In Lloyds Syndicate 1221 (Millenium Syndicate) v. Coventree Inc., 2012 ONCA 341, the Court of Appeal affirmed the Application Judge’s decision that, based on the policy language and the circumstances underlying the negotiation and issuance of the policy, the current directors’ and officers’ policy afforded coverage for a claim although notice of the potential for that claim had been given to a previous insurer.
Coventree was a major participant in the asset-backed commercial paper market in Canada. In August 2007, there was a severe disruption in this market and share prices dropped significantly. When this disruption occurred, Coventree was insured under a D&O policy by the Great American Insurance Company. Great American advised that this policy would not be renewed after it expired on October 17, 2007. The Great American policy included coverage for claims made after the expiration of the policy so long as notice of the potential claims was given during the policy period. On October 16, 2007,
Coventree provided notice to Great American of all potential claims it could envision due to the market collapse.
Coventree obtained extended coverage from Great American for $1 million for claims made between October 17, 2007 and October 17, 2008, which were based upon acts alleged to have occurred prior to October 17, 2007. Coventree also obtained a new D&O policy from Lloyds Syndicate for the period October 17, 2007 to October 17, 2008 which provided coverage in the amount of $10 million. The Lloyds Syndicate policy excluded “prior acts coverage” for any claim based upon an alleged wrongful act that occurred before October 17, 2007.
On September 18, 2008, Coventree applied to Lloyds for coverage for the period beginning on October 17, 2008. Lloyds issued a policy in the amount of $10 million effective from October 17, 2008 to April 17, 2010. This policy was a claims-made policy, with the exclusion for prior acts coverage removed.
In July 2009, the Ontario Securities Commission issued a notice of hearing and statement of allegations against Coventree and two of its senior officers, raising matters for which Coventree gave notice to Great American on October 16, 2007. Coventree and its two senior officers incurred $12 million in legal costs. Great American responded to the claim and paid its limits of $1 million. Coventree claimed against Lloyds for reimbursement of defence costs under the Lloyds 2008-10 policy. Lloyds denied coverage.
In Coventree’s policy application to Lloyds, it affirmatively answered that it had given notice of claims to its prior insurer, and responded in the negative to a question whether it had knowledge of any acts that might give rise to a claim. The application contained a “carve-out” provision with the purported intention to not afford coverage for any such claims. Lloyds’ agent then sent a document to Coventree’s broker, which waived the answers to these questions and was subject to Lloyds accepting an application “with original signature.” The agent then issued a temporary binder providing coverage and waiving the answers to the questions. This was followed by Coventree’s broker sending Lloyds’ agent a new application bearing an original signature, and with the questions unanswered. Lloyds ultimately issued a policy that included an endorsement which appeared to provide that $5 million of the $10 million limits applied to the “prior acts.”
Extrinsic Evidence: the Court’s Comments
The Court applied the general principles used to interpret insurance policies in its decision that the Lloyds policy provided coverage for the “prior acts” referred to in the October 16, 2007 notice to the extent of the first $5 million of the $10 million policy limits.
The Court noted that the purpose of interpreting an insurance contract is to determine the intentions of the parties viewed objectively at the time the contract was entered into. To do so, one must complete an analysis of the written insurance policy. The Court stated, “contracts are not to be looked at in a vacuum” and recognized that it may be necessary and proper to look at the surrounding circumstances to determine the intentions of the parties. However, the Court limited the surrounding circumstances it examined and relied upon those known to both parties at the time of execution of the contract. The Court stated:
The court’s search for the intention of the parties may be aided by reference to the surrounding circumstances or factual matrix at the time of the negotiation and execution of the contract, as viewed objectively by a reasonable person.
In addition to the insurance contract, the Court looked at all e-mail correspondence between the parties, the applications submitted on behalf of Coventree by its agent, and the quotes, binders and proposals issued by Lloyds. Examining such items, the Court determined that it was the intention of the parties that Lloyds policy cover prior acts referred to in the October 16, 2007 notice up to the first $5 million of the $10 million limits.
Lloyds’ Argument on the Policy’s Carve-Out Provision
Lloyds relied on the carve-out provision included in its application for insurance to deny coverage to Coventree. The carve-out provision read:
it is understood and agreed that if any such claims exist, or any such facts or circumstances exist which could give rise to a claim, then those claims arising from such facts or circumstances are excluded from the proposed insurance.
Because Lloyds had a copy of the October 16, 2007 notice, Coventree, through its broker, made it clear it wanted “full prior act coverage” and Lloyds issued a temporary binder which provided temporary coverage in which it waived answers to questions relating to prior knowledge, both the application judge and the Court of Appeal found that this evidence supported a finding that Lloyds had waived the carve-out provisions. In these circumstances, it was illogical for Lloyds to have intended to exclude coverage and waive the answers to the questions, especially after Coventree’s October 16, 2008 express request for full prior acts coverage.
The Court held that as of October 17, 2008, a reasonable person objectively viewing these circumstances would have concluded that Lloyds intended to provide full prior acts coverage of $5 million for matters included in the October 16, 2007 notice. With respect to the temporary binder issued by Lloyds on October 17, 2008, the Court noted that although the temporary binder is “not part of the final policy of insurance when issued… [it] is part of the factual matrix and is therefore relevant to what the objectively viewed intention of the parties was as they proceeded.”
Some time after October 17, 2008, Coventree submitted three further applications to Lloyds electronically and on each application answered the giving of prior notice question in the affirmative. Lloyds issued the 2008 policy on November 20, 2008, a term of which was that Coventree’s application for insurance formed part of the policy. In addition, Lloyds appended a copy of Coventree’s application with this question answered in the affirmative but it did not append a copy of the October 16, 2007 notice. As a result, Lloyds argued that because it included a copy of the application with the affirmatively-answered question, the-carve out provision applied. The Court did not accept this argument stating, “it would be more than a little surprising if once Coventree obtained a temporary binder to cover the prior acts referred to in the October 17, 2007 notice, it then forewent that coverage in submitting the further applications.”
On November 21, 2008, after Lloyds issued the policy, Coventree’s broker e-mailed the Lloyds’ agent for Lloyds regarding the
endorsement which excluded coverage for prior acts from the first $5 million. Coventree’s broker said it understood that coverage would be excluded from the second $5 million, but re-affirmed Coventree’s position that it was purchasing full prior acts coverage. Lloyds did not take issue with this assertion.
On December 10, 2008, Coventree’s broker forwarded to Lloyds’ agent a new application with the prior knowledge questions unanswered. This application had an original signature as required by the October 17, 2008 binder. In 2009, Lloyds issued the final version of the endorsement dealing with prior acts coverage, which amended the exclusion provisions of the policy by adding:
“based upon, arising out of, relating to, directly or indirectly resulting from or in consequence of, or in any way involving any Wrongful Acts or related Wrongful Acts where all or any part of such acts were committed, attempted or allegedly committed or attempted prior to October 17, 2007, applies only to the $5,000,000 excess of $5,000,000 limit of liability”.
The effect of this endorsement was that the second $5 million of the $10 million coverage does not apply to acts committed prior to October 17, 2007. This implied that the first $5 million does apply to acts committed prior to October 17, 2007. If Lloyds had intended to exclude coverage for the acts referred to in the October 16, 2007 notice it would have been “logical” to have done so in this endorsement.
Lloyds’ additional arguments to exclude coverage
Lloyds also argued, albeit unsuccessfully, that section VI.B of the 2008 policy operated to exclude coverage for acts referred to in the October 16, 2007 notice. Section VI.B stated:
“More than one Claim involving the same Wrongful Act or Related Wrongful Acts of one or more Insureds shall be considered a single Claim, and only one Retention shall be applicable to such single Claim. All such Claims constituting a single Claim shall be deemed to have been made on the earlier of the following dates: (1) the earliest date on which any such Claim was first made or (2) the earliest date on which any such Wrongful Act or Related Wrongful Act was reported under this Policy or any other policy providing similar coverage”.
The Court did not accept Lloyds’ argument stating that section VI.B deals with the subject of retention (“the amount of loss the insured is responsible for before the insurer has to begin paying up to the policy limits”). Furthermore, this section did not exclude coverage for claims that would otherwise be covered under the policy. Having already found that the parties intended the policy to cover prior acts referred to in the October 16, 2007 notice, the Court held that section VI.B does not alter the agreement relating to coverage.
Lloyds also argued that section IV.B excludes coverage of matters referred to in the October 16, 2007 notice. This section is a general exclusion clause for claims for which notice was previously given to another insurer and states:
“The Insurer shall not be liable to make any payment for Loss for any Claim made against any Insured based upon, arising out, relating to, directly or indirectly resulting, in consequence of, in any way involving, or in connection with:
B. any Wrongful Act or related Wrongful Act or any fact, circumstance or situation which has been the subject of any notice of Claim given under any other policy of which this Policy is a renewal or replacement.”
Lloyds argued that the October 2008 policy was a renewal or replacement of the Great American Policy and that this section applies to exclude coverage. The Court did not find it was necessary to resolve this issue and agreed with the application judge that once the parties intended to make the October 2008 policy cover matters referred to in the October 16, 2007 notice, it would not make sense to interpret the general exclusion clause as intending to refer to matters set out in that notice. In fact, to interpret the general exclusion clause this broadly, would go against the Supreme Court of Canada’s interpretation principle as set out in its Reid Crowther decision – which holds that exclusion clauses are to be construed narrowly.
The Coventree decision differs from other cases that discuss the use of extrinsic/parol evidence. It suggests that a court can look at documentary evidence to discern the factual matrix and glean the objective intent of the parties in order to ascertain what the coverage was as long as no ambiguity is revealed by this analysis. Thus, it does not necessitate going as far as receiving parol evidence (as in Chilton v. Co-operators,  O.J. No. 579) to determine the parties’ subjective intent which is required because there is ambiguity in the policy language.
In light of this case, the need for insurers to take care in respect of the language used in policy-related documents and what is stated in correspondence between the parties is re-emphasized. This case illustrates that such material may be considered the type of extrinsic evidence that is open to a court’s scrutiny in determining the intention of the parties. It also emphasizes that to exclude coverage for prior acts, the insurer must do so clearly and unambiguously.
Michael S. Teitelbaum is a partner with Hughes Amys LLP and Hyla Korn is an associate with Hughes Amys LLP (A member firm of the ARC Group Canada).