Y would be without recourse if Chartis had deliberately frustrated the spirit and intent of the Houlden order. Having been permitted by the Houlden order to defend the Alberta action, Chartis was not permitted to undermine its insured's coverage so as to deprive E & Y of the "proceeds".

[83] If there is any evidence that Chartis intentionally misled the court or subverted the course of justice, there are remedies available, subject to any defences Chartis may have, including potential limitation defences. It is open to E & Y to move for appropriate relief, including perhaps the variation of the Houlden order to include an assignment of CGT's cause of action for a breach of the duty of good faith. Alternatively, E & Y might have a claim for abuse of process on the basis of a collateral attack on [page762] a court order: Toronto (City) v. Canadian Union of Public Employees (C.U.P.E.), Local 79, [2003] 3 S.C.R. 77, [2003] S.C.J. No. 64, 2003 SCC 63, at para. 34. Abuses of the court's process are actionable in tort: Harris v. Glaxosmithkline Inc. (2010), 106 O.R. (3d) 661, [2010] O.J. No. 5546, 2010 ONCA 872, at para. 27. In addition, although perhaps not available in these circumstances, an action for civil contempt might be available for breach of the strict terms of a court order: see Bell ExpressVu Limited Partnership v. Corkery (2009), 94 O.R. (3d) 614, [2009] O.J. No. 356, 2009 ONCA 85.

[84] Given the manner in which the issues were divided, with the issue of breach of any duty of good faith being left for trial, there is no evidentiary record before this court -- nor was there before the motion judge -- that would permit me to determine whether such relief should have been granted to E & Y. In fairness, E & Y should be given the opportunity to make submissions to the motion judge on the issue whether any other remedy is available. Without circumscribing the motion judge's analysis or procedure, it will be up to the motion judge to determine (a) what evidentiary record is required and how that record should be developed; (b) whether any remedy or remedies are available; and (c) what relief, if any, should be granted.

[85] It would be in this context that a court might consider the remedies available to E & Y, should it be determined that the findings of fact in the Alberta action were the result of Chartis deliberately "steering" the defence so as to bring the claim within the policy exclusions.

[86] The motion judge concluded Chartis did not owe a separate duty of good faith to E & Y, in either the Alberta action or in this action. He concluded, at paras. 143-44:

The difficulty is with respect to the question of whether Chartis could owe a duty of good faith to [E & Y] in the Alberta action. An insurer owes no duty to a person asserting a claim against its insured. The claimant is a stranger to the relationship between the insurer and the insured and is not in privity of contract with them (see: Karamanolis et al. v. Prudential Insurance Co. Ltd., 1983 CanLII 1647 (ON SC), [1983] O.J. No. 3140, 42 O.R. (2d) 752). Recognizing such a duty would be "completely unworkable in the context of [an] adversarial relationship", would create "irreconcilable conflicts of interest" and lead to a "breakdown of the indemnity system" (see: D.M. v. Alberta Lawyers Insurance Assn., 2006 ABQB 598, [2006] A.J. No. 983, 271 D.L.R. (4th) 246, at paras. 57-59).

On this basis, there could be no independent duty of good faith owed by Chartis to [E & Y][.]

[87] I agree with the motion judge's rationale as to why E & Y has no claim for breach of a direct duty of good faith either in the Alberta action or in this action. [page763]

E. Conclusion

[88] For these reasons, I would dismiss the appeal and would allow the cross-appeal, in part. E & Y may seek directions from the motion judge in the event it seeks further relief. As success is to some extent divided, I would make no order as to the costs of the proceedings in this court.

Appeal dismissed; cross-appeal allowed in part.

Notes

[^1]: Although the Supreme Court reversed this court's decision in Whiten and accepted the result Laskin J.A. offered in dissent, it accepted this point, on which this court was unanimous.

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