It is commonplace for corporations to have on their boards of directors professionals such as accountants or lawyers. Aside from the D&O insurance policy issued by the corporation, these professionals may benefit from what is known as Outside Directorship Liability insurance ("ODL") coverage. Such coverage, often issued to law firms and accounting firms as either a stand-alone policy or as an add-on to professional liability insurance, provides umbrella and/or excess coverage for liabilities which may attach to professionals in their role as outside directors of corporations.
In Goodman v. AIG Commercial Insurance Company of Canada,[i] recently rendered, the Ontario Court of Appeal discussed the interplay between these two types of coverage and ruled that the ODL insurer had a duty to defend two lawyers and pay all related defence costs. This decision was rendered despite the fact that the D&O policy, a primary policy by nature, also provided for a duty to pay for defence costs.
The appellants were two lawyers who were sued in their capacity as directors of a corporation. They benefited from the protection of a D&O policy issued to the corporation by AIG as well as from ODL coverage issued by Lloyd's to their law firm. The D&O policy offered indemnity coverage for defence costs while providing that the insurer did not have a duty to defend the insureds. In other words, the insurer's duty was to reimburse the insureds after the fact for their defence costs. The ODL policy provided for coverage that went beyond that of the D&O policy and included a duty to defend. The claim against the lawyers was for an amount in excess of the coverage offered by the D&O policy.
THE JUDGMENT AT TRIAL
The lawyers sought a judicial ruling as to whether AIG or Lloyd's should reimburse them for their defence costs, as both insurers denied having that obligation. Both the lawyers and Lloyd's argued that the duty to defend provided for in the ODL policy was converted into an obligation to indemnify for defence costs over the limits of the D&O policy pursuant to a "follow-form" clause found in the ODL policy. The ODL insurer, Lloyd's, argued that its duties were as such identical to that of the primary D&O insurer, i.e., to indemnify after the fact as opposed to defending. On the other hand, AIG argued that its D&O policy provided coverage for defence costs over and above any other policy providing for a duty to defend. According to AIG, Lloyd's should therefore pay all defence costs given the duty to defend provided in the ODL policy.
The Ontario Superior Court of Justice held that the follow-form clause in the ODL policy did not convert the duty to defend provided for in that policy into an indemnity clause (as per the primary D&O policy). According to the Court, the follow-form provision of the ODL policy related only to the indemnity for payments to be made to third parties rather than defence costs. The Court concluded that Lloyd's, as ODL insurer, was therefore solely responsible for paying the defence costs.
THE JUDGMENT OF THE ONTARIO COURT OF APPEAL
The Ontario Court of Appeal dismissed the appeal. First, the Court stated that, following the decision by the Supreme Court of Canada in Nichols v. American Home Assurance Company,[ii] the duty to defend is deemed to be separate from the duty to indemnify. The Court noted that the two duties are dealt with separately in the ODL policy and that the follow-form clause of the ODL policy only dealt with indemnity. There was, in fact, no follow-form language in the section where the ODL policy addresses the duty to defend.
The Court added that the D&O policy is by nature a primary policy while the ODL coverage is umbrella insurance. If there is no coverage under the D&O policy, the role of the ODL policy is to fill that gap and to "drop down." According to the Court, this is precisely the case here with regard to the duty to defend provided for in the ODL policy (and absent from the D&O policy).
The lawyers and the ODL insurer, Lloyd's, argued that this interpretation favoured by the Court was not consistent with their own expectations that all defence costs would be paid under the D&O policy. This argument was rejected by the Court, which found that the expectations alleged by the parties relating to the ODL policy were simply not reflected in the provisions of the policy itself.
This judgment is another reminder that our Courts do not hesitate to analyze the policy wordings at issue as opposed to simply going along with labels put on policy products.