Court File and Parties

COURT FILE NO.: CV-14-10503-CL DATE: 20181113 ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST)

BETWEEN:

CANADIAN NORTHERN SHIELD INSURANCE COMPANY and ROYAL AND SUN ALLIANCE INSURANCE COMPANY OF CANADA Plaintiffs – and – 2421593 CANADIAN INC., THE CO-OPERATORS GROUP LIMITED, FEDERATED AGENCIES LIMITED, VANCOUVER CITY SAVINGS CREDIT UNION and 7081332 CANADA INC. Defendants

COUNSEL: Marg A. McKillop and J. Anthony Caldwell, for the Plaintiffs Geoff Hall and Jacqueline Cole, for the Defendants, 2421593 Canadian Inc. and Vancouver City Savings Credit Union

HEARD: June 4, 5, 6, 8 and 11, 2018

Judgment

L. A. Pattillo J.:

Introduction

[1] The central issue in this action is whether the dealings between the plaintiffs Royal & Sun Alliance Insurance Company of Canada and Canadian Northern Shield Insurance Company and the defendant 2421593 Canada Ltd., formerly known as Vancity Insurance Services Ltd., between June 2008 and January 2009 proceeded to the point of a legally enforceable contract providing for the provision of habitational (home and property) insurance.

[2] Between July 2008 and September 2009, the parties engaged in discussions and worked together in implementing the proposed insurance program.

[3] For the reasons that follow, I conclude that the parties entered into a legally enforceable contract by at the latest September 11, 2008 and that 2421593 Canada Ltd. wrongfully terminated it on September 9, 2009, by failing to give the two year notice of termination required by the agreement, thereby entitling the plaintiffs to damages for breach of contract.

Background

1) The Parties

[4] Royal & Sun Alliance Insurance Company of Canada (“RSA”) is a Canadian corporation which carries on business throughout Canada as an underwriter and issuer of, among other things, property and automobile insurance.

[5] Canadian Northern Shield Insurance Company (“CNS”) is a Canadian corporation which carries on business in British Columbia and elsewhere in Canada as an underwriter and issuer of, among other things, property and automobile insurance.

[6] In January 2008, RSA purchased CNS (collectively “RSA/CNS”).

[7] The defendant Vancouver City Savings Credit Union (“Vancity”) is a credit union governed by the Credit Union Incorporation Act, R.S.B.C. 1996, c. 82 and carries on business as a financial institution in British Columbia.

[8] 2421593 Canada Inc., formerly Vancity Insurance Services Ltd. (“VCI”), is a Canadian corporation which at all material times was owned by Vancity and carried on business in British Columbia as an insurance broker offering property and automobile insurance, primarily to Vancity members.

[9] The action was previously dismissed against the defendants The Co-Operators Group Limited, Federated Agencies Limited, and 7081332 Canada Ltd. on motions for summary judgment brought by the defendants.

2) The Evidence

[10] At the trial, RSA/CNS relied mainly on the material filed on the summary judgment motion including the affidavits of Tony Hayes (“Hayes”), and Keith Mottram (“Mottram”), employees of RSA/CNS who were involved in the discussions, and Glen Pentland (“Pentland”), who was also involved in the discussions on VCI’s behalf. In addition, each of Hayes, Mottram and Pentland testified at the trial. RSA/CNS also called a damages quantification expert.

[11] In response, the defendants also called a damages expert to respond to the plaintiffs’ expert. However, apart from discovery transcripts and cross-examinations, the defendants lead no fact evidence and relied on the documents filed.

[12] The defendants submit that the contemporaneous written record is more reliable than the witnesses’ recollections. They take issue with Hayes and Pentland’s testimony in particular, not on the basis of credibility but rather based on the unreliability of human memory in a commercial setting. They rely on the observations about the unreliability of human memory made by Leggatt J. of the Commercial Court of the High Court of Justice Queen’s Bench Division in Blue v. Ashley, [2017] EWHC 1928 (Comm).

[13] At paras. 66-67 of Blue, Leggatt J. observes, based on a number of factors including the biases inherent in the litigation process, the procedure of trial preparation, the faulty model of memory as a mental record and the unreliability of memory to recall past beliefs, that the best approach for a judge to adopt in a commercial trial is to place little if any reliance on witnesses recollections of what was said in meetings and conversations and to base factual findings on inferences drawn from the documentary evidence and known or probable facts.

[14] While I do not disagree with Leggatt J’s observations generally concerning the fallacy of memory, I do not consider that his Lordship was suggesting that a witness’ evidence should be given little reliance in favour of the documents in every case. In my view, factual findings depend on both the documents and the evidence. Where the written record is a clear contemporaneous record which contradicts a witness’ evidence, I agree, subject to the reliability of the record, that little reliance should be placed on that witness’ evidence. Where, however, the written record is not clear, does not contradict the witness or is not reliable, then the witness’ evidence must be assessed based on all of the evidence.

[15] In addition, the litigation process creates prior recorded testimony through cross-examination and/or discoveries which inevitably results in inconsistencies in testimony. The nature and extent of those inconsistences may or may not impact on the reliability assessment of the witness’ memory.

[16] The frailty of human recollection is one of the factors that must clearly be considered along with all other relevant evidence in assessing how much or how little to rely on a witness’ testimony.

[17] In this case, I accept the evidence of Hayes, Pentland and Mottram. In my view they gave their evidence in a straight forward and non-argumentative manner. I found their evidence, which as between Hayes and Pentland was not always consistent on what occurred, to be credible. Further, none of them had a particular stake in the outcome. Their “ties of loyalty” have long since disappeared. Hayes no longer works for RSA/CNS having left in 2014. Pentland is no longer associated with VCI’s successor. After the sale of VCI in 2009, he worked for Federated Agencies for two and a half years assisting in the transition of the business to Co-operators offices following which he joined the BC Auto Association as marketing manager for insurance products. Mottram retired from RSA in July 2013.

[18] In addition, I consider that much of Hayes and Pentland’s evidence was corroborated by the documents.

[19] That said, I do not accept the evidence of both Hayes and Pentland when they testified that in their view the parties had reached an agreement concerning the provision of insurance. That evidence is subjective and not relevant in respect of the issue before the court. The ultimate issue however is different from the witnesses’ evidence as to whether the parties reached agreement on various terms of an agreement. In my view that evidence is relevant and something which must be considered.

3) The Facts

[20] The following are my findings of fact arising from the evidence.

[21] Since at least 1998, VCI acted as a non-exclusive broker of property and automobile insurance policies underwritten and issued by CNS pursuant to a written broker agreement dated October 19, 1998 (the “Broker Agreement”).

[22] The Broker Agreement, which was subsequently amended from time to time, appointed VCI as an agent of CNS and gave VCI authority to solicit and negotiate insurance contracts on behalf of CNS, to bind CNS to such risks in accordance with an underwriting schedule to the Broker Agreement and to collect premiums. The Broker Agreement provided for a 20% commission rate for habitational insurance and a 90 day or 180 day notice of termination. It also set out other terms including target net loss ratio, profit sharing, reporting, and payment obligations. The name of the insurance product CNS was providing to VCI was Pure Home.

[23] As noted, the Broker Agreement with CNS was non-exclusive. VCI also had agreements with other insurers to enter into contracts of insurance on their behalf. In addition to CNS, the other insurers were Sovereign General (“Sovereign”), AXA, Aviva, ING, Wawanesa, Optimum West and Economical.

The Request for Information

[24] In late 2007 or early 2008, VCI received approval from its parent Vancity to pursue a single insurer partnership. At the time, such an arrangement was unique to the industry. In February, 2008, Pentland, VCI’s Business Development Manager, prepared a Request for Information (“RFI”) to determine whether a number of insurers were interested in developing an exclusive supplier arrangement with VCI. The RFI advised that VCI was conducting a comprehensive review of its current personal lines insurance operations to develop a program with the specific objectives of increasing profitability and increasing growth, retention and client loyalty. The RFI invited major insurers “to express their interest in partnering with Vancity insurance.”

[25] In early March 2008, VCI sent the RFI to a number of major insurers, including RSA/CNS.

RSA/CNS Responds to the RFI

[26] Five insurers, including RSA/CNS responded to the RFI. RSA/CNS’ response, dated March 2008, was entitled: “Building the Vancity Insurance Customer Proposition”. In the response, RSA/CNS proposed a single insurer partnership, a five year exclusive commitment, the development of an insurance program for Vancity which included branded habitational insurance, $50,000 worth of market research annually, the training of VCI employees and an increase in basic commission revenues from the then current 20% to 25% (the “Program”). RSA/CNS requested an opportunity to conduct due diligence and have further discussions with VCI. Ken Keenan (“Keenan”), President of CNS, and Hayes who was Vice-President Sales and Distribution of RSA/CNS at the time, led RSA/CNS’ response.

[27] VCI reviewed the responses to its RFI and decided to learn more about three of the insurers’ proposals.

The June 10, 2008 Meeting

[28] On May 12, 2008, Pentland contacted Keenan at CNS and advised him that VCI wished to meet with RSA/CNS to better understand the details of RSA/CNS’ proposed Program. Following their discussion, Pentland sent Keenan a document he prepared which he described as a guideline for the discussions titled: “Proof of Concept Guidelines: Vancity Insurance Habitational Program”. The introduction contained the following statement:

The intent of this next stage is not to finalize or to reach definitive agreement on these items but rather to achieve a fuller understanding of the requirements, work effort, workflow, timeline, and partnership expectations if the parties were to proceed with the proposed program.

[29] RSA/CNS and VCI agreed to meet on June 10, 2008 to discuss RSA/CNS’ proposal. In advance of the meeting, RSA/CNS prepared a document entitled “Building the Vancity Insurance Customer Proposition: Beyond the RFI … Experiencing Partnership June 10, 2008”. The document set out in some detail RSA/CNS’ Program including its proposed business model, customer model and operating model. The document set out a number of proposals to facilitate the one- insurer, one-broker partnership VCI proposed. At the end of the document, RSA/CNS set out the following:

Compensation Structure

• Commission 20% to 25% based on profitability and operating model

• Profit Sharing CPC % increase from 10% to 25%

• Portfolio transfer 5% plus CNS would manage conversion internally

• Marketing 1% of premium volume

Contract: Terms and Conditions

• 5 Year Agreement

• Quarterly review

• Formal Agreement

• Minimum 6 months cancellation notice

[30] Keenan and Shelly Toyota, a Vice-President of Personal Insurance for Canada for RSA attended the June 10th meeting on behalf of RSA/CNS. Terry Taciuk (“Taciuk”), VCI’s President, as well as Pentland and other operational personnel were present for VCI. Keenan and his associates made a lengthy presentation supporting RSA/CNS’s proposal. The discussions that followed covered a number of topics raised by VCI dealing with the workings of the proposed relationship including the proposed methods of portfolio transfer, RSA/CNS’s proposed Business Alignment Model, product development ideas and claims proposals.

[31] During the session, VCI confirmed that the compensation and contract points in RSA/CNS’s June 10, 2008 document were acceptable if RSA/CNS’ proposal was acceptable. However, they requested to extend the proposed 6 month cancellation notice to 12 months. RSA/CNS agreed.

[32] Following the meeting, Pentland and Bill Corbett (VCI’s Operations Manager) had a further meeting with RSA/CNS representatives on June 15, 2008 to discuss technical issues concerning the new business and portfolio transfer.

[33] After that meeting, VCI determined RSA/CNS would be the exclusive home insurer for VCI and that it would proceed to negotiate an exclusive insurer arrangement with RSA/CNS and work together to develop an exclusive home insurance product for VCI to offer to its clients and potential clients who were Vancity members (the “Program”). VCI considered that CNS’ culture and values aligned with VCI’s.

The July 3, 2008 Meeting

[34] On June 26, 2008, Pentland called Keenan and advised him that RSA/CNS had been selected by VCI “to enter exclusive negotiations to become their sole insurer.” Keenan responded that he was thrilled that RSA/CNS had been chosen and reconfirmed RSA/CNS’ commitment to partnering with VCI. He said he would immediately assemble his team and arrange a joint meeting right away in order to move forward with the initiative. The meeting was subsequently scheduled for July 3, 2008.

[35] Representatives from both RSA/CNS and VCI attended the July 3, 2008 meeting, including Keenan and Hayes on behalf of RSA/CNS and Taciuk and Pentland for VCI. RSA/CNS prepared an agenda listing a number of topics dealing with what the Program would look like going forward together with transition issues.

[36] Following the July 3 meeting, Pentland prepared an outline of the topics discussed at the meeting in a document titled “Vancity, CNS/RSA Program – Meeting Minutes”. The discussions included the shared vision and expectations for the “partnership” as the parties were referring to it; VCI’s communications to its other insurers about the exclusive arrangement with RSA/CNS; VCI and RSA/CNS’ internal staff communications about the agreement; the rollover of business to RSA/CNS from its other insurers; how new business would be dealt with; the development of a new fully branded VCI habitational insurance product by January 1, 2009; and the commitment of both sides to hire project managers to facilitate the implementation of the Program.

[37] As noted, the parties agreed to set January 1, 2009 as the target date for the launch of the “fully branded customized Vancity habitational product” underwritten by RSA/CNS. They agreed that the new product would include the Pure Home product. They also discussed at some length the rollover of existing VCI clients to the new product when their policies either expired or were cancelled. The challenge was to make the transition as seamless as possible for the clients. The process was very complex and required a significant amount of time and effort on both sides. Each side agreed to immediately begin to coordinate the rollover process and hire a project manager to facilitate it.

[38] The discussions focused in part on what Pentland said VCI viewed as a “significant risk” of backlash from its existing insurers prematurely cancelling their agreements with VCI in response to news of its agreement with RSA/CNS. The parties discussed the issue at length and agreed that in the event that any of VCI’s other insurers cancelled their agreements prematurely, preventing VCI from writing and renewing insurance for its customers, they would accelerate the January 1, 2009 timeline contemplated for implementation of the new product and RSA/CNS would provide an interim insurance product to VCI’s clients until the planned customized product was developed and available.

[39] As part of the discussions concerning the shared vision and expectations, the parties reviewed the contract terms in VCI’s Proof of Concept and RSA/CNS’s responses.

[40] In his evidence, Hayes summarized his understanding of the agreement the parties reached at the July 3, 2008 meeting as follows:

• RSA/CNS would be the exclusive insurer for VCI;
• The term of the agreement was five years;
• There was to be a 12 month termination clause;
• Commissions were to increase in accordance with the compensation set out in RSA/CNS’s Proof of Concept – commissions would be 25% once the Program was in full effect. In addition, 5% would be paid upon the rollover of each policy and 1% of premium volume would be used for marketing purposes. Profit sharing was to increase from 10% to 25%;
• RSA/CNS and VCI would coordinate the rollover of VCI’s existing business to RSA/CNS to ensure VCI’s business was protected if there was an insurer backlash/cancellation;
• The parties would coordinate the rollover of the business where there was no insurer cancellation;
• RSA/CNS would provide an interim branded RSA product which would include Pure Home, “possibly by September 1”;
• The parties would design a customized/branded product for VCI to offer to its customers aiming for a January 1, 2009 start date;
• Both parties would hire project managers to move the project forward;
• RSA/CNS would pay the technological costs for the rollover; and
• RSA/CNS agreed to make a large deposit with Vancity.

[41] As Pentland confirms, at the end of the July 3 meeting, the parties agreed that RSA/CNS would exclusively supply home and property insurance to VCI and, starting January 1, 2009, VCI would rollover all business to RSA/CNS. In the interim, RSA/CNS would accommodate any rollover required by insurer cancellation. The parties agreed to publically announce their new relationship. RSA/CNS would pay a 25% commission on new business; a onetime 5% rollover commission; a $50,000 marketing support payment plus 1% of premium volume; and RSA/CNS would pay for the rollover’s technology costs. Both parties agreed to a five year agreement term. The termination provision was to be discussed later. RSA/CNS proposed a one year notice period. Pentland said that VCI wanted a two year rehabilitation period followed by a one year notice period.

Events Following July 3, 2008

[42] On July 7 and 8, 2008, VCI (Taciuk and Pentland) visited its other insurers and advised them that VCI would be partnering with RSA/CNS in an exclusive home insurance provider relationship which it planned to implement by January 1, 2009. They told the other insurers that until then, VCI would place business with its insurer partners as usual.

[43] On July 8, 2008, both parties advised their employees of the new relationship. Taciuk sent an email to all VCI’s head office and branch staff which stated, in part: “After a thorough review we have decided that we will proceed with a program underwritten by a single insurer and that insurer will be RSA/CNS.” Also on July 8, 2008, CNS advised all of its employees of the agreement with VCI by email.

[44] On July 14, 2008, VCI announced its agreement with RSA/CNS to the Vancity staff. In part the announcement stated:

Vancity Insurance has inked a major deal with a national insurer to underwrite an exclusive Vancity Insurance branded home insurance product. The company has undergone a rigorous evaluation process and is pleased to announce that Royal Sun Alliance and Canadian Northern Shield (“RSA/CNS”) will be underwriting this program product. This is a very exciting time for Vancity Insurance as we develop a meaningful, long-term partnership with a large international insurer. In addition to its insurance strength, RSA has a strong commitment to community leadership and, as part of this deal, has agree [sic] to support Vancity’s banking operations by maintaining a large deposit with the credit union. The branded product will be developed in phases over the next several months and will be a customized insurance product for the benefit of our members and staff.

[45] Following the July 3rd meeting, two teams comprised of personnel from both VCI and RSA/CNS were assembled to work through the rollover conversion and to develop the new branded product respectively. CNS/RSA appointed Laura Sato and VCI appointed Paul Mittal as the project managers. The teams set timelines, met regularly to discuss issues as they arose, and met to review each of the projects’ progress.

[46] The rollover team was responsible for both developing the software required to move the insurance policies from VCI’s system to RSA/CNS’s system as well as developing a protocol for the rollover. Mottram, who had extensive experience with RSA dealing with the rollover of broker business and its technical requirements, was directly involved in the development of the software for the rollover together with an outside consultant, Brovada Technologies, which RSA/CNS paid for as agreed.

[47] The new branded insurance product, which the parties agreed would incorporate the Pure Home product, was being developed by underwriting teams from both RSA/CNS and VCI. They were involved in developing the product and determining coverages and rates. On October 29, 2008 VCI announced to its staff that as of December 1, 2008, the first generation VCI exclusive insurance product would be available for new business and rollover business. Up to December 1, 2008, VCI offered an RSA policy for new business and rollovers.

The Sovereign Cancellation

[48] On July 10, 2008, as VCI had feared, Sovereign, one of VCI’s insurers, advised VCI that it was cancelling its agreement with VCI, effective immediately. As a result, effective July 10, 2008, VCI could no longer write any new or renewal Sovereign business after 90 days (October 30, 2008). Even though Sovereign subsequently extended the renewal date to November 15, 2008, its cancelation caused the rollover planning and implementation to be placed on a faster track than initially anticipated at the July 3 meeting.

[49] As agreed at the July 3 meeting, RSA/CNS worked with VCI to expedite the rollover as a result of Sovereign’s cancellation. To transfer the Sovereign business smoothly, RSA/CNS hired additional staff and dedicated existing staff to deal with the business influx. It also had to expedite the required VCI employee training on the RSA/CNS insurance product and its systems. The Sovereign rollover commenced on October 1, 2008 for renewals dated on or after November 30, 2008 up until December 1, 2008.

The September 11, 2008 Meeting

[50] On September 11, 2008, the parties again met to discuss the contract’s terms. In advance, Taciuk sent a long email to Keenan on September 9, 2008 headed “Contract Negotiations with RSA/CNS. Draft September 8, 2008”. The document, prepared by Pentland, contained the following headings with bullet points under each heading setting out VCI’s position:

1. “Spirit and Intent” Partnership Agreement
2. Three Year strategic Plan
3. Company-Broker Contract & Risk Mitigation
4. Term of Agreement
5. Technology
6. Confidentiality/Privacy
7. Claims service
8. Auditing
9. Remuneration
10. Signing bonus
11. Rollover costs
12. Profit-sharing
13. Marketing support
14. Direct Bill Finance Fee & Revenue Sharing
15. Staff Training
16. Staff Insurance Program
17. Operational Understanding
18. Service Level Agreement

[51] As Pentland was out of town and did not attend the September 11, 2008 meeting, Hayes provides the only evidence with respect to what occurred, beyond the minutes which VCI prepared. Hayes’ evidence, confirmed by the minutes, is that the parties had a very wide ranging discussion about the details of the Program which included topics that would not be part of the contract.

[52] The parties had already agreed to many of the points listed in VCI’s September 8, 2008 draft earlier in either the June or July meetings. For example, the five year term, marketing support in the form of a $50,000 payment and 1% of premium volume annually, and a 5% commission override on new business.

[53] Hayes’ evidence is that the parties agreed on the following additional terms at the September 11th meeting:

• The five year agreement term would commence when the new insurance product was launched (still anticipated to be January 1, 2009);
• The agreement could be terminated on two years (24 months) notice. The parties agreed they would focus on rehabilitation during the first year of the notice to resolve any issues which gave rise to the notice;
• RSA/CNS would deposit $5 million with Vancity when the agreement was signed;
• RSA/CNS would pay VCI a $135,000 bonus when the agreement was signed;
• RSA/CNS agreed to pay a 23% incremental commission of on new business prior to the Program being operational and 25% thereafter. Otherwise the commission structure set out in the Proof of Concept would apply;
• RSA/CNS’ $50,000 payment for marketing support was payable in year two of the agreement and subject to joint agreement on initiatives;
• Apart from the prior agreement that RSA/CNS would pay the rollover’s technology costs, each party would pay their own day to day technology costs;
• RSA/CNS would provide all of the training for VCI staff to implement the Program;
• The customized insurance product would contain environmental features;
• RSA/CNS agreed to pay $56,000 towards VCI’s costs for its project manager (Mittal);
• RSA/CNS agreed to support launch and marketing events for VCI’s insurance staff;
• RSA/CNS would pay a referral fee in cash to VCI’s staff for referring business to VCI and provide a staff discount.

[54] Hayes’ evidence is that some of the items discussed at would need to be developed further as the Program developed. These items included the business plan, a three year strategic plan, the claims promise for the VCI product, ways in which to structure the commission and profit sharing, the amount to pay VCI employees for referrals, the VCI staff discount, the auditing procedure, the development of various marketing initiatives including a campaign to target Vancity members, and the contents of the branded product.

[55] At the end of the meeting, Hayes agreed on behalf of RSA/CNS to prepare a first draft of the written agreement.

[56] Sometime after the September 11 meeting, ING advised VCI that it was cancelling its right to place VCI’s business with ING effective November 1, 2008 and that effective February 18, 2009, it would no longer accept renewals. The ING rollover commenced on January 5, 2009.

[57] Subsequently, the Aviva rollover commenced on February 16, 2009. The Wawanesa rollover commenced April 6, 2009.

[58] By September 2009, approximately 9,000 insurance policies had been rolled over from VCI’s other insurers to RSA/CNS.

The First Draft of the Agreement

[59] Hayes forwarded a draft contract to VCI on December 1, 2008. In the cover letter to Taciuk, Hayes apologized for the delay and stated that he hoped that it would “serve as a solid first draft for us to work on.” He noted that the contract was built with the ability to add addendums for specific contract items such as service level agreements or claims satisfaction surveys. Hayes also said that while they had initially discussed RSA/CNS paying a signing bonus of $135,000 at the time the contract was signed, as a result of the delay in providing the first draft, RSA/CNS was open to discussing payment of the bonus before the end of December.

[60] The letter also outlined how RSA/CNS saw the various levels of commission:

Vancity Program Compensation

• Project Management fees - $56,000 – Paid November 2008

• Contract Signing bonus - $135,000 – Payment at signing or before Dec 31, 2008

• Override commissions – 5% for all rollover business. We see this override payment as a year one payment to compensate for the administrative effort and expense in rolling the business to CNS. The override commission will be paid quarterly commencing with Nov 15, 2008 Sovereign rollover. The 5% override will be applied to all rollover business from Sovereign, AXA, Aviva, ING, Wawanesa, Optimum West and Economical

• Transaction commission will be 20% on all business

• Transaction commission on all new business will be increased to 23% paid quarterly

The above takes into account the lump sum payments in the short term as well as our approach on the long term incentives such as commission levels and override bonus. Once we have a fully formed Vancity proposition in 2009, we will of course set a date to move to the 25% commission levels as per the original proposal.

[61] On December 11, 2008, Hayes followed up his December 1 letter with an email to Pentland asking if he had a chance to look at the “memo” outlining compensation to ensure “we are all on the same page.” Pentland responded the same day by return email noting how detailed the draft contract was and that “it is close”. He also questioned when the 25% commission would begin.

[62] On January 6, 2009, Pentland sent an email asking Hayes to verify the amounts that VCI would be accruing. The email also set out Pentland’s understanding of the commission agreed to for rollover and new business, the override commission and when the commissions would begin.

[63] On January 8, 2009, Hayes and Keenan met with Pentland to discuss compensation. Following the meeting, Hayes sent an email to Pentland, with a copy to Keenan and Beckie Scarrow at RSA setting out how RSA/CNS saw the compensation model through the transition phase:

Nov 1, 2008 – All new business 23%

All rolled over business issued at 23%

Override payments paid quarterly, 5% of all new to CNS transferred business. This will commence with the Sovereign rollover.

RSA and CNS business will move to 23% commission as of April 19, 2009 renewal effective date.

We are also in agreement that policies moved to CNS prior to official rollover date, we will move to 23% commission. As discussed, please keep track of these accounts and report separately.

[64] Pentland responded on January 12, 2009 noting that one addition discussed was not in Hayes’ summary. The item was that the advanced remarketing to policies to CNS prior to the rollover would receive the 5% override. Hayes responded by email the same day, agreeing and apologizing for leaving it out of his summary.

Vancity Seeks to Sell VCI

[65] In or around December, 2008, Vancity began exploring the sale of VCI. In early March, an executive at RSA told Keenan that RSA had been approached to put in a bid for VCI. The information came as a complete surprise to Keenan and Hayes. Notwithstanding, VCI continued to act in implementing the agreement with RSA/CNS.

[66] Subsequently, RSA/CNS partnered with a broker and the broker put in a bid for VCI. On May 25, 2009, RSA/CNS was advised that its broker’s bid for the purchase of VCI was not accepted. RSA/CNS wrote to Vancity advising it that it was considering its options but at VCI’s request it would continue to provide insurance services as it had since July 2008. It further advised that it would suffer significant damages if the agreement was cancelled at sale completion.

[67] Vancity responded advising that the contract had never been signed, contained a number of errors and did not reflect VCI’s understanding of the current business arrangement.

The Sale of VCI

[68] On July 21, 2009, VCI announced that it had been sold to The Co-operators Group Limited (“Co-operators”). This was RSA/CNS’ first notice of VCI’s purchaser. Co-operators is a competitor. It provides the same type of insurance as RSA/CNS does. The sale to Co-operators was completed on September 1, 2009.

[69] On September 9, 2009, James Hollands, the District Manager for the Metro Vancouver District of Federated Agencies Limited (“Federated”) wrote a letter to Keenan at CNS. Federated is part of the Co-operators group of companies. The letter stated that VCI had been purchased by a subsidiary of Federated effective September 1, 2009. The letter also purported to terminate the Broker Agreement, in accordance with s. 11.7 (one year’s notice).

[70] The September 9, 2009 letter advised that all commercial and personal lines new business were to cease September 10, 2009. Policies rolling over to the VCI Pure Home Product were to cease October 24, 2009 and all renewals were to cease December 10, 2009.

The Issues

[71] The parties agree and I concur that the issues for determination by the court in this action are:

1. Did the discussions and dealings between RSA/CNS and VCI result in a legal and binding agreement between them; and
2. What are the damages RSA/CNS has incurred arising from VIC’s termination on September 9, 2009.

Analysis

Issue 1: Was there a Legally Binding Contract between RSA/CNS and VCI?

The Law

[72] There is no disagreement between the parties as to the applicable law on what constitutes a legally enforceable contract. For a legally binding contract to exist, the parties must have agreed on all of the essential terms. An agreement is not final or binding if it is merely an agreement to agree later on essential terms; if what has been agreed to is sufficiently uncertain or where the parties intend that there is no binding agreement until a subsequent formal contract is executed: Ward v. Ward, 2011 ONCA 178, 104 O.R. (3d) 401, at paras. 53-54; Bawitko Investments Ltd. v. Kernels Popcorn Ltd. (1992), 79 D.L.R. (4th) 97 (Ont. C.A.) at pp. 103-104.

[73] As Robins J.A. stated at pp. 103-104 of Bawitko Investments Ltd.:

As a matter of normal business practice, parties planning to make a formal written document the expression of their agreement, necessarily discuss and negotiate the proposed terms of the agreement before they enter into it. They frequently agree upon all of the terms to be incorporated into the intended written document before it is prepared. Their agreement may be expressed orally or by way of memorandum, by exchange of correspondence, or other informal writings. The parties may "contract to make a contract", that is to say, they may bind themselves to execute at a future date a formal written agreement containing specific terms and conditions. When they agree on all of the essential provisions to be incorporated in a formal document with the intention that their agreement shall thereupon become binding, they will have fulfilled all the requisites for the formation of a contract. The fact that a formal written document to the same effect is to be thereafter prepared and signed does not alter the binding validity of the original contract.

However, when the original contract is incomplete because essential provisions intended to govern the contractual relationship have not been settled or agreed upon; or the contract is too general or uncertain to be valid in itself and is dependent on the making of a formal contract; or the understanding or intention of the parties, even if there is no uncertainty as to the terms of their agreement, is that their legal obligations are to be deferred until a formal contract has been approved and executed, the original or preliminary agreement cannot constitute an enforceable contract. In other words, in such circumstances the "contract to make a contract" is not a contract at all. The execution of the contemplated formal document is not intended only as a solemn record or memorial of an already complete and binding contract but is essential to the formation of the contract itself. See, generally, Von Hatzfeld Wildenburg v. Alexander, [1912] 1 Ch. 284; Canada Square Corp. Ltd. et al. v. Versafood Services Ltd. et al. (1980), 25 O.R. (2d) 591 (H. Ct.), aff'd., (1981), 34 O.R. (2d) 250 (C.A.); Bahamaconsult Ltd. v. Kellogg Salad Canada Ltd. (1976), 9 O.R. (2d) 630 (H. Ct.), rev'd, (1977), 15 O.R. (2d) 276 (C.A.); Chitty on Contracts, 26th ed. (1990), at pp. 79-91; Corbin on Contracts, (1963), Vol. 1, s. 29-30; and Treitel, Law of Contract, 7th ed. (1987), at pp. 42-47.

[74] The determination of whether the parties intended to contract and whether the essential terms of the contract can be determined with a reasonable degree of certainty is arrived at from the perspective of an objective, reasonable bystander in light of all the material facts. The subjective intentions and beliefs of the parties are irrelevant and have no place in the analysis. See: United Gulf Developments Ltd. v. Iskandar, 2008 NSCA 71, 267 N.S.R. (2d) 318, at para. 82; Olivieri v. Sherman, 2007 ONCA 491, 86 O.R. (3d) 778, at para. 44; Apotex Inc. v. Allergan Inc., 2016 FCA 155, 483 N.R. 131, at paras. 44-51.

[75] Further, essential terms vary with the nature of the transaction and the context in which the agreement is made: United Gulf Developments, at para. 14; Hole v. Hole, 2016 ABCA 34, 27 Alta. L.R. (6th) 217, at para. 49.

[76] Similar considerations apply to determine whether or not a written agreement is a condition for an agreement existing. Cromwell J.A. (as he then was) discussed the approach to determine whether a written agreement was a condition for a binding agreement at paras. 75-76 of United Gulf Developments:

75 Parties may agree that they will execute a future, more formal document. If they have agreed on all of the essential terms and it is their intention that their agreement be binding, there is an enforceable contract; it is not unenforceable simply because it calls for the execution of a further formal document. The question is whether the further documentation is a condition of there being a bargain, or whether it is simply an indication of the manner in which the contract already made will be implemented. Professor Waddams, in The Law of Contracts, 5th ed. (Toronto: Canada Law Book, 2005) puts the question well:

Is execution of the formal contract a step in carrying out an already enforceable agreement, like a conveyance under an agreement to buy land, or is it a prerequisite of any enforceable agreement at all? ... [T]he test must be the reasonableness of the parties' expectations. Has the promisor committed himself to a firm agreement or does he retain an element of discretion whether or not to execute the formal agreement? In the former case there is an enforceable agreement. In the latter there is none." (section 51 page 36,)

76 This is a matter of the proper construction of the agreement, viewed as a whole and in light of its origins and purposes: Calvan Consolidated Oil & Gas Co. Ltd. v. Manning, [1959] S.C.R. 253 at 260-61; Bawitko Investments Ltd. v. Kernels Popcorn Ltd. (1991), 53 O.A.C. 314, 79 D.L.R. (4th) 97 (C.A.) at 103-04; Mitsui & Co. (Point Aconi) Ltd. v. Jones Power Co., supra at para. 67.

[77] Further, the court can consider the subsequent conduct of the parties as reinforcing whether the parties had entered into an enforceable agreement when determining whether the parties have reached an agreement on the essential terms: Fedel v. Tan, 2010 ONCA 473; 101 O.R. (3d) 481, at para. 44. See also Geoff R. Hall, Canadian Contractual Interpretation Law, 3rd edition, 2016, chapter 7.5 at pp. 212-214.

Position of the Parties

a) RSA/CNS

[78] RSA/CNS submits that the evidence establishes that by the end of the July 3, 2008 meeting, the parties had reached agreement on the essential terms of an agreement to create, market and sell a customized insurance policy to be exclusively supplied by RSA/CNS. Specifically, RSA/CNS submits the essential terms agreed to included the product; the commission rate to be paid; other financial costs and incentives; the projected launch date; the term of the agreement; and termination of the agreement. While there remained a small number of items yet to be agreed upon, they were not essential to the agreement.

[79] Additionally, the parties agreed that if any of VCI’s other insurers cancelled their agreements with VCI, RSA/CNS would step into the void and ensure VCI’s clients had insurance.

[80] Further, while the parties agreed that their agreement would be reflected in a written contract, at no time was it agreed or understood that there was no legally enforceable agreement until a written contract was signed.

[81] RSA/CNS also relies on the parties’ conduct between July 2008 and September 2009. They submit that during that period, the parties acted as if they had an agreement on sufficient terms to enable them to work together to implement the agreement.

[82] RSA/CNS submits that by terminating the agreement in the manner it did on September 9, 2009, VCI breached the agreement because it failed to provide RSA/CNS with the required two year notice period for termination.

[83] RSA/CNS claims $4,367,000 in damages arising from the breach.

b) Vancity and VCI

[84] The defendants submit that the evidence establishes that all three of the circumstances in which an agreement does not constitute an enforceable contract exist in this case. They submit that a large number of essential terms remained to be determined; that what the parties did agree on was not sufficiently certain to constitute a legally binding contract; and that the parties contemplated from the outset of discussions that there would be a non-binding letter of intent followed by negotiations followed then by a legally enforceable contract.

[85] The defendants submit that the evidence establishes that in the summer and fall of 2008, the parties got ahead of themselves and the parties protracted negotiations resulted in an incomplete negotiation.

[86] In support of their submission that the parties failed to reach a legally binding agreement, the defendants submit that the court should prefer the documentary record to the testimony of RSA/CNS’ witnesses. The written record about the events is robust and contemporaneous when compared to the frailties of the witnesses’ evidence given the passage of time and their faulty recollection.

[87] In the event that the court finds that there was a legally enforceable agreement, the defendants submit that the appropriate quantum of damages is $1,620,000.

Discussion

i. Did the Parties Reach a Legally Binding Agreement

[88] The first task in determining whether the parties reached a legally binding agreement is to determine the agreement’s essential terms. As pointed out in United Gulf Developments at para. 14, the essential terms are in part defined by the nature of the transaction and the context in which the agreement is made. They are also defined by the parties’ interests.

[89] The agreement in this case concerned an exclusive arrangement between an insurance company and an insurance broker for the broker to sell property insurance. The parties were two established insurance companies and an insurance broker who had been doing business with one of the insurance companies for at least ten years pursuant to a written contract. There was a significant history of doing business together.

[90] VCI conceived and initiated the concept of only dealing with and selling product from one insurer rather than a number of insurers with a view to improving efficiencies and increasing growth, retention, and profit. It was an arrangement that was unique in the industry at the time.

[91] In entering into a relationship with one insurer as compared with many, the insurance product VCI would offer to its clients was important. While each of VCI’s existing insurers offered a different product and pricing, it was important to VCI that the product from any single insurer meet the coverage and pricing needs of all its clients.

[92] Further, in entering into an agreement with a single insurer, VCI was very cognizant that it was exposing itself to a substantial financial risk in the event that one or more of its existing insurers prematurely cancelled its agreement with VCI. This would result in VCI having no insurance coverage for its clients. Accordingly, in entering into any agreement with only one insurer, VCI considered both the term of the agreement and the length of the termination provisions to be very important terms of any agreement.

[93] VCI also recognized that by entering into an agreement with just one insurer, its clients could be left without any insurance coverage if any of its other insurers prematurely cancelled their agreements with it before the new, single insurer was in place. Accordingly, VCI needed agreement that any insurer it dealt with would be willing and able to take any business arising from cancellations in the interim period before the proposed agreement was fully operational.

[94] It is also clear that compensation to VCI in the form of commission, as well as other economic incentives was also an important component of any agreement.

[95] Given the parties, the nature of the alleged agreement and the context in which it was made, I conclude from the evidence that the essential terms of any agreement between RSA/CNS and VCI were: exclusivity, development of a custom insurance product, term, termination, compensation, and ensuring that VCI’s clients would be covered in the event of any premature cancellations by VCI’s other insurers.

[96] In my view and based on the evidence, I am satisfied that RSA/CNS and VCI agreed upon each of the above essential terms during the course of their discussions on June 10, July 3 and September 11, 2008.

- Exclusivity

[97] From VCI’s RFI in February 2008, RSA/CNS’ response to it and the subsequent discussions, RSA/CNS and VCI understood and agreed that the arrangement between them involved the exclusive supply of habitational insurance by RSA/CNS to VCI for sale to its clients. This term was specifically confirmed and agreed at the July 3, 2008 meeting.

- Customized Insurance Product

[98] At the time of the RFI, CNS was providing the Pure Home insurance product to VCI. In their response to the RFI, RSA/CNS stated that they would develop an insurance program for VCI which included branded habitational insurance. This commitment was continued through their presentations at the June and July 2008 meetings.

[99] The evidence establishes that the parties agreed at the July 3, 2008 meeting that they would work together to develop a customized insurance product to be offered to VCI’s clients and underwritten by RSA/CNS. The product would incorporate the provisions of the Pure Home product. As Pentland said, the original intent was to develop the exclusive product following the July 3 meeting and aim to have the product ready by January 1, 2009. At the September 11, 2008 meeting, the parties further agreed that the customized insurance product would contain environmental features.

[100] Following the July 3, 2008 meeting, representatives of the parties met on numerous occasions and developed what they referred to as the first generation of the product which VCI marketed and sold to its clients after December 1, 2008. There is no evidence that there was ever any disagreement between the parties concerning the development of the customized product, either before or after December 1, 2008.

- Term

[101] RSA/CNS’ initial response to VCI’s RFI, proposed a five year term for the agreement. VCI raised no issue with that term at the parties’ first meeting on June 10, 2008. The five year term was subsequently confirmed at the July 3, 2008 meeting. At the September 11, 2008 meeting the parties agreed that the five year term would commence when the customized product was launched which at that time was still anticipated to be January 1, 2009. There is no evidence that the parties ever discussed altering that term at any subsequent meeting. Accordingly, I find that the parties agreed by July 3, 2008 that the agreement’s term was five years.

- Termination

[102] RSA/CNS’s document prepared for the June 10, 2008 meeting set out, under “Contract Terms and Conditions”, a minimum six months cancellation notice. At the June 10, 2008 meeting, VCI requested that the cancellation notice be extended to 12 months. RSA/CNS agreed.

[103] At the July 3, 2008 meeting, Hayes’ evidence is that the parties agreed to a 12 month termination clause. Pentland’s evidence is that VCI wanted a two year rehabilitation period prior to any notice of termination and the parties agreed to discuss the termination provision later.

[104] In light of the difference in the evidence, I do not find that the parties agreed to a termination provision on July 3, 2008. However, Hayes’ evidence, as confirmed by his note to VCI’s agenda following the September 11, 2008 meeting, establishes that at that meeting the parties agreed on a two year notice of termination with a focus on rehabilitation during the first year.

- Compensation

[105] In the document prepared for the June 10, 2008 meeting, RSA/CNS set out a compensation structure, proposing a commission increase from the then 20% to 25%; an increase in profit sharing from 10% to 25%; 5% on portfolio transfers (rollovers); and 1% of premium volume to be used for marketing. At the meeting, VCI advised that they found RSA/CNS’ compensation proposals acceptable.

[106] At the July 3, 2008 meeting, the parties agreed on the above compensation structure proposed by RSA/CNS. They also agreed that, in addition to the 1% marketing amount, RSA/CNS would pay VCI $50,000 for marketing support, would pay the technology costs of the rollover and would make a large deposit with Vancity.

[107] At the September 11, 2008 meeting the parties clarified $5 million would be deposited with Vancity. They also agreed that the $50,000 for marketing support would be paid in year two of the agreement and subject to joint agreement on initiatives. In addition, and as a result of the influx of new business prior to the customized product being ready, they agreed that RSA/CNS would pay an incremental commission of 23% on new business being written until the customized product was offered. They also agreed that RSA/CNS would pay VCI a $135,000 bonus when the agreement was signed and pay $56,000 towards VCI’s costs of its project manager. Further, RSA/CNS would support the launch and marketing of the customized product and provide all of the training for VCI’s staff. Finally, RSA/CNS agreed to pay both a finder’s fee for referring business and a discount for VCI employees.

[108] VCI submits that the emails between Hayes and Pentland following Hayes’ delivery of the draft contact in early December 2008, together with their evidence demonstrate a “manifest” disagreement with respect to compensation. I disagree. At that time the parties were discussing and clarifying when the enhanced commissions which had been agreed to would apply, specifically the 23% commission. The agreed commission amounts never changed. The question was when the enhanced commissions would apply during the interim phase before the customized product was launched.

[109] In any event, it is clear in my view from Hayes’ January 8, 2009 email to Pentland following their meeting and Pentland’s response to it on January 12, 2009 that any issues regarding compensation had been resolved to VCI’s satisfaction. There is no evidence that the parties had any further discussion concerning compensation after January 12, 2009.

[110] I am satisfied therefore that the parties had reached agreement of the compensation issues by September 11, 2008.

- Protection from Pre-mature Cancellation by VCI’s Insurers

[111] Nothing in VCI’s RIF, RSA/CNS’ response or the June 10, 2008 meeting dealt with VCI’s need to ensure that its clients were protected from premature cancellations by its insurers in the event it reached an agreement to proceed with just one insurer.

[112] VCI first raised the issue at the meeting of July 3, 2008. In response, RSA/CNS agreed that it would step in to cover any of VCI’s clients whose policies were prematurely cancelled. As it turned out, not long after VCI advised its other insurers that it had selected RSA/CNS to be its exclusive insurer, Sovereign served a notice of termination requiring both VCI and RSA/CNS to expedite their plans to accommodate policy rollovers.

[113] As the evidence establishes, in addition to the parties agreement on the above terms, there were other terms that they agreed to at the meetings up to and including September 11, 2008 which, while not essential to the agreement, are further evidence in my view that they entered into a binding legal agreement. The additional matters discussed and agreed include RSA/CNS’ training of VCI staff, payment of the technology costs of the rollover, payment towards the cost of VCI’s project manager and the provision of both a finder’s fee for referring business and a discount for VCI employees.

[114] VCI submits that a large number of matters, apart from commission, were not agreed to including operational issues, confidentiality terms, service level agreements (“SLA”) and termination provisions.

[115] I have already addressed termination provisions. The parties clearly agreed at the September 11, 2008 meeting on a two year notice period for termination.

[116] While confidentiality terms would be part of the contract, they were not essential for a binding agreement. As Pentland testified, there was already in place a confidentiality provision in the Broker Agreement between CNS and VCI.

[117] With respect to the other items raised by VCI, in my view they fall into the category of items which are ancillary terms which are already implicit from the agreed essential terms. In the broker/insurer context, they are matters such as client satisfaction targets and measurements, claims handling standards, and audit and inspection requirements all of which can be resolved and made part of the agreement by appendix or by separate agreement.

[118] Nor do I consider that it was necessary or intended by the parties that before they had a binding agreement, the parties had to agree on all operational issues. Implementation of the agreement was complex from an operational view point. Issues such as the integration of technology, underwriting levels and pricing all had to be resolved. After July 3, 2008, the parties worked together in dealing with those issues and resolved them such that they were able to address all rollovers without disruption to VCI’s clients. Further, items such as preparing a three year strategic plan or setting growth targets were matters to be resolved in the future but were not necessary for a binding agreement concerning the provision of insurance.

[119] I am also satisfied that there is nothing uncertain about the essential terms agreed to.

[120] Further, apart from early reference to a formal contract in the documents, there is no evidence that the parties ever intended or agreed that the agreement would not be binding until a formal written contract was signed. While that might have been the initial intent of RSA/CNS or VCI, the events following the July 3, 2008 meeting and specifically the Sovereign cancellation forced the parties into expediting the timeline to accommodate policy rollovers. While the parties were able to agree on the essential terms of their agreement, the urgency created by the Sovereign cancellation caused the parties to focus their energies and resources on dealing with the rollovers. My sense from the evidence is that completion of the written contract suffered as a result. But that did not matter because the parties never agreed that there was no binding agreement until a written contract was signed.

[121] There was no evidence up to the notice of termination in September 2009 that there was ever any mention or discussion between the parties that a written contract was necessary to have a binding agreement. It was only after the contract was terminated that VCI’s new owners took the position that the agreement was conditional on a signed written contract.

[122] Finally, while not all of the essential terms were agreed until September 11, 2008, the conduct of the parties after July 3, 2008 and through to the termination on September 9, 2009 confirms in my view that the parties had reached a legally binding agreement that RSA/CNS would be VCI’s exclusive insurer of habitational insurance. The announcements to the parties’ staffs and VCI’s other insurers, the working together to develop the new insurance product and implement the rollovers and the fact that by September 2009, approximately 9,000 policies had been issued by RSA/CNS, all confirm that the parties had reached a binding agreement.

[123] For the above reasons, therefore, I conclude that RSA/CNS and VCI entered into a legally binding agreement by September 11, 2008 that RSA/CNS would be the exclusive supplier of habitational insurance to VCI for a five year term, and that VCI breached the agreement on September 9, 2009 by purporting to terminate it without providing for two years notice as required by the agreement.

Issue 2: What Damages Arose from VCI’s Termination

[124] As noted at the outset, RSA/CNS and Vancity/VCI each called expert chartered accountant/business valuators, experienced in damage quantification to address damages.

[125] RSA/CNS called Christopher Nobes, a managing director of Duff & Phelps Canada Limited (“Duff & Phelps”). Mr. Nobes has a degree in Business Administration (“MBA”) from the Ivey School of Business at Western University, is a member of the Canadian Institute of Chartered Accountants, and a member of the Canadian Institute of Chartered Business Valuators. He has provided clients and the court with business valuations, valuations of business interests, and damage quantification since 1997, initially at Campbell Valuation Partners Limited and since 2016 at Duff & Phelps.

[126] Vancity/VCI called Larry Andrade, a partner in the financial advisory group at Deloitte LLP. Mr. Andrade has an MBA from the Schulich School of Business at York University and is a member of the Canadian Institute of Chartered Accountants and the Canadian Institute of Chartered Business Valuators, in addition to the Associates of Certified Fraud Examiners, and the Association of Certified Forensic Investigators of Canada. He has approximately 20 years of experience in areas of economic loss quantification, litigation support, business valuations and forensic accounting. Mr. Andrade was with Cole & Partners from 2005 to 2010 when it was purchased by Duff & Phelps. He joined Deloitte in 2017.

[127] Both parties agreed to the other’s expert’s qualifications to testify. I had no hesitation in qualifying both Mr. Nobes and Mr. Andrade as experts in the loss quantification field, based on both education and experience.

a. Christopher Nobes

[128] Mr. Nobes testified that he quantified RSA/CNS’ pre-tax income loss resulting from VCI’s cancellation of the agreement utilizing the following methodology:

(i) He first estimated the gross written premiums which RSA/CNS would have realized during the loss period, which, based on counsel’s instructions was the two year period from September 1, 2009 to August 31, 2011 (“the “Loss Period”). To arrive at this number, Mr. Nobes utilized CNS/RSA’s actual operating history with VCI for the 12 months prior to September 1, 2009, together with forecasts both RSA/CNS and VCI prepared;

(ii) Mr. Nobes then subtracted the actual gross written premiums realized by RSA/CNS during the Loss Period (together with premiums received after the termination between September 1, 2009 and December 31, 2009);

(iii) Next, he subtracted the estimated gross written premiums that RSA/CNS would have ceded to reinsurers to manage the risk of exposure on the VCI business resulting in an incremental written premiums estimate. Based on a review of CNS’ historical reinsurance rates Mr. Nobes adopted an 11.7% reinsurance ratio for RSA/CNS’ personal insurance products and 11.0% for RSA/CNS’ commercial insurance products;

(iv) He then subtracted the estimated claims (i.e. losses) that RSA/CNS would have incurred during the Loss Period by applying a loss ratio to the incremental estimate of written premiums. After reviewing RSA/CNS’ forecasted loss ratio for the Loss Period, VCI’s five-year average loss ratio for its book of business from 2004 to 2008, and its forecasted loss ratio for 2008 together with the loss ratios reported by the Canadian property and casualty insurance participants during the five-year period from 2007 to 2011, Mr. Nobes adopted an estimated loss ratio for RSA/CNS of 49.0% in year one and 49.7% in year two;

(v) Next, he subtracted the incremental operating costs RSA/CNS would have incurred during the Loss Period to service the estimated gross written premiums, made up of commissions, taxes and associated fees, and administrative expenses which Mr. Nobes determined averaged 39.6% (excluding September 2009) of monthly net written premiums. In September 2009, the operating expenses were 87.5% greater than the remainder of the Loss Period on account of a one-time marketing fee and an administrative fee.

(vi) Finally, Mr. Nobes then added the estimated incremental investment income RSA/CNS would have earned on funds invested during the Loss Period, which he concluded, based on RSA/CNS’ forecast and the benchmark rates of returns on bonds and equities during the Loss Period, would have been 2.1% of net written premiums.

[129] Utilizing the above methodology, Mr. Nobes’ opinion as to RSA/CNS’ financial loss during the two years he considered as the Loss Period is as follows:

FINANCIAL LOSS SUMMARY Pre-Tax Income – Year 1 [01-Sep-09 to 31-Aug-10] $ 1,868,623 Pre-Tax Income – Year 2 [01-Sep-10 to 31-Aug-11] 2,498,590 Total Financial Loss (rounded) $ 4,367,000

b. Larry Andrade

[130] In response, Mr. Andrade testified that in his opinion, the methodology Mr. Nobes used to determine RSA/CNS’ financial loss was reasonable. Further, he stated that he reviewed and tested the various financial estimates and assumptions Mr. Nobes used and concluded that they were all reasonable except for the loss ratio Mr. Nobes applied. In his opinion, the loss ratio was in the 49 to 55% range. Mr. Andrade’s only other difference from Mr. Nobes’ opinion was with respect to the Loss Period. He was instructed by counsel to assume a loss period of two years commencing on February 24, 2009 (he used March 1, 2009) to February 28, 2011.

[131] Applying his two changes to Mr. Nobes’ methodology and assumptions, Mr. Andrade’s opinion of the total financial losses which were incurred by RSA/CNS over the two year period from March 1, 2009 to February 28, 2011 were $1,620,000 ($227,546 in year one and $1,392,497 in year two), utilizing a loss ratio of 55% and $3,187,000 ($558,104 in year 1 and $2,628,674 in year two), utilizing a loss ratio of 49%. Further, if a loss ratio of 55% is applied to the loss period assumed by Mr. Nobes (September 1, 2009 to August 31, 2011), Mr. Andrade’s opinion was that the total loss suffered by RSA/CNS during that period would have been $2,278,000. Finally, applying a loss ratio of 49% for the two years, Mr. Andrade concurred in Mr. Nobes’s calculations.

[132] Mr. Nobes testified that he reviewed and vetted Mr. Andrade’s calculations and confirmed that they are accurate.

[133] I am impressed with and accept the testimony of both experts. As counsel noted, it is not often that experts agree to the extent that Mr. Nobes and Mr. Andrade did in coming to their conclusions. In the end, the experts only differ on the commencement date of the Loss Period and the loss ratio to be applied. The former is a legal question and the latter a factual one.

a) Commencement Date of the Loss Period

[134] As noted, the issue of when the loss period should commence is a legal question. Mr. Nobes and Mr. Andrade used dates which were not based on any application of their expertise but rather on instructions received from their respective counsel. While both experts have approached their calculations on the basis the loss period is two years which is the period of notice required pursuant to the agreement between the parties, they do not agree on when the notice period should start. RSA/CNS submits that it should commence on September 1, 2009, the date that VCI terminated the agreement by written notice. Based on the principle in Hamilton v. Open Window Bakery, 2004 SCC 9, [2004] 1 S.C.R. 303, VCI submits that the commencement date should be February 24, 2009, approximately six months earlier than CNS/RSA submits.

[135] Hamilton reaffirmed the general principle in assessing damages for wrongful repudiation of contract that “where there are several ways in which the contract might be performed, that mode is adopted which is the least profitable to the plaintiff, and least burdensome to the defendant.” Hamilton at para. 11, citing Cockburn v. Alexander (1848), 6 C.B. 791, 136 E.R. 1459.

[136] Vancity and VCI submit that the damages assessment requires that I determine the minimum performance to which RSA/CNS was entitled under the agreement. They submit that the minimum performance of the termination provision was in February 2009 when Vancity decided to sell the VCI business and engaged prospective purchasers, including RSA. It was then that VCI breached the agreement.

[137] I do not accept the defendants’ submissions. There was only one way VCI could terminate the agreement in accordance with its terms – by giving two years notice. It breached the agreement at the beginning of September 2009, by terminating it without the required notice. The evidence does not support that VCI breached the agreement in February 2009 when Vancity decided to put VCI up for sale. In fact both RSA/CNS and VCI continued to act pursuant to the agreement up until the time it terminated it in September 2009. The principle in Hamilton does not apply.

[138] Accordingly, I find that the loss period commenced on September 1, 2009 as Mr. Nobes assumed.

b) Loss Ratio

[139] Loss ratio is the percentage of the total claims incurred to the total earned premiums realized. Claims incurred are the largest expense in Mr. Nobes’ methodology. The higher the claims (and hence the loss ratio), the less earned premiums which in turn, as can be seen from the conclusions of the two experts, has a significant impact on the determination of RSA/CNS’ financial loss.

[140] In reaching his decision to adopt RSA/CNS’ forecasted loss ratios for the VCI book of business for the loss period of 49.0% for year one and 49.7% for year two, Mr. Nobes initially considered the following four factors:

(i) RSA/CNS’ 49.0% loss ratio forecast for year one and 49.7% for year two. RSA/CNS management prepared the forecast after the termination for the purpose of litigation;

(ii) RSA/CNS’ historical loss ratios incurred from the VCI book of business (49.9% in 2009, 38.7% in 2010 and 45.4% over the entire period) which were prepared by management. The actual loss ratio for the period as per RSA/CNS’ financial reporting was 60.2%;

(iii) The loss ratio reported by Vancity in its investment opportunity marketing document dated February 24, 2009 of 41.1% for 2008 and a five year average loss ratio from 2004 to 2008 of 55.2%. The reported loss ratio included claims related to VCI’s auto business which were not included in the agreement; and

(iv) Loss ratios reported by property and casualty insurance industry participants during a five year period from 2007 to 2011. The first quartile loss ratio was in the range of 53% (2009) to 57.7% (2010) and averaged 55.5%. The Canadian property and casualty industry includes companies with a high concentration of automotive policies which have a different risk profile than property and commercial insurance. Mr. Nobes also said that geography can play a major part in risk profile and a company operating nationally is not geographically equivalent to VCI whose clients are primarily in the lower mainland of British Columbia.

[141] Based on the foregoing, Mr. Nobes determined that the RSA/CNS’ management’s 49.0% year one forecast and 49.7% year two forecast was reasonable, falling between the 45.4% loss ratio realized by RSA/CNS for the VCI book of business and the quartile one industry loss ratio which averaged 55.5% over the period.

[142] In response, Mr. Andrade disagreed with Mr. Nobes’ loss ratio conclusion. In his view, it was not reasonable because it ignored and did not accord with the actual loss ratio of the VCI book of business, Vancity’s own marketing document and the historical loss ratios for the Canadian and British Columbia property insurance industry and RSA/CNS during the period under consideration.

[143] Utilizing information obtained from the Office of the Superintendent of Financial Institutions database, Mr. Andrade considered the average yearly loss ratio from 2007 to 2011 for the Canadian property insurance industry as a whole as well as RSA and Co-operators. Nationally, the yearly loss ratios for personal property insurance ranged between a 64.1% low in 2010 and a 77.7% high in 2009. During the same period, RSA reported yearly loss ratios for personal property on a national basis between a 58% low in 2007 and an 82.5% high in 2009. The Co-operators yearly loss ratios over the same period were even higher.

[144] Mr. Andrade also looked at the reported loss ratios for RSA, CNS and Co-operators for British Columbia for the years 2008 to 2011. Generally they had a lower loss ratio than the rest of the country. During the period, RSA had a yearly loss ratio which ranged from a 9.7% low in 2011 to a 140.2% high in 2010. CNS had a 51.1% low in 2011 and a 60.4% high in 2009. Co-operators’ loss ratios were slightly higher.

[145] Mr. Andrade also considered RSA/CNS’ loss ratio during the time it underwrote policies for VCI. He noted that there was no discernable pattern in the decrease or increase of RSA/CNS’ experienced loss ratio between the first 12 months (58.8%) and the last five (60.9%). He considered it “good information” and could not understand why Mr. Nobes ignored it in favour of RSA/CNS’ forecast.

[146] Mr. Andrade also considered both Vancity’s February 29, 2008 RFI prepared to solicit interest in the single insurer partnership concept and an investment opportunity marketing document dated February 24, 2009 prepared to support Vancity’s intended sale of VCI. The RFI included the loss ratios for Vancity’s top five major insurers for their personal lines of insurance. For the five year period from 2003 to 2007, the loss ratios averaged approximately 55%. The marketing document reported a 55.8% five-year loss ratio from 2004 to 2008.

[147] As noted, Mr. Andrade opined, based on his review, analysis and research that the appropriate loss ratio to apply in respect of calculating RSA/CNS’ financial loss was somewhere in the range of 55% at the high end and 49% at the low end.

[148] Mr. Nobes filed a reply report dealing primarily with Mr. Andrade’s analysis and opinion of the loss ratio. In doing so, Mr. Nobes focused on the historical loss ratios of three of VCI’s competitors in the lower mainland and Vancouver Island where VCI primarily did business to support his opinion. The information was obtained from RSA’s records. The loss ratios for the three competitors for the 2010 to 2013 years were 41.3%, 41.8% and 47.9% respectively.

[149] In Mr. Nobes’ opinion, Mr. Andrade’s reliance on national and provincial average loss ratios results in an overstatement of the applicable loss ratio given that the risk profile of the lower mainland and Vancouver Island is materially different than that of British Columbia and of Canada nationally.

[150] At trial, RSA/CNS filed additional information which Mr. Nobes testified to, again obtained from RSA’s records, which sets out the loss ratios of insurance brokers engaged in the sale of personal property insurance in the lower mainland and Vancouver Island (the “Relevant Area”) and in all of British Columbia for the years 2010 to 2013 by aggregate premiums. Exhibit 14 lists brokers with aggregate premiums for the four years of between $10 and $20 million. The average loss ratio for brokers in the Relevant Area for 2010 and 2011 is 49.9%. Exhibit 15 lists brokers with aggregate premiums in excess of $20 million. The average loss ratio for brokers in the Relevant Area is 50.5% for 2010 and 2011.

[151] Based on the evidence on this issue, I make the following findings:

i. Geography is an important consideration when considering loss ratios;

ii. The loss ratios for personal property insurance in the Loss Period were lower in British Columbia than nationally in Canada for the same period;

iii. Further, the loss ratios experienced during the Loss Period in the lower mainland and Vancouver Island, where VCI was primarily carrying on business, were lower than those in the remainder of British Columbia.

iv. Based on all of the relevant data, I am satisfied that the range of loss ratios proposed by Mr. Andrade of between 49% and 55% is the appropriate range within which to determine the applicable loss ratio.

[152] Like Mr. Andrade, I consider that RSA/CNS’ 60.2% loss ratio for the 17 months it was actually booking VCI’s business as set out in its financial reporting is an important factor in the analysis. While Mr. Nobes said he gave it significant consideration, he attributed little if no weight to it. He said it was comprised of actual claims and management’s estimate of future claims. Yet he relied on management’s preparation of a revised loss ratio which reduced the loss ratio by a full 15%.

[153] Mr. Nobes also gave little weight to the Vancity marketing document which indicated that there was a 55.2% average loss ratio for VCI’s book of business from 2004 to 2008. I recognize that VCI’s book of business contained automobile insurance which has a higher risk factor. However, automobile was only a small portion of the total book of business.

[154] While the above two factors indicate that the loss ratio is closer to the top end of Mr. Andrade’s range, the reported loss ratios for brokerages selling personal property insurance in the lower mainland and Vancouver Island within the same aggregate premium range suggest that the loss ratio should be closer to the bottom of his range.

[155] Given the various data points in evidence which tend to support both ends of Mr. Andrade’s range, it is my view that a fair loss ratio to apply to determine RSA/CNS’ financial loss for the Loss Period is 52%.

Conclusion

[156] For the above reasons, judgment to issue in favour of RSA/CNS against VCI for breach of contract in an amount to be determined in accordance with these reasons.

[157] To determine the amount of the judgment, I direct that RSA/CNS have Mr. Nobes calculate RSA/CNS’ financial loss using all of the assumptions he used in his initial calculation save and except that a 52% loss ratio should be applied for each of the two years in the Loss Period. Mr. Nobes should then provide a copy of his calculation to Mr. Andrade for review. If there are any issues as to the final amount, I may be spoken to. Otherwise, counsel should provide me with the final agreed amount of the damages.

[158] The claim against Vancity is based on a conspiracy with VCI to misrepresent their true intentions and mislead the plaintiffs concerning the sale of VCI in order to obtain a higher purchase price. In the absence of any evidence to substantiate such a claim, the action is dismissed against Vancity.

[159] At the conclusion of the argument, counsel agreed that cost submissions should follow my decision. Accordingly, RSA/CNS shall file its Cost Outline together with brief written submission not to exceed five pages within 15 days. The defendants shall file their Cost Outline and submissions (same length) within 15 days following receipt of RSA/CNS’s submissions.

L. A. Pattillo J. Released: November 13, 2018