



COURT OF APPEAL FOR ONTARIO

CITATION: Lloyds
    Syndicate 1221 (Millennium Syndicate) v. Coventree Inc., 2012
    ONCA 341

DATE:  20120524

DOCKET: C54323

OConnor A.C.J.O., Armstrong and Watt JJ.A.

BETWEEN

Lloyds Syndicate 1221
    (Millennium Syndicate)

Respondent (Appellant)

and

Coventree Inc.

Applicant (Respondent in Appeal)

Eric A. Dolden and Paul Dawson, for the respondent
    (appellant)

Geoffrey D.E. Adair, Q.C., and Jennifer King, for the
    applicant (respondent)

Heard:  February 9, 2012

On appeal from the order of Justice Lederer of the Superior
    Court of Justice, dated September 13, 2011, reported at 2011 ONSC 4788.

OConnor A.C.J.O.:

[1]

The issue on this appeal is whether a directors and officers insurance
    policy provided coverage for a claim when notice of the potential for that
    claim had been provided to a previous insurer.  The application judge, Lederer
    J., considered the language of the policy as well as circumstances underlying
    the negotiation and issuance of the policy.  He concluded that the policy
    afforded coverage.  I see no basis to interfere with his conclusion.

BACKGROUND

[2]

The respondent (Coventree) was a major participant in the asset backed
    commercial paper (ABCP) market in Canada.  In August 2007, the ABCP market
    experienced a severe disruption.  Coventrees business was devastated and its
    share price dropped significantly.  Soon after, Coventree wound up its
    business.

[3]

Prior to 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 (Great American) with a coverage limit of $1 million.

[4]

Shortly after the collapse of the market, Great American informed Coventree
    that it would not renew its directors and senior officers 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 had
    given notice of the potential claims during the policy period.

[5]

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 of the potential claims it could envision relating to the
    market collapse (the October 16, 2007 notice).  Coventree cast the October 16,
    2007 notice as broadly as possible in order to maximize the coverage.

[6]

Coventree obtained extended coverage from Great American in the amount
    of $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.

[7]

In addition, Coventree obtained a new directors and officers insurance
    policy from the appellant, Lloyds Syndicate 1221 (Lloyds) for the period
    October 17, 2007 to October 17, 2008 (the Lloyds 2007 policy).  The Lloyds
    2007 policy provided coverage in the amount of $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.

[8]

In March 2008, Coventree
    requested Lloyds to provide excess coverage to that provided by Great American
    for the period up to October 17, 2008.  Lloyds declined.

[9]

In September 2008, Coventree set about to acquire coverage for the
    period following October 17, 2008.  Although it had not received any claims
    relating to the collapse of its business, Coventree was aware that there was an
    ongoing investigation 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.

[10]

On
    September 18, 2008, Coventree applied to Lloyds for directors and officers coverage
    for the period beginning October 17, 2008.  A number of discussions, exchanges
    of documents and negotiations ensued.  Eventually, Lloyds issued a policy in
    the amount of $10 million for the period from October 17, 2008 to April 17,
    2010 (the Lloyds 2008 policy).  Coverage for prior acts was capped at the
    first $5 million of the $10 million limit.  The Lloyds 2008 policy was a
    claims-made policy  meaning 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 Lloyds 2007 policy was removed.

[11]

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 Coventrees 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 $12 million.  In time, Great American
    accepted that its policy responded to the claim and paid its limits of $1
    million.  Coventree claimed against Lloyds for reimbursement for defence costs
    under the Lloyds 2008 policy.  Lloyds denied coverage.  Coventree brought the
    application underlying this appeal.

[12]

On
    the application, it was common ground that the Lloyds 2008 policy was a
    claims-made policy and that Coventree made the claim for reimbursement of the
    OSC related defence costs within the policy period.  It was also agreed that
    absent an exclusion provision, the costs incurred in defending the OSC
    proceeding were properly the subject of a claim under the policy.  In addition,
    it was agreed that if the Lloyds 2008 policy responded to the claim, it did so
    only to the extent of the first $5 million of the policy limits.

[13]

Lloyds
    argued, however, that there were three provisions in the Lloyds 2008 policy
    that excluded coverage for acts referred to in the October 16, 2007 notice.  In
    particular, Lloyds referred to (i) a carve out clause in the application for
    insurance submitted by Coventree; (ii) section VI.B; and (iii) section IV.B of
    the Lloyds 2008 policy.

[14]

The
    application judge found that the Lloyds 2008 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.  He based this conclusion on
    a careful analysis of the provisions in the policy and the circumstances
    relating to the negotiation and issuance of the policy, including Endorsement
    24 to that policy which addressed exclusions for prior acts.  He concluded that
    none of the exclusion clauses relied upon by Lloyds applied to matters referred
    to in the October 16, 2007 notice.

ANALYSIS

(a)

The Legal Principles

[15]

The
    Supreme Court of Canada has set out the general principles to be used in
    interpreting insurance policies.  In
Reid Crowther & Partners Ltd.
,
    [1993] 1 S.C.R. 252, at p. 269, the court said:

In each case, the courts must interpret the provisions of the
    particular policy at issue in light of general principles of interpretation of
    insurance policies, including but not limited to: (i) the
contra proferentem
rule; (2) the principle that coverage provisions should be construed broadly
    and exclusion clauses narrowly; and (3) the desirability, at least where the
    policy is ambiguous, of giving effect to the reasonable expectations of the
    parties.

[16]

When
    interpreting the terms of a contract, including an insurance contract, the aim
    is to determine the intentions of the parties viewed objectively at the time they
    entered into the contract.  The analysis begins with an examination of the text
    of the written agreement.  The aim is to determine the objective intentions of
    the parties from the words they have used.

[17]

However,
    the words of a contract alone may not be determinative of the objective
    intention of the parties.  Contracts are not to be looked at in a vacuum.  Rather,
    it is perfectly proper, and indeed may be necessary, to look at the
    surrounding circumstances in order to ascertain what the parties were really
    contracting about:
Hill v. Nova Scotia (Attorney General)
, [1997] 1
    S.C.R. 69, at para. 20.  The courts 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:  see also
Ventas Inc. v. Sunrise Senior
    Living Real Estate Investment Trust et al.
, 2007 ONCA 205,
85 O.R. (3d) 254.

[18]

Words
    used in a contact are often better understood when the context of their use is
    understood.  The purpose of the context is to determine what a reasonable
    person in the context of the surrounding circumstances would have understood
    the agreement to be.  The subjective intentions of the parties are not
    relevant.  Consideration of the surrounding circumstances is generally
    restricted to the circumstances known to both parties at the time of the
    execution of the contract.  These circumstances include facts that were known
    or reasonably capable of being known by the parties when they entered into the
    contract.  See:
Dumbrell v. Regional Group of Companies Inc.
, 2007 ONCA
    59, 85 O.R. (3d) 616, at paras. 50, 53 and 56;
Ventas
, at para. 24; and
King
    v. Operating Engineers Training Institute of Manitoba Inc.
, 2011 MBCA 80,
    341 D.L.R. (4th) 520, at paras. 69-73.

(b)

The Carve Outs

[19]

On September 18, 2008, Coventree delivered an application for insurance
    to an agent for Lloyds.  The application was in the standard form used by
    Lloyds for parties applying for insurance.  Question 6(c) in the application
    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 and/or any Director and/or Officer? 
    If Yes, provide details.

This question was followed by what is described as a
    carve out provision.  It stated as follows:

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.  [Emphasis in original].

[20]

Coventree
    answered question 6(c) in the affirmative.  In response to the request for
    details, it referred to Appendix 6(c).  Coventree attached the October 16, 2007
    notice to Great American as Appendix 6(c).

[21]

Coventrees
    evidence was that in applying to Lloyds, it was specifically seeking coverage
    for matters referred to in the October 16, 2007 notice.  Following the ABCP
    market disorder, Coventree was winding down its operations.  Its business
    activities were limited to providing administrative services to certain market
    participants.  It was not conducting any new business.  It was concerned,
    however, that the coverage with Great American was limited to $1 million for
    acts relating to the market disruption which occurred before October 17, 2007. 
    Its objective in applying to Lloyds in 2008 was to obtain full prior acts
    coverage, including most particularly those potential claims referred to in the
    October 16, 2007 notice.  When it answered question 6(c) in the affirmative, it
    did not know whether Lloyds would be agreeable to providing prior act coverage
    or not.  Answering question 6(c) in the affirmative and providing the October
    17, 2007 notice ensured that Lloyds was aware of the potential for claims being
    made during the policy period relating to the matters set out in the October
    17, 2007 notice.

[22]

Question
    7 in the application form asked if anyone for whom the insurance was intended
    had any knowledge of any act or omission which may give rise to a claim which
    may fall within the scope of the proposed insurance.  Question 7 was followed
    by a similar carve out to that which followed question 6.  Coventree answered
    question 7 in the negative.

[23]

On
    September 30, 2008, the parties had a telephone conversation to allow the
    senior vice-president of Lloyds agent to assess the risks involved in insuring
    Coventree.  The main topic of conversation concerned the potential litigation
    risks that were the subject of the October 16, 2007 notice.

[24]

A
    back and forth process ensued.  On October 3 and 14, Lloyds agent sent a
    document to Coventrees brokers variously referred to as a quote, a proposal
    or a binder.  There are two important aspects of these documents.  First,
    each was subject to Lloyds accepting an application with original signature. 
    Second, each of these documents contained the phrase:waive questions number 6
    and 7.

[25]

On
    October 16, 2008, Coventrees broker emailed Lloyds agent stating in part:  Please
    bind coverage effective 10/17/08 - 4/17/10 ... for a limit of 10M (
of which 5M will have full prior act coverage
) and a
    premium of $535,000.  [Emphasis added.]

[26]

On
    October 17, 2008, the senior vice-president of Lloyds agent sent a temporary
    binder providing coverage with the same language as referred to in para. 25 above
    waiving the answers to questions 6 and 7.

[27]

Pausing
    in the narrative here, the application judge found that Lloyds intended to
    waive the answers to clauses 6(c) and 7 in the application form as well as the
    carve outs that followed these questions.  Specifically, the application judge
    found that Lloyds intended to waive the carve outs in the applications as they
    applied to matters referred to in the October 17, 2007 notice.

[28]

In
    my view, the application judges conclusion that Lloyds had waived the carve
    out provisions as of October 17, 2008 was supported by the evidence.  Lloyds
    knew about the October 16, 2007 notice.  It had a copy of it.  Coventree,
    through its brokers, had made it clear that it wanted full prior act coverage
    and on October 17, 2008, Lloyds issued a binder providing temporary coverage in
    which it waived the answer to questions 6 and 7.  I accept that waiving an
    answer to a question does not necessarily imply waiver of the carve out that
    followed.  However, it makes little sense in these circumstances that if Lloyds
    wished to exclude the matters referred to in the October 16, 2007 notice, it
    would have waived the answers to questions 6 and 7.  Prior to including the
    words waive questions number 6 and 7 in its temporary binder, Lloyds had received
    an application on September 18 in which the questions had been answered. 
    Further, Lloyds waived the answer to those questions in the face of Coventrees
    express request on October 16, 2008 for full prior act coverage.

[29]

In
    addition, I am satisfied that, as of October 17, 2008, a reasonable person viewing
    these circumstances objectively would have understood that the parties had
    agreed that Lloyds would provide full prior acts coverage to the extent of $5
    million, at least for the matters included in the October 16, 2007 notice.  I
    recognize that a temporary binder is not part of the final policy of insurance
    when issued.  That said, I think that the temporary binder is part of the
    factual matrix and is therefore relevant to what the objectively viewed
    intention of the parties was as they proceeded forward after October 17, 2008.

[30]

Lloyds
    relies heavily on the next series of events arguing that they show that the
    parties did not intend to include full prior act coverage in the issued policy.

[31]

In
    the weeks following October 17, 2008, Coventree submitted three further
    applications to Lloyds electronically.  In each, it answered question 6(c) as
    it had done in its original application of September 18.

[32]

On
    November 20, Lloyds issued the 2008 policy.  The policy provided that Coventrees
    application for insurance forms a part of the policy.  Lloyds appended a copy
    of Coventrees application with question 6(c) answered in the affirmative, but
    without the October 17, 2007 notice appended.  Lloyds argues that as a result,
    the issued insurance policy includes the carve out which became operative when
    question 6(c) was answered in the affirmative.

[33]

I
    do not accept this argument.  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.

[34]

Moreover,
    despite the issuance of the policy on November 20, 2008, the parties did not
    finally settle the wording of the endorsement that dealt with what prior acts
    were excluded from coverage until Lloyds issued Endorsement 24 later in 2009.

[35]

In
    my view, the events following November 20, 2008 refute the argument that the
    parties intended to exclude the matters referred to in the October 16, 2007
    notice.  On November 21, 2008, Coventrees broker emailed the agent for Lloyds
    expressing concern about Endorsement 21 to the issued policy, which excluded
    coverage for prior acts from the first $5 million coverage rather than the
    second $5 million as Coventrees broker understood the agreement to be.  In his
    email, he said:

... as it is the second $5M that
    will not provide full prior act coverage before 10/17/07.
The first $5M will have full prior act coverage ...
[Emphasis
    added.]

[36]

Thus,
    Coventree continued to take the position that it was purchasing full prior act
    coverage.  Lloyds did not take issue with this assertion.

[37]

On
    December 10, 2008, Coventrees broker forwarded to Lloyds agent a new
    application with questions 6(c) and 7 unanswered.  Lloyds binder of October
    17, 2008 required Coventree to submit an application with an original
    signature.  The application forwarded on December 10, 2008 had an original
    signature and was the only one submitted with an original signature.

[38]

The
    senior vice-president of Lloyds agent testified that frequently the final
    application comes in late in the day.  Lloyds did not respond to receiving the
    December 10, 2008 application.  Moreover, in December 2008, the parties had yet
    to finalize the wording of the endorsement to the policy that specifically
    dealt with prior act coverage.

[39]

Later
    in 2009, Lloyds issued what turned out to be the final version of the
    endorsement dealing with prior act coverage.  Endorsement 24 amends the
    exclusion provisions of the policy by adding:

It is agreed that
Section IV
;
Exclusions
, is
    amended by adding the following:

based upon, arising out of,
    relating to, directly or indirectly resulting from or 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.

[40]

The
    effect of Endorsement 24 is that the second $5 million of $10 million coverage
    does not apply to acts committed prior to October 17, 2007.  Implicitly,
    however, the first $5 million coverage does apply.  Had Lloyds 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 the endorsement specifically
    addressing exclusions for prior acts.  Instead, it worded the endorsement to
    implicitly provide $5 million prior act coverage for acts committed before
    October 17, 2007.

[41]

Given
    the history of the dealings between the parties, I am satisfied that, objectively
    viewed, the intention of the parties was that the 2008 insurance policy cover
    the matters referred to in the October 16, 2007 notice.

(c)

Section VI.B

[42]

Lloyds
    argues that section VI.B of the 2008 policy operates to exclude coverage for
    the acts referred to in the October 17, 2007 notice. Section VI(B) reads as
    follows:

B. More than one
Claim
involving
    the same
Wrongful

Act
or
Related Wrongful Acts
of one of
    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.

[43]

I
    do not accept Lloyds argument.  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 (somewhat akin to a
    deductible).  On the face of it, s. VI.B does not purport to exclude coverage
    for claims that would otherwise be covered under the policy.  In any event,
    having concluded that the parties intended the Lloyds 2008 policy to cover
    acts referred to in October 16, 2007.  I do not interpret s. VI.B  a retention
    clause  to alter that specific agreement relating to coverage.

(d)

Section IV.B

[44]

Lloyds argues that s. IV.B excludes coverage of matters referred to in
    the October 17, 2007 notice.  Section IV.B is a general exclusion clause for
    claims for which notice was previously given to another insurer.  The
    applicable part reads as follows:

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 or
Claim
given under any other policy of
    which this Policy is a renewal or replacement.

[45]

Lloyds
    argues that the Lloyds 2008 policy was a renewal or replacement of the Great
    American policy and that clause s. IV.B, therefore, excludes coverage. 
    Coventree takes the opposite position.  I do not find it necessary to resolve
    this issue.  I agree with the application judge that once one concludes that
    the parties intended the Lloyds 2008 policy to cover the matters referred to
    in the October 17, 2007 notice, it would make no sense to interpret the general
    exclusion clause as intending to refer to matters set out in that notice.

[46]

The
    Supreme Court of Canada in the case of
Reid Crowther
set out the
    principle that in interpreting insurance contracts, exclusion clauses should be
    narrowly construed.  See also:
Derksen v. 539938 Ontario Ltd.
, 2001 SCC
    72, [2001] 3 S.C.R. 398, at para. 49.  It follows that a generally worded exclusion
    clause, as in the case of Section IV.B, should give way to an agreement to cover
    a specific matter.  Having found that the parties intended to cover the matters
    referred to in the October 16, 2007 notice, I do not accept that s. IV.B
    overrules that specific agreement.

CROSS-APPEAL ON COSTS

[47]

Coventree
    cross-appeals from the award of costs on a partial indemnity scale.  Coventree
    claims that the application judge erred in not awarding costs on a full
    indemnity scale because this case involved an insured applying for a
    declaration regarding the obligation to pay defence costs.  Both parties agree
    that the application judge inadvertently omitted $12,805.63 in disbursements.

[48]

Cost
    awards are discretionary and should not be lightly interfered with.  A judge of
    first instance is in the best position to determine the entitlement, scale and
    quantum of any such award:
McNaughton Automobile Ltd. v. Co-operators
    General Insurance Co.
, 2008 ONCA 597, 298 D.L.R. (4th) 86, at para. 27.

[49]

The
    application judge in this case did acknowledge that costs on a full indemnity
    scale have been awarded in cases involving the duty of the insurer to provide a
    defence to a claim.  However, he found that this case was one where the costs
    of the defence were claimed as an item insured under the policy, and not one
    based on the duty of the insurer to provide a defence to a claim that may fall
    within the insurance policy.  Lloyds had a legitimate question with respect to
    the interpretation of this policy and it should have been able to raise this
    question without incurring an exposure to substantial indemnity costs.  I see
    no reason to interfere with the application judges findings on costs.

[50]

Therefore,
    Coventrees cross appeal on costs is dismissed but the costs award below is
    increased by $12,805.63 to reflect the application judges inadvertent
    oversight of Coventrees claimed disbursements.

DISPOSITION

[51]

In
    the result, I would dismiss the appeal with the respondents costs on the
    appeal fixed in the amount of $15,000 and the appellants costs on the cross
    appeal fixed in the amount of $5,000.  The net amount owing to the respondent is
    $10,000, inclusive of disbursements and applicable taxes.  In addition, and as
    the parties agreed, the costs award below in favour of Coventree is increased
    by $12,805.63.

RELEASED:  DOC  MAY 24 2012

D. OConnor
    A.C.J.O.

I agree Robert P.
    Armstrong J.A.

I agree David Watt
    J.A.


