No defence required due to a material misrepresentation by omission

The insurer successfully appealed an order requiring it to defend the insurerds in a Ponzi scheme lawsuit.  The Court found that the insureds’ failure to disclose the source of financing was material and had been omitted from disclosure by the insured. 

Insurance law – Directors and officers liability insurance – Wrongful acts – Misrepresentation – Practice – Appeals – Duties and liabilities of insurer

Davies v. AIG Insurance Co. of Canada, [2024] O.J. No. 2900, Ontario Court of Appeal, June 27, 2024, E.E. Gillese, D.M. Brown and D. Paciocco JJ.A.

Appeal by insurer of judgment on two competing applications on the issue of duty to defend. The judgment appealed from had determined the insurer had a duty to pay defence costs of defendants.

The insureds were individuals: the principal owner of several real estate development companies and his spouse. The insureds were also defendants in two lawsuits alleging they operated the companies in a Ponzi scheme and misappropriated money from syndicated mortgages advanced by individual investors. An insurer had issued directors and officers liability insurance policies to the companies. The insurer paid for the defence costs of the lawsuits but sometime after paying over $1,000,000, denied coverage on the basis the insureds had failed to disclose the syndicated mortgages which amounted to a material misrepresentation. The insureds and the insurer ultimately brought competing applications to determine whether the insurer owed a duty to pay defence costs.

The application judge found a complete absence of any mention of syndicated mortgages, but nevertheless determined the insurer failed to meet their onus to show there was a misrepresentation. The application judge focused on an email from the insureds responding to inquiries from the insurer about the companies’ financing by outlining in imprecise terms various sources of their financing without mentioning syndicated mortgages. The judge determined that the absence of a mention of syndicated mortgages was troubling but insufficient to conclude there had been misrepresentation. The judge found, through reliance on the insurer’s expert, that the subject of real estate development financing is material to a decision to extend coverage. Nevertheless, the judge determined that the email was sufficiently lacking detail that the insurer had an obligation to follow up and inquire more than it did. Accordingly, the application judge found that the insurer had failed to prove there was a misrepresentation or that it was material, and the insureds were successful on their application. 

On the insurer’s appeal, the court determined that the application judge made an error of law by failing to consider all relevant evidence in deciding whether there was a misrepresentation and if so, whether it was material. In failing to disclose that syndicated mortgages were a source of financing for the companies, the court concluded the insureds made a material misrepresentation by omission. The court then applied the legal test for materiality and concluded that there was clear and unchallenged evidence from the insurer that they would not have assessed the risk as they did if they had known the true state of the financing for the companies.

The appeal was successful, and the insurer was determined not to have a duty to pay the insureds’ defence costs. The insureds were ordered to pay the insurer the amount of the defence costs paid to date as damages as well as interest and costs.

This case was digested by Mark A. McPhee and edited by Steven W. Abramson of Harper Grey LLP.  If you would like to discuss this case further, please feel free to contact them directly at [email protected] or [email protected].