Policy Interpretation

The legal principles governing the interpretation of an insurance policy are said to be well-settled in Canada. Over the past 20 years, our highest court has heard several appeals and provided much guidance as to the proper approach. Yet there remains room for disagreements rooted in unique fact patterns and variations in contractual language. For example, decisions in the ongoing dispute between Onex Corporation and American Home Assurance Company with respect to coverage under several directors’ and officers’ (D&O) policies continue to demonstrate that factual context and reasonable expectations can impact liability determinations.

Such cases teach that intentions, negotiations, and expectations should be carefully monitored and considered when any contract or policy is being prepared or construed.

In the instance of Onex and American Home Assurance, proceedings were originally commenced in Georgia by a litigation trust on behalf of unsecured creditors as a part of Chapter 11 bankruptcy measures when Magnatrax Corporation, a former subsidiary of Onex, became insolvent. It was alleged that Onex and four of its officers and directors had enriched themselves at the expense of Magnatrax, contributing to its failure.

After close to US$35 million in reported defence costs, the claims were ultimately settled for US$9.25 million. Under a D&O “run-off” policy issued to Magnatrax in anticipation of its possible sale by Onex, American Home paid out US$15 million against the defence costs. However, Onex and the four directors and officers (two of whom were also directors and officers of Magnatrax and the other two of whom had been alleged to be de facto directors and officers of Magnatrax) commenced an action in Ontario seeking coverage under other policies issued to Onex.

At the time of this writing, the Supreme Court of Canada still has yet to determine whether it will grant leave and hear challenges to findings of the Court of Appeal for Ontario made earlier this year regarding motions for summary judgment and its ruling that more evidence was needed in order to resolve the dispute as to how specific terms of the policies should be interpreted.

Apart from the somewhat complex but interesting web of policies, endorsements, and terms in this case, it clearly stands out that the Court of Appeal declined to resolve an issue of contractual interpretation between these sophisticated parties by a review of policy language and background information. Instead, this case serves as another reminder that there can be much more to the contractual interpretation of an insurance policy.

When giving meaning to a policy as a contract, the first principle of law to be considered is that the parties to an agreement sought to put their intentions into words. A court then, in reading and imposing an understanding of that contract should be seeking to give force to the parties’ intentions. Finding the meaning that was intended by the parties when they entered into the contract is the goal. If it can be said that the language of the contract is clear and unambiguous then that is the end of it. But that may not be quite as simple as its sounds.

As determined in 2006 by the Supreme Court of Canada, in its ruling in Jesuit Fathers of Upper Canada vs Guardian Insurance Co. of Canada, an insurance policy must be considered in its context to assess the intent of the insurer and the insured. The Ontario Court of Appeal’s reasons, in paragraph 104 of its February 25 decision in Onex v. American Home Assurance, remind, that the very exercise of determining whether or not the language is ambiguous must include an assessment of “…the words of a contract in light of the factual matrix in which the agreement was written.” The court held, in paragraph 105, that “[i]t is important to distinguish what is meant by the factual matrix from extrinsic evidence that it is admissible to resolve an ambiguity.” In determining whether there is an ambiguity, rather than in resolving such an ambiguity, it is important to consider the factual matrix arising from the “genesis of the agreement, its purpose, and the commercial context in which the agreement was made,” held Justice Doherty of the Court of Appeal, in 2008, in Dumbrell v. The Regional Group of Companies Inc.

Consequently, if it is determined that there is any ambiguity having considered this factual matrix, then one must turn to rules of contract construction such as preferring interpretations that are consistent with the reasonable expectations of the parties, and for this purpose extrinsic evidence may be considered. Of course, other rules may also be said to come into play, such as the well-known principle of broad interpretation of coverage and narrow interpretation of exclusions (which might be said to have greater importance in cases with more unequal negotiating power and less actual negotiation) and the rule meant only as a last resort, contra proferentem.

Providing further guidance, the Court of Appeal observed in paragraph 108 in Onex that “…the admission of extrinsic evidence does not mean that the parties’ subjective views of what was intended by the agreement will be used to resolve the ambiguity.” Instead it was held that the courts must look for the interpretation that gives effect to the reasonable expectations or intentions of the parties at the time the contract or policy was made.

Having found, contrary to the urging of both sides, that in fact the policy language was ambiguous, the Court of Appeal determined that the evidence necessary to determine the reasonable expectations or intentions of the parties with respect to a specific endorsement (with two different but commercially reasonable alternatives) was not entirely before it. It did, however, reference that the evidence might include discussions and correspondence.

Thus, such extrinsic evidence beyond the four corners of the written agreement itself and regarding the parties’ reasonable expectations becomes not only relevant, but required to determine the contractual issues.

Looking elsewhere for guidance on the consideration of reasonable expectations or intentions of the parties, it deserves note that the Supreme Court of Canada has previously considered the American doctrine of “reasonable expectations.” In1992 in Brissette Estate v. Westbury Life Insurance Co., the highest court held, at paragraph 102, that the reasonable expectations doctrine generally aims to “…make certain that insurance policies provide the coverage which the insured can reasonably expect to receive.” As noted in Brissette Estate, it has even been suggested, at least in some American academic circles, that this doctrine should take strong precedence over policy wordings.

Unlike in the U.S., where often the focus has been on expectations of the insured, in Canada, reasonable expectations of both insurer and insured may receive more equivalent attention. Interestingly, the dissenting reasons of Justice Cory in Brissette Estate might be said to support a notion that reasonableness should be a constraint or limit on construing any ambiguity in favour of an insured, as in the 1984 Court of Appeal for Ontario decision in Wigle v. Allstate Insurance Co. of Canada.

However, cited in the Onex appeal decision in support of a norm that reasonable expectations should be considered in cases of ambiguity is also the 1993 decision by the Supreme Court of Canada in Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co. It included a finding that an insured’s reasonable expectation is, at a minimum, that an insurance plan will provide coverage for legitimate claims on an ongoing basis.

As Justice McLachlin wrote for the court in paragraph 271: “The presumption must be that the intention of the parties is to provide and obtain coverage for all legitimate claims on an ongoing basis, whether through renewal with the same insurer or through securing new insurance with a different insurer.” Although not specifically noted in the decision, evidence in
a particular case, whether it be of negotiations between the parties or otherwise, that goes to the reasonable expectations should be able to overcome this presumption. Certainly, it has been held to be material when commercial reality cannot support an insured’s interpretation. As an example, see the Supreme Court of Canada’s decision in 1999 in The Guarantee Company of North America v. Gordon Capital Corp.

Where an ambiguity is found upon consideration of a policy within its factual matrix, what people did, said, and reasonably expected becomes important in the process of resolving the ambiguity. This is driven by the objective of finding the result that is most faithful to the fact that what the parties really were doing when they entered into a written agreement was putting their intentions into words. It is actually those intentions then, rather than the words, that matter the most.