





CITATION:
Dunn v. Chubb
          Insurance Company of Canada, 2011 ONCA 36





DATE:
          20110118



DOCKET: C52134 & C52135



COURT OF APPEAL FOR ONTARIO



Goudge, Lang and Karakatsanis JJ.A.



BETWEEN



Frank Dunn



Applicant (Respondent)



and



Chubb Insurance Company of Canada, Chubb Atlantic
          Indemnity Ltd., Zurich Insurance Company, Liberty International Underwriters
          Canada, a Division of Liberty Mutual Insurance Company, Ace Insurance,
          Continental Casualty Company and American Home Assurance Company



Respondents (Appellants)



AND BETWEEN



Douglas Beatty



Applicant (Respondent)



and



Chubb Insurance Company of Canada, Chubb Atlantic
          Indemnity Ltd., Zurich Insurance Company, Liberty International Underwriters
          Canada, a Division of Liberty Mutual Insurance Company, Ace Insurance,
          Continental Casualty Company and American Home Assurance Company



Respondents (Appellants)







Alan L. W. DSilva, Elizabeth Pillon and Ellen M. Snow, for
          the appellant Chubb Insurance Company of Canada



Marcus B. Snowden, for American Home Assurance Company



Kathryn Podrebarac, for Douglas Beatty



Kurt K. Pereira, for Liberty International Underwriters



Thomas G. Heintzman, Q.C., and William G. Scott, for Frank
          Dunn



Heard: October 6, 2010



On appeal from the orders of Justice D. R. Cameron of the
          Superior Court of Justice dated April 23, 2010 and June 15, 2010.



Goudge J.A.:



INTRODUCTION

[1]

This is an appeal from the order of the application
    judge, Cameron J., requiring the appellant insurers (referred to collectively
    as Chubb) to pay 90% of certain defence costs of the respondents Dunn and
    Beatty, pursuant to a directors and officers liability insurance policy. That
    policy covered the period from 1999 to 2001 and will be referred to as the 2001
    Policy. At that time, the respondents were executives covered by the 2001
    Policy.

[2]

The application before Cameron J. has a relatively
    unusual history. It was ordered by this court to resolve the ambiguity in
    Endorsement 3 of the 2001 policy and hence its applicability to the
    circumstances of this case.

[3]

The application judge resolved the ambiguity and held
    that Endorsement 3 applies. For the reasons that follow, I agree and would
    therefore dismiss the appeal.

THE GENESIS OF THE APPLICATION

[4]

The
    application before Cameron J. began with companion applications by the two
    respondents each seeking a declaration of entitlement to reimbursement by Chubb
    of certain defence costs (a defined term referred to as Defence Costs in the
    2001 Policy) that they incurred in respect of specific civil actions and
    regulatory proceedings. At first instance, their claims for Defence Costs
    beyond those already being paid by Chubb were dismissed.

[5]

On
    appeal this court described the relevant circumstances as follows as paras.
    8-11:

8.  The
    insurance policy in issue (the 2001 Policy) was one of many issued by Chubb
    to Northern Telecom Limited (now Nortel Networks Corporation).  It covered the Policy Period from 1999 to
    2001 (the Policy Period).  The 2001
    Policy is a variant of a claims made policy.

9.  During
    the Policy Period, the [respondents] participated in certain conduct that
    became the subject of civil proceedings commenced in 2001 and 2002 (the 2001
    Proceedings).  Chubb acknowledges that
    the 2001 Proceedings triggered coverage under the 2001 Policy.

10.  In 2004
    and subsequent years, further proceedings were brought against the
    [respondents].  These proceedings include
    civil cases as well as regulatory proceedings by the Ontario Securities
    Commission and the United States Securities and Exchange Commission.  All of these proceedings include allegations
    against the [respondents] by reason of their conduct in 2001 (the 2001
    Conduct) as well as their conduct in 2003 to 2004 (the 2003 Conduct).  Counsel refer to these 2004 and subsequent
    civil and regulatory proceedings as the Hybrid Proceedings.  All of the Hybrid Proceedings were commenced
    after the expiration of the Policy Period.

11.  Chubb
    acknowledges that the 2001 Conduct pleaded in the Hybrid Proceedings triggers
    coverage under the 2001 Policy because a claim was made regarding the [respondents]
    2001 Conduct during the Policy Period.  Thus, Chubb accepts that it is responsible for 100 percent of the Defence
    Costs incurred by the [respondents] in the Hybrid Proceedings to the extent
    that those proceedings relate to the 2001 Conduct.  However, Chubb takes the position that it is
    not responsible for the [respondents] Defence Costs in the Hybrid Proceedings
    to the extent that those costs relate exclusively to the [respondents] 2003
    Conduct.  As a result of taking the above
    position, Chubb has been paying 50 percent of the [respondents] Defence Costs
    for the Hybrid Proceedings.

[6]

This court allowed the appeal from the dismissal of the
    respondents applications. It concluded that Endorsement 3 of the 2001 Policy, the
    general allocation mechanism for Defence Costs, which would make Chubb liable
    to pay 90% of those costs of the Hybrid Proceedings if it applied, is ambiguous
    as written. As a consequence, it could not determine the applicability of
    Endorsement 3 to these circumstances. It therefore remitted the applications
    back to the Superior Court of Justice to be heard together as a single
    application to resolve the issue. The result was the order by Cameron J.
    presently under appeal.

[7]

In its reasons, this court addressed a number of other
    issues. It found that Endorsement 10, the special allocation mechanism for
    Defence Costs arising from a Securities Transaction has no application to the
    circumstances of this case. It also concluded that the 2001 Conduct and the
    2003 Conduct are not Interrelated Wrongful Acts as that term is used in the
    2001 Policy. Finally, it concluded that absent an applicable allocation
    provision in the 2001 Policy the approach of allocating 50% of the Defence
    Costs of the Hybrid Proceedings to the 2001 Policy was appropriate. These
    determinations finally settled these various issues, and need not be considered
    in this appeal.

THE DECISION APPEALED FROM

[8]

Before
    outlining the reasons of Cameron J., it is helpful to set out the relevant
    provisions of the 2001 Policy. The applicable ensuring clause is Section 1
    which underlines the basic claims made nature of the Policy:

Insuring Clauses

Executive Liability Coverage 
    Insuring Clause 1

1.
The Company shall pay on behalf of each of the
Insured Persons

all
Loss
for which the
Insured Person
is not indemnified by
    the
Insured Organization
and which
    the
Insured Person
becomes legally
    obligated to pay on account of any
Claim
first made against him, individually or otherwise, during the
Policy Period
or, if exercised, during
    the Extended Reporting Period, for a
Wrongful
    Act
committed, attempted, or allegedly committed or attempted by such
Insured Person
before or during the
Policy Period
. [Emphasis in original.]

[9]

The relevant parts of the Definitions Section of the
    2001 Policy are as follows:

Definitions

Claim
means:

...

(ii) a civil proceeding commenced by the service of
    a complaint or similar pleading,

...

against any
Insured
    Person
for a
Wrongful Act
...

Defense
    Costs
means that part of
Loss
consisting of reasonable costs ... incurred in defending or investigating
Claims
...

...

Loss
means the total amount which any
Insured
    Person
becomes legally obgligated to pay on account of each
Claim
and for all
Claims
in each
Policy Period
and the Extended Reporting Period, if exercised, made against them for
Wrongful Acts
for which coverage
    applies, including, but not limited to, damages, judgements, settlements, costs
    and
Defense Costs
...

...

Wrongful
    Acts
means any error, misstatement, misleading statement, act, omission,
    neglect, or breach of duty committed, attempted, or allegedly committed or
    attempted, by an
Insured Person
,
    individually or otherwise, in his
Insured
    Capacity
, or any matter claimed against him solely  by reason of his serving in such
Insured Capacity.
[Emphasis in
    Original.]

[10]

Section 8 is also important. The relevant part is as
    follows:

Limit of Liability, Deductible and
    Coinsurance

8.  For the
    purposes of this coverage section, all
Loss
arising out of the same
Wrongful Act
and all
Interrelated Wrongful Acts
of any
Insured Person
shall be
    deemed one
Loss
, and such
Loss
shall be deemed to have originated
    in the earliest
Policy Period
in
    which a
Claim
is first made against
    any
Insured Person
alleging any such
Wrongful Act
or
Interrelated Wrongful Acts
. [Emphasis in Original.]

[11]

Finally, Endorsement 3 is central. It was effective as
    of August 31, 1998 and replaced the previous general allocation provision in
    the Policy, namely Section 12. As written, Endorsement 3 reads, in part:

EXECUTIVE
    PROTECTION POLICY

ENDORSEMENT

Coverage
    Section:
EXECUTIVE LIABILITY

Company:
CHUBB INSURANCE COMPANY OF CANADA

Effective
    date of this endorsement:
AUGUST 31,
    1998

Endorsement
    No.
3

Issued to:
NORTHERN TELECOM LIMITED

To be
    attached to and form part of Policy No.
8156-36-67

It is agreed that:

1.

This
    endorsement shall not apply to an
Employment-Related
    Claim
.

2.

In
    consideration of the premium paid, it is agreed that subsection 12,
Allocation
, is deleted in its entirety and
    the following is inserted:

Allocation

12.       If both
Loss
covered by this coverage section and
Loss
not covered by this coverage section are incurred, either
    because a
Claim
against an
Insured Person
includes both covered
    and uncovered matters or because a
Claim
is made against both an
Insured Person
and others, including the
Insured
    Organization
, the
Insureds
and
    the Company shall allocate such amount as follows:

(a)       with respect to
Defense Costs
, to create certainty in determining a fair and proper
    allocation of
Defense Costs
, 90% of
    all
Defense Costs
which must
    otherwise be allocated as described above shall be allocatd to covered
Loss
and shall be advanced by the
    Company on a current basis; provided, however, that no
Defense Costs
shall be allocated to the
Insured Organization
to the extent the
Insured Organization
is unable to pay by reason of
Financial Impairment
.

This
Defense Cost
allocation shall be the
    final and binding allocation of such
Defense
    Costs
and shall not apply to or create any presumption of any other
Loss
;

...

[Emphasis in
    Original.]

[12]

The ambiguity found by this court arose because of the
    second use of Loss in the first line of Endorsement 3. Simply put, given the
    definition of Loss, can there be a Loss that is not covered, as that first
    line suggests? It was this conundrum that led this court to direct a new
    hearing.

[13]

The fresh evidence tendered on the application directed
    by this court clarified that the second use of Loss in the first line of
    Endorsement 3 was simply a typographical error, unintended and unnoticed by the
    parties to the 2001 Policy. It should have been lower case loss not the
    defined term Loss. That is not now disputed by Chubb.

[14]

The importance of the possible application of
    Endorsement 3 in the 2001 Policy is clear. After the 2001 Policy, Chubb
    continued for some years to provide Nortel with directors and officers
    liability on much the same terms as the 2001 Policy. As Chubb acknowledged in
    its factum, a loss arising from the 2003 Conduct would have potentially been
    covered under the 2003 Policy. However, Chubb rescinded that policy with
    respect to the respondents. Thus, the extent of coverage of their Defense Costs
    of the Hybrid Proceedings must be determined under the 2001 Policy alone.

[15]

The application judge concluded that Endorsement 3 in
    the 2001 Policy applied to these circumstances and therefore ordered Chubb to
    pay 90% of the respondents Defense Costs to defend the Hybrid Proceedings.

[16]

He found that the Hybrid Proceedings are Claims, and,
    as acknowledged by Chubb, there is Loss included in them, namely the Loss (particularly
    for Defense Costs) arising from the 2001 Conduct. Since a Claim for the 2001
    Conduct was first made in the 2001 Policy Period, s. 8 requires that the Claim
    for the same Conduct in the Hybrid Proceedings is deemed to have originated in
    that earlier Policy Period. That is, it is deemed to be a Claim under the 2001
    Policy, and therefore covered.

[17]

The application judge also found that the Hybrid
    Proceedings include uncovered loss, namely that arising from the 2003 Conduct,
    which is unconnected to the 2001 Conduct and was not the subject of a Claim in
    the 2001 Policy Period.

[18]

As a consequence, the application judge applied
    Endorsement 3 to the Hybrid Proceedings to order that 90% of the Defense Costs
    of those Proceedings be allocated to the covered loss and that Chubb be
    required to pay them.

[19]

Finally, the application judge turned to the costs of
    the application and of the steps leading up to it. This court left that issue
    to him, but set out the costs it would have awarded to the respondents for the
    appeal had it granted the declaration they sought. Since the conclusion reached
    by the application judge now does that, and also effectively reverses the
    result reached on the original companion applications, the application judge
    awarded costs to the respondents for that original hearing, for the appeal to
    this court, and for the application remitted to him. He substantially
    discounted the total amounts sought by the respondents. Having in mind the
    amounts set out for costs of the appeal by this court he awarded the respondent
    Dunn a total of $250,000 and the respondent Beatty a total of $110,000.

THE APPELLANTS POSITION IN THIS COURT

[20]

The appellant acknowledges that the substitution of
    loss for the second use of Loss in the first line of Endorsement 3 of the
    2001 Policy resolves the ambiguity found by this court.

[21]

Nonetheless, it maintains the position that Endorsement
    3 does not apply to the Hybrid Proceedings because those Proceedings are not
    Claims made in the 2001 Policy Period. Its position is encapsulated in its
    factum at para. 57:

57.  By its
    terms, Endorsement No. 3 only applies to allocate between covered Loss and
    uncovered loss in
Claims
made in the
    2001 Policy Period in respect of
Wrongful
    Acts
for which coverage applies. Endorsement No. 3 would only be engaged
    where a
Claim
made during the Policy
    Period contains allegations that would give rise to coverage under the 2001
    Policy (e.g. allegations of
Wrongful
    Acts
committed before or during the Policy Period by an
Insured
in his capacity as a director
    or officer of Nortel) as well as allegations which are excluded from coverage
    (e.g. allegations of wrongful conduct engaged in by an
Insured
in some other capacity). [Emphasis in original.]

[22]

The appellant says this in light of the language of
    Endorsement 3,  the claims made nature
    of the 2001 Policy Period, the time-limited definition of Loss, which
    provides only for Claims made in the Policy Period, and the unreasonable
    commercial consequences of applying Endorsement 3 to proceedings like the
    Hybrid Proceedings. In addition, it criticizes the application judge for
    mischaracterizing the Hybrid Proceedings as being an Interrelated Claim, a
    term not used at all in the 2001 Policy.

ANALYSIS

[23]

Endorsement
    3 in the 2001 Policy is the mechanism by which Defense Costs are to be
    allocated between covered Loss and uncovered loss. It applies if both Loss
    covered by the Policy and loss not covered by the Policy are incurred because
    a Claim includes both covered and uncovered matters. This is clear now that
    the ambiguity caused by the first line of Endorsement 3 has been resolved by
    recognizing that it uses both Loss and loss.

[24]

To
    reiterate, the appellants position in this court is that Endorsement 3 only
    applies where a Claim for covered Loss and uncovered loss is made within the
    2001 Policy Period.

[25]

I
    disagree. The definition of Claim in the 2001 Policy is not time limited. It
    does not require that to be a Claim, it must be made within the Policy Period.
    This is supported by the definition of Loss which refers to all Claims in
    each Policy Period, to distinguish them from Claims made outside the Policy
    Period. Only a Claim made within the Policy Period attracts coverage. Thus the
    Policy clearly contemplates that there can be Claims made within the Policy
    Period, which are covered, and Claims made outside the Policy Period, which are
    not.

[26]

In
    the 2001 Policy as a whole, a claim can be a Claim even if not made in the
    2001 Policy Period. There is nothing in the language of Endorsement 3 itself
    that would suggest that Claim means something different there than in the
    rest of the Policy.

[27]

I
    would therefore conclude that nothing in the wording of the 2001 Policy or in
    Endorsement 3 itself requires that the Endorsement is operative only when the
    Claim concerned is made in the 2001 Policy Period. On the plain meaning of the
    language there is no such limitation.

[28]

Nothing
    in the claims made nature of the 2001 Policy or in the definition of Loss
    alters this conclusion. There is no doubt that both the Insuring Clause and the
    definition of Loss require a Claim to be made during the 2001 Policy Period for
    there to be coverage. Both the insuring clause and the definition of Loss are
    fully operative without the limitation to Claim being advanced by the
    appellant.

[29]

Nor
    does this produce a commercially unreasonable result. Chubbs concern is that
    it could be held to account for 90% of Defense Costs in a proceeding many years
    after the expiration of the 2001 Policy where only 1% of the allegations relate
    to misconduct first reported during the 2001 Policy Period. This concern
ignores
the applicability of
    limitations periods to a proceeding brought so long after the fact. More
    importantly, Endorsement 3 is explicitly designed to create certainty in the
    allocation of Defense Costs where a Claim includes both covered and uncovered
    matters. That is an entirely commercially reasonable objective for Endorsement
    3, and a full justification for the presence of such a provision.

[30]

In
    my view, therefore, the application judge was correct to find that Endorsement
    3 of the 2001 Policy applies to the Hybrid Proceedings. The 2001 Conduct
    included in them is as acknowledged by Chubb to be a covered matter. This is
    because of s. 8 of the Policy. Since the Claim for the Loss the 2001 Conduct
    caused was first made during the 2001 Policy Period, s. 8 deems the Loss found
    in the Hybrid Proceedings to arise out the 2001 Conduct to be a Loss
    originating in the 2001 Policy Period. On the other hand, the 2003 Conduct
    included in the Hybrid Proceedings is an uncovered matter because it was in no
    way a Claim made within the 2001 Policy Period.

[31]

In
    these circumstances, Endorsement 3 dictates that 90% of all Defense Costs for
    the Hybrid Proceedings be allocated to the covered Loss. Chubb must therefore
    pay this allocation.

[32]

I
    conclude that the application judge discharged the task mandated by this court.
    He was presented with fresh evidence that resolved the ambiguity in Endorsement
    3 and, based on that, he determined its application to these circumstances. He
    did so correctly and without contradicting any prior findings of other courts.
    His passing reference in describing s. 8 to Interrelated Claims is of no
    moment either to his reasoning or to the validity of his conclusion.

[33]

I
    would therefore dismiss the appellants argument concerning Endorsement 3.

[34]

I
    would award costs of the various proceedings in this matter on the basis agreed
    to by the parties:



a.

Costs of the prior appeal to this
        court to the respondent Dunn in the amount of $35,000 and costs to the
        respondent Beatty in the amount of $15,000.

b.

Costs of this appeal to the
        respondent Dunn in the amount of $40,000 and to the respondent Beatty in the
      amount of $10,000.

c.

All costs awards are inclusive of
        disbursements and applicable taxes.



[35]

The
    appeal is dismissed.

RELEASED:  JAN 18 2011
    (S.T.G.)

S. T. Goudge J.A.

I agree. S. E. Lang J.A.

I agree. Karakatsanis J.A.


