Ontario Court of Appeal Rules on D&O Liability Insurance Case

On January 18, 2011, the Ontario Court of Appeal released its reasons in Dunn v. Chubb Insurance Company of Canada, 2011 ONCA 36. The appeal was heard together with the companion application, Beatty v. Chubb Insurance Company of Canada.

Frank Dunn, the former President and Chief Executive Officer of Nortel and Douglas Beatty, the former Chief Financial Officer, were insured under Directors and Officers' insurance policies issued by Chubb and various excess carriers for the 2000-2001 policy period. Dunn and Beatty were defendants in a number of civil proceedings that were commenced during the policy period.

In 2004, after expiration of the policy period, further proceedings were brought against Dunn and Beatty, partly resulting from allegations made against them by reason of their conduct in 2001. The insurers accepted responsibility for defence costs incurred by Dunn and Beatty to the extent those proceedings related to conduct during the policy period, but did not accept responsibility for defence costs that related exclusively to later conduct. The policy contained an allocation provision, Endorsement 3, which provided for an advance of 90 per cent of defence costs in circumstances where a claim contained both covered and uncovered matters.

The insurers accepted responsibility for 50 per cent of defence costs in relation to conduct occurring within, and conduct occurring outside, the policy period. 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 responsible for 90 per cent of the costs of defending these actions.

At first instance, claims by Dunn and Beatty for defence costs beyond those already being paid by the insurers were dismissed.

On appeal, the Court of Appeal found an ambiguity in Endorsement 3 of the policy. In order to clarify the definition of the word “Loss” in that provision, the Court of Appeal ordered a further hearing.

The Application Judge held that Endorsement 3 applied, and Chubb was ordered to pay 90 per cent of Dunn and Beatty's defence costs related to the proceedings commenced outside the policy period. The insurers appealed.

In dismissing the appeal, the Court of Appeal held that Endorsement 3 applied to both the “Loss” covered by the policy and the “loss” not covered by the policy because a “Claim” includes both covered and uncovered matters.

The Court held that the Application Judge was correct in finding that Endorsement 3 applied to the later proceedings.

Frank Dunn was represented by Thomas Heintzman, QC, William Scott and Junior Sirivar of McCarthy Tétrault LLP.

Douglas Beatty was represented by Kathryn Podrebarac and Jennifer Lynch of Tough & Podrebarac LLP.

Chubb was represented by Alan D'Silva, Elizabeth Pillon and Ellen Snow of Stikeman Elliott LLP.

Lawyer(s)

Kathryn M.E. Podrebarac Elizabeth Pillon Ellen M. Snow Alan L.W. D'Silva Thomas G. Heintzman

Firm(s)

McCarthy Tétrault LLP Podrebarac Barristers Professional Corporation Stikeman Elliott LLP