COURT FILE NO.: CV-10-00411180-0000

DATE: 2012-09-17

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

ERNST & YOUNG INC. Plaintiff

– and –

CHARTIS INSURANCE COMPANY OF CANADA, FORMERLY KNOWN AS AIG COMMERCIAL INSURANCE COMPANY OF CANADA AND AMERICAN HOME ASSURANCE COMPANY Defendants

COUNSEL: Lawrence G. Theall & Michael Foulds, for the Plaintiff/Moving Party Douglas H. McInnis & Jacqueline L. Wall, for the Defendants

HEARD: May 28, 29 & 30, 2012

LEDERER J.:

Introduction

[1] International Warranty Company Limited (“IW”) sold extended warranties to the purchasers of certain automobiles. Central Guaranty Trust Company (“Central Guaranty Trust”) received the premiums as trustee for the purchasers of the warranties. IW was placed in receivership. The plaintiff, Ernst & Young Inc., was the receiver of IW and the defendant, Chartis Insurance Company of Canada (“Chartis”), the insurer of Central Guaranty Trust. As a result of allegations that the trusts had been breached, Ernst & Young sued Central Guaranty Trust in the Court of Queen's Bench in the Province of Alberta. That action began with a Statement of Claim, dated October 14, 1992, issued pursuant to an order made by the Associate Chief Justice of Alberta (Miller A.C.J.) Following a lengthy history, the claim was resolved by the judgment of Mr. Justice MacCallum, dated January 21, 2010. He found in favour of the receiver and awarded judgment against Central Guaranty Trust. The parties advised that, with interest included, the award totalled $10,028,411.32, plus costs. Ernst & Young Inc. has attempted to realize on its judgment, relying on a policy of insurance held by the defendant. The defendant, Chartis, has refused to pay. As a result, the receiver has launched this action against Chartis, as the insurer of Central Guaranty Trust.

[2] This is a motion for summary judgment brought by Ernst & Young Inc. As such, it relies on Rule 20.01(1) and Rule 20.04(2) of the Rules of Civil Procedure. Chartis does not oppose the motion so much as it makes submissions that, if successful, would end the action in its favour. By way of example, Chartis says that Ernst & Young Inc. is without standing to bring the action and, even if it has standing, the applicable policy of insurance does not cover the loss.

[3] Rule 20.04(2) of the Rules of Civil Procedure says:

The court shall grant summary judgment if,

(a) the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence; or

(b) the parties agree to have all or part of the claim determined by a summary judgment and the court is satisfied that it is appropriate to grant summary judgment.

[4] Given the position of the parties for much of this motion, Rule 20.04(2)(b) is the applicable clause of the rule. This follows from an understanding that the questions of whether Ernst & Young Inc. has standing and whether the available insurance will cover the loss depend on the wording of the policy and the findings of Mr. Justice MacCallum. This information provides the court with the “full appreciation” it requires to determine these issues (Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764, [2011] O.J. No. 5431 (QL), at paras. 50-54).

[5] The parties agree that there will be issues that will have to be left to a trial. As matters stand, the motion is for partial summary judgment. Both sides seek partial summary judgment in their favour.

Background

[6] It could be said that this action begins with the decision of Mr. Justice MacCallum, but it would be impossible to decide the issues raised by this motion without an understanding of the background leading to that judgment. In fact, the hearing he conducted was not the first time the matter came to trial. It had been tried and decided by Mr. Justice W. E. Wilson. He dismissed the claim. The Court of Appeal of Alberta set aside that determination and ordered a new trial. The proceeding conducted by Mr. Justice MacCallum was that trial. In understanding the role played by the second trial, it is important to understand that Mr. Justice MacCallum heard no viva voce (oral) evidence. He relied on the record of the first trial. His reasons reveal that, at the first trial, certain of the facts that led to the trial were agreed to. Some of the history that is the background to the case I am asked to decide is found within the findings of fact that were relied on by Mr. Justice MacCallum; some of it is not.

[7] In the paragraphs that follow [8-18], I review what I have taken from the decision of Mr. Justice MacCallum.

[8] IW entered into contracts with several automobile manufacturers. As a result of those contracts, it sold extended warranties to the customers of those manufacturers. Prior to 1986, IW insured its obligations under these Mechanical Protection Agreements (“MPA’s”) with Commonwealth Insurance Company. Beginning in March 1986, this changed. IW entered into trust agreements with Royal Trust. Over the years 1986 and 1987, separate trusts associated with sales of each of the automobile manufacturers were established. IW funded the various trusts by depositing money, from the sale of each of the MPA’s, into the appropriate trust. IW sought and obtained the consent of the automobile manufacturers to a change of trustee from Royal Trust to Central Guaranty Trust. On February 24, 1987, Central Guaranty Trust was appointed trustee of the various trusts valued, in total, at $23 million.

[9] The reason for the change is significant. The discussions leading to the takeover of the trusts by Central Guaranty Trust began in October 1986. IW required a loan of $1.6 million. IW implied to Central Guaranty Trust that, if it provided the loan, it would secure the trusteeship of the funds. In his reasons, Mr. Justice MacCallum observed that the “ostensible reason” for the change was that Central Guaranty Trust could invest the funds at a higher rate. He went on to observe that “the real reason” was that Royal Trust would not extend the loan. If Central Guaranty Trust would make the loan, it would get the business to administer the trusts. Central Guaranty Trust got the business and made the loan in October 1987. I shall return to this loan shortly.

[10] In the decision of Mr. Justice MacCallum, it is made clear that those at Central Guaranty Trust (he refers to one officer by name) understood the nature of IW’s business, that the trusts had been established to replace insurance, that, on average, each warranty ran for five years, and that only the balance remaining in the trust at the end of the five years was to be turned over to IW.

[11] It is in the context of the last point that the loan made by Central Guaranty Trust becomes important. The loan was for $1.5 million. It was used to discharge the indebtedness of IW to Lloyd's Bank. Central Guaranty Trust signed a loan commitment on October 23, 1987. On October 27, 1987, the security for the loan was changed. Instead of assigning the residual interest in the surplus that would exist on termination of the various trusts, IW withdrew $1.5 million immediately, based on what was referred to as an “actuarially projected surplus”. The money was used to purchase time deposit certificates which were then used as security for the loan. On December 7, 1987, less than two months later, Central Guaranty Trust attached the time deposits and re-paid its loan. In his decision, Mr. Justice MacCallum found that the money used to re-pay the loan was misappropriated by Central Guaranty Trust. It was complicit in an improper withdrawal of money belonging to the trust. Central Guaranty Trust had been told by its lawyers that they refused to provide an opinion as to the ability of IW to withdraw an actuarially projected surplus from the trust. Mr. Justice MacCallum found that this was part of a total of $2,606,430.50 that was withdrawn, in breach of trust, as an actuarially projected surplus made while the trusts were still in force. He makes these findings regardless of the fact that $61,320.37 was re-paid and $509,000 was contested as a breach. As put by Mr. Justice MacCallum, $2,036,110.13 of the $2,606,430.50 was conceded, by the parties, to be a breach of the trust.

[12] While the money acquired through the sale of the MPA’s in Quebec followed a somewhat different path than in other provinces, in the end, it, too, became the subject of a trust held by Central Guaranty Trust. On June 16, 1987, Central Guaranty Trust withdrew $509,000 from the Quebec trust during the term of the trust. These are the funds referred to by Mr. Justice MacCallum as being contested as a breach. The money was paid to IW, pursuant to an actuarial certificate demonstrating this amount to be an “actuarially projected surplus”. It was argued that Quebec law applied and permitted the withdrawal of such surplus amounts and that this abrogated any private agreement to the contrary. Mr. Justice MacCallum reviewed this and determined that Central Guaranty Trust and IW were in breach of their own trust agreement, even under Quebec law, if it applied.

[13] On this basis, Mr. Justice MacCallum included the $509,000 among the breaches of trust to which Central Guaranty Trust was a party, although it was not “conceded” to be such by the parties to the action.

[14] Mr. Justice MacCallum noted that, sometime late in 1987, but, in any event, after all the withdrawals had been made, IW and Central Guaranty Trust attempted to change the trust agreements. They purported to change the definition of trust beneficiaries such that Central Guaranty Trust no longer held the funds for the benefit of the automobile manufacturers or the holders of the MPA's but, instead, “in trust for IW”. The changes provided a right to remove actuarially projected surpluses during the term of the trusts. Mr. Justice MacCallum found that this self-serving ratification of what had already been done could not undo the breaches of the trust. He observed that there was no evidence that Central Guaranty Trust ever obtained the consent of the automobile manufacturers to the changes or advised them of those changes once they had been made.

[15] There was a further breach of the trusts. IW did not fund the August, 1987 premiums amounting to $594,532.29. Central Guaranty Trust argued that this did not constitute a breach of trust on its part because it was not the trustee of the funds until it received them. Mr. Justice MacCallum did not accept this submission. He found that Central Guaranty Trust was a party to the default by IW. Two days before the $1.5 million loan transaction was to close, representatives of IW advised an officer of Central Guaranty Trust that the trusts contained a surplus and that, based on this calculation, the August remittances did not have to be paid. Payment of the premiums would only serve to enhance the surplus already in place. Central Guaranty Trust responded by withdrawing from the trust and paying to IW the actuarially projected surplus of $1,303,715.82 for the loan transaction as well as a claim for reimbursement payments totalling approximately $963,000. Based on this, Mr. Justice MacCallum found that both IW and Central Guaranty Trust intentionally breached the terms of the trust by allowing further withdrawals for the benefit of IW.

[16] This is the judgment that Chartis, the defendant in the action, has refused to pay.

[17] There is one further event of importance referred to in the reasons of Mr. Justice MacCallum. He was asked to award costs against Chartis as the insurer of the defendant, Central Guaranty Trust. He observed that costs against persons not named to an action are not unknown, though they are exceptional. He asked, what was the status of the insurer in the action he had considered? As perceived by Mr. Justice MacCallum, the answer derived from an order of Mr. Justice Houlden, of the Ontario Court (General Division), the immediate predecessor of this Court. On November 2, 1993, Central Guaranty Trust was wound-up by order of the Ontario Court, pursuant to the provisions of the Winding-up & Restructuring Act, R.S.C. 1985, c. W-11 (“Winding-up Act”). As a result of the winding-up proceeding, Ernst & Young Inc. brought a motion for, among other things, an order to lift the stay of proceedings so as to allow the action in Alberta to continue. The motion was heard by Mr. Justice Houlden on October 6, 1993. The order referred to by Mr. Justice MacCallum was made on that day. The order does lift the stay. It also limits the plaintiff, Ernst & Young Inc., if successful in the action, to reliance on any insurance policies to satisfy the judgment. It would have no rights to execute against the estate of Central Guaranty Trust and none of its assets would be subject to judicial process “… nor should any costs be awarded against the estate but the plaintiff shall have the right to file and pursue a proof of claim in the winding up proceedings”. This assisted Mr. Justice MacCallum in dealing with the issue of costs. As we shall see, the order of Mr. Justice Houlden is relied on for other purposes here.

[18] Before turning to that part of the history that was not referred to by Mr. Justice MacCallum, it is important to review what transpired in the court proceedings which preceded his involvement. This part of the story is referred to in the decision of the Court of Appeal made in respect of the judgment of Mr. Justice W.E. Wilson.

[19] In the following paragraphs [20-26], I review what I have taken from the judgment of the Alberta Court of Appeal.

[20] IW stopped carrying on business during the month of December, 1987. Some warranty holders were at risk. The receiver was appointed to determine the extent of the warranty obligations that remained and to make a recommendation to the court as to how best to deal with the warranty holders. The receivership was case-managed by Miller A.C.J. The receiver filed a report and a series of orders were issued. The automobile manufacturers assumed most of the warranty obligations of IW, the trust funds held by Central Guaranty Trust were paid to the receiver, the receiver paid a substantial portion of the funds it received to the automobile manufacturers and the receiver was authorized to bring an action against Central Guaranty Trust to determine whether it had breached its obligations as trustee.

[21] On the eve of the trial heard by Mr. Justice W. E. Wilson, during May 2000, Central Guaranty Trust amended its Statement of Defence to allege, for the first time, that the trusts were invalid. Mr. Justice W. E. Wilson determined that the trusts were invalid and that, as a result, no other form of relief was called for. In particular, Mr. Justice W. E. Wilson found that the issue of the validity of the trusts was not settled by the principles of res judicata, collateral attack or abuse of process. This is the decision that was set aside by the Court of Appeal of Alberta. The Court of Appeal acknowledged that no specific determination was made by Miller A.C.J. as to the validity of the trusts. Nonetheless, a finding that the trusts were valid was fundamental to, and made in, the receivership proceedings. All of the pre-conditions required for a finding of res judicata were present and there were no special circumstances available to justify a denial of reliance on the principle. The Court of Appeal found that reliance on the invalidity of the trust as a defence amounted to a collateral attack on at least one of the orders that have been made by Miller A.C.J. Most importantly, the Court of Appeal of Alberta found that it was an abuse of process for Central Guaranty Trust to re-litigate the issue of the validity of the trusts. The Court said:

…It is simply too late. Central Guaranty [Trust] was involved in the receivership proceedings from the outset. It participated while agreements were reached and orders were granted varying the trusts and distributing the trust proceeds. It watched unsecured creditors' claims go unpaid as the trusts were administered. It stood by as the [automobile manufacturers] assumed IW’s obligations to the warranty holders. All of this transpired while Central Guaranty [Trust] knew there was a potential defence that the trusts were invalid. To allow Central Guaranty [Trust] to raise that defence more than a decade later in these circumstances would violate principles of judicial economy and certainty and seriously undermine the administration of justice in this province.

(Ernst & Young Inc. v. Central Guaranty Trust Company 2006 ABCA 337, at para. 54)

[22] The Court of Appeal of Alberta set aside the decision of Mr. Justice W.E. Wilson and ordered a new trial to determine whether Central Guaranty Trust had breached the trusts and, if it had, what remedy should be imposed.

[23] Even with this, I have not yet completed a review of the history on which the motion before me is founded. There are facts, more accurately alleged facts, on which the plaintiff relies but which have not, as of yet, been the subject of any determination by any court. These allegations concern how it was that Central Guaranty Trust came to amend its Statement of Defence, so close to the trial, to suggest the trusts were not valid. The Court of Appeal of Alberta, in its decision, noted that, in April 1988, Central Guaranty Trust was made aware, by its lawyers of the time, of the existence of a possible defence that the trusts were invalid. It did not raise the defence at that time. Why did this happen when it did?

[24] Shortly before the trial before Mr. Justice W. E. Wilson (the plaintiff alleges about six weeks before the scheduled trial date), the insurer, which had taken over the defence of Central Guaranty Trust, retained new counsel to defend its insured. The new lawyer reviewed the policy of insurance held by Chartis and came to the opinion that there was no coverage available to Central Guaranty Trust. He conveyed this position to counsel for plaintiff, Ernst & Young Inc., in the hope that it would settle. The lawyer wrote to counsel for the plaintiff providing a copy of the insurance policy in a sealed envelope. The letter indicated that the envelope could be opened only if the plaintiff provided certain undertakings, including that it would take no steps to amend its Statement of Claim to “embrace coverage”. The envelope was returned unopened.

[25] I digress to observe that an absence of coverage would serve to exculpate the insurer, but not insured from liability. Warren P. Cooney was examined-for-discovery, on behalf of Chartis, in the action in which this motion is brought. He is the “Complex Claims Director” and an officer of the company. He acknowledged that counsel retained, by an insurer, to defend an insured party should litigate and conduct that defence. If the insurer needed coverage advice, it would not be sought from the counsel that is defending the insured under the policy.

[26] As counsel for Ernst & Young Inc. on this motion sees it, the actions of Chartis and the counsel it retained to defend its insured were directed to steering the case, not to defending Central Guaranty Trust, but to having the action before the court in Alberta determined on the basis of an absence of coverage. Counsel for Ernst & Young Inc., in this action, says that instructions given by Chartis to amend the Statement of Defence of Central Guaranty Trust to allege there were no legally-valid trusts was demonstrative of this effort. If there were no valid trusts, then, according to Chartis, there would be no coverage. Mr. Justice W. E. Wilson heard the motion and took it under reserve. The trial proceeded “largely on the basis of agreed facts and an agreed exhibit book”. Except for an expert to provide an opinion on Quebec law, no evidence was called on behalf of Central Guaranty Trust. Counsel for Ernst & Young Inc., on this motion, sees this as a further indication that the central thrust of the approach being taken by those supposedly representing Central Guaranty Trust was to demonstrate there was no coverage under the applicable policy, not to providing a substantive defence. According to counsel for Ernst & Young Inc., this is confirmed by what happened next. Unknown to Ernst & Young Inc., after Chartis instructed the counsel it had retained to defend the interests of Central Guaranty Trust to plead there were no valid trusts, the Chartis coverage counsel, in New York, wrote to the provisional liquidator of Central Guaranty Trust advising of the amendment. The letter indicated that, should it be determined that there were no valid trusts, there would be no insurance coverage available. Counsel for Ernst & Young Inc. believes this letter clearly shows Chartis steering the defence to avoid coverage, conduct it says was improper. For the time being, I make no comment as to the validity or appropriateness of these assertions. I note only that these allegations arise from the history that led to this action and this motion. In considering this, it should be remembered that, had the judgment of Mr. Justice W.E. Wilson remained in place, there would have been no liability on either the insurer or the insured. Having found there were no valid trusts, he found there was no reason to go on to consider if they had been breached or, if they had, what, if any, remedy that would lie against Central Guaranty Trust, the defendant in the action he tried. The Court of Appeal of Alberta did not make an independent finding that the trusts were valid. It determined that, as a result of reliance on and acceptance of the validity of the trusts in orders made over the course of the action, a determination that the trusts were valid “…was fundamental to, and made in, the receivership proceedings”. The matter had been decided.

[27] This takes me to the present proceedings. With the judgment of Mr. Justice MacCallum in hand, Ernst & Young Inc. wrote to Chartis, as the insurer of Central Guaranty Trust, requesting that the judgment be satisfied. When no response was received, this action was commenced. The motion for summary judgment was scheduled to be heard on February 28 and 29, 2012. The parties agreed to adjourn the motion, on consent, to April 18, 2012 on terms set out in an order, dated March 2, 2012. This order outlined the issues that were to be addressed on the motion for summary judgment. For ease of reference, they are repeated here:

(a) Does the plaintiff have standing to bring this action against Chartis?

(b) What, if any, rights did the order of Mr. Justice Houlden, dated October 6, 1993, in the Ontario Court (General Division) File No.B368/92 provide to the plaintiff?

(c) Is coverage available, under Policy No. 943 63 96 (the “Policy”) issued by Chartis to Central Guarantee Trust Company, to pay the amounts owing under the judgment of Mr. Justice MacCallum, dated January 21, 2010, in the Alberta Court of Queen's Bench Action No. 9203 20,725 (the “Alberta Action”), which determination shall be subject to the plaintiff's right to argue bad faith at trial with respect to any coverage defences based upon the wording of the Policy?

(d) Is there any excess policy above the Policy, and what are its limits?

(e) Is the limit of liability of the Policy reduced by defence costs?

(f) Did Chartis owe Central Guaranty Trust a duty of good faith in the Alberta Action?

(g) Did Chartis owe the plaintiff a duty of good faith in the Alberta Action?

(h) Does Chartis owe the plaintiff a duty of good faith in the Ontario Action?

(i) Does the plaintiff have an actionable right against Chartis for breach of any duty of good faith to Central Guaranty Trust?

(j) Does the plaintiff have an actionable right against Chartis for any duty of good faith to the plaintiff?

(k) For greater certainty, the court hearing the motion for partial summary judgment will not determine the following issues:

(i) whether Chartis breached its duty of good faith, if any, to Central Guaranty Trust and/or the plaintiff, and any consequential relief, including relief with respect to Chartis’s defences based upon the Policy wording; or

(ii) the issue of punitive damages.

[28] I return to what I said at the outset of these reasons. Much of this motion deals with aspects of this action which the parties agree can be determined on a motion for summary judgment (Rule 20.04(2)(b)). Those that cannot are found at paragraph “(k)”, above and the qualification found in paragraph “(c)”. At the outset of the motion, Chartis added to the list. As Chartis sees it, issues dealing with policy limits should be left to trial. These include whether there is an excess policy that may apply and, if so, its limits (see paragraph “(d)”), whether the policy limits have been eroded by the cost spent defending Central Guaranty Trust in the Alberta action (see paragraph “(e)”) and the value of any deductible that may be relied on. This is not specifically referred to in the order of March 2, 2012. It is an addition to the list.

Does the plaintiff, Ernst & Young Inc., have the standing to bring this action?

[29] The first issue reviewed by both parties was the fundamental question of whether Ernst & Young Inc. has the standing to bring this action. Clearly, if it does not, there would be no purpose in proceeding further.

[30] In beginning a discussion of this question, it is important to remember that IW ceased to do business on December 16, 1987. On December 31, 1987, Miller A.C.J. appointed Ernst & Young Inc. receiver of IW. On June 16, 1988, Miller A.C.J. directed an issue to determine whether disbursements from the trusts by Central Guaranty Trust (being the loan of $1.5 million and the $509,000 withdrawn from the Quebec trust) were made in accordance with the trust agreements. If not, the Court could order Central Guaranty Trust to pay back the money. Ernst & Young Inc., as the receiver, and Central Guaranty Trust were named as parties. On January 28, 1992, Miller A.C.J. authorized Ernst & Young Inc., to bring an action, on behalf of the purchasers of the MPA’s, against Central Guaranty Trust advancing any claim the receiver considered appropriate. This included, but was not limited to, the issues directed by the order of June 16, 1988. The action which proceeded to trial, first before Mr. Justice W. E. Wilson; and, subsequently, before Mr. Justice MacCallum, was commenced with a Statement of Claim, authorized by Miller A.C.J. on October 14, 1992. Mr. Justice MacCallum noted:

It is plain, therefore, that the Receiver was given unfettered discretion in this action against [Central] Guaranty Trust to seek any determination and relief it considered appropriate in the matter of IW, and breach of trust by [Central] Guaranty Trust was one such matter.

(Ernst & Young Inc. v. Central Guaranty Trust Company 2010 ABQB 26, at para. 30)

[31] This was followed by the winding-up of Central Guaranty Trust and, on October 6, 1993, the order of Mr. Justice Houlden lifting the stay the winding-up order put in place. This allowed Ernst & Young Inc. to continue the action that was ongoing in Alberta. As part of his order, Mr. Justice Houlden allowed that the Provisional Liquidator of Central Guaranty Trust was not required to defend the Alberta action, but permitted the insurer of Central Guaranty Trust to do so. Chartis took over the defence. The order of Mr. Justice Houlden went on to provide that, to the extent that Ernst & Young Inc. succeeded in the action, it would have no right to issue execution against the estate of Central Guaranty Trust. The only recourse left to Ernst & Young Inc., insofar as the estate of Central Guaranty Trust was concerned, was the right to file and pursue a proof of claim in the winding-up proceedings. The order went on to make clear that any proceeds from insurance coverage arising out of the judgment would belong to Ernst & Young Inc. Counsel advised the court that a claim was made within the winding-up proceedings based on the judgment of Mr. Justice MacCallum. The claim was taken as proved and a pro rata share, being $159,000, was distributed to Ernst & Young Inc. The only source available to recover any additional funds in satisfaction of the judgment is insurance. Chartis is the holder of a policy insuring Central Guaranty Trust.

[32] It was on July 12 and 14, 1988 that Miller A.C.J. gave approval to an agreement between Ernst & Young Inc. and the automobile manufacturers, whereby the latter agreed to honour claims of certain MPA purchasers. In return, they received a share of the money held in trust with respect to some of the MPA’s. Finally, it should be said that, on March 19, 1995, Central Guaranty Trust was discharged as trustee on its own motion and Ernst & Young Inc., the receiver, appointed in its stead. Mr. Justice MacCallum observed:

It is clear… that the Receiver properly brought this action on behalf of the trust beneficiaries by court order and the [automobile manufacturers], by court order, became the beneficiaries of the trusts.

There was no need to sue in a representative capacity given the orders of Miller, A. C. J., the Receiver. Ernst & Young is the proper claimant.

(Ernst & Young Inc. v. Central Guaranty Trust Company, supra, (ABQB), at paras. 34 and 35)

[33] It is in these circumstances that counsel for Chartis submits that Ernst & Young Inc. has no standing to bring this action, which is in furtherance of collecting whatever may be owed under the policy. Without going further, one has to wonder how this could be seen as reasonable or appropriate. The holders of the MPA’s, the true beneficiaries under the trusts, and the automobile manufacturers who had, by agreement and court order, stepped in to take over responsibility for at least some of the agreements, would be left without the possibility of recourse to any insurance that was held by and could have benefited Central Guaranty Trust. The order of Mr. Justice Houlden would be largely meaningless in that there would have been little purpose in the receiver proceeding and none in suggesting that, if successful, it could look to the insurer to make good on the judgment. There would be no reason for the insurer to have defended the Alberta action. It could have stood by and waited, in any subsequent action relying on insurance, to argue that Ernst & Young Inc. was without standing.

[34] Counsel for Chartis says that the ability of a third party, without privity of contract with the insurer, to sue relying on a policy of insurance is constrained by s. 132(1) of the Insurance Act, R.S.O. 1990, c. I. 8. It says:

Where a person incurs a liability for injury or damage to the person or property of another, and is insured against liability, and fails to satisfy a judgment awarding damages against the person in respect of the person' s liability, and an execution against the person in respect thereof is returned unsatisfied, the person entitled to the damages may recover by action against the insurer the amount of the judgment up to the face value of the policy, but subject to the same equities as the insurer would have if the judgment had been satisfied.

[Emphasis added]

[35] As counsel sees it, this provision establishes, by statute, the circumstances and conditions under which an unsatisfied judgment creditor (in this case, Ernst & Young Inc.) can sue the insurer (in this case, Chartis) of an insolvent judgment debtor (in this case, Central Guaranty Trust). It is said that this provision does not assist Ernst & Young Inc. because the Alberta judgment does not satisfy the threshold requirement that the liability of the insured (Central Guaranty Trust) be “for injury or damage to person or property of another” (Ernst & Young Inc.). The section, by its language, does not apply to economic loss of the type established by Ernst & Young Inc. in the Alberta action. In making this submission, counsel relied on the case of Perry v. General Security Insurance Co. of Canada, 1984 CanLII 2146 (ON CA), [1984] O.J. No. 3300 (QL). In that case, a solicitor failed to properly register a mortgage on behalf of the client who had retained him for that purpose. The property was sold under power of sale. There were insufficient funds to discharge the loan the client had made. The client sued the solicitor and obtained a default judgment against him. Ultimately, the client came to look to the insurer of the solicitor for satisfaction of the judgment. Among the questions the court was asked to resolve was whether the solicitor incurred a liability “for injury or damage to the person or property of the plaintiffs” within the meaning of a predecessor of what is now s. 132(1) of the Insurance Act. The motions judge, with what the Court of Appeal referred to as “obvious reluctance”, found that he had not. The Court of Appeal agreed. It did not accept that the loss of a pecuniary interest was injury or damage to property. The Court of Appeal quoted the definition of “property” as found in the Insurance Act. It has not changed:

‘property’ includes profits, earnings and other pecuniary interests, and expenditure for rents, interest, taxes and other outgoings and charges and in respect of inability to occupy the insured premises, but only to the extent of express provision in the contract

[36] While acknowledging that there were broader ways of interpreting what was meant by “property”, the Court held that:

In looking at the scope of s. 109 [now s. 132 (1)], I do not think the words of the section can be interpreted to mean economic loss unrelated to physical damage to property.

(Perry v. General Security Insurance Co. of Canada, supra, at para. 13, per MacKinnon A.C.J.O.)

[37] It went on to compare the situation it confronted with the decision of the Supreme Court of Canada in Jordan House Ltd. v. Menow et al., 1973 CanLII 16 (SCC), [1974] S.C.R. 239 and concluded:

…to interpret the word ‘property’ in s. 109 [now s. 132(1)] of the Insurance Act to cover the present claim would be, in the words of Laskin J., “[an] attempt to read the word ‘property’ in a sense which is entirely foreign to its ordinary meaning as well as to the context in which it is used…”

(Perry v. General Security Insurance Co. of Canada, supra, at para. 17, per MacKinnon A.C.J.O.)

[38] I am obliged to observe that, left to myself, I would interpret the opening clause of the definition of the word “property” as found in the Insurance Act (“includes profits, earnings and other pecuniary interests”), as separated from what follows the word “and” which comes immediately after the word “interests”. The “and” separates introductory words leaving definitions of “property” unassociated with the reference to “insured premises”, which the Court of Appeal relied on as limiting “property” as found in the definition (see: Perry v. General Security Insurance Co. of Canada, supra, at para. 11, per MacKinnon A.C.J.O.). It appears that this approach of attempting to parse the section was considered and rejected. In a separate set of reasons, the case also observed:

…I am persuaded by the reasons of MacKinnon A.C.J.O. that the interpretation of ‘property’ in that subsection [then s. 109 (1), now s. 132 (1)], reading this objection as a whole and in context, cannot be extended to cover the plaintiffs’ loss. With great respect to my brother Houlden, he has agreed with MacKinnon A.C.J.O. that the definition of ‘property’ in s. 1 para. 54 of the Act (so as to include ‘other pecuniary interests’) does not apply to a policy of professional liability insurance, but has then gone on to hold that ‘property’ includes ‘pecuniary interests’ even without the definition clause. I do not agree, because I think the conclusion is not consonant with a reading of s-s. 109(1) [now s. 132(1)] as a whole.

(Perry v. General Security Insurance Co. of Canada, supra, at para. 60, per Arnup J.A.)

[39] There is a feature which distinguishes Perry from the case to be decided. The concern in Perry was that it would have been wrong to allow the claimants (those seeking recovery from the insurance company) to recover against the insurer without any procedural protections or rights being afforded to the insurer (see: Perry v. General Security Insurance Co. of Canada, at para. 20, per MacKinnon A.C.J.O.). In that case, the solicitor failed to notify his insurer. It was counsel to the clients who advised the insurer of the problem and informed it as the matter progressed. The insurer advised counsel to the clients that it would be unable to intervene without the solicitor reporting the claim in accordance with the policy of insurance. This had not happened by the time default judgment was awarded. Some months later, the solicitor agreed to provide information to the insurer, but did not do so. In this case, it could hardly be said that Chartis was denied reasonable protections. To the contrary, the order of Mr. Justice Houlden allowed that it could, and it did, take over the defence of Central Guaranty Trust, its insured, in the Alberta action. As I have already noted, it is being alleged that Chartis steered this defence to its own interest when the counsel it retained to defend its insured directed that defence to the issue of coverage rather than the substance of the breaches of trust that were said to have occurred.

[40] Nonetheless, there is nothing uncertain or ambiguous about the interpretation the Court of Appeal has placed on the definition of “property”, as found in the Insurance Act and as utilized in s. 132(1) of that legislation. In the circumstances, I am required to abide by its findings. If there is to be a change, it will have to come from the Court of Appeal. As it is, s. 132(1) of the Insurance Act does not provide Ernst & Young Inc. with the standing necessary to bring this action.

[41] Interestingly, there is a case that directly disagrees with the finding in Perry v. General Security Insurance Co. of Canada. In Juno Estate v. Saskatchewan Government Insurance, 1983 CarswellSask 209, 2 W.W.R. 183, a lawyer was retained to act for parties injured in an automobile accident. He failed to commence the action within the applicable limitation period. The plaintiff sued the solicitor for professional negligence and obtained judgment. She then sought to have the judgment satisfied by the solicitor's liability insurer. The Saskatchewan Insurance Act, R.S.S. 1978, c. S-26 contained a provision similar to, and with the same introductory words, as s. 132(1) of the Insurance Act of Ontario. The judge considered the decision, not of the Court of Appeal, but of the motions judge in Perry. He came to a different conclusion. The judge relied on what he understood to be the intention of the Legislature, which was to provide a remedy to the unsatisfied judgment creditor where the insured did not enforce payment, leaving the successful plaintiff with no remedy against the insurer. The judge referred to a provision in the “Part” of the Saskatchewan Insurance Act in which the section providing recourse to the insurer appeared. It applied the provisions in that Part “to every contract of insurance made in Saskatchewan” (s. 101) other than some exceptions which are not relevant here. (Essentially, the same provision is found in the Insurance Act of Ontario s. 122.) Taking these considerations into account, the judge found that the plaintiff had standing to proceed against the insurer. The “Annotation” attached to the report of the case refers to the result as “attractive”, but also suggests there is a “fatal flaw in this logic”. Be that as it may, as I see it, I am left to adhere to the decision of the Court of Appeal which was not considered in Juno Estate v. Saskatchewan Government Insurance.

[42] It may be of assistance if I point out that, in British Columbia, the applicable legislation has been amended to account for the limitation found in s. 132(1) of the Insurance Act. In Starr Schein Enterprises Inc. v. Gestas Corp., 1987 CanLII 2763 (BC CA), [1987] B.C.J. No. 803; 13 B.C.L.R. (2d) 85, the British Columbia Court of Appeal quoted s. 26 of the Insurance Act, R.S.B.C. 1979, c. 200. It opens with the same words as s. 132(1) of the Ontario statute (“Where a person incurs liability for injury or damage to the person or property of another...”). The Court of Appeal of British Columbia concluded “… that the loss of a pecuniary benefit cannot be said to be damage to property as those words are used in the Act” (see: Starr Schein Enterprises Inc. v. Gestas Corp., supra, at p. 3). It went on, and after referring to Perry v. General Security Insurance Co. of Canada, supra, noted:

My difficulty with the reasoning of Houlden J. [in Perry] is that to arrive at his conclusion the words ‘for injury or damage to the personal property of another’ must be ignored. If the legislature had intended to cover all losses it would simply have said: ‘where a person incurs liability and is insured against that liability…’ But it did not do that. It inserted the words ‘for injury or damage to the person or property of another’ and thereby limited the scope of the section. We have no right to ignore those limiting words.

(Starr Schein Enterprises Inc. v. Gestas Corp., supra, at pp. 3-4)

[43] The legislation was considered again in Pope v. Talbot Ltd. 2011 CarswellBC 1033; 2011 BCSC 548, 23 B.C.L.R. (5th) 318. By this time (2011 as compared to 1987), the statute had changed. The applicable section was s. 24 of the Insurance Act R.S.B.C. 1996, c. 266. Section 24(1) said:

If a judgment has been granted against the person in respect of a liability against which the person is insured and the judgment has not been satisfied, the judgment creditor may recover by action against the insurer the lesser of

(a) the unpaid amount of the judgment, and

(b) the amount the insurer would have been liable under the policy to pay the insured had the insured satisfied the judgment.

[44] With this legislation in place, it is clear that the limitation found in s. 132(1) of the Insurance Act, which had been present in earlier legislation, has been removed from the Insurance Act that applies in British Columbia. To me, this underscores the strength of the decision of the Court of Appeal in Perry v. General Security Insurance Co, of Canada, supra.

[45] This leaves open the question of whether s. 132(1) of the Insurance Act is the only means by which Ernst & Young Inc. can acquire the standing necessary to bring this action. On this, the parties sharply disagree.

[46] Counsel for the insurer, Chartis, takes the position that there is no other avenue available to Ernst & Young Inc., beyond s. 132(1) of the Insurance Act, by which it can obtain the standing necessary to pursue satisfaction of the judgment it has obtained against Central Guaranty Trust. In support of this proposition, reference was made to three cases.

[47] The first is Byrne v. Zurich Insurance Co., [2004] O.J. No. 5791. In that case, the plaintiff suffered injuries on property owned by Bramalea Limited. An offer to settle was made by Bramalea. The offer was not accepted. Bramalea went bankrupt. Zurich insured Bramalea. As a result of the bankruptcy, the action, which had been commenced against Bramalea, was stayed. Counsel for Zurich argued that the limits under the policy had been exhausted. He wrote to counsel for the plaintiff offering a dismissal of the claim with costs. Counsel for the plaintiff moved to lift the stay and re-instate the claim. The plaintiff succeeded at trial. The award remained unsatisfied. The plaintiff commenced an action relying on the Insurance Act. Zurich moved for summary judgment dismissing the claim. It was common ground that the policy had been exhausted. Whatever rights the plaintiff may have had, they did not extend beyond that which would have accrued to Bramalea as the insured. Even if Zurich had actual or constructive knowledge of the offer, that fact would not serve to impose any special duty or liability upon Zurich beyond that which would arise under s. 132 of the Insurance Act. The court determined:

The limits of the Policy have been exhausted. This fact, which is not disputed, is not circumvented by the making of claims for breach of fiduciary duty, negligence, bad faith and breach of duty of care as none of those causes of action arise from the nature of the relationship between the parties or are available to the Plaintiffs in these circumstances. The sole tenable action against Zurich, with which the Plaintiffs had no contractual dealings, is by virtue of s. 132 of the Insurance Act. Had Bramalea paid the judgment and sought recovery itself directly from Zurich, the answer would be the same. . . .

[Emphasis added]

(Byrne v. Zurich Insurance Co., supra, at para. 27)

[48] The second case is Algoma Steel Corp. v. Royal Bank of Canada, 1992 CanLII 7413 (ON CA), [1992] O.J. No. 889; 8 O.R. (3d) 449. Kelsey-Hayes Canada Limited was sued in Missouri as a result of injuries suffered by a child that was struck by a wheel it had manufactured when it broke free from a truck. Kelsey-Hayes alleged that the steel used in the manufacture of the wheel was a defective product of Algoma Steel Corp. It sought to claim contribution and indemnity from Algoma. Algoma was, at the time, the subject of a plan of arrangement under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-86 (“CCAA”). No proceedings could be brought against Algoma without leave of the court. The purpose of obtaining leave was that, once judgment had been obtained, Kelsey-Hayes would be able, relying on s. 132 of the Insurance Act, to pursue the proceeds of a product liability insurance policy held by Algoma. The central issue was whether, under the CCAA, the fact that the plan of arrangement existed prevented the court from allowing a lawsuit against Algoma by Kelsey-Hayes, even to the limited extent of the insurance proceeds. There would be no prejudice to other creditors if the recourse under such an order was limited to the proceeds of insurance. I note that the same would be true in this case. The Court of Appeal relied on s. 132(1) of the Insurance Act as the basis on which it allowed the action to proceed. It observed:

Royal is potentially answerable to Kelsey-Hayes, a third party with respect to Algoma’s policy of insurance only by virtue of this statutory provision but, in any third-party claim against it, its liability is ‘subject to the same equities as the insurer would have if the judgment had been satisfied’. Prejudice, in a legal sense, as far as Royal [the insurer] is concerned is non-existent.

[Emphasis added]

(Algoma Steel Corp. v. Royal Bank of Canada, supra, at para. 10)

[49] The third case is Hemeon v. District of West Hants (Municipality), [2008] N.S.J. No. 329; 2008 NSSC 234, 268 N.S.R. (2d) 104. Mrs. Hemeon bought a house. Shortly thereafter, she detected the presence of mould. Among others, she sued Mr. Dorey, who had been the contractor who built the home. Mrs. Hemeon could no longer pursue her claim against Mr. Dorey because, by his discharge from bankruptcy, he was released from any liability. She wished to continue the action against him so as to obtain a judgment which she would then be able to enforce against his insurer. The court found that the issue of whether there was coverage could be dealt with if the claim was successful and relied on s. 28 of the applicable Insurance Act, R.S.N.S. 1989, c. 231 (essentially the same as s. 132(1) of the Ontario Insurance Act) to allow the claim to proceed. The Court (the Registrar) concluded:

A reasonable foundation particularly with the assertion in the Buchanan case about the underlying legal obligations remaining has been set to suggest that Mrs. Hemeon may be entitled to be paid by the insurer for any damages for which Mr. Dorey may be liable, but for his having been discharged from the bankruptcy. She should have the opportunity to pursue this possibility. Otherwise I think without the declarations sought she will be ‘materially prejudiced’ in being denied the opportunity to pursue a course of action which may be of benefit to her. Whether she will be successful or whether the insurer will have a defence is for another court to determine.

(Hemeon v. District of West Hants (Municipality), supra, at para. 22)

[50] These cases each deal with their own specific facts. They do not stand for a general proposition that there can be no means, other than reliance on s. 132(1) of the Insurance Act, by which a third-party may look to an insurer to satisfy a judgment. In Byrne and Algoma, the court suggests that, in the particular circumstances, no alternative action is available. The core concern of these cases is to avoid prejudice. In Perry, the court was concerned that the insurer would have been without procedural protection. In Hemeon, the court believed that the third-party should not be denied the right to proceed against the insurer.

[51] The difficulty with the position taken by Chartis is that it would create a circumstance where those representing the purchasers of the MPA’s, the ultimate beneficiaries of any insurance that might be available, would be unable to proceed to attempt to realize on the judgment that has been obtained. In this way, they, through Ernst & Young Inc., would be prejudiced.

[52] Counsel for Ernst & Young Inc. takes a decidedly different approach. In his submission, there is another route by which his client can be seen to have the standing necessary to bring this action. In short, counsel says that the ability to sue the insurer is a chose in action and that, as such, it can be assigned. The effect of the order of Mr. Justice Houlden was to assign the right to sue the insurer of Central Guaranty Trust to Ernst & Young Inc.

[53] A “chose in action” is described in Halsbury’s Laws of England, 4th Edition, Volume 6, Paragraph 1, as follows:

The expression ‘chose in action’ or ‘thing in action’ in the literal sense means a thing recoverable by action, as contrasted with a chose in possession which is a thing of which a person may have not only ownership but also actual physical possession. The meaning of the expression ‘chose in action’ has varied from time to time, but is now used to describe all personal rights of property which can only be claimed or enforced by action and not by taking physical possession. It is used in respect of both corporeal and incorporeal personal property which is not in possession.

(quoted in: Gosse v. Juany Inc. 1995 CanLII 9892 (NL CA), 1995 CarswellNfld 308, 134 Nfld. & P.E.I.R. 15, at para. 30)

[54] The right to receive an indemnity under an insurance contract is a “chose in action” and, as such, is capable of being assigned. McGillivray and Parkington on Insurance Law, 11th Edition, para. 20-005, at p. 560, states:

…the assured may wish merely to transfer the right to recover under the policy. This is a chose in action and can be effectively assigned at common law provided that the requirements of s. 136 of the Law of Property Act 1925 are fulfilled.

[55] This was given effect in 1124980 Ontario Inc. v. Liberty Mutual Insurance Co. 2003 CarswellOnt 1474; 2003 CanLII 45266 (ON SC), 33 B.L.R. (3d) 206. In that case, employees and retirees of Inco Ltd. were to receive certain benefits, including payment for prescription drugs. Inco Ltd. financed the plan itself, but it was administered by the respondent insurance company. The applicant owned and operated a pharmacy. The applicant refused to enter into a letter of understanding with Inco Ltd. to limit its dispensing fee charged under the Inco Ltd. benefit plan. In response, Inco Ltd. instructed the respondent to refuse to recognize assignments of benefits made by individuals covered under the plan in favour of the applicant. Inco Ltd. acknowledged the obligation to pay the cost of prescriptions and dispensing fees the applicant charged to those entitled to benefits, but it refused to allow the right of assignment to be exercised in favour of the applicant to enable direct payment to the pharmacy. In part, the question was whether the assignments were valid. In concluding that they were, Madam Justice Epstein observed:

…Where an insurer receives a notice of an assignment of proceeds payable under an insurance policy, the insurer is obliged to pay the proceeds to the assignee and, although this may be pursuant to the contract with the assignor, the insurer pays out the assignor at its peril.

This right to receive an indemnity under an insurance contract is a chose in action and is capable of being assigned.

(1124980 Ontario Inc. v. Liberty Mutual Insurance Co., supra, at paras. 45 and 46)

[56] Unlike 1124980 Ontario Inc. v. Liberty Mutual Insurance Co., in the case I am asked to decide, there is no assignment from Central Guaranty Trust to Ernst & Young Inc. There is, however, the order of Mr. Justice Houlden. It specified that Ernst & Young Inc. can continue the action and, if successful, look to any applicable policy of insurance to satisfy the judgment. By his order, Mr. Justice Houlden reserved any proceeds from insurance to satisfy any judgment or settlement of the action, free of any claims by the Provisional Liquidator of Central Guaranty Trust. The order also made clear that Ernst & Young Inc., if successful in the action, was to have no right to issue execution against the estate of Central Guaranty Trust. In this way, the proceeds from any applicable insurance policy would be available to satisfy any judgment made in favour of Ernst & Young Inc. Other creditors would not be prejudiced by the continuation of the action. The estate of Central Guaranty Trust would be available in the liquidation. This is consistent with the approach taken in Algoma Steel Corp. v. Royal Bank of Canada. Nonetheless, counsel for Chartis submitted that Mr. Justice Houlden did not have the jurisdiction to make the order.

[57] This submission is based on the premise that the jurisdiction of the judge was limited by s. 132(1) of the Insurance Act. “The Superior Court of Ontario has all the jurisdiction, power and authority historically exercised by courts of common law and equity in England and Ontario” (see: Courts of Justice Act R.S.O. 1990 c. C. 43, s. 11 (2)). That jurisdiction may be limited by statute, but in order to do so, the Legislature must divest the Court of its general jurisdiction in unequivocal terms:

The court’s jurisdiction, however, is not fixed. It has long been settled that the jurisdiction of a superior court may be limited by statute. In Board v. Board (1919), 1919 CanLII 546 (UK JCPC), 48 D.L.R. 13 (Alberta P.C.), at p. 18, Viscount Haldane in reviewing cases dating as far back as 1774, said that ‘nothing shall be intended to be out of the jurisdiction of a superior court, but that which specially appears to be so.’ In Michie v. Toronto (City) (1967), 1967 CanLII 202 (ON SC), [1968] 1 O.R. 266 (Ont. H.C.) at p. 268, Stark J. wrote that ‘… the Supreme Court of Ontario has broad universal jurisdiction over all matters of substantive law unless the Legislature divests from this universal jurisdiction by legislation in unequivocal terms.’ Brooke J.A. speaking for this court in 80 Wellesley St. East Ltd. v. Fundy Bay Builders Ltd., 1972 CanLII 535 (ON CA), [1972] 2 O.R. 280 (Ont. C.A.) stated at page 282, ‘As a superior court of general jurisdiction, the Supreme Court of Ontario has all the powers that are necessary to do justice between the parties. Except where provided specially to the contrary, the court’s jurisdiction is unlimited and unrestricted in substantive law in civil matters.’

(Beach v. Moffat 2005 CanLII 14309 (ON CA), 2005 CarswellOnt 1693, 75 O.R. (3d) 383, at para. 8)

[58] The same point is made in Sullivan on Construction of Statutes, as follows:

Although legislation is paramount, it is presumed that legislatures respect the common law. It is also presumed that legislatures do not intend to interfere with common law rights, to oust the jurisdiction of common law courts, or generally to change the policy of the common law.

Those presumptions permit the courts to insist on precise and explicit direction from the legislature before accepting any change. The common law is thus shielded from inadvertent legislative encroachment.

(Ruth Sullivan, Sullivan on the Construction of Statutes, 5th ed. (Markham: LexisNexis, 2008) at 431-432)

[59] There is nothing in s. 132(1) of the Insurance Act which would serve to limit the common law authority of the court to order that a third-party may look to the proceeds under a policy of insurance held to the benefit of the person or company against whom it has obtained a judgment which has not otherwise been satisfied. Following Perry, the limitation that an action commenced under s. 132(1) can only deal with liability for injury or damage to person or property may restrict the proceedings that rely on that section, but does not serve to limit what can be done under the auspices of the common law or the general jurisdiction of the court.

[60] In Thibodeau v. Thibodeau 2011 ONCA 110, 2011 CarswellOnt 686, 104 O.R. (3d) 161, the Court of Appeal considered whether the motions judge erred in granting priority to the claim of a wife for equalization payments, following the breakup of a marriage, over the claims of the unsecured creditors of her bankrupt husband. The judge had ordered that the husband was to make the equalization payment using his share of the proceeds from the sale of the matrimonial home. The court said:

I accept at the outset that an agreement between spouses transferring or agreeing to transfer property from one to another – in a fashion analogous to an agreement of purchase and sale – transfers an equitable interest in the property to the transferee spouse. There is no reason why a court order for the transfer of property in the same way should not have the same effect from the date the order is made. The upshot of such an agreement or order is to impose a trust or trust-like condition on the property rendering the payee spouse’s claim enforceable against the payor’s trustee in bankruptcy.

(Thibodeau v.Thibodeau, supra, at para. 26)

[61] This explains that, where the parties are able to effect a change like transferring property or assigning a chose in action, the court has the jurisdiction to make an order that has the same result. Looked at from this perspective, s. 132(1) of the Insurance Act does not limit the jurisdiction of the court so much as it broadens it to allow for third parties, without privity of contract, to collect from the insurers of those they have judgments against if, for some reason, an assignment is unavailable.

[62] Counsel for Chartis says that the Insurance Act is not the only legislation of concern. The order of Mr. Justice Houlden responded to a request that the automatic stay, imposed when proceedings under the Winding-up Act were undertaken in respect of Central Guaranty Trust, be lifted. Counsel for Chartis submitted that it was of “paramount importance” to recognize that, under the Winding-up Act, Mr. Justice Houlden did not have the power to override s. 132(1) of the Insurance Act and the limitations placed on actions commenced under that statutory provision. This presumes that s. 132(1) of the Insurance Act is the only means by which a third party may obtain standing to pursue the insurer of a party against which it has obtained judgment. Mr. Justice Houlden lifted the stay, but imposed terms, as the Winding-up Act, s. 21 permits. In this case, the conditions were directed to ensuring that there would be no prejudice to the creditors of the estate of Central Guaranty Trust. This is consistent with the broad authority provided under the Winding-up Act, which does not restrict other powers the court has and allows it to consider the “wishes” of other creditors. It says:

131. Any powers conferred by this Act on a court are in addition to, and not in restriction of, any other powers at law or in equity of instituting proceedings against any contributory or the estate of any contributory, or against any debtor of the company or the estate of any debtor of the company, for the recovery of any call or other sum due from the contributory, debtor or estate, and those proceedings may be instituted accordingly.

132. A court may, with respect to all matters relating to the winding-up of the business of a company, have regard, so far as it deems just, to the wishes of the creditors, contributories, shareholders or members of the company, as proved to it by any sufficient evidence.

[63] In response to this, counsel for Chartis referred to Stelco Inc. (Bankruptcy), Re. 2005 CanLII 8671 (Ont. C.A.). In that case, two directors were appointed to the Board of Directors of a company that had obtained protection from its creditors under the CCAA. Employees of the company were concerned as to the role these directors would play. They were significant shareholders and the employees feared they would act, in their own, rather the company's best interest. The employees sought and obtained an order removing the new directors. The two directors appealed. Among the issues raised on the appeal was whether the motions judge had jurisdiction to make the order. The Court of Appeal found that he did not. He did not have any inherent jurisdiction separate from or independent of the CCAA. He was carrying out a supervisory function under the auspices of that legislation. Whatever discretion he had was provided by the legislation, in particular, s. 11 of the CCAA. Moreover, “…there was a statutory scheme, under the Canada Business Corporations Act R.S.C. 1985, c. C-44] (and similar provincial corporate legislation), providing for the election, appointment and removal of directors.” In spite of its expansive nature, “… inherent jurisdiction does not operate where Parliament or the Legislature has acted”. In other words, the Legislature had fully dealt with the issue. “There [was] no legislative gap to fill.” (see: Stelco Inc. (Bankruptcy), Re. supra, at paras. 33-35 and 48).

[64] This situation is quite different. The Insurance Act, s. 132(1) does not foreclose a third party seeking to satisfy a judgment, relying on an assignment or corresponding order of the court, from proceeding against the insurer of the party against which it has obtained judgment. The Winding-up Act, s. 131 makes clear that the authority provided under that legislation is not to be taken to detract from any other authority the court may have.

[65] It was said that the intent of the order was only to lift the stay and to give Ernst & Young Inc. priority over other creditors and the Provisional Liquidator of Central Guaranty Trust for any insurance proceeds to which Ernst &Young Inc. established a right after obtaining a judgment against Central Guaranty Trust. If the impact of the order of Mr. Justice Houlden is limited in this way, it is rendered, for practical purposes, meaningless. What is the purpose of Ernst & Young Inc. establishing a right to insurance proceeds and giving it a priority if it is unable to proceed against an intransigent insurer which has refused to pay.

[66] I pause to note that, if s. 132(1) of the Insurance Act was effective to provide standing to Ernst & Young Inc. to proceed against Chartis, that authority would arise from “a statutory assignment of the policy” putting the former in the shoes of Central Guaranty Trust (see: Juno Estate v. Saskatchewan Government Insurance, supra, at para. 11 referring to Frederick v. Aviation & Gen. Ins. Co., 1966 CanLII 271 (ON CA), [1966] 2 O.R. 356 (C.A.))

[67] Based on the analysis I have reviewed, I would find that Ernst & Young Inc. has standing to commence this action naming as the defendant, Chartis.

[68] Even if the analysis is incorrect, it would not matter. To me, the position adopted on behalf of Chartis is a collateral attack on the order made by Mr. Justice Houlden. The rule against collateral attack has been described as follows:

It has long been a fundamental rule that a court order, made by a court having jurisdiction to make it stands, is binding and conclusive unless it is set aside on appeal or lawfully quashed. It is also well settled in the authorities that such an order may not be attacked collaterally – and a collateral attack may be described as an attack made in proceedings other than those whose specific object is the reversal, variation, or nullification of the order or judgment.

(Wilson v. The Queen, 1983 CanLII 35 (SCC), [1983] 2 S.C.R. 594 (S.C.C.) at 599, as quoted in Ernst & Young Inc. v. Central Guaranty Trust Company, 2006 ABCA 33, at para. 47)

[69] It has been said that the purpose of the rule against collateral attack is to ensure:

… a judicial order pronounced by a court of competent jurisdiction [is] not... brought into question in subsequent proceedings except those provided by law for the express purpose of attacking it.

(Danyluk v. Ainsworth Technologies Inc., 2001 SCC 44, [2001] 2 S.C.R. 460 (S.C.C.) at para. 20, as quoted in Ernst & Young Inc. v. Central Guaranty Trust Company, supra, (ABCA), at para. 48)

[70] The rule has been justified, as follows:

The rationale behind the rule is powerful: the rule seeks to maintain the rule of law and to preserve the repute of the administration of justice. To allow parties to govern their affairs according to their perception of matters such as the jurisdiction of the court issuing the order would result in uncertainty. Further, ‘the orderly and functional administration of justice’ requires that court orders be considered final and binding unless they are reversed on appeal.

(R. v. Litchfield 1993 CanLII 44 (SCC), 1993 CarswellAlta 160, [1993] 4 S.C.R. 333 at para. 22)

[71] The order of Mr. Justice Houlden was made on October 6, 1993, which is to say, nearly nineteen years ago or six years before the beginning of the trial conducted by Mr. Justice MacCallum. It was never appealed. The actions of the parties over the intervening years are consistent with an understanding that the proceedings it continued could result in an action by Ernst & Young Inc. against Chartis, as the insurer of Central Guaranty Trust. Coverage counsel, in New York, telephoned the provisional liquidator to point out that, insofar as Chartis was concerned, there was no coverage. In circumstances where Ernst & Young Inc. would have no standing to bring an action to realize on the judgment from the policies of insurance, there would be no purpose in raising coverage. The pertinent issue would have been whether Ernst & Young Inc. would have the standing to bring a subsequent action against Chartis if it was successful in its trial against Central Guaranty Trust. The court was not referred to any evidence which would suggest that this issue was raised at any time prior to the decision of Mr. Justice MacCallum.

[72] To my mind, raising this issue now is an attempt, by Chartis, to reinterpret the order of Mr. Justice Houlden. This is demonstrated by the submission made by counsel, on behalf of Chartis, that paragraph 5 of the order which indicates that “any proceeds from insurance coverage arising out of a judgment or settlement of the action belong to the plaintiff” should be understood to refer only to a settlement. This arises from a reading of the endorsement made by Mr. Justice Houlden at the time the order was made. Counsel for Chartis pointed out that the endorsement refers only to “a settlement”. It says: “If a settlement is made with the insurer, the proceeds will be the property of the plaintiff [Ernst & Young Inc.]….”. It is too late to look behind the words of the order and to attempt to re-interpret them based on the endorsement. This is something that should have been done either by way of an appeal or a request for clarification at the time the order was made. To allow this, at this late date, would give substance to a collateral attack on the order.

[73] This only confirms my determination that Ernst & Young Inc. has standing to bring this action.

Does the insurance policy held by Chartis provide coverage?

[74] This looks to be a straight-forward question. It would entail an interpretation of the policy. Do the words of the policy provide coverage for breach of the trusts? Endorsement 10 of the policy provides the answer. In its introductory paragraph, Endorsement 10 makes clear that it provides insurance for the “operations of the trust department”. Under the heading, “Insuring Agreement”, the policy provides for the indemnification of the insured “… for all sums which the Insured shall become legally obligated to pay as loss resulting from any claim …for any wrongful acts… of the Insured… but only if such wrongful act… results from the rendering or failure to render services solely in the Insured’s capacity as [Part A] Executor or administrator of estates… or trustee under personal or corporate trust agreements.”

[75] “Loss” means, in part, “… any amount that the Insured shall be legally obligated to pay because of judgments rendered against the “Insured…”.

[76] “Wrongful Act” is defined as: “any breach of duty, neglect, error, misstatement, misleading statement or omission committed in any capacity stated in the insuring agreement, parts A & B.”.

[77] From this, a breach of trust which occurred as a result of a failure of the insured (Central Guaranty Trust) to properly carry out its function as the trustee, under the applicable trust agreements and which caused a loss to the beneficiaries of the trust who have proved their claims would be insured under Endorsement 10.

[78] In fact, at the examination-for-discovery of Warren P. Cooney, (Chartis) coverage was admitted. During the course of the discovery, the following questions were asked and answers provided:

1972 Q. And my understanding, from what you told me last time, was that there isn't an issue that a breach of trust and liability of Guaranty Trust for breach of trust doesn't fall within the coverage grid. That is exactly what endorsement 10 was there for.

A. Yes

1973 Q. So I am simply trying to get your acknowledgment and agreement that that is the case and what you are really relying on is the exclusion you referred me to.

A. Yes

1974 Q. Okay. So there is no dispute about the fact that judgment falls within the coverage grant, but Chartis relies on an exclusion?

A. Correct.

[79] During the course of the submissions, on this motion, counsel for Chartis stepped away from this admission. He began by relying on what was referred to as the “fortuity principle”. It holds as a general principle of insurance law that only fortuitous or contingent losses are covered by a liability policy. Whatever is to be taken from such a general assertion, it cannot be that it overrules, stands apart or sets aside the specific words of the insurance contract. It has been said:

Further, the argument does not take into account the wording of the Policy. The key to coverage lies not in the general nature of the policy itself but in whether the alleged acts fall within its provisions and coverage is not excluded. As Justice Iacobucci noted at para. 67 of [Non-Marine Underwriters v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551], general principles of insurance contract interpretation are ‘merely interpretive aids that cannot decide any issues by themselves’.

[Emphasis added]

(S. (J.A.) v. Gross, 2002 ABCA 36, [2002] 5 W.W.R 54 (Alta C.A.), at para. 29, as quoted in Bridgewood Building Corp. (Riverfield) v. Lombard Gen. Insurance Co., 2006 CanLII 10205 (ON CA), 2006 CarswellOnt 2017 (Ont. C.A.) at para. 8)

[80] The idea that it is the words of the policy that govern is confirmed by s. 124(1) of the Insurance Act. It states:

All of the terms and conditions of the contract of insurance shall be set out in full in the policy or by writing securely attached to it when issued, and, unless so set out, no term of the contract or condition, stipulation, warranty or proviso modifying or impairing its effect is valid or admissible in evidence to the prejudice of the insured or beneficiary.

[81] This adds the proviso that it is the prejudice of the insured or beneficiary which is of concern. The “fortuity principle” provides guidance, but it does not set aside or override the meaning of the words that make up the policy.

[82] How is it to be applied in this case? What guidance does it provide?

[83] In his submissions, counsel for Chartis relied on Liberty Mutual Insurance Co. v. Hollinger Inc., 2004 CanLII 10995 (ON CA), [2004] O.J. No. 481, 236 D.L.R. (4th) 635. In that case, the defendant, Hollinger, took over a newspaper in Chicago. It determined to re-orient the customer base to a “white” audience. The company “brazenly” set out to remove “black images” from the newspaper, including the articles of a well-known African-American journalist. He sued. Included in the complaint were allegations of racial discrimination. Hollinger advised its insurer of the claim, retained counsel and eventually settled. Hollinger tendered the claim to its insurer, requesting a contribution to the cost of its defence and indemnity with respect to the discrimination claims. The Court of Appeal determined that the claims fell outside the terms of the policy and that, as a result, the insurer was not required to provide a defence to the discrimination claims. The court noted that, apart from the exclusion clause, there were certain features of the policy that appeared, on its face, to allow for coverage of claims of intentional discrimination. It concluded that the words of the policy must be read “… in light of a general principle of insurance law that arises from the very nature and purpose of insurance, namely, that ordinarily only fortuitous or contingent losses are covered by a liability policy. Where an insured intends to cause the very harm that gives rise to the claim the insured cannot look to a liability policy for indemnity” (see: Liberty Mutual Insurance Co. v. Hollinger Inc., supra, at para. 16).

[84] In comparing that case to the present situation, it is important to acknowledge the distinction between intentionally causing harm and an intentional act (which may have unintended consequences). In Liberty Mutual Insurance Co. v. Hollinger Inc., the following is quoted:

The general rule in this regard, known as the principle of ‘fortuity,’ is that ‘a contract of insurance to indemnify a person for damages resulting from his own intentional misconduct is void as against public policy and courts will not enforce such a contract.’ In this context, it is important to read ‘intentional’ narrowly. Many courts recognize that public policy does not prohibit insurance coverage for all liabilities incurred due to intentional torts, but instead precludes coverage only for liabilities arising out of conduct intended to cause harm…

[I]f the wrongful act amounts to a purposeful effort by the employer to cause injury to the employee, courts generally will still refuse to enforce otherwise available insurance for reasons of public policy.

[Emphasis added]

(F. J. Mootz, Insurance Coverage of Employment Discrimination Claims (1997) 52 U. Miami L. Rev. 1 at 32 and 38, as quoted in Liberty Mutual Insurance Co. v. Hollinger Inc., supra, at para. 18)

[85] It is clear that Central Guaranty Trust intended that money be taken from the trust to be used to purchase security for the loan it made to IW and that money taken from the Quebec trust be passed on to IW. From the findings of Mr. Justice MacCallum, it is apparent that Central Guaranty Trust was complicit in the failure of IW to pay the required premiums to the trust. There can be little doubt from the reasons of Mr. Justice MacCallum and the concessions to which he referred that the trusts were intentionally breached. What is not demonstrated is that these acts were taken with the intention of causing harm to the trusts. To the contrary, the evidence suggests that all of these acts were undertaken by Central Guaranty Trust on the understanding that there was a surplus in the trusts and that the funds did, or ultimately would, belong to IW. The value of the funds that were utilized to secure the loan, and, as I understand it, the remaining monies that were withdrawn and the premiums that were not paid were the subject of actuarial certificates which certified that the funds were surplus to the obligations of IW as determined by the providers of the certificates. That this turned out to be wrong does not change the fact that the damage caused was not intended by Central Guaranty Trust.

[86] The words of the policy demonstrate that coverage would be available where Central Guaranty Trust failed to properly carry out its obligations as a trustee. The application of the fortuity principle may guide application of the policy. Where the wrongful acts were intended, but the consequent damage was not, the coverage evident from the words of the policy stands. The loss is a fortuitous and contingent one.

[87] I find that there was coverage. This being so, it is not necessary for me to consider whether, separate from this finding, Chartis should be bound by the admission made, at the examination-for-discovery, that the policy provided that coverage.

Are there exclusions in the policy that apply to withdraw coverage?

[88] Before going on, I should say that, in this case, I do not believe that anything important turns on the issue of whether or not there is coverage, independent of a consideration of the exclusions that may apply. In applying the fortuity principle in Liberty Mutual Insurance Co. v. Hollinger Inc., the Court of Appeal set aside the decision of the judge who had heard the initial application. Before her, the case had rested on the exclusion for claims arising from “the wilful violation of a penal statute”. The judge considered that the applicable human rights legislation was remedial and not penal and that the exclusion did not apply. It is with this background that the Court of Appeal stepped back, examined the initial question of whether the insuring provisions of the policy provided coverage and considered the effect of the “fortuity principle”. The same distinction does not exist here. In this case, the court was referred to two of the exclusions found in Endorsement 10, exclusions 7 and 13. They say:

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 action the Insured is legally responsible.

[89] Counsel for Chartis submitted that “… the fortuity principle entitles Chartis to deny coverage because insurance is not available for losses that an insured knows of, planned, intended or was aware are substantially certain to occur. Chartis never agreed to indemnify [Central Guaranty Trust] for any judgment requiring [Central Guaranty Trust] to return monies that were ‘wrongfully taken’ and misappropriated by [Central Guaranty Trust] as a result of [Central Guaranty Trust] ‘intentionally breach[ing] the terms of the Trust’” (see: Factum of the Respondents, para. 82). If I am wrong and the fortuity principle should be applied to deny coverage, the allegations on which Chartis relied, if proved, would serve as readily to cause coverage to be withdrawn under one or both of the exclusions referred to. If, as I have found, despite consideration of the fortuity principle there is coverage, the application of the exclusions could still lead to a finding that coverage should be denied.

[90] I should point out that, where coverage is not available under the Insuring Agreements or is denied as a result of the applicability of the Exclusions, the impact on the rights of the insured is the same. In saying this, I rely on the following from the Supreme Court of Canada:

Thus far, I have proceeded only by reference to the actual wording of the policy. However, general principles relating to the construction of insurance contracts support the conclusion that the duty to defend arises only where the pleadings raise claims which would be payable under the agreement to indemnify in the insurance contract. Courts have frequently stated that ‘[t]he pleadings govern the duty to defend’: Bacon v. McBride 1984 CanLII 692 (BC SC), (1984), 6 D.L.R. (4th) 96 (B.C.S.C.), at p. 9. Where it is clear from the pleadings that the suit falls outside of the coverage of the policy by reason of an exclusion clause, the duty to defend has been held not to arise: Opron Maritimes Construction Ltd. v. Canadian Indemnity Co. (1986), 1986 CanLII 89 (NB CA), 19 C.C.L.I. 168 (N.B.C.A.), leave to appeal refused by this Court, [1987] 1 S.C.R. xi.

(Non-Marine Underwriters, Lloyds of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, at para. 74, as quoted in Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801 at pp. 810-11; and in Hodgkinson v. Economical Mutual Insurance Co., 2003 CanLII 36413 (ON CA), [2003] O.J. No. 5125 (C.A.) at para. 18)

[91] Counsel for Ernst & Young Inc. submitted that, in the circumstances, Chartis is unable to rely on the full wording of Exclusion 7 and none of Exclusion 13. It is his position that, when asked during the course of the examination-for-discovery, the witness, called on behalf of Chartis (Warren P. Cooney), only referred to the presence of fraud as the reason why coverage should be excluded. Counsel says, on this basis, that Chartis is estopped from relying on anything further. In taking this position, counsel for Ernst & Young & Young Inc. referred to the case of Harrison v. Antonopolous 2001 CanLII 62754 (ON SC), 2001 CarswellOnt 272, 26 C.C.L.I. (3d) 61. An accident occurred on March 18, 1989 and a Statement of Claim was issued on March 14, 1991. On April 10, 1996 during the examination-for-discovery of the plaintiff, her counsel stated there would be no claim for loss of income. Nonetheless, on May 12, 1999, a report was served detailing her loss of income. By that time, the plaintiff had changed counsel. Her new lawyer was unaware of the concession, but indicated that, in any event, the plaintiff had changed her mind. Upon receiving this advice, the defendants attempted to obtain employment records from all of her alleged pre-accident employers. In some cases, the records had been destroyed; in others, there were none. The motions judge refused to allow the “admission” to be withdrawn. It affected the legal relationship between the parties. If leave was granted to make the change, the defendant would be unfairly exposed to a large loss of income claim.

[92] The situation here is different. During the course of the discovery, Warren P. Cooney was asked the following question and provided following answer:

622Q. I am trying to understand precisely why you say there is no indemnity? You refer to fraud, is there any other grounds your company is relying on to say there is no indemnity table under the policy?

A. I'm not sure, but the principle grounds is the finding of fraud in the Alberta judgment.

[93] Later in the same discovery, in response to the same question, the witness failed to provide any more substantive information. He indicated that he was acting on the advice of counsel and that information was privileged. Counsel for Chartis offered to take the matter under advisement for the witness to determine if there were any other sections he would like to add. Counsel for Ernst & Young Inc. pointed out that information was not privileged and said, at question 958:

I shouldn't have to ask and wait for an undertaking, and it shouldn't be filtered through counsel. It should be [an] answer I am entitled to receive directly from the officer of the Corporation who has got that responsibility.

So if it is refused, great. If you then want to later answer it on undertaking or change your position, fine, but I am putting you on notice now that the failure to answer now is a fact we will draw to the court's attention.

[94] What this demonstrates is that there was no definitive admission that fraud was the only basis for claiming that coverage was excluded by the provisions of policy. Exclusion 7 refers to more than just “fraud”. Moreover, the facts on which the claim for exclusion depends were known to the plaintiff. They were found in the words of the policy and the judgment of Mr. Justice MacCallum. There is nothing to suggest that there was anything further the plaintiff required to respond to the submissions made on behalf of the Chartis. If there was prejudice, it could have been corrected by additional discovery, adjournments, if necessary, and an appropriate award of costs.

[95] I am not prepared to find that the defendant should be restricted to relying on “fraud” as the basis for claiming that coverage is withdrawn by the exclusions found in the policy of insurance.

[96] This leaves me to consider whether the exclusions relied on relieve Chartis of its responsibility to pay under the policy. Looking at Exclusion 7, there was no suggestion that the actions of Central Guaranty Trust were “criminal” in nature. While they could still amount to “fraud”, the fact remains that Mr. Justice MacCallum did not use that word in the course of his reasons. “Malicious” implies not just the intent to do wrong (in this case to breach the trusts), but the intent to harm another. This leaves “dishonesty”.

[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.

[98] As for Exclusion 13, the phrase of interest is the “gaining in fact of any profit or advantage to which one is not legally entitled”. The words, and the intent behind them, are not hard to understand. The application of Exclusion 13 would depend on the facts of the particular case. In this case, the relevant facts relate to the loan:

• the fact that its willingness to make the loan was the catalyst for the transfer of the trusts to Central Guaranty Trust;

• the fact that trusts funds were used to purchase the time deposit certificates used as the security given to Central Guaranty Trust; and,

• the fact that the decision to purchase the time deposit certificates was made on October 27, 1987 and they were attached by Central Guaranty Trust, less than two months later, on December 7, 1987 so that the loan could be repaid.

[99] The effect was that the money taken from the trust to the benefit of Central Guaranty Trust (see: Ernst & Young Inc. v Central Guaranty Trust Company, supra, (ABQB), at para. 15 (36) and (39)).

[100] The issue is whether the findings of Mr. Justice MacCallum demonstrate that the actions taken by Central Guaranty Trust, or those for who it was responsible, were dishonest or provided Central Guaranty Trust with profit or advantage to which it was not legally entitled. If they were dishonest or provided an illegal advantage, Exclusion 7, Exclusion 13, or both of them, would become operative and remove Chartis from liability under the policy.

[101] Mr. Justice MacCallum made the following findings:

1. Under the heading: “Fact Overview”

An IW officer, with the co-operation of a [Central] Guaranty Trust officer, managed to subvert the system of third-party protection, thus engaging the liability of their corporate masters. Importer dealers sold MPA’s, deducted commissions, and remitted the balance of premiums to IW. IW then deposited the money in establish trusts with [Central] Guaranty Trust. The latter, knowing the funds received were intended to be trust funds for the benefit of MPA Purchasers, paid large sums from those trusts to IW for IW’s own use, and some for [Central] Guaranty Trust’s own benefit, contrary to the trusts’ purposes.

[Emphasis added]

(Ernst & Young Inc. v. Central Guaranty Trust Company, supra, (ABQB) 26 at para. 11)

2. Under the heading:”Conceded Breaches”

Guaranty Trust withdrew $2,606,430.50 from the Trusts, and repaid $61,320.37 for a net of $2,545,110.13. Of this, $509,000.00 is contested as a breach so that the net breach conceded is $2,036,110.13. Of this, I find that $1,570,182.00 was misappropriated by [Central] Guaranty Trust to repay a debt owing to it by IW.

It should be noted that [Central] Guaranty Trust replaced Royal Trust in 1987 at the instance of IW for the ostensible reason that Guaranty Trust could invest trust funds at a higher rate. The real reason, as may be seen from the evidence (Exhibit 2, D-2, 3 and 4), was that Dale Mather, a director of IW, required a loan of $1.5 million which Royal Trust would not extend. If [Central] Guaranty Trust would loan it, they would get IW’s book of business to administer, approximately $21 million and rising. [Central] Guaranty Trust got the book and made the loan in October of 1987. Carl Andrade of [Central] Guaranty Trust and Dale Mather of IW were complicit in this arrangement which saw [Central] Guaranty Trust withdraw $1,233,533.82 on October 28th, 1987 from certain trusts, in addition to the $266,466.18 withdrawn on September 15th, 1987.

The last two sums totalled $1.5 million and the money was used to purchase deposit certificates which were hypothecated to [Central] Guaranty Trust as security for the loan. In addition, [Central] Guaranty Trust took an assignment of IW’s interest in the residual balances on termination of the trusts. Andrade had been told by [Central] Guaranty Trust’s lawyers that they refused to provide an opinion as to IW’s ability to withdraw actuarially projected surplus from the trusts.

In the result, I find that the sum of $2,606,430.50 was withdrawn, in breach of trust, as actuarially projected surplus while the 1986 Trust Agreements were still in force. They were changed in December of 1987 by IW and [Central] Guaranty Trust to provide that [Central] Guaranty Trust held the funds “in trust for IW” and gave a right to remove actuarially projected surplus – all this, apparently, without the consent or even the knowledge of the Importers. This self-serving ratification of what had passed could not undo the breaches of trust.

[Emphasis added]

(Ernst & Young Inc. v. Central Guaranty Trust Company, supra, (ABQB), at paras. 36, 37, 38 and 39)

3. Under the heading: “Contested Breaches

A. The Quebec Trust”

As for applying s. 26 of the Trustee Act, R.S.A. 2000, c. T-8, by impounding the interest of the beneficiary for the benefit of the trustee, that section was not meant to protect a trustee from his own malfeasance. [Central] Guaranty Trust is not a victim of accident or slip, but rather a participant with IW (through their respective officers Andrade and Mather) in a deliberate breach of trust.

[Emphasis added]

(Ernst & Young Inc. v. Central Guaranty Trust Company, supra, (ABQB), at para. 44)

4. Under the heading: “Contested Breaches

B. Failure to Pay Premiums into Trust”

In my view, however, [Central] Guaranty Trust is answerable and accountable because it was party to IW’s default in payment and paid out substantial funds to IW in the face of this.

I agree with the Plaintiff’s argument that both IW and Guaranty Trust intentionally breached the terms of the Trust by allowing further withdrawals for IW’s benefit and even by allowing withdrawals for legitimate purposes related to the payment of MPA claims in the face of IW’s failure to pay in August premiums.

[Emphasis added]

(Ernst & Young Inc. v. Central Guaranty Trust Company, supra, (ABQB), at paras. 71 and 74)

[102] In summary, the findings of Mr. Justice MacCallum indicate that Central Guaranty Trust deliberately breached the trusts. It misappropriated funds and engaged in subversion and complicity for its own benefit. Central Guaranty Trust, knowing that it was in breach of the trusts, transferred significant amounts of money from the trusts to IW. Central Guaranty Trust 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 Central Guaranty Trust.

[103] I find that Exclusions 7 and 13 operate such that Ernst & Young Inc. cannot rely on the policy of insurance held by Chartis to satisfy the judgment it obtained against Central Guaranty Trust.

Restitution

[104] Counsel on behalf of Chartis submitted that, in any event, there is no coverage under Endorsement 10 to pay the judgment because restitutionary payments to not constitute an insurable loss.

[105] In his reasons, Mr. Justice MacCallum noted that: “[t]he appropriate remedy says the Plaintiff is restitution to the trust”. He held that: “… the trustee’s liability is to reconstitute the Trusts by returning to the Trusts all funds improperly removed” (see: Ernst & Young Inc. v. Central Guaranty Trust Company, supra, (ABQB), at paras. 75 and 83).

[106] In the circumstances, I am not prepared to deal with whether restitutionary payments were excluded from coverage either under Endorsement 10 or as matter of public policy. The submissions made by counsel, on behalf of Chartis, rely essentially on American authorities. Counsel, on behalf of Ernst & Young Inc., referred to some Canadian authorities which, he said, demonstrate circumstances in which restitution has been awarded. What is clear is that this question has not been definitively determined in a Canadian context. Absent a full trial with evidence in which to set a context, this is not a matter to be determined on a motion for summary judgment. In any event, given that I have found that there is no coverage as a result of the operation of Exclusions 7 and 13, there is no need for me to resolve this issue now.

Policy Limit (Pre-judgment Interest, Cost of Providing a Defence, Value of the Deductible and Excess Insurance)

[107] In the event that Ernst & Young Inc. could look to the policy, how much money would be available to satisfy the judgment? In view of the fact that I have found that the available exclusions relieve Chartis of the obligation to pay, it would seem there is not much purpose in considering this question. Even so, the parties have made a series of submissions which would impact on this issue. In the hope that it may assist in resolving whatever remains after this motion has been decided, it may be, as well, that I go on.

[108] Four issues have been raised:

(a) Is the value of any pre-judgment interest awarded by the court included in the judgment such that it must be paid out of the value of the available insurance?

(b) Is the cost the insurer has been put to in providing a defence to its insured applied to the limits of the policy such that it erodes what is available to satisfy the judgment?

(c) What is the value of the deductible to be absorbed by the insured prior to any call on the policy to satisfy the judgment?

(d) Is there excess insurance available which would increase the value of the amount that is available to satisfy the claim?

[109] I begin by repeating that three of these four matters (defence costs, value of the deductible and the presence of excess insurance) are the three questions that counsel for Chartis submitted should be issues left for a trial. In other words, these are matters which should be considered by me, pursuant to Rule 20.04(2)(a), not Rule 20.04(2)(b) of the Rules of Civil Procedure. The question is whether there is a genuine issue requiring a trial. Nothing was said, by counsel, with respect to the remaining matter: “prejudgment interest”. I will deal with it on the same basis.

(a) Pre-judgment Interest

[110] The parties agree that post-judgment interest falls outside the limits of the policy and must be paid by the insurer on that basis. It is payable in addition to the limits of the policy:

In the absence of any express contractual provision, I can see no good reason for post-judgment interest to be included within the policy limit. This can be illustrated by positing the situation where a judgment is granted against an insured for an amount equal to or greater than the policy limit. In such a situation, if post-judgment interest was included in the policy limit the insurer could (theoretically) delay payment with virtual impunity by, for example, prosecuting an unmeritorious appeal, since its exposure to its insured would be capped at the policy limit. Meanwhile, post-judgment interest would continue to accrue. In light of the insured's obligation to pay post-judgment interest once a claim has been crystallized into a judgment, it makes sense to impose a like obligation on the insurer, regardless of the policy limit.

(Solway v. Lloyds Underwriters, 2006 CarswellOnt 3160 (C.A.), at para. 62, quoting the decision of the trial judge at 2005 CanLII 10650 (ONSC) at para. 57)

[111] The parties do not agree that the same should apply to pre-judgment interest. Counsel for Ernst & Young Inc. said it should. Counsel for Chartis submitted it should not. He pointed to cases where pre-judgment interest was found to be included within whatever limits the applicable policy ascribed (see: Kalkins (Litigation Guardian of) v. Allstate insurance Co. of Canada (1996), 1996 CanLII 7970 (ON SC), 28 O.R. (3d) 237, 1996 CarswellOnt 853 (ONSC), at paras. 47 and 49, and Solway v. Lloyds Underwriters, supra, (ONSC), at para. 54).

[112] Counsel for Ernst & Young Inc. observed that both these cases arose in respect of motor vehicle insurance policies. The Insurance Act makes specific provision for post-judgment interest in respect of this form of insurance. It says, at s. 245(c):

Every contract evidenced by a motor vehicle liability policy shall provide that, where a person insured by the contract is involved in an accident resulting from the ownership, or directly or indirectly from the use or operation of an automobile in respect of which insurance is provided under the contract and resulting in loss or damage to persons or property, the insurer shall,

(c) pay all costs assessed against the insured in any civil action defended by the insurer and any interest accruing after entry of judgment upon that part of the judgment that is within the limits of the insurer’s liability

[113] The Insurance Act is silent as to pre-judgment interest in respect of motor vehicle insurance. It is, on this basis, that the cases to which I just referred determined that it is payable from the limits of the policy. The legislation says nothing as to the treatment of interest in respect of errors and omissions insurance, the form of policy being considered in this case. Accordingly, this is a matter that is not dealt with by the statute, leaving it to the particular words of the policy of insurance to resolve the issue. In this case, the policy, that is Endorsement 10, required the insured to be indemnified for a “loss”. A “loss” includes an amount the insured is legally obliged to pay “because of judgments rendered against the Insured” (see: para. [61], above). In his “Judgment”, Mr. Justice MacCallum awarded, among other things “…judgment for interest calculated from the date of each breach of trust…” (see: Judgment of Mr. Justice MacCallum, dated January 21, 2010, at para. 2.). The calculation of that interest is set out in Schedule “A” to the “Judgment” beginning June 16, 1987 (the day that $509,000 was withdrawn, by Central Guaranty Trust, from the Quebec Trust) and ending on January 21, 2010 (the date the judgment was rendered).

[114] In this situation, the judgment obligates Central Guaranty Trust to pay interest for the period before and leading up to the date of the judgment. The policy requires that it be paid. It comes out of the limits of the insurance the policy provided.

[115] A rationale for this is explained in Pagliarelli v. Di Biase Brothers Inc. 1989 CanLII 4092 (ON CA), 1989 CarswellOnt 24, 68 O.R. (2d) 597, at p. 607. In that case, pre-judgment interest is explained as “… compensation for the victim with respect to the delay necessitated by the time interval from the date on which the right to money award arises and the date on which it is awarded. It is, in the words of Chouinard J. in Travelers Insurance Co. of Can. v. Corriveau, 1983 CanLII 3744 (MB KB), [1982] 2 S.C.R. 866 at 875, [1983] I.L.R. 1-1601, 24 Man. R. (2d) 81, merely “damages due to delay” (quoted in Pagliarelli v. Di Biase Brothers Inc., supra, at p. 607. Viewed as damages arising out of the delay necessitated by prosecuting action, it is not hard to see pre-judgment interest as part of the damage associated with the original harm and, therefore, justifiable as payable from the limits of the insurance policy.

[116] This is distinct from the concern expressed with respect to post-judgment interest. There, the proposition was that, if the interest was paid from the policy limits at the point that those limits were exhausted, there would be no impetus for the insurer to pay. It could never be liable for more and the longer it held on to the money, the more it could earn from it. With pre-judgment interest, the expectation is that the insurer should move more quickly to resolve the issue before the limits of the policy are reached and that the damage to insured increases over the course of any delay.

[117] This issue can be resolved by reliance on the policy so the court is able to have the “full appreciation” necessary to determine the issue. Counsel for Ernst & Young Inc. submitted that, in the absence of a specific statement in the policy, there was ambiguity, that the issue should be resolved in favour of the insured and decided against the insurer as the party who prepared the policy (contra proferentem). I do not agree. There is nothing ambiguous in understanding that the insurer is obliged to pay pre-judgment interest because the words of the judgment itself direct the payment.

[118] I find that, in this case, if coverage were available from the policy of insurance held by Chartis, any pre-judgment interest would be payable from the limits of that policy. The issue is determinable from the policy and the context set by the earlier decisions. The court can have the required “full appreciation”.

(b) Defence Costs

[119] Are the costs expended by Chartis in providing a defence to its insured to be accounted for within the limits of the policy of insurance? In this case, the order of Mr. Justice Houlden “permitted” the insurer of Central Guaranty Trust to defend the action that had been commenced by Ernst & Young Inc. This was consistent with Endorsement 10 of the policy of insurance which says that “…[t]he Insurer shall at all times have the right but not the obligation to take over and conduct in the name of the Insured the… defense of any claim…”. Following the order of Mr. Justice Houlden, made on October 6, 1993, Chartis took over the defence of Central Guaranty Trust.

[120] What about costs awarded against the insured in a judgment at the end of a trial? Are they included within the limits of the policy? Mr. Justice MacCallum, in his reasons and in his judgment, awarded costs of the trial he heard against the insurer of Central Guaranty Trust. Paragraph 3 of his judgment states:

The Plaintiff shall have costs against the Defendant’s insurer based on double column 5 of the Schedule 5 for this Trial. The name of the insurer shall be provided in writing to counsel for the Plaintiff within 60 days from June 24, 2010, and upon provision of that name judgment for these caught shall be entered against that insurer.

[121] Typically, it would be anticipated that the costs of the defence of Central Guaranty Trust, as expended on its behalf, by its insurer, would fall within the limits of the policy of insurance. The policy opens with this “Notice”:

The limits of liability available to pay judgments or settlements shall be reduced by amounts incurred for legal defense. Further note that amounts incurred for legal defense shall be applied against the retention amount.

[122] This applies to Endorsement 10. Its opening sentence indicates that the endorsement forms part of the whole policy. The notice and the other provisions in the policy applied to Endorsement 10 to the extent that they are not overridden by its specific terms.

[123] Moreover, any costs awarded against Central Guaranty Trust would fall within the policy limits because they fall under the definition of “Loss” found in Endorsement 10. They would be amounts “the Insured shall be legally obligated to pay… for attorneys’ fees”.

[124] The circumstances in this case are, in respect of the defence provided to Central Guaranty Trust, not “typical” and, insofar as the order for costs, made in favour Ernst & Young Inc. is concerned, unusual.

[125] With respect to the latter, the judgment of Mr. Justice MacCallum is clear. The order he has made is directed to the Insurer (Chartis) and, thus, is not an amount the insured (Central Guaranty Trust) is “legally obligated to pay”. This is an amount the insurer has been ordered to pay in its own right.

[126] With respect to the former, the problem is somewhat more complicated. Counsel for Ernst & Young Inc. submitted that, as a result of Chartis having chosen, pursuant to the order of Mr. Justice Houlden, to take up the defence of its insured, it has, as part of that decision, also taken on the obligation to pay for those costs itself. So far as I can see, there is nothing in Endorsement 10, or anywhere else in the policy, that provides that a decision to take up the defence of the insured inexorably includes a decision to be responsible for those costs. To the contrary, the opening paragraph of the policy demonstrates that the cost of the defence falls within the limits of the policy, even in the face of a provision in Endorsement 10 which allows that the decision to take up the defence is for the insurer to make.

[127] The complication arises because, as counsel for Ernst & Young & Young Inc. sees it, it is not appropriate to allow the insurer to run a defence using, what is, in effect, the money of its insured. This is not a novel problem. In some circumstances, this is overcome by the insured being permitted to retain the counsel of its choice. In this case, it has been alleged that the counsel retained to act on behalf of Central Guaranty Trust was more concerned with the impact on the insurer (Chartis) than on his client, the insured (Central Guaranty Trust). On its face, it seems wrong that the insured would have to pay for a defence which was not directed to its best interests. Later in these reasons, I will deal with the question of whether a duty of good faith was owed, by Chartis, to Central Guaranty Trust and is owed to Ernst & Young Inc. For the moment, I observe only that, absent the allegation of the presence of a duty of good faith and its breach, the cost of providing a defence to Central Guaranty Trust would erode the limits of the policy of insurance. This conclusion is arrived at through a review of the policy. On this basis, the court is able to “fully appreciate” the circumstances necessary to make this determination.

[128] There is an additional question that remains with respect to the issue of costs of the defence. Some determination has to be made as to the value of the costs of the defence of Central Guaranty Trust. No one, except Chartis, knows how much money has been spent. These costs include more than legal fees. The definition of “Loss” found in Endorsement 10 also refers to “… costs of attachment, appeal or similar bonds and other legal expenses normally incurred in the investigation and defense of claims or suits…” Taking these factors into account would take the costs at stake back to expenditures made before the order of Mr. Justice Houlden. In this situation, during the course of examination-for-discovery, Warren P. Cooney was asked and agreed to produce proof as to what had been paid to defend the action. Pursuant to the schedule set by the court, the material for this motion was to have been filed during October, 2011. It was, but did not include advice as to the cost of the defence. Chartis’s present counsel was retained during December, 2011. He offered to provide a letter to the court which would disclose the cost of the defence. This motion was initially to be heard in February, 2012, but was adjourned to provide counsel, on behalf of Chartis, time to properly prepare. Counsel, on behalf of Ernst & Young Inc., agreed to the adjournment, but would not consent to further or fresh material being filed. In an endorsement, I agreed that retaining new counsel should not be an opportunity to re-open the record. By now, it has become trite to observe that, on a motion for summary judgment, a party is required to “put its best foot forward”. Even so, a motion for summary judgment is not an opportunity to catch out a party who falls short. In this case, information was offered, after it was due, but before the motion was argued. There will be cases where there is a tension between the requirement that a party “put its best foot forward” and the obligation of the court to have a “full appreciation” of the case before granting summary judgment. In this case, I will make no determination about the value of the costs expended on the defence of Central Guaranty Trust.

(c) Deductible

[129] Endorsement 10 contains a provision for a deductible. It is valued at $750,000 for “…each wrongful act or series of continuous, repeated and interrelated wrongful acts…” Counsel for Chartis submitted that each breach of the trust attracts a separate deductible. In the alternative, he says that there should be separate deductibles payable by Central Guaranty Trust in respect of the misappropriation of funds to re-pay the loan and the reimbursement payments in respect of surplus funds. In his view, these are separate and independent wrongful acts for different purposes that are not interrelated. I do not agree. To deal with this in this way would render the insurance essentially meaningless. Nine breaches were identified by the parties, as follows:

1. June 16, 1987: $509,000.00

2. August 7, 1987: $53,333.80

3. August 10, 1987: $27,185.70

4. September 1, 1987: $594,532.29

5. September 3, 1987: $12,537.50

6. September 16, 1987: $266,466.18

7. October 1, 1987: $434,101.50

8. October 28, 1987: $1,233,533.82

9. November 9, 1987: $70,182.00

[130] What is apparent from this is that virtually none of these losses would be covered. Only breach number 8 exceeds $750,000.00. What is missing from this analysis is the understanding that the breach of the trust is not merely the taking of the money, but the reliance on the actuarial surplus as a justification for it. Viewed in this way, each of the breaches of trust is related to the others. The common feature is the improper reliance on an actuarial surplus and the accompanying certificates as justifying the taking of money from the trust, or the failure to pay premiums into the trust. The same analysis applies in considering the taking of the money to satisfy the loan as one breach and the reimbursement payments as a second breach.

[131] Again, the factors the court requires to deal with this question can be fully appreciated as required by the test in Combined Air Mechanical Services Inc. v. Flesch, supra.

[132] As with the cost of the defence of Central Guaranty Trust, there is no evidence that would comprehensively explain how much money was paid by Central Guaranty Trust against the value of the deductible. It is said that Chartis had control of the evidence of the amounts incurred by Central Guaranty Trust before it took over the defence. The information has not been provided. In circumstances where I have found that the policy will not provide coverage, it does not matter what the value is. If there was coverage, I would have said it is simply not appropriate, on a motion for summary judgment, to rely on an adverse inference (presumably, that the full $750,000 has been paid), as counsel for Ernst & Young Inc. would have me do, when accurate information can easily be made available. In saying this, I point out that, in considering a motion for summary judgment, Rule 20.04(2.1)(3) of the Rules of Civil Procedure permits the judge to draw “…any reasonable inference from the evidence”. To me, it is not reasonable, in the absence of full information, to infer that $750,000 has been paid. Moreover, Rule 20.04(2.2) allows that a judge “…may, for the purposes of exercising any of the powers set out in sub-rule (2.1), order that oral evidence be presented…” In other words, if appropriate, the judge can be provided with additional evidence. The issue of what may have been paid against any deductible would arise only if there was coverage. I have found there is not.

(d) Excess Insurance

[133] The policy, which has been produced and is included in the record, limits the value of the insurance that can be claimed. Endorsement 10 limits liability to (a) $5,000,000 for each wrongful act or series of interrelated wrongful acts; and, (b) $5,000,000 aggregate each policy year. Counsel for Ernst & Young Inc. believes that there is another policy, an excess policy, that provides an additional $5,000,000 of insurance.

[134] This belief is based on documents that were produced and, counsel believes, confirmed by the work of an independent “expert”. The Record contains eight forms entitled, “Reinsurance Notice of Loss”. These were described as forms Chartis would send to its reinsurers advising of the claim. Each of these refers to the applicable policy by number and to either:

• ‘Excess Treaty Shr: 62% of $5,000,000 in Excess of $5,000,000’

or

• ‘Reinsurance Coverage Limits…[30%. 2.5%, 29%, or 0.5%] of 62% of $5,000,000 in Excess of $5,000,000’.

[135] On discovery, Warren P. Cooney could not explain these documents. He was asked to inquire as to “… what they mean?” This request was taken “… under advisement” (see: 154Q). He advised that it was “possible” that there was another policy “sitting on top…providing additional limits of insurance” (see: 371Q-375Q). Warren P. Cooney was asked to go back to the reinsurance department and ask that all relevant documents be produced. This was refused (see: 198Q). Ultimately, in responding to undertakings, the witness advised that: “…all reinsurance is not relevant or material to this claim” (see: Joint Motion Record, Tab 21, p. 1888). Without answers, Ernst & Young Inc. retained as an expert a man who had “worked extensively with both excess insurers and excess reinsurers”. He reviewed the eight documents and accepted certain facts which placed them in context and offered the opinion that Chartis had policy limits of at least $10,000,000 exposed to the claims in the action brought against Central Guaranty Trust.

[136] In view of what he sees as the failure of Chartis to provide additional information, counsel, on behalf of Ernst & Young Inc., requests that I draw an adverse inference that there is additional insurance in place and that the actual value available is $10,000,000.

[137] It is the position of Chartis that there is not and never has been a policy that provides excess insurance over and above that afforded by Endorsement 10 and that this was made clear to Ernst & Young Inc. as early as October 25, 1999. On that day, counsel to Central Guaranty Trust delivered a statement (referred to as “Statement Pursuant to Paragraph 6 of the Disclosure Protocol Entered into by the Plaintiff and the Defendant”) which, among other things, disclosed that the “… Insurance Policy provides for a limit of liability of $5 million…” On November 4, 2010, Master Brott ordered Chartis to produce “copies of all policies of insurance issued by [Chartis] including any declarations and endorsements that may be required to satisfy any part of the [Alberta] judgment…” The only policy produced in response to this order was the one being considered here, including Endorsement 10. In Schedule “A” to the sworn affidavit of documents provided by Chartis, this same policy is the only one listed. Counsel, on behalf of Chartis, advised that a letter has been delivered which definitively responds to this concern. Counsel, on behalf of Ernst & Young Inc., refused to consent to this letter being produced to the court. It was received outside the time period set for the delivery of the record for this motion.

[138] This is not a situation in which it is appropriate for an adverse inference to be drawn. Reliance on the statements found on the Reinsurance Notice of Loss forms and the initial recognition by the witness at discovery that it was possible that additional insurance was in place is the only evidence which suggests the existence of excess insurance. I am not prepared to give any credence to the opinion evidence that was proffered. The conclusion that there is excess insurance is little more than speculation. The witness had no involvement in any aspect of the claim made against Central Guaranty Trust and no firsthand knowledge of any internal reinsurance arrangements Chartis could have had in place. Chartis has consistently said the identified policy is the only policy. In the end, Ernst & Young Inc. chose not to move to set aside the refusals made at discovery and to refuse to consent to apparently relevant material being produced to the court, albeit outside the schedule that was set. It decided, for the purposes of the motion, to force Chartis to live with the positions it had adopted along the way on the basis that it should be taken as having put its best foot forward. It might have been better if Chartis had been more forthcoming sooner or if Ernst & Young Inc. had allowed the recent letter to be produced. The court is not concerned with who made the best tactical decisions but, rather, with finding the truth within a fair and efficacious process.

[139] In the circumstances, I do not know and cannot fully appreciate whether there is or is not excess insurance. If, in the absence of coverage, this remains relevant and the parties cannot find another way to come to a common understanding, this is a matter that will have to be dealt with at whatever trial remains.

Duty of Good Faith

[140] It was submitted that Chartis owed a duty of good faith to its insured, Central Guaranty Trust, that it was breached and that the remedy associated with the breach accrues to the benefit of Ernst & Young Inc. The order of March 2, 2012 leaves for a trial the question of whether any duty of good faith was breached and what, if any, relief would arise as a consequence of that breach. The order indicates that, on this motion for summary judgment, the court will be asked only to consider whether Chartis owed a duty of good faith to Central Guaranty Trust in the Alberta action and to Ernst & Young Inc. in that action and in this action.

[141] There appears to be little doubt that an insurer owes a duty of good faith to its insured:

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.

(702535 Ontario Inc. v. Non-marine underwriters, Lloyd's London, England 2000 CanLII 5684 (ON CA), 2000 CarswellOnt 904, 184 D.L.R. (4th) 687 at para. 27)

and

The authorities are unanimous that a contract of insurance is a contract uberrimae fidei; a contract requiring the utmost good faith. The relationship born of such a contract is imbued with a duty of good faith incumbent on both the insurer and the insured. See Halsbury’s Laws of England Vol. 25 para. 378.

(Adams v. Confederation Life Insurance Co., 1994 CanLII 9244 (AB KB), [1994] 6 W.W.R. 662, at para. 54)

[142] For the purposes of this motion, Chartis acknowledged that, as the liability insurer of Central Guaranty Trust, it owed Central Guaranty Trust a duty of good faith in the Alberta action.

[143] The difficulty is with respect to the question of whether Chartis could owe a duty of good faith to Ernst & Young Inc. 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).

[144] On this basis, there could be no independent duty of good faith owed by Chartis to Ernst & Young Inc. Does this answer the question? It does not.

[145] In Shea v. Manitoba Public Insurance Corp. 1991 CanLII 616 (BC SC), 1991 CarswellBC 60, 55 B.C.L.R. (2d) 15, an infant was seriously injured while riding as a passenger in a motor vehicle driven by his father and owned by his uncle. The accident took place in British Columbia. The vehicle was licensed in Manitoba and insured by the Manitoba Public Insurance Corp. An action was commenced. It became apparent that the damages of the infant plaintiff would exceed the $300,000 limit on the insurance of his uncle. The plaintiff offered to settle for the policy limit, without prejudice to his claims for no-fault benefits and interest. The insurer refused. The action proceeded to trial. The plaintiff was awarded judgment against his father and uncle for damages of $831,327, plus interest of $101,030. The father and uncle assigned their rights against the insurer to the plaintiff. An action was brought in the names of all three claiming indemnity for the full amount of the judgment and interest, in excess of the policy limit. They succeeded. The insurer had breached the duty of good faith it owed to the insured. It had failed to give as much consideration to their interest as it did to its own. The assignment to the plaintiff was a valid transfer of rights of the insured. The infant plaintiff was “…entitled to a declaration of entitlement to indemnity for the difference between the amount owing on the judgment… and the amounts which [had] already been paid” (see: Shea v. Manitoba Public Insurance Corp., supra, at para. 311).

[146] Much the same occurred in Fredrickson v. Insurance Corp. of British Columbia 1986 CanLII 1066 (BC CA), 1986 CarswellBC 131, 3 B.C.L.R. (2d) 145 (B.C.C.A.) appeal dismissed 1988 CanLII 38 (SCC), 1988 CarswellBC 697, 6 W.W.R. 633 (S.C.C.). Following a motor vehicle accident and a trial, but before an appeal was heard, the insurer settled beyond the limits of the available insurance. The insured was unable to make up the difference and assigned his only asset of significance, a cause of action against the insurer for failure to properly defend the action the claimant had brought against him, to the claimant. In upholding the assignment, the court explained the policy considerations at stake:

The rule precluding the assignment of mere rights of action in contract is based on the rule against maintenance and champerty. As in the case of causes of action in tort, where the assignee possesses a sufficient pre-existing interest in the cause of action assigned, the suggestion of maintenance is negated and the assignment is valid: Trendtex Trading Co. v. Crédit Suisse, supra. In considering the assignability of the cause of action in tort, I have concluded that the assignee in this case had a genuine pre-existing financial interest in the cause of action assigned and that the assignment did not savour of maintenance or champerty. The same conclusion applies to the cause of action in contract.

(Fredrickson v. Insurance Corp. of British Columbia, supra, at para. 52 (CarswellBC) or at para. 46 (1986 CanLII 1066 (BC CA)))

[147] In this case, I have found that the right to proceed against Central Guaranty Trust and to look to its insurer to realize on any judgment was, by the order of Mr. Justice Houlden, assigned to Ernst & Young Inc. The pre-existing financial interest of Ernst & Young Inc. is bound up in its responsibility as receiver of IW and the order of Miller A.C.J. (directing an issue as to whether the disbursements breached the trust) as well as the order of Mr. Justice Houlden. To my mind, it would be incongruous to permit Ernst & Young Inc. to proceed against Central Guaranty Trust on the basis that it could only look to insurance to satisfy any judgment, allow the insurer to provide the defence and then leave Ernst & Young Inc. without recourse if that insurer failed to satisfy the duty of good faith it owed to its insured. As counsel for Ernst & Young Inc. 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”.

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

[149] With the finding that coverage is not available, the question of whether there has been a breach of a duty of good faith is the only issue left to be contested in this proceeding. I do not see how or why any new or independent duty of good faith would arise. In this case, Chartis and Ernst & Young Inc. are in a directly adversarial relationship. Beyond the typical requirements of integrity, civility and compliance with the rules and procedures of the court, there is no special or additional duty of good faith that Chartis, as the insurer owes to Ernst & Young Inc., as the person standing in the shoes of the insured. In any trial considering whether the duty good faith was breached in the Alberta action, the parties are left to fight it out as they would in any trial.

[150] I find that, in the Alberta action, there was a duty of good faith owed by Chartis to Central Guaranty Trust and that any cause of action alleging it was breached has been properly assigned to Ernst & Young Inc. There is no duty of good faith owed by Chartis to Ernst & Young Inc. in any proceeding alleging a breach of duty in the earlier action.

[151] Although I have not referred to it in the foregoing analysis, I should say that, if it were necessary to proceed to trial on the issue of whether or not there was coverage available to Ernst & Young, I would treat it differently. In Whiten v. Pilot Insurance Co., 2002 SCC 18, [2002] 1S.C.R. 595, the home of the plaintiff burned to the ground. Rather than acknowledge coverage, her insurer refused to pay. It alleged that the plaintiff had “torched” the house. The insurer took this position even though the local fire chief, its own investigator and its initial expert all said there was no evidence of arson. The jury awarded the plaintiff $1,000,000 in punitive damages. In upholding the award, the Supreme Court of Canada observed that the insurer owed the plaintiff a duty of good faith meaning that “the plaintiff’s peace of mind should have been Pilot’s objective, and her vulnerability ought not to have been aggravated as a negotiating tactic” (see: Whiten v. Pilot Insurance Co., supra, at para. 129). The punitive damage award arose from the breach of the duty of good faith. It was a separate actionable wrong. In the present case, if coverage was available and the insured looked to for payment, the same duty of good faith referred to in Whiten would apply. It would be owed to the insured and assignable to the claimant.

[152] The same can be said to have arisen in Fidler v. Sun Life Assurance Co. of Canada 2006 SCC 30, 2006 CarswellBC 1596, [2006] 8 W.W.R. 1. In that case, the insured was employed as a receptionist in a bank. She was covered by a group policy that provided for payment of long-term disability benefits for two years if she was unable to do her own job and after two years if she was unable to do any job. After the insured was diagnosed with chronic fatigue syndrome and fibromyalgia, the insurer paid long-term disability benefits to her for approximately six and one-half years. Despite having no medical evidence that the insured was capable of working, the insurer terminated her benefits. The insured commenced an action. One week before trial, the insurer offered to reinstate the benefits and pay all outstanding amounts plus interest. As a result, the trial dealt only with her entitlement to aggravated and punitive damages. The Supreme Court of Canada disallowed the award of $100,000 in punitive damages which had been made by the Court of Appeal. It upheld the trial judge who had determined that, while the insurer may have been overzealous, its actions did not amount to bad faith. Where coverage was the issue, there was a duty of good faith. It had not been breached.

Conclusion

[153] Finally, the order of March 2, 2012 seeks a determination as to whether the Ernst & Young Inc. has an actionable right against Chartis for breach of a duty of good faith. I have found there is a duty. The rights arising out of any breach of that duty have been assigned. This being so, it is for Ernst & Young Inc. to determine whether it believes there has been a breach of that duty and whether it wishes to sue. It may or may not be that there was a breach of duty of good faith in the conduct of the defence of Central Guaranty Trust in the Alberta action. There is no reason I can see why Ernst & Young Inc. should not be permitted to take that issue to trial. On the other hand, I have found that there would be no duty of good faith owed by Chartis to Ernst & Young Inc. in this action since it concerns only whether the duty of good faith was breached in the Alberta action. It follows that the allegation that such a duty was breached because Chartis refused to accept any of the settlement offers that were made in respect of this action do not amount to and are not actionable as a breach of duty of good faith.

[154] As the order of March 2, 2012 makes clear, I am not being asked to determine whether any duty of good faith that is owed has been breached and, if it has, what damages arise from it. This was wise. It would not be possible for a judge, without viva voce (oral) evidence, to fully appreciate the circumstances surrounding the conduct of the defence of Central Guaranty Trust in the action. It would not be possible to determine whether there was a breach of any duty of good faith and, if there has been, what the appropriate remedy would be.

[155] In summary, I find the following:

1. Ernst & Young Inc. has the standing necessary to bring this action.

2. The policy provides coverage, however, as a result of Exclusions 7 and 13, no coverage is available, under Endorsement 10, to Central Guaranty Trust or to Ernst & Young Inc.

3. A duty of good faith was owed by Chartis to Central Guaranty Trust in respect of the Alberta action and was assigned, through the order of Mr. Justice Houlden, to Ernst & Young Inc.

4. If coverage were available, I would find:

(a) pre-judgment interest would erode the limits of the policy;

(b) absent the allegation of the presence of a duty of good faith and its breach, the cost of providing a defence to Central Guaranty Trust would erode the limits of the policy of insurance;

(c) the breaches are interrelated and, thus, there is only one deductible of $750,000 to be accounted for; and,

(d) the question of whether there is excess insurance in place would be left to the trial.

5. The issue that remains is whether the duty of good faith owed by Chartis to its insured, Central Guaranty Trust, was breached. Any remedy arising from such a breach would stand to the benefit of Ernst & Young Inc.

Costs

[156] I begin by saying that this was a long and complicated motion. Counsel, to their credit, worked to unravel the history and rationalize the motion in the hope that it would narrow the issues and move the matter towards a final resolution. Only they will know whether they have succeeded and whether this is a step towards a final determination. The parties have been fighting over these matters for some years. While, in the absence of submissions from counsel, I cannot know, it may be that, given the joint efforts of their counsel to move this matter in a direction that will benefit both sides, each party should pay its own costs.

[157] In the event the parties are unable to agree as to costs, I will consider submissions, in writing, on the following terms:

1. From a party seeking costs, no later than fifteen days after the release of these reasons. Such submissions are to be no longer than five pages, double-spaced, not including any Costs Outline or Bill of Costs and case law that may be included.

2. From a party responding to a request for costs made by another, no later than ten days thereafter. Such submissions are to be no longer than three pages, double-spaced, not including any case law that may be included.

3. If necessary, from a party seeking to reply to a response to its request for costs, no later than five days thereafter. Such submissions are to be no longer than one page, double-spaced.

LEDERER J.

Released: 2012-09-17

COURT FILE NO.: CV-10-00411180-0000

DATE: 2012-09-17

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

ERNST & YOUNG INC. Plaintiff

– and –

CHARTIS INSURANCE COMPANY OF CANADA, FORMERLY KNOWN AS AIG COMMERCIAL INSURANCE COMPANY OF CANADA AND AMERICAN HOME ASSURANCE COMPANY Defendants

JUDGMENT

LEDERER J.

Released: 2012-09-17