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Insurance Policy Interpreted in Officers’ Favour

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In certain circumstances, directors and officers may find that their claims for indemnification under a directors’ and officers’ insurance policy have been denied by the insurance company as a result of various exclusions contained in the policy.

However, the Ontario Court of Appeal’s recent decision in Lloyds Syndicate 1221 (Millennium Syndicate) v. Coventree Inc. suggests that, depending on the circumstances in which the insurance agreement was entered into, the words of the policy, including any exclusion clauses, may not be determinative as to whether the directors and officers are entitled to coverage.

Notice of potential claims

Coventree Inc. was a major participant in Canada’s asset-backed commercial paper (“ABCP”) market. When the ABCP market collapsed in August 2007, Coventree found itself exposed to potential regulatory and civil liability.

Coventree Inc. and its directors and senior officers were insured under a policy issued by the Great American Insurance Company (“Great American”) that had a coverage limit of $1 million. The policy was set to expire on October 17, 2007 and Great American advised Coventree Inc. that the policy would not be renewed.

However, the policy included coverage for claims commenced after the policy’s expiration provided that Coventree Inc. delivered notice of the potential for such claims before the policy expired.

On October 16, 2007, Coventree Inc. gave notice to Great American of all potential claims that it envisioned could arise from the ABCP market collapse (the “Great American Notice”). The Great American Notice was worded as broadly as possible to maximize post-expiry coverage.

Prior act coverage

Coventree Inc. also sought supplementary coverage by obtaining insurance from Lloyds Syndicate 1221 (“Lloyds”). After a series of negotiations, Lloyds issued an insurance policy for Coventree Inc. in the amount of $10 million for the period from October 17, 2008 to October 17, 2010 (the “Lloyds Policy”).

The Lloyds Policy provided coverage for any alleged act that occurred before October 17, 2007. However, this prior act coverage was capped at the first $5 million of the $10 million limit.

OSC proceedings

In July 2009, the Ontario Securities Commission commenced regulatory proceedings against Coventree Inc. and two of its senior officers. Coventree Inc. incurred more than $12 million in legal fees in responding to the proceedings and sought to recoup some of this amount from its insurers.

Since the regulatory proceedings fell within the scope of the potential claims identified in the Great American Notice, Great American agreed to pay out its coverage limit of $1 million. Lloyds, however, denied coverage to Coventree Inc. on the basis that while the Lloyds Policy included prior acts, it excluded the potential claims referred to in the Great American Notice.

Alleged carve-out

Lloyds relied on a carve-out provision in Coventree Inc.’s insurance application form to deny coverage to Coventree Inc. for claims identified in the Great American Notice. When Coventree Inc. had applied for insurance coverage from Lloyds, it had been asked the following question:

6(c) Has anyone for whom this insurance is intended given notice under the provisions of any other previous or current insurance policy of any facts or circumstances which may give rise to a claim being made against the Company [Coventree] and/or any Director and/or Officer? If Yes, please provide details.

This question was followed by a carve-out provision stating:

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.

Coventree Inc. answered question 6(c) in the affirmative and attached the Great American Notice to the application. Lloyds argued that pursuant to question 6(c) and the carveout provision, any claim for which Coventree Inc. had provided notice to a previous insurer would be excluded from coverage.

Policy context and purpose

Both the application judge and the Court of Appeal rejected Lloyds’ position and held that the Lloyds Policy provided coverage against claims referred to in the Great American Notice. The Court of Appeal emphasized the negotiations surrounding the Lloyds Policy rather than the wording of the policy documents themselves.

The court stated that while the examination of any written contract must begin with the text of the agreement, the words alone may not be determinative of the objective intention of the parties.

The court determined that it could examine the factual circumstances at the time of the negotiation and signing of the contract to determine what a reasonable person would have understood the agreement to mean.

The court found that when Coventree Inc. applied to Lloyds, it was specifically seeking additional insurance coverage for matters in the Great American Notice since Great American’s coverage was limited to $1 million. After the ABCP market crash, Coventree Inc. was financially devastated and in the process of winding down its operations.

Coventree Inc. did not require insurance for any subsequent acts since it was not conducting any new business. Coventree Inc.’s sole objective in obtaining insurance from Lloyds was to ensure that prior acts would be covered by the policy.

Parties’ communications

The court determined that in answering question 6(c) in the affirmative and providing Lloyds with a copy of the Great American Notice, Coventree Inc. ensured that Lloyds was aware of the potential claims that could be made during the Lloyds Policy period.

The court further noted that the main topic of the negotiations between Coventree Inc. and Lloyds was the potential litigation risks that were the subject of the Great American Notice.

In subsequent communications, Lloyds sent a proposal to Coventree Inc. with the phrase, “waive questions number 6 and 7.” The Court found that this was clear evidence that Lloyds knew about the Great American Notice as well as Coventree Inc.’s interest in obtaining coverage for acts covered by the notice.

In addition, that by delivering such a proposal, Lloyds indicated that it would not exclude coverage of potential claims described in the Great American Notice.

Although Lloyds’ proposal did not form part of the final insurance documents, the court found that it was a relevant part of the factual matrix which, when viewed objectively, showed that the parties intended the Lloyds Policy to include claims covered by the Great American Notice.

The court also noted that the Lloyds Policy stated that coverage for acts prior to October 17, 2007 would be capped at $5 million. The court reasoned that since the Lloyds Policy provided a cap on coverage for prior acts, it implicitly covered claims referred to in the Great American Notice up to $5 million.

Exclusion clause rejected

The court rejected Lloyds’ submission that two general provisions in the Lloyds Policy operated to exclude coverage for claims referred to in the Great American Notice. Notably, one of the provisions was an exclusion clause for claims for which notice was previously given to another insurer.

The court held, however, that an exclusion clause in an insurance contract should be construed narrowly, with the result that the general exclusion clause could not be interpreted as altering the parties’ specific agreement that the Lloyds Policy covered potential claims identified in the Great American Notice.


The Court of Appeal’s decision in this case is noteworthy for the court’s reliance on the context under which the insurance policy was issued, and the purpose for which the insured obtained coverage — rather than the wording of the policy itself — in interpreting the policy. This shift in interpretive focus is exemplified by the court’s refusal to consider the exclusion clause for prior claims once it concluded that the parties intended for the Lloyds Policy to cover such claims.

Ultimately, the court’s decision suggests that directors and officers(as well as the companies that may be obligated to indemnify them) may be able to overcome exclusions of coverage where they can demonstrate that the context and purpose underlying the policy favours an interpretation which extends coverage to them.

However, the Court of Appeal’s decision may not be the final word on the matter, as Lloyds has sought leave to appeal this decision to the Supreme Court of Canada.

This article was co-authored with Dentons’ Soloman Lam. It was originally published in Legal Alert, Vol. 31, No. 8 and is republished with permission of Carswell, a division of Thomson Reuters Canada Limited.