Insurance policies are significant commercial contracts that deserve to be treated as such. A recent case illustrates this and shows that proper documentation of the parties' negotiations is also important. Finally, the case illustrates how parties may protect themselves for anticipated claims under 'claims-made' policies that are about to expire and under subsequent claims-made policies.
The facts of Coventree Inc v Lloyds Syndicate 1221 were as follows (with certain key facts highlighted below).
Coventree was a major participant in the asset-backed commercial paper (ABCP) market in Canada. In August 2007 the ABCP market experienced severe disruption.(1) Coventree's business was devastated and its share price dropped significantly. Soon after, Coventree wound up its business.
Before the collapse of the ABCP market, Coventree and its directors and senior officers had been insured under a policy issued by Great American Insurance Company with a coverage limit of C$1 million.
Shortly after the collapse of the market, Great American informed Coventree that it would not renew its directors' and officers' (D&O) policy, which was due to expire on October 17 2007. The Great American policy included coverage for claims made after the expiration of the policy if Coventree gave notice of the potential claims during the policy discovery period.
The management of Coventree considered that there was the potential for claims against the company and its directors and officers arising from the market disruption. As a result, on October 16 2007 Coventree gave notice to Great American of all the potential claims it could envisage relating to the market collapse. Coventree cast the October 16 2007 notice as broadly as possible in order to maximise the coverage.
Coventree obtained extended coverage from Great American in the amount of C$1 million for claims made between October 17 2007 and October 17 2008 which were based upon acts alleged to have occurred before October 17 2007.
In addition, Coventree obtained a new D&O insurance policy from Lloyd's Syndicate 1221 for the period from October 17 2007 to October 17 2008 (the Lloyd's 2007 policy). The Lloyd's 2007 policy provided coverage in the amount of C$10 million, but expressly excluded "prior act coverage" - that is, coverage for any claim based upon an alleged wrongful act that occurred before October 17 2007.
In March 2008 Coventree requested Lloyd's to provide excess coverage to that provided by Great American for the period up to October 17 2008. Lloyd's declined.
In September 2008 Coventree sought to acquire coverage for the period following October 17 2008. Although it had received no claims relating to the collapse of its business, Coventree was aware that an ongoing investigation was being conducted by the Ontario Securities Commission (OSC) and that there was the potential for a claim for costs in relation to an OSC hearing.
On September 18 2008 Coventree applied to Lloyd's for D&O coverage for the period beginning October 17 2008. A number of discussions, exchanges of documents and negotiations ensued. Eventually, Lloyd's issued a policy in the amount of C$10 million for the period from October 17 2008 to April 17 2010 (the Lloyd's 2008 policy). Coverage for 'prior acts' was capped at the first C$5 million of the C$10-million limit. The Lloyd's 2008 policy was a claims-made policy (ie, it covered claims made during the policy period). The policy provided coverage to Coventree and its directors and officers for, among other matters, defence costs for proceedings against the insureds. The exclusion for prior acts coverage in the Lloyd's 2007 policy was removed.
In July 2009 the OSC issued a notice of hearing and statement of allegations against Coventree and two of its senior officers. That notice related to matters referred to in Coventree's October 16 2007 notice to Great American. In the course of responding to the OSC notice, Coventree and its two senior officers incurred legal fees in excess of C$12 million. In time, Great American accepted that its policy responded to the claim and paid its limits of C$1 million.
Coventree claimed against Lloyd's for reimbursement for defence costs under the Lloyd's 2008 policy. Lloyd's denied coverage.
The case, as all cases do, turned on the application of law to facts. The Ontario Court of Appeal started from a more classic approach and, as such, it is instructive to interweave its finding with those of Justice Lederer, the application judge.
The starting principle for policy interpretation was the Supreme Court of Canada decision in Reid Crowther,(2) summarised as:
- including the contra profrentem rule (ie, that any ambiguity in the contract will be construed against the party that drafted the contract);
- interpreting coverage provisions broadly and exclusions narrowly; and
- at least where the policy is ambiguous, giving effect to the reasonable expectations of the parties.
The court of appeal summarised the approach to be applied to the facts of this case:
- The contract (policy) should be examined to determine the objective intention of the parties; and
- Contract words may be insufficient and contracts should not be looked at in a vacuum. Courts can and do look at the factual matrix at the time of negotiation and execution from the perspective of what a reasonable person would view objectively. While the subjective intentions of parties is not relevant, even words used in a contract (eg, an insurance policy) are often better understood in the context of discussions/negotiations leading up to the contract. This shows that even in the case of standard form contracts, such as Lloyd's D&O policy, the negotiations of the parties are extremely important and in this case were determinative.
The first challenge that Coventree and its advisers had to face was back in October 2007, when they had to give a claim under the Great American policy. Understandably, Coventree had to make its notice as broad as possible in order to have a chance at obtaining the maximum protection under that policy. In light of the Supreme Court's Jesuit Fathers decision,(3) an insured should ensure that it has sufficient notification requirement/provision breadth under the policy, and that matters reported that later come to fruition constitute a claim under the policy. Coventree's October 2007 notice resulted in it being entitled to C$1million of protection under the Great American policy that, but for the notice, it might not otherwise have enjoyed.
The second challenge that Coventree had was getting an insurer to agree to provide coverage under a claims-made policy for a period that had significant risk associated with it. Coventree was unable to find such coverage in 2007 and the Lloyd's 2007 policy excluded any coverage for claims based on alleged acts that occurred before October 17 2007. After several attempts, Lloyd's agreed for the renewal of its policy in October 2008 to provide coverage for prior acts in the amount of C$5 million (effectively half the policy limit).
A third challenge was Coventree's obligation to complete its 2008 application to Lloyd's in "utmost good faith" or face having its policy made voidable for misrepresentation. Question 6(c) of the application asked for disclosure of previous notices, which Coventree was obliged to answer in the positive and to provide a copy of the broad notice to Great American in October 2007. The application specified that any claims related to the notice were to be covered by the previous policy, if at all, and not the Lloyd's policy. Another question of the application (Question 7) asked for information that any of the insureds had of any facts or circumstances that may give rise to claim or fall within the scope of the proposed insurance. Again, the application specified that resulting claims were excluded from coverage. While Coventree answered this question in the negative, on reflection it or its advisers were probably concerned about the correctness of this answer. They then convinced Lloyd's to "waive question 6 &7". This became important as the application judge and the court of appeal found that the waiver extended to the carve-out or exclusionary language that was a part of the question.
The fourth challenge that Coventree and its advisers dealt with was following through to ensure that the communications were reduced to writing, and that the documentation reflected the coverage that had been agreed upon for prior acts. Insurance companies are often late with their policy documentation.(4) Coventree's advisers were quick to point out where Lloyd's correspondence and policy terms differed from what had been agreed to. They corrected Lloyd's correspondence on at least three occasions and had Lloyd's amend the policy terms after the policy was issued. The final signed application was delivered only once the corrections were made. Both levels of court were influenced by Coventree having made full disclosure to the insurer and having taken a consistent approach to the negotiation and the documentation. This gave Coventree an additional C$5 million of coverage.
The importance of effective risk management has been heightened by the 2008 economic meltdown and the experiences of the last four years. Insurance coverage is a crucial part of any company's risk management programme and this case provides some important lessons.
The case illustrates that companies should treat their insurance coverage and contracts as they do other important commercial contracts. They should understand the potential claims that they are exposed to and determine how best to protect the company and the insureds under existing policy terms. They should determine what steps the company can take under its existing policy to extend coverage or at least the reporting period. While insurers are loath to extend coverage where they perceive significant risks, the insurance market and underwriting attitudes can change over time. What is not possible initially may become possible on renewal. Once the insurer has agreed in principle, it is important to be persistent and diligent in following through with the commitment. As this case shows, the company needs to be careful to ensure that there are no misrepresentations in the application, and that the standard form documentation does not undermine the coverage position agreed to. Navigating these tricky areas requires good advice from both the company's insurance broker and its legal adviser. Documenting the negotiations leading up to the policy is also important. The proper use of professionals to achieve the goal of risk minimisation is also important.
(1) See Palmay, Asset Backed Commercial Paper – What Is It? What Happened? What May Be Coming? Lessons to be Learned, June 2008, www.mcmillan.ca/94845.
(4) See the much publicised events surrounding the property insurance for the New York World Trade Centers and the events of September 11 2001, Palmay: "New York, September 11: One Occurrence or More?", Lang Michener In Brief (Spring 2002), reprinted in Canadian Insurance Law Reporter (February 2007, Issue 674); and 9/11 Five Years Later – Insurance Lessons, www.mcmillan.ca/94865.
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