Court File and Parties

COURT FILE NO.: CV-18-603899

DATE: 2019-11-14

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: BLAINE FROATS, KATHLEEN FROATS, 0759964 BC LTD., GARY FROATS, JOAN FROATS and 574245 BC LTD., Applicants

AND:

BERKLEY INSURANCE COMPANY, Respondent

BEFORE: Schabas J.

COUNSEL: Nathaniel Read-Ellis, Counsel for the Applicants

Colin Empke, Counsel for the Respondent

HEARD: November 12, 2019

ENDORSEMENT

[1] The applicants seek a declaratory order that the respondent, Berkley Insurance Company, is obligated to defend an action the applicants have brought against an insured. Although the notice of application sought a declaration that the policy afforded coverage, the applicants have amended their relief to only seek an order that the respondent defend the action. For the reasons that follow, I dismiss the application.

[2] The applicants are suing Al Housego (“Housego”), an investment advisor and financial planner for, among other things, breach of contract and negligence arising from his advice to the applicants to invest in mutual funds of a company known as Crystal Wealth Management System Limited (“Crystal Wealth”). Those funds failed, Crystal Wealth is in receivership, and the applicants have lost their investments.

[3] The action against Housego has been commenced in British Columbia, and Housego is defending the action.

[4] Berkley issued a contract of insurance to Housego for the period July 1, 2017 to July 1, 2018. The policy was an agents’ errors and omissions policy for life agents covering the sale and servicing of insurance products. It also provided, at extra cost, coverage for sale and servicing of mutual funds, securities and other financial products. Housego, however, only purchased the basic policy covering insurance products. In his application, he advised that he was not engaged in financial planning, and when the policy was issued he was specifically advised that the policy does not cover claims involving “mutual fund activities”.

[5] Berkley has therefore denied coverage and Housego has not contested that denial.

[6] The applicants take issue with the denial of coverage and submit that the policy may apply, which they say gives rise to a duty, or requirement, to defend the action by Berkley. In particular, the applicants rely on the definition of “professional services” in the policy which, they submit, includes financial planning advice in connection with mutual funds. That definition is found in Endorsement #13 to the policy, as follows:

R. “Professional Services” mean:

1. The sale or servicing of:

a. Life insurance, accident and sickness insurance, disability income insurance, indexed annuities and fixed annuities;

b. Variable insurance products, including but not limited to variable annuities, flexible and scheduled premium annuities and variable life insurance;

c. Pension and Profit Sharing Plans (the sale of such Plans only), Guaranteed Investment Certificates, Registered Retirement Income Funds, Registered Retirement Savings Plans, Registered Education Savings Plans, Registered Disability Savings Plans and Tax Free Savings Accounts (if purchased):

d. Mutual funds registered with the applicable provincial government agency or securities commission and sold by a licensed Mutual Fund Representative (if purchased);

e. “Securities” sold through a licensed “Dealer”, so long as such securities were offered for sale on a Investment Industry Regulatory Organization of Canada regulated securities exchange (if purchased);

Financial planning, advice and consultation solely in connection with any of the products listed in Subsection 1. a-e; or

f. Referral Services related to bank products.

[7] The parties agree that the policy only covers item (d), mutual funds, “if purchased”, and there is no dispute that Housego did not purchase insurance for that activity. However, the applicants argue that the second sentence of item (e), “[f]inancial planning, advice and consultation solely in connection with any of the products listed in Subsection 1. a-e” is included without additional cost or purchase and therefore the policy includes financial planning in relation to mutual funds, which is what has been pleaded against Housego.

[8] The applicants say that this wording unambiguously brings Housego’s alleged conduct within the terms of the policy. Alternatively, they say that if there is ambiguity then the policy must be interpreted against Berkley and the duty to defend the claim arises. In support they cite the Supreme Court of Canada decision in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, [2010] 2 SCR 245, 2010 SCC 33 at paras. 22- 24. Further, with respect to the duty to defend, Rothstein J. stated at para. 19:

An insurer is required to defend a claim where the facts alleged in the pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim (Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801, at pp. 810-11; Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49, [2001] 2 S.C.R. 699, at para. 28; Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at paras. 54-55). It is irrelevant whether the allegations in the pleadings can be proven in evidence. That is to say, the duty to defend is not dependent on the insured actually being liable and the insurer actually being required to indemnify. What is required is the mere possibility that a claim falls within the insurance policy. Where it is clear that the claim falls outside the policy, either because it does not come within the initial grant of coverage or is excluded by an exclusion clause, there will be no duty to defend (see Nichols, at p. 810; Monenco, at para. 29).

[9] In my view, Progressive Homes has no application here. The duty to defend arises from contract – the contract between the insurer and the insured. The applicants here are not parties to a contract of insurance with Berkley, and have no standing to enforce a duty to defend, should it exist. This does not leave the applicants without a remedy against Berkley should they be successful against Housego. The policy provides that if the applicants succeed against Housego they are “entitled to recover under this Policy to the extent of the insurance afforded by this Policy.” However, they must await obtaining a judgment before seeking indemnity from Berkley, should they be entitled to it.

[10] The applicants submit that the Court has broad jurisdiction to hear and grant declaratory relief, so long as a “substantial question” exists and the applicant has a “real interest” in the outcome, citing Solosky v. The Queen, 1979 CanLII 9 (SCC), [1980] 1 SCR 821, at para. 11. However, Solosky did not involve contractual relations and a third party seeking a ruling on the rights in the contract. No case was cited to me in which a non-party to an insurance contract has obtained an order requiring the insurer to defend.

[11] While disclosure of insurance policies at an early stage of a proceeding is important so that parties can make informed decisions about prosecuting an action and the likelihood of recovery, as discussed by Perell J. in Sharma v. Timminco, 2010 ONSC 790, those goals have largely been achieved here. The policy has been disclosed and the applicants will need to weigh the likelihood of their interpretation of the policy succeeding, should they be successful against Housego. However, they are not entitled to bring Berkley into the action by way of defending the action now.

[12] I also do not accept the applicant’s interpretation of the policy that it includes “financial planning...in connection with mutual funds.” Yanaky v. Arch Insurance (Canada), 2014 ONSC 4719 at paras. 27-30, considered a similar situation in which a policy covered the sale and servicing of insurance and other products, and included coverage for securities if “added to this Policy by endorsement.” As here, the policy also provided coverage for “financial planning…in connection with” the products listed. However, as Firestone J. stated: “Yanaky did not purchase coverage for securities. As a result, there can be no coverage for allegations related to the solicitation, sale, or servicing of securities.” Further, as there was no coverage for the specific product purchased in that case, planning advice was “not related to the solicitation, sale, or servicing of the enumerated products.”

[13] Accordingly, the application is dismissed.

[14] In accordance with the agreement of the parties, the applicants shall pay costs of the application to Berkley fixed at $10,000.

Schabas J.

Date: November 14, 2019