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Insurer obligated to defend former directors of a credit union for a legal action commenced by the FRSA

August 10, 2021

Insurance law – Directors and officers liability insurance – Wrongful acts – Duty to defend – Interpretation of policy – Terms of policy – Duties and liabilities of insurer

Goodfellow v. CUMIS General Insurance Co., [2021] O.J. No. 2744, 2021 ONSC 3604, Ontario Superior Court of Justice, May 18, 2021, P.J. Cavanagh J.

Five former directors of a credit union sought a declaration that the insurer was obligated to defend them pursuant to a Directors’ and Officers’ Liability policy (the “Policy”). The Court concluded the insurer is obligated under the policy to defend the directors in the underlying claim.

The Financial Services Regulatory Authority (“FRSA”) investigated various transactions of the credit union and took control as administrator. The FRSA commenced a legal action against the directors for damages suffered by the credit union for wrongful conduct, including breaches of duties owed to the credit union by the directors. The directors sought coverage from the insurer and the insurer denied coverage, relying on the Policy’s “Insured vs. Insured” exclusion.

The “Insured vs. Insured” exclusion provides that the Policy does not apply to loss based upon, arising out of, or attributable to a claim “by or on behalf of” the credit union, except for specified claims. The directors argued that the exclusion was intended to provide protection for insurers against collusive suits between insured corporations and their insured officers and directors. They argued that action was commenced by a genuinely adverse representative of the credit union. The Court rejected the directors’ argument as the question of collusion was addressed in an exception to the exclusion. The Court found the exclusion was not ambiguous and applied to exclude coverage for the claim.

The directors argued that the Policy included an exception to the exclusion that restores coverage for claims that are a derivative action brought or maintained on behalf of the insured by a “person” who is not a director or officer, without the cooperation, solicitation, assistance or active participation of the insured or any director or officer. The insurer argued that the exception did not apply because neither the FRSA nor the credit union is a “person” and because the underlying claim was not a derivative action.

As the Policy did not define “person”, the Court relied on the reasonable expectations of the parties and found that the claim was brought by a “person”.  The Policy also did not define the term “derivative action”.  The Court rejected the insurer’s submission that a “derivative action” is a term of art limited to a common law derivative action by a minority shareholder, a statutory derivative action under the Ontario Business Corporations Act, or an action under section 50 of the Credit Unions and Caisses Populaire Act. The Court found if the insurer had intended to limit the meaning of “derivative action” it could have done so with clear language. Therefore, the underlying claim constituted a “derivative action” within the policy.

The Court concluded the exception to the exclusion applied to restore coverage for the directors under the Policy.

This case was digested by Dominic Wan, and first published in the LexisNexis® Harper Grey Insurance Law Netletter and the Harper Grey Insurance Law Newsletter. If you would like to discuss this case further, please contact Dominic Wan at [email protected].

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Important Notice: The information contained in this Article is intended for general information purposes only and does not create a lawyer-client relationship. It is not intended as legal advice from Harper Grey LLP or the individual author(s), nor intended as a substitute for legal advice on any specific subject matter. Detailed legal counsel should be sought prior to undertaking any legal matter. The information contained in this Article is current to the last update and may change. Last Update: August 10, 2021.

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