July 24, 2024
Dolden Case Brief – A Strong New Precedent on Conditions Precedent – July 24, 2024
A STRONG NEW PRECEDENT ON
CONDITIONS PRECEDENT:
FURTADO v. LLOYD’S UNDERWRITERS
By Paul Dawson, Dolden Vancouver
In Furtado v. Lloyd’s Underwriters, the Court of Appeal for Ontario has just released a decision strongly affirming the importance of respecting condition precedent notice clauses in claims made and reported insurance policies – and confirming that insureds cannot obtain statutory relief from forfeiture when failing to satisfy conditions precedent. The judgment resolves a degree of confusion that had crept into forfeiture cases recently, clearly endorsing well-established caselaw stemming from the Court’s 1998 decision in Stuart v. Hutchins. This decision will be of interest to all specialty lines insurers, insureds, and brokers.
The appellant Insured, Mr. Furtado, is a director and officer of Go-To Developments Holdings Inc., a property development company. The respondent Lloyds Underwriters provided a directors and officers liability insurance policy to Go-To during the period October 2018 to October 2019.
The Policy required Mr. Furtado to notify Underwriters “as soon as practicable” about a “Claim”, which was defined to include regulatory proceedings. It also permitted him to notify Underwriters about a potential “Claim”, so that if a “Claim” were later made arising from those circumstances, Underwriters would treat it as having been first made at the time such notice was given. Importantly, the Policy included a “suspension clause”, suspending Mr. Furtado’s duty to notify Underwriters about an actual or potential “Claim” (and preserving his right to notify about a circumstance) “whilst communication or notification is prohibited by confidentiality orders”.
In May 2019, the Ontario Securities Commission issued a Summons to Mr. Furtado, requiring him to produce documents and be examined under oath pursuant to the Ontario Securities Act. However, s. 16(1) of the Act prohibited Mr. Furtado from telling anyone about the Summons other than his lawyer, so he was unable to notify Underwriters about the investigation. Mr. Furtado received additional Summonses between 2019 and 2021. In December 2021, the OSC commenced a receivership application against Go-To and in March 2022, it commenced enforcement proceedings against Mr. Furtado and Go-To, alleging various breaches of securities laws.
Mr. Furtado did not notify Underwriters about the OSC investigation until February 2022, after the actual “Claim” had been made, relying on his counsel’s advice back in 2019 that the Act prohibited such disclosure. However, the Act was amended in December 2019 by the addition of s. 16(1.1), which expressly authorized disclosure of confidential investigations to insurers, subject to certain conditions. Three of the Summonses Mr. Furtado received in 2021 expressly drew his attention to the change, but he did not take advantage of the opportunity conferred by the new legislation.
When Underwriters finally learned in 2022 about the investigation, receivership, and charges, they denied coverage on the basis that the “Claim” had been first made outside of the policy period. Further, Mr. Furtado had not given notice during the policy period of a circumstance of a possible “Claim”, so the “Claim” could not be “tied back” to the policy period. Mr. Furtado commenced a coverage proceeding in Ontario Superior Court, seeking relief from forfeiture under the Ontario Insurance Act, s. 129.
In October 2023, the application judge dismissed the coverage proceeding. She followed the 1998 Ontario Court of Appeal decision in Stuart v. Hutchins in ruling that no relief from forfeiture was available because the notice provision was a condition precedent, and she also held that granting relief would seriously prejudice Underwriters. The Court further held that Mr. Furtado could have notified Underwriters about the OSC investigation once s. 16(1.1) came into effect, but failed to do so for more than a year. Allowing relief from forfeiture would, in effect, rewrite the policy.
On appeal, Mr. Furtado submitted that the 2014 Ontario Court of Appeal decision in Kozel v. Personal Insurance Company had changed the law set out in Stuart: the only test now should be whether relief from forfeiture would prejudice the insurer, whether the clause was a condition precedent or otherwise. He further submitted that Underwriters would suffer no prejudice from relief in this case.
However, the Court of Appeal ruled that Kozel has not overruled or modified Stuart: relief from forfeiture cannot be granted where an insured breaches or fails to satisfy a condition precedent to coverage. The condition precedent notice provision in a claims made and reported policy forms an essential trigger of coverage. If not satisfied, there can be no forfeiture of coverage (and thus no relief from forfeiture) since coverage has not been triggered in the first place. Kozel is distinguishable because the policy provision at issue there was not a condition precedent. Accordingly, once the confidentiality provisions in the Act were amended (and the OSC expressly notified him of that fact), Mr. Furtado could and should have alerted Underwriters to the OSC investigation. Had he done so, the subsequent “Claims” against him in December 2021 and March 2022 would have been covered under the policy.
For insurers, this case illustrates the power and importance of condition precedent language in policies as a means of defining the scope of coverage. It supports the principle of contractual certainty, for both insureds and insurers: conditions precedent must be satisfied in order for coverage to exist. If they are not satisfied, there is no coverage – even if the insurer has not suffered any prejudice. Relief from forfeiture can only come into play if there is coverage in the first instance. The case is also a salutary reminder to insureds and brokers to familiarize themselves thoroughly with notice provisions in policies, and to be ready to act upon them as soon as circumstances allow in order to preserve coverage.
For further information or if you have any questions about the above article, please contact the author: Paul Dawson, Dolden Vancouver, Email: [email protected].
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