COURT FILE NOS.: CV-21-00669766-0000 and CV-22-00678886-0000
DATE: 20221201
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Court File No. CV-21-00669766-0000
JOHN DAVIES AND JUDITH DAVIES
Applicants
– and –
AIG INSURANCE COMPANY OF CANADA
Respondent
BETWEEN:
Court File No. CV-22-00678886-0000
AIG INSURANCE COMPANY OF CANADA
Applicant
– and –
JOHN DAVIES AND JUDITH DAVIES
Respondents
Lawrence G. Theall and Dylan Cox Lawyers for the Applicants/Respondents, John Davies and Judith Davies
David N. Vaillancourt and Alyssa Hall, Lawyers for the Respondent/Applicant, AIG Insurance Company of Canada
HEARD: OCTOBER 4, 2022
G. DOW, J.
REASONS FOR DECISION
[1] Each party commenced an application seeking to determine whether the insurer, AIG Insurance Company of Canada (“AIG”) is obligated to defend John Davies and Judith Davies (“the Davies”) in what was called the “Underlying Action”. The plaintiffs in that action allege the defendants, including the Davies and companies operated by John Davies misappropriated funds raised from syndicated mortgages those companies had secured to fund real estate development.
Background
[2] John Davies operated seven or eight real estate development companies. AIG initially defended John Davies and his spouse, Judith Davies pursuant to Corporate Directors and Officer’s Policies it issued to each of the Davies’ companies July 28, 2015. The policies were renewed in July 2016.
[3] To that end, AIG reviewed and paid $1,015,418.97 in legal accounts on behalf of the Davies before notifying them on October 1, 2019 that it was denying coverage and contested its duty to defend pursuant to the terms of the policies. Fortunately, the policies are identical and may be treated in the singular. Subsequent to its denial of coverage, the Davies have incurred additional defence costs in the amount of $71,590.04. It seeks reimbursement of this amount. It was acknowledged that this quantum has not been reviewed as to its reasonableness by AIG and any order for repayment should include provision for review, and if necessary, assessment.
[4] The essence of the denial of coverage goes back to when coverage was first sought in May, 2015. The Davies used a broker, Greg Markell at HUB International who dealt with an underwriter with two years’ experience, then Michelle Alexander (who subsequently becomes and will be referred to as Michelle McQueen).
[5] At the time the applications were reviewed, AIG was attempting to build up its business in the area and acknowledged greater flexibility on terms and pricing. It denies any compromise on the evaluation of the risk or agreeing to underwrite polices for entities it would not normally accept.
[6] The process of AIG obtaining the requisite information to determine whether it would offer the policies and on what terms and premium included three parts. The first part was a 16 page Application form with thirteen sections and a multitude of questions to be answered.. These included details as to financial information and boxes to be checked. I note the example of the application form attached as Exhibit N to Michelle McQueen’s affidavit sworn April 18, 2022 contained many unanswered questions including “Total Assets” and ‘Total Liabilities” in Section B or Current Insurance Details in Section N. It contained the signature of John Davies, as the President of the corporate policy holder. There was accompanying wording making it clear that any materially false information would void coverage.
[7] The second part of the process involved inputting the information received into a proprietary rating sheet, completed by Michelle McQueen. That document apparently contained comment boxes where explanations or rationale could be noted.
[8] The third part was any or all notes and records kept. In this case, it involved email exchanges. The critical email exchange occurred on July 16, 2015. Greg Markell emailed Michelle McQueen with “answers to your questions”. The questions are summarized by Greg Markell with the answers provided. The fourth question stated:
Question: “Regarding the inter-company loans, they were hoping to get an understanding as to who the loan facility is that is providing to the current companies”.
Answer: “Balfor will go shoulder to shoulder for covenants, the remaining loans provided by mezzanine and construction financing. Memorandum of understanding and term sheet from a lender on board. Kingset (sp?) Capital in Toronto, John Love’s company. $500MM funds. All schedule A banks in funds.”
[9] The meaning of this answer is at the core of the dispute. What is clear is:
a) the first sentence may have specialized meaning with regard to “remaining loans provided by mezzanine and construction financing”;
b) the reference to Kingset (sp?) Capital is actually what is known in the business as an alternative lender;
c) the statement “$500MM funds. All schedule A banks in funds” was taken to mean financing was in place with one or more Schedule A banks for up to $500 million by AIG as opposed to Kingsett Capital having access up to $500 million in financing for its business as claimed by the Davies;
d) the complete absence of any mention of syndicated mortgages as the method of financing being used by John Davies in his real estate developments; and
e) no other records were put forward by AIG or the Davies that detailed any request for clarification or disclosure of how John Davies was financing real estate developments aside from the evidence in cross-examination tendered subsequently, years later by Michelle McQueen and John Davies.
Analysis
[10] The parties acknowledged it is settled law that the duty to defend arises when the pleadings of the Underlying Action raises the mere possibility of a result where coverage might exist. Further, to avoid the duty to defend, the onus is on the insurer to prove an exclusion will apply. That is, the exclusion being relied upon clearly removes any coverage. The exclusion should be narrowly construed.
[11] The parties also identified and relied on the need for AIG to show it met its burden to prove the following five factual requirements to avoid funding defence costs:
a) there was a misrepresentation;
b) the misrepresentation was in the application the companies completed for coverage;
c) the misrepresentation was material;
d) the Underlying Action alleges, arises out of, is based upon, as attributable to, or is in consequence of the subject matter of the alleged misrepresentation; and
e) the insured (that is John Davies) knew of the misrepresentation.
[12] Regarding whether a misrepresentation was made, the Davies rely on alternative interpretations of the answers as to who was lending money to the corporations and the admissions of Michelle McQueen in her cross-examination. This included the lack of any specific recollection of a phone conversation or the existence of any notes which explained the email of July 16, 2015. Further, there was no follow-up or additional inquiries made with regard to any loan agreement for $500 million. Michelle McQueen acknowledged the wording was open to an interpretation other than her own.
[13] In this regard, AIG submitted the evaluation of the misrepresentation should be on an objective basis and the failure to disclose the actual state of financing amounted to a misrepresentation. That is, the various companies were being financed by syndicated mortgages.
[14] Further, it was clear there was no evidence that John Davies was aware of the email of July 16, 2015 before the denial of coverage occurred. The basis for imputing his having knowledge of it would be on the basis Greg Markell, as his broker, was his agent. AIG submitted the email needed to be interpreted objectively and in context in accordance with caselaw such as Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (at paragraphs 46-48) where I was directed to “read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract.”
[15] In this regard, the content of the email lacks detail or precision. While the absence of syndicated mortgages is troubling, it is also inappropriate to blindly accept Michelle McQueen’s interpretation of its meaning.
[16] In this regard, I was referred to the statement in Silva v. Sizoo, [1997] O.J. No. 40910 (at paragraph 93) that “an insurer is not a detective”. However, in the last sentence of the proceeding paragraph, which I accept, “a reasonably competent underwriter would know or find out about the way in which” its proposed insured “carried on their business”.
[17] I find the wording is insufficient to conclude a misrepresentation had occurred and AIG’s position thus fails.
[18] For completeness, regarding the second requirement for the misrepresentation to be in the application completed for coverage, I am prepared to accept the notes and documentation such as the July 16, 2015 email can and does form part of the application. I do so on the basis it represents the duty on the parties entering into an insurance contract to treat each other with good faith and with fulsome disclosure.
[19] Regarding the third element that the misrepresentation was material, clearly AIG’s interpretation of it was submitted to me as having not met that requirement. However, the point form nature of it and reference to a variety of financing possibilities should have been clarified. Given it was Greg Markell answering on behalf of the Davies that AIG claims to have relied on to offer coverage, it cannot merely rely on its interpretation of what it was told when same was not clear. Here, AIG relied on the expert opinion of Adam Briklyn as a director and owners underwriting expert. That evidence included “determining the source and amount of financing is the cornerstone underwriting issue for a privately owned real estate development company” (at page 8 of his report). This reinforces my conclusion of the need for Michelle McQueen to have recorded her understanding of the financing in some fashion beyond what has been put forward. For example, a dated note by her having confirmed the email meant the Davies had $500 million in funding from (which) Schedule A bank would be compelling. I would conclude the subject of the real estate development financing is material to the decision to extend coverage.
[20] Regarding the Underlying Action and whether the alleged misrepresentation is something that “arises out of, is based upon, is attributable to, or is in consequence” as contained in the wording of the policy, it is clear the Underlying Action seeks to recover money related to funds intended for real estate development and allegedly used for some other purpose. I would conclude that is sufficient to fall within the broad description required.
[21] Finally, regarding whether John Davies knew of the purported misrepresentation, I would agree with AIG’s submission that such knowledge is attributable to him through the principles of agency.
Conclusion
[22] The Davies are entitled to the relief sought, being a declaration that AIG has a duty to resume defending and the payment of the legal costs of John and Judith Davies in the Underlying Action. Further, the incurred unpaid defence costs of $71,590.04 are to be reviewed for reasonableness and payment with any necessary assessment if not agreed to. This includes any assessment of interest on that account (or accounts).
Costs
[23] The Costs Outline submitted by counsel for the Davies sought fully indemnified fees totaling $209,263.00 plus HST ($27,204.19) and disbursements of $8,171.45 inclusive of HST. The total is $244,638.64.
[24] This compares with the Costs Outline from counsel for AIG in which full indemnity is in the amount of $208,433.02 (plus HST) and disbursements of $70,053.94. As a result, neither side made a submission that the amount sought by the other in the event of their success was excessive.
[25] I was advised that there were no Offers to Settle to review.
[26] Counsel for the Davies relied on the Court of Appeal decision of Godonoaga (Litigation Guardian of) v. Khatambakhsh, 2000 16891 (ON CA), [2000] O.J. No. 3807 to submit their entitlement to the highest level of costs given the nature of the dispute. That is, having to litigate AIG’s obligation to continue to pay for the legal costs of defending the Davies in the Underlying Action. That decision satisfies me the appropriate costs award is as requested by counsel for the Davies and same is ordered, payable forthwith.
_____________________________ Mr. Justice G. Dow
Released: December 1, 2022
COURT FILE NOS.: CV-21-00669766-0000 and CV-22-00678886-0000
DATE: 20221201
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Court File No. CV-21-00669766-0000
JOHN DAVIES AND JUDITH DAVIES
Applicants
– and –
AIG INSURANCE COMPANY OF CANADA
Respondent
BETWEEN:
Court File No. CV-22-00678886-0000
AIG INSURANCE COMPANY OF CANADA
Applicant
– and –
JOHN DAVIES AND JUDITH DAVIES
Respondents
REASONS FOR DECISION
Mr. Justice G. Dow
Released: December 1, 2022