Date Closed

January 18, 2011

Lead Office

Toronto

On January 18, 2011, the Ontario Court of Appeal released its reasons in Dunn v. Chubb Insurance Company of Canada.  The appeal was heard together with the companion application, Beatty v. Chubb Insurance Company of Canada. 

This decision was the conclusion of a six-year struggle to secure D&O defence costs for Messrs. Dunn and Beatty, a struggle that went twice to the Court of Appeal.

Mr. Dunn, the former President and Chief Executive Officer of Nortel, was insured under Directors and Officers’ insurance policies issued by Chubb and various excess carriers for the 2000-2001 policy period.  Mr. Dunn and Mr. Beatty were defendants in a number of civil proceedings that were commenced during the policy period.  The insurers acknowledged that they were responsible for all defence costs incurred in respect of these proceedings. After the expiration of the policy period, further proceedings were brought against Messrs. Dunn and Beatty for which the insurers accepted responsibility for only 50% of the defence costs incurred by Messrs. Dunn and Beatty.  Those further proceedings made allegations about conduct during the policy period and conduct after the policy period.  The insurers took the position that, while they were responsible for defence costs in relation to the conduct which occurred during the policy period, they were not responsible for the defence costs in relation to conduct outside the policy period.  The insurers made a 50-50 allocation of defence costs in relation to conduct occurring within, and conduct occurring outside, the policy period.

The policy contained an allocation provision, which provided for an advance of 90% of defence costs in circumstances where a Claim contained both covered and uncovered matters.  Dunn and Beatty argued that, since these actions included allegations relating to conduct during the policy period and conduct outside the policy period, the allocation provision applied and the insurers were liable for 90% of the costs of defending these actions.
The insurers argued that the allocation provision did not apply because the proceedings were not Claims made in the policy period.  The insurers relied upon the word “Loss” in a crucial place in the allocation provision, asserting that by virtue of the “L” in that word, the word had a defined meaning and included only actions commenced within the policy period, and not actions commenced outside the policy period. 
At first instance, claims by Messrs. Dunn and Beatty for defence costs beyond the 50% already paid by the insurers, were dismissed.  On appeal, the Court of Appeal found an ambiguity in the allocation endorsement due to the capitalization of the word “Loss” in that provision.  To resolve the ambiguity, the Court of Appeal ordered a further hearing.

On the re-hearing, cross-examination revealed that the capitalization of the word “Loss” was a typographical error made by a Chubb employee and that the word ought to have been “loss”, thereby removing the application of the defined term.  Accordingly, an action commenced after the policy period gave rise to “loss” and thereby fell within the allocation provision, as long as it alleged wrongful acts occurring during the policy period.
On the re-hearing, the Application Judge held that the allocation provision applied and ordered the insurers to pay 90% of the defence costs of Messrs. Dunn and Beatty relating to the proceedings commenced outside the policy period.  The insurers appealed.

In dismissing the appeal, the Court of Appeal held that the allocation provision was a mechanism by which the defence costs were to be allocated between covered “Loss” and uncovered loss.  The allocation provision applied if both Loss covered by the policy and loss not covered by the policy were incurred because the Claim included both covered and uncovered matters.  The Court of Appeal rejected the insurers’ position that the endorsement only applied to proceedings commenced during the policy period, and held that the Application Judge on the re-hearing was correct in finding that the allocation provision applied.
This whole proceeding is a harrowing tale of how difficult it may be for individuals to obtain coverage under D&O insurance policies, how persistent they must be and how vulnerable they may be to the frailties of the wording inserted into D&O policies by the insurers.

McCarthy Tétrault LLP successfully represented Mr. Dunn, with a team led by Thomas Heintzman.