September 16, 2022
Newsletter – September 2022
“2022 Coverage Special”
In the past several months there have been a number of important rulings dealing with common coverage issues, including three decisions issued by the Ontario Court of Appeal that will be of interest for Canadian insurers. This special newsletter focusses on these coverage decisions as well as some practical “takeaways” for insurers.
Coverage for Breach of Privacy: Demme v. Healthcare Insurance Reciprocal of Canada
By Michael Libby, Dolden Wallace Folick Vancouver, Email: [email protected]
Prior to 2012, the question of whether the common law recognized a cause of action for invasion of privacy had been debated for decades. That question was answered by the Ontario Court of Appeal in the case of Jones v. Tsige 2012 ONCA 32. There, the court confirmed the existence of the tort of intrusion upon seclusion. The tort will be made out where a plaintiff can demonstrate that the defendant orchestrated an intentional invasion of private affairs without justification, and a reasonable person would find the conduct to be highly offensive.
In Demme v. Healthcare Insurance Reciprocal of Canada 2022 ONCA 503, the plaintiff / insured – a registered nurse – was alleged to have misused confidential patient records to access an automatic drug dispensing unit to wrongfully obtain Percocet. Demme was sued by several of the patients whose medical records were used, who alleged that Demme had committed the tort of intrusion upon seclusion as recognized in the Jones case. Demme then sought coverage from her liability insurer, whose policy extended to claims for “bodily injury” (defined to include injury arising out of invasion or violation of the right to privacy.
Both the chambers judge and the Court of Appeal found that coverage was excluded by the “intentional act” exclusion. They noted that the tort of intrusion upon seclusion requires intentional conduct and deliberate and significant invasions of privacy. As such, the allegations against Demme did not amount to an “occurrence” or accident – and even if they did, the policy’s intentional act and criminal act exclusions would operate to remove any coverage that might otherwise arise. The court also accepted that while allegations in negligence formed part of the claims against Demme, they were derivative of the intentional invasion of privacy, which was the true nature of the claim.
As privacy claims become more prevalent, insurers are well advised to consider potential defence obligations closely and to be mindful that some related claims may be exclusively intentional in nature such that they fall outside of coverage. Dolden Wallace Folick LLP’s privacy and coverage teams are always available to discuss such situations.
Unexpected Obligations on Follow-Form Excess Policies: Coronos Group Inc. v. Assicurazioni Generali S.p.A.
By Michael Libby, Dolden Wallace Folick Vancouver, Email: [email protected]
In many cases, excess insurance coverage is written on a “follow-form” basis – that is the excess policy will be issued on substantially the same terms and conditions of the underlying primary policy and the former’s limits will sit above the latter’s. However, a recent decision, Coronos Group Inc. v. Assicurazioni Generali S.p.A. 2022 ONCA 525, demonstrates on the perils of broadly adopting the primary policy’s wordings and not taking special care to ensure that unwanted provisions in that wording are excluded from the excess policy.
Cronos – a global cannabinoid company – held a primary Executive and Corporate Securities Insurance Policy issued by AXA XL (the “Primary Policy”). Cronos also held a secondary Excess Directors’ and Officers’ Liability Policy issued by the appellant, Assicurazioni Generali S.P.A. (“Generali”) (the “Excess Policy”), which covered the same policy period. The Primary Policy included an Optional Extension Period (“OEP”) option that allowed the insured to extend the period of coverage beyond the expiration date of the Primary Policy within 30 days of its expiry. The Excess Policy provided that it is subject to the same terms, conditions, limitations and exceptions as are contained in the Primary Policy, with certain exceptions, as follows:
This Policy is subject to the same terms, conditions, limitations, and exceptions (except as regards the premium, the amount and limits of liability, any deductible or self-insurance provision, the obligation to investigate and defend and the renewal agreement (if any)) as are contained in the Primary Policy. The Primary and Underlying Policy will be maintained in full effect during the currency of this Policy…
The Excess Policy also stated:
No amendment to the Primary or Underlying Policy during the Period of Insurance, in respect of which the primary or underlying insurers require an additional premium or a deductible, shall be effective in extending the scope of cover of this Policy unless and until agreed in writing by the Company.
On February 26, 2020 (the day before both policies were set to expire), Cronos and AXA XL negotiated a 13-month extension of the Primary Policy, under the OEP clause in lieu of renewal. Since the amendment extended the term of the policy period to March 27, 2021, the extension afforded Cronos coverage for claims premised on wrongful acts occurring after the expiry of the original policy period. No such agreement was reached between Cronos and Generali.
Two weeks later, two securities class action claims were commenced against Cronos and two of its officers. Two weeks after that, Cronos advised Generali that it was electing to exercise the OEP option for the Excess Policy as well and paid the associated premium. Generali took the position that the Excess Policy did not grant Cronos the right to elect the OEP and refused to accept the premium payment.
Court of Appeal Decision
Both the trial court, and the Court of Appeal concluded that Cronos was entitled to – and had validly – extended the Excess Policy such that coverage arose for the class action claims.
More specifically, the Court of Appeal confirmed that: (i) the exclusion of “premium” in Condition 2 did not relate to the OEP option; (ii) the OEP option did not result in a “policy renewal” that would be caught by Condition 2’s exclusion of a “renewal agreement”; and (iii) the amendment of the Primary Policy to extend it for another 13 months did not run afoul of Condition 8 of the Excess Policy, which required Generali’s consent to certain amendments, because it did not change the scope of the coverage to be provided by the Excess Policy. Thus Cronos was entitled to coverage under both the AXA/XL primary policy, as well as the Generali Excess Policy.
The incorporation of broad “follow form” language can be a matter of great convenience to excess insurers and can also provide insureds with comfort that any excess coverage will mirror the underlying primary coverage and not have any unexpected gaps in coverage. It should be remembered, however, that courts will always construe coverage provisions broadly and exclusionary provisions narrowly. As such, excess insurers should always scrutinize any unusual or unwanted terms in a primary policy and strive for clarity when spelling out what does and does not “follow the form” of the primary coverage. Dolden Wallace Folick LLP’s coverage group frequently assists domestic and international insurers with policy wording reviews to help ensure that the language used will best achieve the insurers’ intent.
“Other Insurance” – Irreconcilable Differences
In December 2021, our firm summarized the BC Supreme Court decision in Northbridge General Insurance Corp v XL Specialty Insurance Co,  BCJ No 1856, where the Court determined that an “other insurance” clause did not operate to designate one policy as primary to another applicable policy, when the underlying action contained some allegations that were covered exclusively under one policy and some covered exclusively under the other.
In XL Specialty, the insured was an inspection company that was sued by a strata corporation for failing to maintain a transformer device. The strata advanced categories of allegations related to maintenance failures (the “non-professional allegations”) and other categories relating to competency failures (the “professional allegations”). XL Specialty Insurance, the professional liability insurer, was not successful in arguing that all of the plaintiff’s allegations were “non-professional” for its “other insurance” clause to effectively designate Northbridge’s CGL policy as primary insurance.
The Ontario Court of Appeal recently considered a similar issue in the context of a claim for equitable contribution between a CGL and a professional indemnity policy.
In Northbridge General Insurance Co v Aviva Insurance Co, 2022 ONCA 519, the insured pharmacist was covered under a professional liability policy issued by Northbridge and also under a general liability policy issued by Aviva. The Aviva Policy excluded coverage for liability arising out of professional services. As a result, a Pharmacy Professional Liability Endorsement was added to the Aviva Policy to provide liability coverage for claims arising out of the professional services provided by pharmacists employed with the insured pharmacy.
Northbridge defended and ultimately settled the claim without Aviva’s involvement. Northbridge then applied for a declaration to have Aviva contribute equally to the defence and indemnification of the pharmacist.
The Northbridge Policy included the following “other insurance” clause:
(4) Other Insurance
This insurance is excess over any other valid and collectible insurance available to the “insured”, whether such insurance is stated to be primary, excess, contingent or otherwise. This does not apply to insurance which is purchased by the “insured” to apply in excess of the Policy.
The Aviva policy’s Pharmacy Professional Liability Endorsement included an “other insurance” clause, which provided:
ADDITIONAL CONDTIONS (applicable to this endorsement)
The following is added to the Other Insurance clause
The insurance provided under this endorsement is excess over any other valid and collectible insurance available to individual pharmacists for a loss we cover under this endorsement.
The application judge determined that both policies covered the loss at issue in the underlying action, and each purported to be excess to other valid and collectible insurance. As such, he concluded that the two policies were “effectively the same and cannot be reconciled”, and applied the doctrine of equitable contribution, requiring that both insurers split equally the cost of the pharmacist’s defence and indemnification.
Aviva Appealed to the Ontario Court of Appeal.
The Ontario Court of Appeal applied the test for equitable contribution as set out in Family Insurance Corp. v. Lombard Canada Ltd., 2002 SCC 48, confirming that policies that cover the same risk for the same insured must share an equitable burden in contributing to the insured’s loss.
The Court of Appeal affirmed the application judge’s conclusion that the Northbridge and Aviva policies covered the same risk, being “bodily injury arising out of professional services”, and that the “other insurance” provisions in both policies intended to limit coverage to amounts excess of the other policy. As the two policies were irreconcilable as between each other, Aviva was required to contribute to the costs incurred by Northbridge for the defence and indemnity of the insured pharmacist.
An insurance policy will typically contain an “other insurance” clause which effectively allows it to operate as excess insurance, when the insured has coverage for the same loss under another policy.
However, if two competing policies both cover the same risk to the same insured, and seek to designate the other as primary insurance through an “other insurance clause”, the coverage provided as between the two policies becomes irreconcilable which results in both insurers equitably contributing to the loss.
An insurer who intends for a specific area of coverage provided under its policy to be excess to other similar forms of insurance available to an insured, should consider reviewing its policy wordings to ensure that their policy wording is specific enough to permit it to truly function as an excess policy.
COVID-19 Update: Insurer-Friendly Rulings on Business Interruption Claims Going “Viral” in US Courts
By Michael Libby, Dolden Wallace Folick Vancouver, Email: [email protected]
Since the imposition of restrictions seeking to limit the spread of COVID-19, numerous businesses around the world have sought coverage for business interruption losses under their property policies. Such requests were commonly denied on the basis that the requisite “physical damage” was not a factor in the loss, and coverage was therefore not triggered. Unsurprisingly, coverage litigation ensued.
While Canada has yet to see a ruling on the issue from any court, to date four U.S. state supreme courts have ruled in favor of insurers in COVID-19 business interruption claims in finding that shut-downs of business were not the result of “direct physical loss or damage.”
Earlier this year, in April, in Verveine Corp. v. Strathmore Insurance Co., the Massachusetts Judicial Supreme Court found against the policyholder on the issue. In the same month, in Jesse Embers LLC v. Western Agricultural Insurance Co. and Wakonda Club v. Selective Insurance Co. of America, the Iowa Supreme Court also ruled against policyholders.
In June, in Colectivo Coffee Roasters, Inc. v. Society Insurance, a Mutual Co., the Wisconsin Supreme Court also held against a policyholder, stating that “The provisions of Society’s policy on which Colectivo relies, with the exception of the contamination provision, all require Colectivo to allege a direct physical loss of or damage to either its property or a surrounding property.”
In August of 2022, in Sullivan Management LLC v. Fireman’s Fund Insurance Co., the South Carolina Supreme Court found against the policyholder, holding that “While the order prohibiting indoor dining certainly affected Sullivan’s financial well-being, the order itself was not directly physical,” based upon the ordinary meaning of the words “direct physical loss or damage.” Around the same time, the Washington Supreme Court became the fifth state supreme court to rule in favour of insurers, finding in Hill and Stout PLLC v. Mutual of Enumclaw Insurance Co. that “It is unreasonable to read ‘direct physical loss of …property’ in a property insurance policy to include constructive loss of intended use of property,”
Even more recently, albeit not at the state supreme court level, the Illinois Appellate Court determined that government imposed restrictions arising from the pandemic – by themselves – did not amount to “physical loss of or damage to property” (see Black Rock Restaurants LLC v. Society Insurance).
In California, the state Court of Appeal issued a ruling in favour of insureds, but in a narrow context. The decision in Butter Nails and Waxing Inc. v. Underwriters at Lloyd’s, London found coverage for business interruption due to “Civil Authority Action” that requires evacuation of the insured property – but the court specifically noted that property damage was not a requirement under the insuring agreement.
Finally, in Oklahoma, a trial court dismissed the insurer’s application for summary dismissal, finding that the insureds had made a “plausible claim for a fortuitous ‘direct physical loss’” arising out of pandemic-related business interruptions. The Oklahoma Supreme Court overturned that ruling, finding that “The district court’s expansion of business interruption coverage ignores the plain, unambiguous language of the Policy and the decisions from nearly all circuit courts of appeals, many federal district courts, and state courts that have ruled that business interruption coverage requires actual, tangible loss or damage of property, not just loss of use.” (Cherokee Nation et al v. Lexington Insurance Co.)
These rulings maintain a trend – primarily in the US – that has seen the vast majority of decisions fall in favour of insurers. Canadian courts that are eventually called upon to consider COVID-19 business interruption coverage disputes will likely find the reasoning in such decisions to be persuasive.
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