Court File and Parties

COURT FILE NO.: CV-15-529239 DATE: 20170802 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

LIBERTY SILVER CORPORATION Applicant – and – LIBERTY INSURANCE UNDERWRITERS INC. Respondent

Counsel: Geoffrey D.E. Adair, Q.C. and Gordon McGuire, for the Applicant John Nicholl and Kyle Magee, for the Respondent

HEARD: March 27, 2017

L. A. Pattillo J.:

Introduction

[1] Liberty Silver Corporation (“Liberty Silver”), seeks indemnification from the respondent, Liberty Insurance Underwriters Inc. (“Liberty Insurance”), for legal costs incurred on behalf of its officers and directors pursuant to a Liberty Insurance Executive Advantage Policy (the “Policy”), which was issued to Liberty Silver and was in full force and effect during the relevant period (the “Application”).

[2] Liberty Silver claims U.S. $450,158.48 and Cdn. $337,979.56 in respect of legal fees incurred on behalf of its officers and directors as a result of an investigation undertaken by the United States Securities and Exchange Commission (the “SEC”) beginning in the fall of 2012.

[3] Liberty Insurance denies that it has any liability for the costs incurred based on the terms of the Policy.

[4] For the reasons that follow, I allow the Application.

The Facts

[5] The facts of the Application are not in dispute.

[6] Liberty Silver is a Nevada corporation which carries on the business of exploring and developing mining properties in North America. At all material times, Liberty Silver was cross-listed on the Toronto Stock Exchange and the Over-The-Counter Bulletin Board in the United States and accordingly was subject to the regulatory jurisdiction of both the SEC and the Ontario Securities Commission (the “OSC”).

[7] Between September 6 and October 4, 2012, Liberty Silver’s share price and trading volume increased dramatically such that the company’s market capitalization exceeded $100 million which was highly unusual for a little known junior mining company.

[8] On October 5, 2012, the SEC issued an order suspending trading in Liberty Silver’s shares between October 5, 2012 and October 18, 2012. The SEC advised directors of Liberty Silver that it intended to investigate the circumstances surrounding the recent sharp rise in the trading and value of the company’s shares. On October 12, 2012, the OSC followed suit and also issued a cease trade order halting trading in Liberty Silver’s shares until October 18, 2012.

[9] On October 19, 2012, the SEC issued an order (the “Investigative Order”) pursuant to Section 20(a) of the Securities Act of 1933 (the “Securities Act”) and Section 21(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). The Investigative Order authorized an investigation and designated officers of the SEC to take testimony, issue subpoenas and otherwise investigate Liberty Silver, its officers, directors and others for possible violations of various federal laws, including the sale of unregistered securities, fraud in connection with securities transactions, and unlawful manipulation of the price of securities.

[10] The Investigative Order was styled “In the Matter of Liberty Silver” and specifically provided in Part II as follows:

The Commission has information that tends to show that from at least April 2012:

C. In possible violation of Sections 5(a) and 5(c) of the Securities Act of 1933 (“Securities Act”), Liberty Silver, its officers, directors, employees, partners, subsidiaries, shareholders and/or affiliates and other persons or entities, directly or indirectly, may have been or may be offering to sell, selling, and delivering after sale to the public, or may have been or may be offering to sell or to buy through the use or medium of any prospectus or otherwise, certain securities of Liberty Silver, as to which no registration statement was or is in effect or on file with the Commission, and for which no exemption was or is available.

D. In possible violation of Section 17(b) of the Securities Act, consultants, partners, shareholders and/or affiliates of Liberty Silver and/or others, may have published, given publicity to, or circulated, or may be publishing, giving publicity to, or circulating, any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer Liberty Silver’s securities for sale, describes such security for a consideration received or to be received, directly or indirectly, without fully disclosing the receipt of such consideration and the amount thereof.

E. In possible violation of Section 17(a) of the Securities and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Liberty Silver and its officers, directors, employees, partners, subsidiaries, shareholders and/or affiliates, and/or other persons or entities, directly or indirectly, in the offer or sale or in connection with the purchase or sale of certain securities, may have been or may be employing devices, schemes, or artifices to defraud, making untrue statements of material fact or omitting to state material facts necessary in order to make the statements made, in light of the circumstances under which they were or are made, not misleading, or engaging in acts, practices or courses of business which operated, operate, or would operate as a fraud or deceit upon any person.

F. In possible violation of Section 9(a) of the Exchange Act, Liberty Silver and its officers, directors, employees, partners, subsidiaries, shareholders and/or affiliates, may have effected or may be effecting, alone or with one or more other persons, directly or indirectly, a series of transactions in securities registered on a national securities exchange, creating actual or apparent active trading in such securities, or raising or depressing the price of such securities, for the purpose of inducing the purchase or sale of such securities by others.

While engaged in the above-described activities, such persons or entities, directly or indirectly, may have been or may be making use of any means or instruments of transportation or communication in interstate commerce, or of the mails, or of any facility of any national securities exchange.

[11] Following the cease trade order issued by the SEC, Liberty Silver immediately retained the law firm of Berliner McDonald P.C. in the United States to address it. At the same time, it retained Blake, Cassels & Graydon LLP (“Blakes”) in Canada to act on its behalf and on behalf of the directors and officers in respect of the SEC investigation which ultimately became a cross-border investigation by the SEC and the OSC.

[12] In addition, the Governance Committee of Liberty Silver’s board (the independent directors) retained Akin Gump Strauss Hauer & Feld LLP (“Akin Gump”) to act as US counsel for the members of that Committee in responding to the SEC/OSC investigation.

[13] Almost immediately after the SEC issued its cease trade order, SEC staff contacted Liberty Silver with questions for the officers and directors. On October 11, 2012, the SEC and OSC conducted a phone interview of Liberty Silver’s Chief Executive Officer, Geoffrey Browne (“Browne”). It was immediately apparent to Liberty Silver’s counsel from the telephone call that the regulators’ concern was whether the CEO and other individuals in the company were willing participants in the market manipulation, or possible willfully blind.

[14] As the investigation proceeded, its focus narrowed to Browne, the President William Tafuri (“Tafuri”) and John Pulos (“Pulos”), one of the directors. All three were eventually served with subpoenas issued by the SEC pursuant to the Investigative Order. Both Browne and Tafuri were compelled to give testimony and Pulos was required to produce specific documents listed in the subpoena.

[15] During the course of the SEC/OSC investigation, it became apparent to counsel for each of the company and the officers/directors that a potential conflict of interest could arise between Tafuri and Pulos and the other officers/directors given the nature of their connections with the external financier and/or broker/dealer. Accordingly in or around October 2013, separate representation was obtained for both individuals. Tafuri retained Petrillo Klien & Boxer LLP (“Petrillo Klien”) and Pulos retained Alan Futerfas.

[16] The various law firms acting for Liberty Silver and its officers and directors carried out a significant amount of work to demonstrate through compiled and analysed evidence that all Liberty Silver personnel were innocent of any wrongdoing being investigated by the SEC and OSC. The work included responding to the regulators’ extensive documentary requests involving collecting and reviewing both hard and electronic copies going back several years; compiling and producing responsive documents; developing detailed factual chronologies; interviewing witnesses and clients; preparation of clients to give evidence; liaising with the regulators and addressing their follow-up requests and providing written submissions and statements of position.

[17] Eventually, the law firms ultimately succeeded in demonstrating to both the SEC and the OSC that none of Liberty Silver’s officers and directors was complicit in the market manipulation of Liberty Silver’s shares or of colluding or otherwise participating in any stock market fraud. While neither regulator ever formally advised that the investigation had ended, it became clear more than a year after the SEC/OSC investigation had begun that it was no longer being pursued by either the SEC or the OSC.

[18] The defence costs incurred by Liberty Silver and its officers and directors in responding to the SEC/OSC investigation were invoiced to Liberty Silver during the course of the investigation. The totals are set out below with the Liberty Silver’s portion of the fees excluded from the total amount invoiced based on counsels’ review (the “Excluded Amounts”):

Law Firm Amount Invoiced Liberty Silver Portion Total Claimed Blakes $362,822.36 CAD $24,842.80 $337,979.56 CDN Akin Gump $337,907.78 USD $30,596.00 USD $307,311.78 USD Petrillo Klien $53,953.20 USD N/A $53,953.20 USD Alan Futerfas $188,893.50 USD N/A $188,893.50 USD TOTAL: $450,158.48 USD+ $337,979.56 CAD

[19] On November 13, 2012, Liberty Silver provided notice in writing under the Policy of a claim against the officers and directors of Liberty Silver made by the SEC pursuant to the Investigative Order.

[20] Liberty Insurance initially denied coverage. After discussions between the parties, in July of 2013, Liberty Insurance advised that, without prejudice to its position that coverage was not available, it was prepared to pay for certain defence costs associated with the defence of individual officers and directors. Liberty Silver then submitted invoices for reimbursement.

[21] In December 2013, Liberty Insurance advised that it had completed its review of the invoices submitted and was prepared to recognize only a certain amount as defence costs paid on behalf of directors and officers of Liberty Silver. As a result, further negotiations ensued.

[22] In May 2014, Liberty Insurance advised that it had determined that it was unable to recognize any of the defence invoices submitted on the basis that “the SEC Investigation does not meet the definition of a Claim.”

The Policy

[23] The Policy is a Directors and Officers insurance policy effective for the period of May 28, 2012 through May 28, 2013 (the “Policy Period”), and provides for up to $5 million coverage in aggregate for the Policy Period for matters falling within the Insuring Agreements subject to a retention of $100,000 for each claim.

[24] The relevant Insuring Agreements are set forth in ss. 1.1 and 1.2 of the Policy and provide as follows:

1. Insuring Agreements 1.1 Insured Persons’ Liability: The Insurer shall pay on behalf of the Insured Persons all Loss which they shall become legally obligated to pay as a result of a Claim first made during the Policy Period or Discovery Period, if applicable, against the Insured Persons for a Wrongful Act which takes place before or during the Policy Period. 1.2 Insured Organization Reimbursement: The Insurer shall pay on behalf of the Insured Organization all Loss which it is permitted or required by law to indemnify the Insured Persons as a result of a Claim first made during the Policy Period or Discovery Period, if applicable, against the Insured Persons for a Wrongful Act which takes place before or during the Policy Period.

[25] Section 25 of the Policy is the definition section and defines Insured Persons to include officers and directors of Liberty Silver and Liberty Silver as an Insured Organization.

[26] Relevant to the issues in the Application, section 25 of the Policy, as amended from time to time, also contains the following definitions which are set forth in whole or in part, as necessary:

s. 25.3 “Claim” means: a) a written demand for monetary or non-monetary relief against an Insured Person or, with respect to Insuring Agreement 1.3, against the Insured Organization; b) a civil or criminal judicial proceeding or arbitration against an Insured Person or, with respect to Insuring Agreement 1.3, against the Insured Organization; c) a formal administrative or regulatory proceeding against an Insured Person; d) a formal criminal, administrative, or regulatory investigation against an Insured Person; e) an official request for Extradition of any Insured Person; or f) the execution of a warrant for the arrest of an Insured Person where such execution is an element of Extradition; including any appeal therefrom. A Claim will be deemed first made on the earliest date any Insured Person is arrested by a foreign policy authority or receives a written demand, complaint, indictment, notice of charges, or order of formal investigation in such Claim.

s. 25.4 “Defence Costs” means reasonable and necessary fees (including attorneys’ fees and experts’ fees) and expenses incurred in the defence of a Claim and cost of attachment or similar bonds, but shall not include the wages, salaries, benefits or expenses of any directors, officers or employees of the Insured Organization.

s. 25.12 “Loss” means sums which the Insured Persons or, with respect to Insuring Agreement 1.3, the Insured Organization are legally obligated to pay solely as a result of any Claim insured by this Policy, including Defence Costs, damages, judgments, settlement amounts, legal fees and costs awarded pursuant to judgments (including pre and post judgment interest), punitive or exemplary damages, and the multiple portion of any multiplied damage award. Loss shall not include fines, penalties, taxes, dividends or distribution of profits or other assets of the Insured Organization, any amount allocated to uncovered loss pursuant to Section 13, amounts for which there is no legal recourse against Insureds, or matters uninsurable pursuant to any applicable law.

s. 25.20 “Wrongful Act” means: a) any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty, actually or alleged committed or attempted by the Insured Persons in their capacities as such or in an Outside Position, or, with respect to Insuring Agreement 1.3, by the Insured Organization; or b) any matter claimed against the Insured Persons solely by reason of their status as Insured Persons.

The Issues

[27] Liberty Insurance submits that the Defence Costs claimed by Liberty Silver are not covered under the Policy for the following reasons:

1. the Investigative Order and/or subpoenas do not constitute a “Claim” against an Insured Person as required under the Policy;
2. In the event the Investigative Order and/or subpoenas are a “Claim”, it was not in respect of any “Wrongful Act”; and
3. There is no “Loss” which the Insured Persons or Liberty Silver is legally obligated to pay.

[28] Liberty Insurance further submits that, in the event that it is held liable under the Policy for the Defence Costs claimed, Liberty Silver’s proposed allocation of the legal costs between the Insured Persons and Liberty Silver is not appropriate and that it should only be liable for 75% of the total costs incurred by Blakes and Akin Gump.

The Interpretation of an Insurance Policy

[29] The principles of insurance policy interpretation were succinctly set out by Justice Rothstein in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245 at paras. 21 to 24 as follows:

21 Principles of insurance policy interpretation have been canvassed by this Court many times and I do not intend to give a comprehensive review here (see, e.g., Co-operators Life Insurance Co. v. Gibbens, 2009 SCC 59, [2009] 3 S.C.R. 605, at paras. 20-28; Jesuit Fathers, at paras. 27-30; Scalera, at paras. 67-71; Brissette Estate v. Westbury Life Insurance Co., [1992] 3 S.C.R. 87, at pp. 92-93; Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888, at pp. 899-902). However, a brief review of the relevant principles may be a useful introduction to the interpretation of the CGL policies that follow.

22 The primary interpretive principle is that when the language of the policy is unambiguous, the court should give effect to clear language, reading the contract as a whole (Scalera, at para. 71).

23 Where the language of the insurance policy is ambiguous, the courts rely on general rules of contract construction (Consolidated-Bathurst, at pp. 900-902). For example, courts should prefer interpretations that are consistent with the reasonable expectations of the parties (Gibbens, at para. 26; Scalera, at para. 71; Consolidated-Bathurst, at p. 901), so long as such an interpretation can be supported by the text of the policy. Courts should avoid interpretations that would give rise to an unrealistic result or that would not have been in the contemplation of the parties at the time the policy was concluded (Scalera, at para. 71; Consolidated-Bathurst, at p. 901). Courts should also strive to ensure that similar insurance policies are construed consistently (Gibbens, at para. 27). These rules of construction are applied to resolve ambiguity. They do not operate to create ambiguity where there is none in the first place.

24 When these rules of construction fail to resolve the ambiguity, courts will construe the policy contra proferentem -- against the insurer (Gibbens, at para. 25; Scalera, at para. 70; Consolidated-Bathurst, at pp. 899-901). One corollary of the contra proferentem rule is that coverage provisions are interpreted broadly, and exclusion clauses narrowly (Jesuit Fathers, at para. 28).

Analysis

[30] The Policy provides that the insureds must defend themselves and eligible Defence Costs are reimbursed by Liberty Insurance as part of “Loss”, subject to the retention. In order to qualify as Defence Costs as defined in the Policy, fees and expenses must be incurred in defence of a Claim.

Claim

[31] Liberty Insurance submits that the Investigative Order and the subpoenas do not meet the definition of Claim in the Policy. In particular, it submits that neither the Investigative Order nor the subpoenas constitute a formal regulatory investigation against an Insured Person. Rather, the Investigative Order contains the caption “In the Matter of Liberty Silver” and does not identify any director or officer of Liberty Silver by name.

[32] As noted, s. 25.3(d) of the Policy defines Claim to mean “a formal criminal, administrative or regulatory investigation against an Insured Person”. In my view, the Investigative Order was a “formal regulatory investigation” within the plain meaning of that subsection. The Investigative Order clearly commenced a regulatory investigation. It was issued under s. 20 of the Securities Act and s. 21(a) of the Exchange Act and directed a private investigation to determine whether any persons or entities had engaged in or were engaging in any of the reported acts or practices set out therein and designated specific named individuals as officers of the SEC and empowered them to administer oaths and affirmations, subpoena witnesses, take evidence and require production of documents.

[33] Further, I do not consider that because the Investigative Order was styled “In the Matter of Liberty Silver” and did not specifically name a director or officer of Liberty Silver that the investigation was not against an Insured Person. It is clear from a review of the operative portion of the Investigative Order that the investigation clearly included the directors and officers of Liberty Silver. Liberty Silver’s evidence confirms that it was clear from the first call from the SEC that its directors were clearly the target of the investigation. Nor does the Policy provide that in order for there to be a Claim against an Insured Person, the Insured Person must be named specifically.

[34] For the above reasons, therefore, I conclude that the Investigative Order constitutes a Claim within the meaning of the Policy.

Wrongful Act

[35] Liberty Insurance further submits that even if the Investigative Order constitutes a Claim within the meaning of the Policy, the Insuring Agreement requires that the Claim be for a Wrongful Act and there was no Wrongful Act alleged against an Insured Person.

[36] As noted, a Wrongful Act means “any actual or alleged error, misstatement, misleading statement, act, omission, neglect, breach of duty, actually or allegedly committed or attempted by the Insured Persons”.

[37] The Policy contains no definition of “alleged”. Liberty Insurance submits that the terms of the Policy should be given their plain and ordinary meanings unless the Policy indicates otherwise. Black’s Law Dictionary, 8th Edition, defines “alleged” to mean “asserted to be true as described”. As the Investigative Order refers only to “possible” violations of both the Securities Act and the Exchange Act and does not assert any “actual” or “alleged” acts, Liberty Insurance submits that the Investigative Order does not allege any Wrongful Acts by an Insured Person.

[38] Liberty Silver submits that when the phrase “alleged Wrongful Act” is read in the context of the Policy as a whole rather than in isolation as Liberty Insurance purports to do, it is obvious that the parties must reasonably have intended that formal investigations into a “Wrongful Act” would be included in coverage otherwise the inclusion of a “formal … regulatory investigation” would be superfluous.

[39] Both parties have cited US authority in support of their positions. Although it is informative, I am, of course, not bound by it.

[40] Liberty Silver relies on The National Stock Exchange v. Federal Insurance Company, 2007 U.S. Dist. Lexis 23867 (N.D. III. 2007). That case dealt with exactly the same issue as is currently before the court involving virtually identical policy wording. In dealing with the argument that the SEC investigative order in question did not allege any wrongful act because it only stated that the SEC had information tending to show that the plaintiff may have committed securities violations, the court stated at page 12 of the decision:

Because the term “Wrongful Act” as defined in the policy includes acts allegedly committed or attempted, the scope of the term necessarily includes acts that may have been committed. As discussed above, the term “Claim” includes formal investigation proceedings commenced by the February 5, 2004 formal investigative order. Thus, each act or omission alleged in that order is a “Wrongful Act”.

[41] Liberty Insurance in turn points to Employers Fire Ins. Co. v. Promedica Health Systems, 2013 U.S. App. Lexis 8943 (6th Cir. 2013) which declined to follow National Stock Exchange and held that an investigation by the Federal Trade Commission against ProMedica did not allege wrongdoing and accordingly was not a “Wrongful Act” as defined in the policy.

[42] Liberty Insurance mainly relies on MusclePharm Corporation v. Liberty Insurance Underwrites Inc., 2016 U.S. Dist. Lexis 168698 (D. Colo. 2016) which it submits is “directly on point and is a preferable authority because it involves the very same policy language and same type of SEC investigation at issue in this Application.” In fact, the relevant policy language in MusclePharm is in my view materially different than the Policy wording in issue before me.

[43] MusclePharm initially received a letter from the SEC advising that it was conducting an inquiry into the company’s operations. Subsequently, it received an order similar to the Investigative Order in this case. Liberty Insurance denied the claim for defence costs on the ground that neither amounted to a “Claim” under the policy.

[44] Similar to the Policy, the policy in issue in MusclePharm obligated Liberty Insurance to pay for loss resulting from a “Claim” for a “Wrongful Act”. While “Wrongful Act” had the same definition as in the Policy, of note, and different from the Policy, s. 25.3 defined “Claim” in wording identical to s. 25.3 of the Policy save and except that s. 25.3(d) provided:

25.3 (d) a formal criminal, administrative, or regulatory investigation against an Insured Person when such Insured Persons’ receives [sic] a Wells Notice or target letter in connection with such investigation. [My emphasis.]

[45] As deposed by James Sallah, former senior counsel with the SEC who was put forward by Liberty Insurance, if after the investigation SEC staff determine the SEC should begin enforcement proceedings, before making a recommendation to the SEC, staff will typically provide the proposed respondent with notice of this preliminary decision. The notice is known as a “Wells Notice.”

[46] In MusclePharm, Liberty Insurance argued that the SEC’s investigation did not constitute a “Claim” as defined prior to the issuance of the Wells Notices and, in addition, there was no “Wrongful Act” within the meaning of the policy. The District Court based its decision on the latter argument and, relying on the dictionary definition of “alleged”, held that the SEC order and subsequent subpoenas did not involve “a positive assertion that the implicated error or omission is believed to have actually occurred...” and accordingly did not constitute a “Wrongful Act” as defined in the policy.

[47] As noted, the above decisions are not binding on this court. Further, and specifically with regard to MusclePharm, the wording of the policy is sufficiently different as to distinguish its conclusion.

[48] I agree that when interpreting policy terms, ordinary words ought to be given their ordinary meaning “as they would be understood by the average person applying for insurance...” See: Co-operators Life Insurance Company v. Gibbens, 2009 SCC 59, [2009] 3 S.C.R. 605 at para. 21. Further, ordinary meaning is determined with reference to its dictionary definition.

[49] That said, when the ordinary meaning of “alleged” is applied to that term in the definition of Wrongful Act under the Policy, in my view, it creates an ambiguity in the wording of the Policy and specifically in the definition of Claim.

[50] More specifically, Claim includes a “formal … regulatory investigation”. However, regulatory investigations are just that – investigations. Their purpose is to determine whether a regulatory offence has occurred. They do not begin by alleging a Wrongful Act. Accordingly, if Wrongful Act requires an act to be asserted as true, a regulatory investigation can never be covered. Given that a regulatory investigation is included in the definition of Claim, the fact that regulatory investigation (or any investigation) could never result in recovery under the Policy could not have been consistent with the reasonable expectations of the parties.

[51] As noted, MusclePharm is distinguishable. Because the definition of Claim in the MusclePharm policy includes a regulatory investigation but only when a Wells Notice or target letter has been received, the use of the ordinary meaning in respect of “alleged” in the definition of “Wrongful Act” does not give rise to any ambiguity under the policy. A Wells Notice contains alleged acts of wrongdoing.

[52] Accordingly, I agree with Liberty Silver that when Wrongful Act is considered in the context of the Policy as a whole and specifically in the context of “a formal … regulatory investigation”, Wrongful Act includes any matters raised which gave rise to the investigation. In my view, the text of the Policy supports such an interpretation.

[53] For the above reasons, therefore, I conclude that the SEC/OSC investigation, (the Claim) was in respect of a Wrongful Act or Acts.

Loss

[54] Liberty Insurance submits that even if there is a Claim for a Wrongful Act, there is no Loss which Liberty Silver is obligated to pay as required by the definition of Loss and by the terms of the Insuring Agreements.

[55] Liberty Insurance’s argument arises as a result of an agreement between Liberty Silver and its law firm creditors dated March 29, 2016, whereby Liberty Silver assigned the entire proceeds of the Application to the law firm creditors in exchange for full and final releases from any and all claims by the law firm creditors against Liberty Silver, its officers, directors and employees (the “Assignment Agreement”). As a result, Liberty Insurance submits that Liberty Silver no longer has any legal obligation to pay the Defence Costs.

[56] Liberty Insurance further submits that by the time the Application was commenced on May 29, 2015, many of Blakes invoices were statute barred in that, except for the last invoice, they were issued more than two years before the Application was commenced.

[57] As noted, the Policy provides that Loss is a sum that Liberty Silver is “legally obligated to pay” as a result of a Claim. In my view, there is no question that Liberty Silver was “legally obligated to pay” the invoices from the law firms for services rendered in respect of the SEC/OSC investigation when those invoices were rendered. Further, it remained “legally obligated to pay” at the time it submitted the invoices to Liberty Insurance as part of its claim and again at the time that it commenced the Application.

[58] I agree with Liberty Silver’s submission that it can hardly have been the intention of the parties to allow the insurer to escape payment of justly incurred debts on the basis of a compromise it reached long after the claim crystallized otherwise the insurer would be in a position to profit from its own wrongdoing in failing to pay legitimate claims in the first place.

[59] There is nothing in the Policy that provides for when the insured must be “legally obligated to pay”. Any uncertainty of the timing must be resolved in favour of the insured.

[60] Nor do I consider that the Assignment Agreement removes Liberty Silver’s obligation to pay the legal fees. The mutual releases exclude any claims or causes of action arising out of the performance of obligations arising under the Assignment Agreement, one of which is that Liberty Silver will prosecute its action against Liberty Insurance to settlement or final judgment. If it fails to do so, the law firms would have a claim for their fees.

[61] I also reject Liberty Insurance’s submission that the Blakes accounts are statute barred. There is simply not enough evidence to make such a finding particularly in the face of Liberty Silver’s submission that it was legally obligated to pay all the invoices, including Blakes, at least up to the time of the Assignment Agreement.

Allocation

[62] Liberty Insurance submits that in the event that the court determines that it is responsible for the Defence Costs, it is willing to accept responsibility for 100% of the Defence Costs incurred on behalf of Tafuri and Pulos (Petrillo Klien and Alan Futerfas), but only 75% of the Defence Costs incurred by Blakes and Akin Gump on the basis that 75% is allocated to the three other directors and 25% to Liberty Silver whose costs are not covered under the Policy.

[63] Although s. of the Policy provides for the allocation between a covered Loss and uncovered losses, it provides for the parties to agree and in the absence of agreement, Liberty Insurance is to advance the Defence Costs it reasonably believes to be covered under the Policy “until a different allocation is negotiated or determined.” The Policy provides no guidance whatsoever as to the basis upon which the allocation should be made.

[64] In Hanis v. Teevan, 2008 ONCA 678, [2008] O.J. No. 3909 (C.A.) at para. 2, leave to appeal to the S.C.C. refused [2008] S.C.C.A. 504, Doherty J.A. stated:

2. I would hold that the question of apportionment of costs should be determined by the operative language in the policy. Where there is an unqualified obligation to pay for the defence of claims covered by the policy, as in this case, the insurer is required to pay all reasonable costs associated with the defence of those claims even if those costs further the defence of uncovered claims. The insurer is not obligated to pay costs related solely to the defence of uncovered claims.

[65] As indicated by the evidence filed by Liberty Silver, the amounts capable of ready segregation relating to work exclusively for the benefit of Liberty Silver are the Excluded Amounts set out in paragraph 18 herein. The remainder of the work was of coextensive benefit to the Insured Persons (directors and officers) and is not susceptible to further segregation. On the other hand, Liberty Insurance’s proposed allocation is an arbitrary amount based on no evidence.

[66] Accordingly, I accept the allocation proposed of Defence Costs as proposed by Liberty Silver and set out in paragraph 18 herein.

Conclusion

[67] For the above reasons, the Application is allowed. Liberty Silver is entitled to be indemnified under the Policy for the Defence Costs incurred in respect of the SEC/OSC investigation in the amount of US $450,158.48 and Cdn $337,979.56.

[68] At the conclusion of the argument, the parties agreed that if Liberty Silver was successful it was entitled to receive Costs in the amount of $100,000 and if Liberty Insurance was successful, it was entitled to costs of $75,000.

[69] Accordingly, costs payable to Liberty Silver fixed in the amount of $100,000.

L. A. Pattillo J.

Released: August 2, 2017