Introduction:
In a recent decision[1], the Ontario Superior Court of Justice (ONSC) considered the applicability of a prior acts exclusion within a directors and officers liability insurance policy for a claim brought against a company that later filed for protection under the Companies’ Creditors Arrangement Act (“CCAA”). The ONSC found that the claim pertained to events that preceded the policy period, which the endorsement excluded.
Background:
The insured, Just Energy, filed for CCAA protection on March 9, 2021. On the same day, three insurers (the “Insurers”) issued liability policies covering directors and officers of Just Energy (the “Policies”) for their statutory liability for wages and other benefits owing to Just Energy’s employees. However, that coverage was subject to a “Prior Acts Exclusion”.
Before Just Energy filed for CCAA protection, a class action was brought against it by employees alleging unpaid wages and benefits. After Just Energy filed for CCAA protection, the plaintiff sought to recover a portion of these wages and benefits from Just Energy’s directors, under legislation that makes directors of insolvent companies liable for a portion of such wages and benefits.
Although they are considered insolvent, companies that file for CCAA protection continue their operations. The process under the CCAA allows the company to propose compromises with its creditors, with the intention of preventing the company from entering receivership or bankruptcy.
After the CCAA monitor disallowed the plaintiff’s claim against Just Energy’s directors, the plaintiff brought a motion for an order directing the Insurers to pay the amounts claimed, under the Policies.[2]
Legal Analysis:
The motions judge first considered the language of the endorsement that contained the Prior Acts Exclusion. He held that the endorsement excluded claims arising out of “any act, error, omission, misstatement, misleading statement, neglect, breach of duty or Wrongful Act committed or allegedly committed prior to March 09, 2021.”[3] He accepted the Insurers’ argument that the Policies were deliberate in delineating the scope of risk that the Insurers agreed to insure, which did not include the class action. The class action was known to the Insurers at the time the policy was issued.[4]
The judge then considered whether the nullification of coverage doctrine applied to the claim. This doctrine states that exclusion clauses will not be applied where:
- the clause is inconsistent with the main purpose of the insurance coverage and the result would be to nullify the coverage provided by the policy; and
- where to apply the clause would be contrary to the reasonable expectations of the ordinary person as to the coverage purchased.
The judge held that the main purpose of the policies was to protect D&Os for their post-CCAA filing liability during Just Energy’s insolvency.[5] He found that based on this purpose, it would not be contrary to the reasonable expectations of the ordinary person for the coverage to exclude claims based upon or arising out of any act or omission, committed by anyone, prior to Just Energy filing for CCAA protection on March 9, 2021.
Conclusion:
This decision reiterates the importance of both the specific policy language and the commercial context in informing the court’s interpretation of the applicability of exclusion clauses. This case turned on the interplay between CCAA filings and insurance coverage matters. Unlike in a bankruptcy, where the business filing may not have post-filing operations, under the CCAA process, business operations continue. As in this case, an insurer may be prepared to cover a business’s directors for post-CCAA filing conduct, but not pre-filing conduct. Experienced coverage counsel can assist policy holders in navigating such issues.
Footnotes
[1] In the Matter of the Companies’ Creditors Arrangement Act and a Plan of Compromise or Arrangement of 14487893 Canada Inc., 2024 ONSC 5220 [“Re: 14487893 Canada Inc.”]
[2] Ibid paras 7 and 8.
[3] Ibid para 32.
[4] Ibid para 58.
[5] Ibid para 64.
David Yun is an associate at Theall Group LLP and is developing a broad commercial litigation and insurance coverage practice. Prior to joining Theall Group LLP, David completed a summer term at a national Canadian charity in addition to completing a summer and articling term at a mid-sized full-service firm in downtown Toronto.
For more information, visit https://theallgroup.com/
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