Court File and Parties

COURT FILE NO.: CV-22-00688258-0000 DATE: 20230526 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: KESTENBERG SIEGAL LIPKUS LLP and MARC KESTENBERG, Applicants – and – ROYAL & SUN ALLIANCE INSURANCE COMPANY OF CANADA, TRAVELERS INSURANCE COMPANY OF CANADA, AXIS REINSURANCE COMPANY (CANADIAN BRANCH), XL SPECIALTY INSURANCE COMPANY, operating as AXA XL and TRISURA GUARANTEE INSURANCE COMPANY, Respondents

BEFORE: Justice E.M. Morgan

COUNSEL: Rory Barnable, for the Applicants Joyce Tam and Thomas Donnelly, for the Respondents

HEARD: May 25, 2023

Reasons for Decision

[1] The Applicants seek a declaration that the Respondents are responsible for coverage of a professional liability claim against them.

[2] The Applicants are insured under an excess liability policy issued by the Respondents. The record shows that, although this Application is brought in the name of the Applicants as the insured parties, it is their insurance broker, HUB International HKMB Limited (“HUB”), that has the true interest in the Application. The relief sought by the Applicants here follows on HUB’s failure to report the claim to an excess insurer within the coverage period set out in the policy.

[3] In brief, the Respondents issued a second excess professional liability policy to the applicants for the year 2018 (the “RSA policy”). Lloyd’s issued a first excess professional liability policy and LawPRO issued a primary professional liability policy to the Applicants for the same year. The RSA policy is a “claims made and reported” policy, such that it only covers claims that are first made and reported to the insurer during the policy period.

[4] The RSA policy contains a notice provision, labeled “Condition C”, as follows:

As a condition precedent to its rights under this policy, an Insured must provide written notice of any claim as soon as practicable…

[5] In addition, the RSA policy contains a claims-made and reported condition, labelled “Condition D”, as follows:

This policy only covers claims first made against the Insured and reported to the Insurer during the policy period and provided that such claim arises out of an act, error or omission committed or alleged to have been committed on or after the retroactive date set forth at Item. 6 of the Declarations.

[6] This requirement of notice within the term of the policy is a condition precedent to coverage for the claim. While Applicants’ counsel seeks to highlight the fact that Condition D is not labeled a condition precedent, the Court of Appeal has made it clear that a claims-made clause does not have to specify that it is a “condition precedent” in order to be one: Stuart v Hutchins (1998), 40 OR (3d) 321 (CA). It is self-evident from the language of Condition D that notice had to be given during the policy period in order for coverage to ensue.

[7] The record establishes that the Applicants asked HUB to report the claim to Lloyd’s and to the Respondents in 2018. The broker promptly reported the claim to Lloyd’s but failed to report the claim to the Respondents until 2021. By that time the policy period had expired.

[8] Applicants’ counsel submitted in oral argument that while the evidence establishes that neither the Applicants nor HUB gave timely notice of the claim to RSA, the Respondents have not introduced their own evidence as to whether they had perhaps heard about the claim from Lloyd’s or from any source than HUB. He submits that this is a gap in the evidence that suggests that RSA may not have suffered any prejudice because they knew about the claim even though they did not receive proper notice of it.

[9] In my view, there is no merit to this argument. Respondents do not have to respond to matters not raised against them. There is nothing in the Application Record or, for that matter, in Applicants’ counsel’s factum, suggesting that the Respondents heard about the claim against the Applicants from another source. It is not for the Respondents and their counsel to imagine this allegation and to respond to it without it having actually been made. The fact is, as Applicants’ counsel concedes, there is no evidence that RSA had notice of the claim from any source; the fact that the Respondents have not specifically addressed the non-evidence of notice having come from some third party source is not an omission in any legally cognizable sense.

[10] As a result of the failure to report the claim to the Respondents, the “claims made and reported” requirement was not met. The Respondents have therefore denied coverage under the RSA policy.

[11] In Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 SCR 744, at para. 23, the Supreme Court of Canada observed that an important part of the bargain struck in claims-made policies is restricted coverage by the insurer in exchange for a lower premium paid by the insured. Claims are only covered where they are made and reported during the policy period, which can occasionally result in a coverage gap even though the insured was consistently insured. Such gaps are in the nature of the type of coverage chosen by the Applicants herein.

[12] A chronology of relevant events leading to this Application is set out by Respondents’ counsel in their written submissions as follows [references omitted]:

• On July 3, 2018, the applicants provided notice to LawPRO of the [underlying] Tallman Claim.
• On July 4, 2018, the applicants advised their broker that they would like to report the Tallman Claim to their excess insurers, and the broker indicated that it would do so.
• On March 22, 2021, almost three years later, the broker reported the Tallman Claim to the respondents for the first time.
• On October 14, 2021, the respondents denied coverage on the basis that the claim was not reported until March 22, 2021.
• On June 8, 2022, the applicants commenced an application against the broker for the loss of coverage under the RSA policy.
• On August 16, 2022, the applicants and the broker signed an agreement wherein the broker admitted that it was negligent for failing to report the claim, the applicants agreed to allow the broker to commence this application, and the broker agreed to fully indemnify the applicants for the loss of coverage if this application is not successful.

[13] The claims-made condition, or Condition D, contains two requirements. First, it requires that the claim be made and reported during the policy period. Second, it requires that the claim arise out of an act, error, or omission committed or alleged to have been committed on or after the retroactive date. However, the RSA policy in issue here indicates “none” for the retroactive date.

[14] Counsel for the Respondents explains that this means that the retroactive date requirement is met – but it does not invalidate the claims-made and reported requirement. I agree. The text of Condition D unambiguously requires that the claim be first made and reported during the policy period. It is difficult to read it any other way.

[15] Counsel for the Applicants also submits that the notice requirement, or Condition C, only requires that notice be provided as soon as practicable. He argues that this requirement is inconsistent with the Condition D requirement that claims be made and reported within the policy term.

[16] As counsel for the Respondents points out, however, the RSA policy requires that both conditions be fulfilled. That is to say, Conditions C and D work in a coordinated fashion. The RSA policy only covers claims first made and reported during the policy period (Condition D). Within the policy period, however, the insured is obligated to provide notice of a claim as soon as practicable (Condition C).

[17] This coordination of conditions is, from the Respondents’ point of view, sensible, as early reporting allows an insurer to investigate, mitigate, or resolve claims on a timely basis and before evidence is lost, further damage occurs, or litigation is commenced. Respondents’ counsel also explain that Condition C is a preventative measure put in place primarily for an insured’s benefit; it works in order to prevent an insured from waiting until the last day of the policy period to report claims.

[18] The Applicants also argue that the Lloyd’s policy expressly requires the claim to be reported during the policy period, but that the RSA policy, by contrast, only requires notice as soon as practicable. With respect, in making this point the Applicants and their counsel are grasping at straws. It is clear that both the Lloyd’s policy and the RSA policy require the claim to be reported during the policy period and notice to be given as soon as practicable. The two policies are aligned – the RSA policy is a second excess claims-made and reported policy which follows a first excess claims-made and reported policy.

[19] Furthermore, the Respondents point out that The RSA policy allows for an extended reporting period to be purchased if it is elected pursuant to the Lloyd’s policy. If purchased, claims can be reported during the extended reporting period. Respondents’ counsel submit, accurately, that the existence of the extended reporting period clause reinforces the fact that the RSA policy is a claims-made and reported policy. It does not mean that claims can be reported after the policy period where, as here, an extended reporting period is not purchased.

[20] The record in this Application establishes that no extended reporting period was requested or purchased by the Applicants for either of the Lloyd’s policy or the RSA policy. As such, there is no extended reporting period that would apply.

[21] Counsel for the Applicants submits that the entire rationale for insurance is coverage, and that as a matter of public policy coverage must be interpreted generously. While this is indeed correct as a starting point for analysis and as a generally applicable principle, it is not one-sided.

[22] In Jesuit Fathers, at para 33, the Supreme Court observed that “even with all these factors being considered, courts must remain mindful of the rules and principles governing insurance law. In the long run, a contextual but unprincipled approach would render a disservice not only to the industry, but also to insured and to victims. It would lead to further difficulties in obtaining coverage and compensation. Both parties to an insurance contract are entitled to expect that well-established principles will be reflected in the interpretation and application of that contract.”

[23] One such principle is that the explicit terms of an insurance policy are to be adhered to. It does not help insureds at large for policies sold with a discounted premium due to the claims-made condition be suddenly required to cover claims not made within the time parameters of the policy. That will quickly put an end to the sale of policies with discounted premiums.

[24] Finally, counsel for the Respondent further submit that the Court of Appeal has canvassed the claims-made issue thoroughly, and has refused to grant coverage on a relief from forfeiture basis in similar circumstances. In Stuart v. Hutchins (1998), 40 OR (3d) 321 (CA), at paras 32-34, Moldaver JA (as he then was) explained the rationale for this approach. In that case, American, an insurer, denied coverage to Re/Max, its insured, when Re/Max notified it of a claim less than a month after the expiry of the policy term:

American contracted to provide Re/Max with coverage for potential claims made and reported during the policy period. It did not agree to provide Re/Max with coverage for potential claims made but not reported during the policy period and it does not lie with the court to rewrite the policy as if it did.

Much as Re/Max contends that strict construction of the notice provision will lead to harsh and inequitable results, I do not agree. Under the policy, Re/Max could have protected itself by purchasing the extended reporting period endorsement. Alternatively, it could have renewed its policy with American or purchased another policy from a different insurer with retroactive coverage.

In short, Re/Max could have protected itself in a number of ways. The fact that it chose not to is hardly reason to twist the plain wording of the coverage clause and thereby create an ambiguity where none exists.

[25] The same logic applies to the case at bar. The Applicants – or, more realistically, their broker – asks this court to ignore the terms and wording of the RSA policy. There are no viable grounds on which to grant that request.

[26] Furthermore, it is apparent from the record that the Applicants will suffer no prejudice whether they obtain coverage under the RSA policy or not. As indicated at the outset of these reasons, it is HUB, not the Applicants, who would be the real beneficiary of any insurance payout by RSA. The Applicants will not be left to bear the expense themselves, since RSA’s denial of coverage is a result of HUB’s admitted negligence.

[27] Counsel for the Applicants acknowledged at the hearing that HUB itself has professional liability insurers, and that it is they who will have to cover the claim if the Applicants are unsuccessful here. The entire Application, in other words, is a contest between two insurers – the Applicant’s insurer who was not notified on time, and HUB’s insurer who I would presume was notified on time when HUB became aware of its own error.

[28] Under these circumstances, relief from forfeiture for the Applicants would amount to relief from forfeiture for HUB’s insurer. I do not see any basis on which the court should intervene to support the insurer who brings no complaint about notice as against the insurer who did not get proper notice. There are neither contract-based grounds nor equitable grounds for granting the relief sought.

[29] The Application is dismissed.

[30] In accordance with the applicable Practice Direction, both sides’ counsel have submitted Bills of Costs. That is much appreciated. Too frequently, counsel leave costs submissions to a later time, which is not how the costs portion of an application or motion is designed to work.

[31] Costs are always discretionary under section 131 of the Courts of Justice Act. In exercising that discretion, Rule 57.01(1)(0.a) of the Rules of Civil Procedure directs me to take into account the principle of compensation for the successful party. At the same time, Rule 57.01(1)(0.b) directs me to take into account the extent to which a costs request might be beyond the reasonable expectations of the unsuccessful party.

[32] Respondents’ counsel seek, on a partial indemnity basis, a total of $17,649.99, inclusive of disbursements and HST. Applicants’ counsel would seek, also on a partial indemnity basis, the all-inclusive amount of $43,401.80. Given that the Applicants’ request is substantially higher than the Respondents’ request, it is unlikely that the Applicants would be taken by anything other than pleasant surprise by the Respondents’ costs figure.

[33] Rounding the figure off for convenience, the Applicants shall pay the Respondents costs in the all-inclusive amount of $17,600.

Date: May 26, 2023 Morgan J.