COURT FILE NOS.: CV-21-00658241-00CL
CV-21-00658643-00CL
CV-21-00655599-00CL
CV-21-00656590-00CL
CV-21-00655627-00CL
DATE: 20210518
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: CV-21-00658241-00CL
IAN GOODFELLOW, WENDY MITCHELL, NEIL WILLIAMSON, PAULINE WAINWRIGHT, DEBORAH BAKER, BRENT BAILEY, JIM TINDALL, PETER REBELLATI, AL JONES, AND GEIRGE POHLE, Applicants
AND:
CUMIS GENERAL INSURANCE COMPANY, Respondent
AND:
FINANCIAL SERVICES REGULATORY AUTHORITY OF ONTARIO, in its capacity as the Administrator of PACE SAVINGS & CREDIT UNION INC., Intervenor
CV-21-00658643-00CL
FRANK KLEES and KLEES and ASSOCIATES, Applicants
AND:
CUMIS GENERAL INSURANCE COMPANY, Respondent
CV- 21-00655599-00CL
LARRY SMITH, Applicant
AND:
CUMIS GENERAL INSURANCE COMPANY, Respondent
CV-21-00656590-00CL
PHILLIP SMITH, Applicant
AND:
CUMIS GENERAL INSURANCE COMPANY, Respondent
CV-21-00655627-00CL
BRIAN HOGAN, Applicant
AND:
CUMIS GENERAL INSURANCE COMPANY, Respondent
BEFORE: Cavanagh J.
COUNSEL: Steven Stieber, for the Goodfellow Applicants
Michael A. Cohen, for the Applicants, Frank Klees and Klees and Associates
Alistair Crawley and Clarke Tedesco, for the Applicant, Larry Smith
Steven Weisz and Pat Corney, for the Applicant, Phillip Smith
Victor L. Vandergust, for the Applicant, Brian Hogan
Thomas J. Donnelly and Joyce Tam, for the Respondent, CUMIS General Insurance Company
Jason Wadden and Michael Wilson, for the Intervenor in Goodfellow application, Financial Services Regulatory Authority of Ontario, in its capacity as the Administrator of PACE Savings & Credit Union Ltd.
HEARD: April 20, 2021
ENDORSEMENT
Introduction
[1] There are five applications before me. The applicants are former directors of PACE Savings & Credit Union Limited (“PACE”), a credit union. An action has been brought against the applicants in the name of PACE by its regulator and administrator, the Financial Services Regulatory Authority (“FSRA”).
[2] In these applications, the applicants seek a declaration that CUMIS General Insurance Company (“CUMIS”) is obligated to defend the applicants in this underlying claim pursuant to a Directors’ and Officers’ Liability Policy (the “D&O Policy”) issued by CUMIS.
[3] For the following reasons, I conclude that CUMIS is obligated under the D&O Policy to defend the applicants in the underlying claim.
Factual background
[4] The FSRA is the regulator of credit unions in Ontario pursuant to the Credit Unions and Caisses Populaire Act, 1994 (the “Act”). On June 8, 2019, the FSRA amalgamated with the Deposit Insurance Corporation of Ontario, the former entity that carried out the regulation of credit unions in Ontario under the Act. For ease of reference, I refer to the regulator as FSRA, regardless of whether the event described took place before or after June 8, 2019.
[5] The FSRA administers deposit insurance to members of Ontario’s credit unions. It is the regulatory supervisor and, where required, the administrator and liquidator of credit unions (as those terms are defined in the Act).
[6] PACE is a credit union incorporated under the Act and is regulated by the FSRA. As a credit union, PACE is owned and controlled by its members.
[7] The Applicants are each former members of the Board of Directors of PACE.
[8] CUMIS is an Ontario-based insurance company which provides, among other things, insurance products and services to credit unions, caisses populaires, and their members in Canada.
[9] CUMIS issued the D&O Policy for the policy period January 1, 2018 through January 1, 2019. Capitalized words in the D&O Policy have the meanings in the “Definitions” section of the policy.
[10] The D & O Policy provides the following coverage to the applicants:
Subject to the terms and conditions of this Policy, the Insurer will pay on behalf of:
For a DIRECTOR OR OFFICER, any of the following:
All LOSS arising from any CLAIM first made against such DIRECTOR OR OFFICER during the POLICY PERIOD, for which the DIRECTOR OR OFFICER is not indemnified by the CORPORATION.
All LOSS arising from any CLAIM first made against such DIRECTOR OR OFFICER during the POLICY PERIOD, and for which they become legally obligated to pay solely as a result of INSOLVENCY of the CORPORATION.
[11] The D & O Policy provides that it shall not apply to loss based upon, arising out of, or attributable to:
A CLAIM by or on behalf of the CORPORATION or a DIRECTOR OR OFFICER except for a CLAIM:
a. that is a derivative action brought or maintained on behalf of the CORPORATION by a person who is not a DIRECTOR OR OFFICER without the cooperation, solicitation, assistance or active participation of the CORPORATION or any DIRECTOR OR OFFICER; ...
e. brought or maintained by a liquidator, receiver, or trustee in bankruptcy and made directly against a DIRECTOR of the CORPORATION and then only for DEFENCE COSTS, to the extent that they are covered under this policy.
[12] Following an investigation into various transactions and conduct that had occurred or were occurring at PACE, the FSRA issued an Administration Order dated September 28, 2018 and took control of PACE as administrator. This ultimately resulted in the Board of Directors of PACE being rendered functus and the employment of the former CEO and former president being terminated for cause. Pursuant to the Administration Order, the FSRA as administrator took control of PACE and now exercises the powers of the Board of Directors and controls the management of PACE.
[13] By Notice of Action issued on March 18, 2019, a claim was commenced by the FSRA as administrator for PACE. In the Fresh as Amended Statement of Claim dated October 11, 2019 (the “Underlying Claim”), the plaintiff is identified as “PACE Savings & Credit Union Limited, by its administrator, Financial Services Regulatory Authority”. In the Underlying Claim, the plaintiff makes claims for damages suffered by PACE caused by wrongful conduct allegedly engaged in by the defendants against PACE including breaches of duties owed to PACE.
[14] CUMIS was provided with notice of the Underlying Claim and the applicants requested coverage under the D&O Policy.
[15] On October 25, 2019, CUMIS denied coverage for the Underlying Claim on the basis of the “Insured vs. Insured” exclusion in the D&O Policy.
Analysis
[16] CUMIS acknowledges that the Underlying Claim against the Applicants falls within the insuring agreement of the CUMIS policy, for purposes of the duty to defend.
[17] The issues to be decided on these applications are:
a. whether the “Insured vs. Insured” exclusion applies to the claim brought in the name of PACE by the FSRA against PACE’s officers and directors;
b. whether the “derivative action” exception to the “insured vs. insured” exclusion restores coverage for the claim;
c. whether the “liquidator” exception to the “insured vs. insured” exclusion restores coverage for the claim; and
d. whether, if there is coverage for the defence of the Underlying Claim, the applicants are entitled to retain and instruct counsel of their choice without the need to report to or take instructions from CUMIS.
Legal principles applicable to interpretation of policies of insurance
[18] An insurer is required to defend an action in which the pleadings allege facts which, if true, could possibly require the insured to indemnify the insured on a claim. The mere possibility that a claim within the policy may succeed is sufficient to trigger the insured’s duty to defend: Progressive Homes v. Lombard General Insurance Co. of Canada, 2010 SCC 33, at para. 19.
[19] In Progressive, at paras. 22-28, the Supreme Court of Canada reviewed the following principles to be applied to the interpretation of insurance policies (in that case, a comprehensive general liability policy):
a. 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.
b. Where the language of the insurance policy is ambiguous, the courts rely on general rules of contract construction. For example, courts should prefer interpretations that are consistent with the reasonable expectations of the parties, so long as such an interpretation can be supported by the text of the policy.
c. 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.
d. Courts should also strive to ensure that similar insurance policies are construed consistently.
e. When these rules of construction fail to resolve an ambiguity, courts will construe the policy contract contra proferentem - against the insurer. One corollary of the contra proferentem rule is that coverage provisions are interpreted broadly, and exclusion clauses narrowly.
f. Exceptions to exclusions do not create coverage - they bring an otherwise excluded claim back within coverage, where the claim fell within the initial grant of coverage in the first place.
g. Because of this alternating structure, it is generally advisable to interpret the policy in the order of coverage, exclusions and then exceptions.
[20] In Sabean v. Portage La Prairie, 2017 SCC 7, [2017] 1 S.C.R. 121, the Supreme Court of Canada confirmed, at para. 12, that the overriding principle is that where the language of the disputed clause is unambiguous, reading the contract as a whole, effect should be given to that clear language. Only where the disputed language in the policy is found to be ambiguous should general rules of contract construction be employed to resolve that ambiguity. If these general rules of construction fail to resolve the ambiguity, courts will construe the contract contra proferentem, and interpret coverage provisions broadly and exclusion clauses narrowly.
[21] In Markham v. AIG Insurance Company of Canada, 2020 ONCA 239, the Court of Appeal, at para. 45, confirmed that the language of the policy is construed in accordance with the usual rules of construction rather than inferred “expectations” not apparent on a fair reading of the document. The Court of Appeal held that this is particularly so in the case of commercial insurance policies involving sophisticated parties. The insurer must explicitly state the basis on which coverage may be limited.
Does the Insured vs. Insured exclusion apply?
[22] The D&O Policy expressly provides that it shall not apply to loss based upon, arising out of, or attributable to a claim “by or on behalf of” of PACE, except for claims specified.
[23] The applicants submit that this exclusion was intended to provide protection for insurance companies against collusive suits between insured corporations and their insured officers and directors. They submit that when the plaintiff is not the insured corporation, but a representative acting as a genuinely adverse party to the defendant officers and directors, there is no threat of collusion and the underlying rationale for the exclusion does not apply. The applicants contend that to interpret the D&O Policy such that the Underlying Claim is excluded from coverage would result in the virtual nullification of the coverage provided by the D&O Policy and would be contrary to the reasonable expectations of the ordinary person as to the coverage afforded.
[24] In Stuart v. Hutchins, 1998 CanLII 7163 (ON CA), 1998 CarswellOnt 3540, the insured argued that to construe the notice provision in the policy as the insurer submitted it should be read would contravene the spirit of s. 129 of the Insurance Act providing for relief against forfeiture. The Court of Appeal, at paras. 28-30, did not accept that the language of the policy should be interpreted to avoid this outcome:
On a more fundamental level, the position advanced by RE/MAX is one which leads inexorably to the discarding of basic principles that have long governed the interpretation and construction of contracts of insurance.
To the extent that the wording in a contract of insurance is found to be ambiguous, it is accepted that the ambiguity will generally be resolved in favour of the insured. This rule, however, has no application where the wording of the policy is plain on its face and capable of only one meaning.
Trite though it may be, an insurer has the right to limit coverage in a policy issued by it and when it does so, the plain language of the limitation must be respected.
[25] I observe that the question of collusion is not implicated by the language of the exclusion itself. The question of collusion between the insured corporation and officers or directors is addressed in the D&O Policy by the language of an exception to the exclusion, where the claim is a derivative action brought or maintained on behalf of the insured corporation by a person who is not a director or officer, “without the cooperation, solicitation, assistance or active participation of the CORPORATION or any DIRECTOR or OFFICER”.
[26] The language of the exclusion, when the D&O Policy is read as a whole, is not ambiguous. The “Insured vs. Insured” exclusion applies because the Underlying Claim is brought by FSRA on behalf of PACE.
Does the exception to the exclusion relating to a “derivative action” apply so as to restore coverage?
[27] The Applicants argue that if coverage is excluded by the Insured vs. Insured exclusion, the exception to the exclusion relating to a claim that is a “derivative action” applies such that coverage is restored.
[28] This exception in the D&O Policy to the “Insured vs. Insured” exclusion reads:
... except for a CLAIM:
a. that is a derivative action brought or maintained on behalf of the CORPORATION by a person who is not a DIRECTOR OR OFFICER, without the cooperation, solicitation, assistance or active participation of the CORPORATION or any DIRECTOR OR OFFICER;
[29] CUMIS submits that this exception does not apply for two reasons. First, CUMIS submits that the exception only applies where a derivative action is brought or maintained on behalf of the insured by a “person”, and that neither FSRA nor CUMIS is a “person” as that word should be interpreted when used in the D&O Policy. Second, CUMIS submits that the Underlying Claim is not a “derivative action”. I address each of these arguments in turn.
[30] The word “person” is not defined in the D&O Policy. In the absence of a definition, it is necessary to give meaning to this word following the application of principles of interpretation of insurance policies. Where the language in an exception is unambiguous, I must give effect to the clear language, reading the policy as a whole. Where the language is not unambiguous, I must rely on general rules of contract construction. If the ambiguity is not then resolved, I am to construe the D&O Policy against CUMIS according to the doctrine of contra proferentem and, in so doing, interpret the exception broadly and the exclusion narrowly.
[31] The Financial Services Regulatory Authority of Ontario Act, 2016, S.O. 2016, c. 37, Sch. 8 provides in s. 2(1) that “the predecessor Authority and DICO [Deposit Insurance Corporation of Ontario] are amalgamated and shall continue as one corporation without share capital under the name Financial Services Regulatory Authority of Ontario ...”. Section 6(1) of this statute provides that FSRA “has the capacity, rights, powers and privileges of a natural person for carrying out its objects, subject to the limitations of this Act”. It is clear that the FSRA is a corporation which has the capacity, rights, powers and privileges of a natural person for carrying out its objects.
[32] Apart from the statutory power of FSRA to bring an action, a corporation, generally, is capable of making a “CLAIM” (as this word is defined in the D&O Policy) and bringing an action. A corporation is a creature of statute and a legal “person” when this word is used in the context of a corporation making a claim or bringing an action. In this context, the ordinary meaning of the word “person” would generally include a corporation.
[33] The Legislation Act, 2006, R.S.O. 2006, c. C-21, Sch F provides in s. 87 that in every Act and regulation, “person” includes a corporation. The D&O Policy includes a condition which states that “[t]erms of this Policy which are in conflict with any statute of the province or territory in which it is issued are amended to conform to such statute”. Although I do not hold that to interpret the word “person” as used in the D&O Policy to mean only a human being would conflict with the Legislation Act, 2006 (which does not apply to contracts such as insurance policies), I find support in this statutory provision for my conclusion that the ordinary meaning of the word “person”, when used in a contractual provision in reference to a “person” who brings an action, includes a corporation.
[34] CUMIS contends, however, that the D&O Policy, read as a whole, makes a clear distinction between “persons” and “entities”, and that “persons” is used to refer to human beings and “entities” is used to refer to corporations or other entities which are not human beings. CUMIS submits that different words used in an insurance policy are presumed to have different meanings and that PACE and FSRA are “entities”, and not “persons”. Therefore, CUMIS submits, the derivative action exception does not apply.
[35] CUMIS points to several terms in the D&O Policy which refer to a “person or entity” (the definitions of “Change of Control”, “Co-operation”, and “Subrogation”). CUMIS points to other terms which refer to “the entity”, “an entity”, or “any entity” (the definitions of “Corporation”, “Predecessor”, and “Subsidiary”; and the condition with respect to an “entity” which has undergone a change of control), without also referring to a “person”. CUMIS points to other policy terms which refer only to “any person” (the Bodily Injury and Property damage exclusion) or to “a person” (definition of “Employee”), without also referring to an “entity”.
[36] In those paragraphs in the D&O Policy in which the word “entity” is used, and not the words “person or entity”, the context of the policy term indicates that the word “entity” does not refer to a human being. In these policy terms, the context does not require more than the use of the word “entity” to give it the meaning that is intended.
[37] In other policy terms, where the words “person or entity” are used, these words apply broadly to capture any person or entity, human, corporate, or other. A human or a non-human person or entity is able to acquire ownership of securities. A human or a non-human person or entity is able to execute documents or render assistance to the insurer. The insurer may have rights of subrogation against a human or a non-human person or entity, including a corporation, a partnership, an unincorporated association, or any legal entity capable of being sued.
[38] In other terms of the D&O Policy, the word “person” is used in a context that indicates that the word refers to a human person and not a corporation where, for example, the policy refers to “bodily injury, sickness, disease, mental anguish or death of any person”.
[39] It does not follow, however, that because the word “entity” is used in the D&O Policy in contexts where the word does not refer to a human being, and the word “person” is used elsewhere in the policy in contexts where the word does not refer to a corporation or other non-human entity, the word “person” must be given a narrower meaning than its ordinary meaning where the context does not so require. In the exception to the Insured vs. Insured exclusion, the context in which the word “person” is used does not require that the “person” making the “CLAIM” that is a derivative action ...” must be a human being. An individual member of a credit union could make a claim that is a derivative action as could a member of a credit union that is a corporation.
[40] CUMIS argues that the reference in the exception itself to a “person who is not a DIRECTOR OR OFFICER” can only refer to a human being. I disagree. A derivative action may be brought or maintained by an individual who is not an officer or director or by a corporation which is not, and cannot be, an officer or director. In either case, if the meaning of the word “person” includes a corporation, the exception would apply.
[41] CUMIS also relies on the definition of the capitalized word “CORPORATION” in the D&O Policy to mean “[t]he entity named as the Insured in the Declarations or Certificate ...” in support of its submission that a corporation is an “entity” as that word is used in the D&O Policy but not a “person”. I disagree that this definition assists CUMIS. The word “CORPORATION” is a defined term in the D&O Policy that means the insured, PACE, which is a corporation described as an “entity”. It does not follow, however, that where the word “person” is used in other terms of the D&O Policy, the meaning to be given to this word must exclude a corporation where the context does not so require.
[42] I observe that the D&O Policy does not consistently use the word “person” to refer to a human being. In the exclusion dealing with “Outside Directorship”, the D&O Policy refers to “[a]ny act of an individual while serving as a director ...” CUMIS submits that the word “individual” has the same meaning as “person”, and both refer to a human being. I agree that the word “individual” as used in this policy term means a human being. I do not agree, however, that the meaning of the word “person” where it is used elsewhere in the D&O Policy is limited to a human being, unless the context so requires. The ordinary meaning of the word “person” is broader than the ordinary meaning of the word “individual”. Because these two words are each used in the D&O Policy, I presume that, depending on the context in which each is used, the words do not necessarily have the same meaning.
[43] When I consider the language of the exception in the context of the D&O Policy as a whole, I do not agree that the word “person” should be given a meaning other than its ordinary meaning, which, in the context of a person making a claim or bringing an action, includes both an individual and a corporation. It is not necessary to give this word a narrower and more limited meaning. The purpose of the exception applies to both individuals and corporations. If CUMIS wished to limit its risk and exclude coverage for a person bringing a derivative action which is a corporation, it could have done so using clear language. I conclude that the language of the exception is not ambiguous and the word “person”, as used in the exception, includes a person that is a corporation.
[44] If I had concluded that the meaning of the word “person” as used in the exception is ambiguous, I would consider the reasonable expectations of the parties to give meaning to this word. The D&O Policy provides coverage to a director or officer for a loss arising from any claim first made against such director or officer for which the director or officer is not indemnified by PACE. The exception to the exclusion for a claim by or on behalf of PACE that is a derivative action does not expressly limit its application to a claim that is a derivative action brought by an individual. The stated purpose of the D&O Policy is to ensure PACE’s officers and directors against loss from claims made for breach of duty. This purpose would be severely restricted if suits initiated by the FSRA, the regulator of PACE, were not covered.
[45] Given the stated purpose of the D&O Policy, to give the word “person” the narrow meaning advanced by CUMIS would be contrary to the reasonable expectations of an ordinary person as to the coverage purchased. See Zurich Insurance Co. v. 686234 Ontario Ltd., 2002 CanLII 33365 (ON CA), [2002] O.J. No. 4496 (ONCA), at para. 28.
[46] The interpretation of “person” as used in the exception to include a corporation is consistent with the reasonable expectations of the parties and supported by the text of the D&O Policy. To give the word “person” the restrictive meaning advanced by CUMIS would lead to unreasonably restrictive coverage because it would exclude coverage for claims by FSRA, the regulator of PACE, one of the most significant risks faced by directors of a credit union. If I had concluded that the language of the exception is ambiguous, I would conclude that after applying these rules of construction, the D&O Policy should not be given the restrictive interpretation advanced by CUMIS.
[47] If, after applying rules of construction to resolve ambiguity, I had held that the meaning of the word “person” in the exception remained ambiguous, I would apply the contra preferentem rule and interpret the D&O Policy against CUMIS by giving the language of the exception a broad interpretation which includes a corporation within the meaning of the word “person”.
[48] The second submission made by CUMIS is that the Underlying Claim is not a “derivative action” within the meaning of this phrase in the exception.
[49] CUMIS submits that the term “derivative action” is a term of art which has a meaning recognized under Ontario law and that the Underlying Claim does not fall within any of the types of derivative actions so recognized. In support of this submission, CUMIS contends:
a. The Underlying Claim is not a derivative action under s. 246 of the Ontario Business Corporations Act (“OBCA”) because that statute does not apply to corporations to which the Act applies.
b. Prior to the enactment of statutory provisions like s. 246 of the OBCA, a common law derivative action for shareholders existed through exceptions to the rule in Foss v. Harbottle. The Underlying Claim does not qualify as a common law derivative action because the conditions precedent to such an action have not been fulfilled. The action is not brought by minority shareholders on behalf of the credit union.
c. The PACE action is not a derivative action under s. 50 (1) of the Act which, CUMIS contends, is the only derivative action available in Ontario in the credit union context and, given this, the “derivative action” exception to the “insured versus insured” exclusion can only refer to the s. 50 derivative action.
[50] In Rea v. Wildeboer, 2015 ONCA 373, the question before the Court was whether a complainant may assert by way of an oppression remedy proceeding a claim that is by nature a derivative action for a wrong done to the corporation, thereby circumventing the statutory requirement to obtain leave to commence such an action. In its analysis, the Court of Appeal for Ontario described, at para. 18, the nature of a “derivative action” under the OBCA:
The derivative action was designed to counteract the impact of Foss v. Harbottle by providing a “complainant” - broadly defined to include more than minority shareholders - with the right to apply to the court for leave to bring an action “in the name of or on behalf of the corporation ... for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate”: Business Corporations Act, RSO 1990, c. B. 16, s. 246 (“OBCA”). It is an action for “corporate” relief, in the sense that the goal is to recover for wrongs done to the company itself. As Professor Welling has colourfully put it in his text, Corporate Law in Canada: The Governing Principles, 3rd ed. (Mudgeeraba: Scribblers Publishing, 2006), at p. 509, “[a] statutory representative action is the minority shareholder’s sword to the majority’s twin shields of corporate personality and majority rule.”
[51] Although in Rea v. Wildeboer the legal basis for the derivative action was the OBCA, the nature of a derivative action, as described by the Court of Appeal, is one brought by a person in the name of or on behalf of a corporation to recover for wrongs done to the corporation itself. The term “derivative action” describes such an action. This meaning of the term “derivative action” is consistent with the language of the exception in the D&O Policy which refers to a “derivative action brought or maintained on behalf of the CORPORATION by a person who is not a DIRECTOR OR OFFICER ...”.
[52] CUMIS also maintains that s. 50 of the Act does not apply to the Underlying Claim because it was not brought by a credit union member, and no leave was obtained from the court permitting the start of the action. CUMIS contends that there is no other type of “derivative action” known to law which could possibly apply to the Underlying Claim.
[53] Subsections 50(1) and (2) of the Act provide:
Members may maintain representative actions
50(1) Subject to subsection (2), a member of a credit union may maintain an action in a court of competent jurisdiction in a representative capacity for the member and all other members of the credit union suing for and on behalf of the credit union to enforce any right, duty or obligation owed to the credit union under this Act or under any other statute or rule of law or equity that could be enforced by the credit union itself, or to obtain damages for any breach of any such right, duty or obligation.
(2) An action under subsection (1) shall not be started until the member has obtained an order of the court permitting the start of the action.
[54] The D&O Policy, in the exception to the “Insured v. Insured” exclusion, does not limit the words “derivative action” to a derivative action brought under s. 50 of the Act. As I have noted, the term “derivative action” is not defined in the D&O Policy, although many other words are defined. If CUMIS had intended to give particular meaning to the term “derivative action”, or to limit it to an action brought under s. 50 of the Act, it could have done so using clear language. In the absence of a meaning assigned to this term through a definition in the D&O Policy, the term “derivative action” must be given a meaning having regard to the context in which it is used in the D&O Policy, reading the policy as a whole.
[55] I do not accept the submission by CUMIS that a derivative action is a term of art limited to a common law derivative action by a minority shareholder of a corporation, a statutory derivative action under the OBCA or the federal corporate statute, or an action brought under s. 50 of the Act. In making this submissions, CUMIS conflates the common law or statutory requirements for a person to bring an action in the name of or on behalf of a corporation with the action itself. At common law, and under the federal and provincial corporate statutes, a shareholder of a company may only bring an action in a representative capacity on behalf of a company for remedies available to the company in respect of a wrong done to it if certain requirements are satisfied. Under s. 50 of the CUCP Act, a member of a credit union may maintain an action described in this provision in a representative capacity provided that the member has obtained a court order permitting the start of such an action. These requirements are legal rules that, where they apply, specify who may bring such an action and when it may be brought. They do not, however, change the nature of the action.
[56] The nature of the Underlying Claim is clear from the Fresh as Amended Statement of Claim in which PACE, by its administrator, FSRA, sues for wrongful acts by the defendants against PACE. In the Fresh as Amended Statement of Claim, the plaintiff claims remedies for losses suffered by PACE, as pleaded in paragraph 26:
Through the Investigation, the Administrator and the Credit Union learned that the conduct of the Defendants, individually and collectively, had resulted in the Credit Union suffering material losses which in some instances, are continuing. The basis of each of the claims against the Defendants is outlined in detail below.
[57] In paragraph 146 of the Fresh as Amended Statement of Claim, the plaintiff pleads that each of the defendants has engaged in wrongful conduct against PACE:
Each of the Defendants has engaged in wrongful conduct against the Credit Union. Such wrongful conduct includes, but is not limited to, fraud, deceit, breach of fiduciary duties, breach of employment duties, negligence, conversion, unjust enrichment, breach of trust, knowing assistance of breach of fiduciary duty and breach of trust, knowing receipt of the proceeds from breach of fiduciary duty and breach of trust, and breach of contract, all as set out above. The Defendants are liable to compensate and pay damages to the Credit Union on a joint and several basis for the losses suffered by the Credit Union with respect to the wrongful conduct they were involved with, and to disgorge any amounts that they received on account of such wrongful conduct.
[58] The Underlying Claim is one brought by FSRA in the name of and on behalf of PACE for wrongs allegedly done to the corporation itself. This is, by its nature, a derivative action.
[59] When I give the words used in the exception their plain meaning, I conclude that the Underlying Claim is “a derivative action brought or maintained by or on behalf of the “CORPORATION by a person who is not a DIRECTOR OR OFFICER, without the cooperation, solicitation, assistance or active participation of the CORPORATION or any DIRECTOR OR OFFICER”.
[60] The exception to the “Insured vs. Insured” exclusion applies to restore coverage under the D&O Policy.
Does the exception for a claim brought or maintained by a liquidator, receiver, or trustee in bankruptcy and made directly against a Director of the Corporation apply?
[61] The applicants Larry Smith and Phillip Smith submit that if the “derivative action” exception does not apply, the Underlying Claim is, nonetheless, excepted from the exclusion because the Underlying Claim is, in substance, one “brought or maintained by a liquidator, receiver, or trustee in bankruptcy”. This exception applies only for “DEFENCE COSTS”, as defined in the D&O Policy. These applicants contend that although FSRA has authority over PACE as an “Administrator” under the Act, its powers are functionally equivalent to a liquidator, receiver, or trustee in bankruptcy, such that the exception should apply.
[62] Because I have concluded that the “derivative action” exception applies, it is not necessary for me to decide whether this exception applies.
Are the applicants entitled to appoint and instruct counsel of their choice in the Underlying Claim?
[63] CUMIS acknowledges that if it is held that the Underlying Claim is not excluded from coverage, Larry Smith, Philip Smith, Frank Klees and Brian Hogan are entitled to choose and instruct defence counsel. This is so because the claims of fraud and other similar conduct against them potentially trigger exclusions in the policy which would create a conflict of interest and entitle them to independent counsel.
[64] The applicants in the Goodfellow application contend that they are also entitled to appoint and instruct counsel of their choice to defend them in the Underlying Claim, which counsel is to be paid for by CUMIS without needing to report to or take instructions from CUMIS. CUMIS disagrees on the basis that the claims against them are in negligence and there is no conflict of interest.
[65] And insurer who has a duty to defend an action also has a prima facie to choose and instruct counsel and to control the defence. This right to defend and control the defence of the litigation is lost only where there is a reasonable apprehension of conflict of interest on the part of counsel appointed by the insurer. See Markham (City) v. AIG Insurance Company of Canada, 2020 ONCA 239, at paras. 88-89.
[66] The Goodfellow applicants argue that (i) CUMIS denied coverage for defence obligations without a reservation of rights with respect to coverage and thereby repudiated the D&O Policy, and (ii) the actions have been ongoing for some time, and these applicants have retained and instructed counsel who are closely involved in the litigation, such that a change on representation will be prejudicial. The Goodfellow applicants submit that in these circumstances, CUMIS has lost the right under the D&O Policy to retain and instruct counsel.
[67] In support of their submission, the Goodfellow applicants rely on Ontario v. Kansa General Insurance 1991 CanLII 7318 (ONSC). In that case, the insured argued that the insurer had repudiated the contract of insurance by refusing to defend the claim, with the result that the insurer lost its right to appoint and instruct counsel. The application judge examined the correspondence exchanged between the insurer and the insured and concluded that the conduct of the insurer did not entitle the insured to treat the policy as having been repudiated. The request by the insured that it be given the right to appoint counsel and control the defence of the claim was denied.
[68] On the evidence before me, the Goodfellow applicants did not elect to accept the repudiation and treat the D&O Policy as having been terminated. As a result, the D&O Policy remains in full force and effect.
[69] There is no reasonable apprehension of conflict of interest on the part of counsel to be appointed by CUMIS. The right of CUMIS under the D&O Policy to appoint and instruct counsel for the Goodfellow applicants has not been lost.
Disposition
[70] For these reasons, I make the following declarations:
a. A declaration that CUMIS is obligated to defend the applicants in the Underlying Claim pursuant to the D&O Policy.
b. A declaration that the applicants Larry Smith, Phillip Smith, Frank Klees, and Brian Hogan are entitled to appoint counsel of their choosing at CUMIS’ sole expense who need not report to or take instructions from CUMIS.
c. A declaration that CUMIS is required to reimburse the applicants on a full indemnity basis for all past legal and administrative expenses incurred in defending the Underlying Claim and pursuing coverage.
[71] If the parties are unable to resolve costs, the applicants may make written submissions (not exceeding 3 pages for each application excluding costs outlines) within 10 days. CUMIS may make written responding submissions within 10 days thereafter. The applicants may make brief reply submissions (not exceeding one page) if so advised, within 5 days thereafter.
Cavanagh J.
Date: May 18, 2021