Two creditor firms seeking to access insurance policy proceeds in a $2.5-million trust fund misappropriation case against a lawyer lost their bid to interpret the $500,000 sublimit as applying to each of their claims, instead of being an aggregate policy limit.
To make matters worse for the creditors, they couldn’t even collect a penny of the policy’s $500,000 sublimit, because the Lawyers Professional Indemnity Company (LawPro) had spent it all in legal costs to defend the lawyer.
In April 2018, Paul McEnery was disbarred as a lawyer after the Law Society of Ontario, the professional regulator of the province’s legal profession, found that he had wrongfully and intentionally misapplied or misappropriated approximately $2.5 million in trust funds. LawPro insured McEnery under a professional liability policy and handled his defence.
A court in February 2020 rendered a summary judgment against McEnery in favour of the two creditors, identified in court documents as ‘177 Ontario’ and ‘106 Ontario.’ McEnery owed more than $265,000 to 177 Ontario and more than $419,000 to 106 Ontario.
The creditors asked the court to declare they were entitled to the proceeds of the LawPro policy. They argued that the $500,000 policy sublimit, triggered by the lawyer’s dishonesty, was not an aggregate sublimit, but rather applied “per claim.”
For a negligent lawyer, the policy offered $1 million of coverage “per claim” and a $2 million aggregate total policy limit “per policy period,” subject to an exception in the endorsement that introduced a $500,000 sublimit. The sublimit was triggered if the lawyer was dishonest (as opposed to being just negligent).
The $500,000 sublimit clause reads: “Innocent Party Coverage – SUBLIMIT OF LIABILITY of $500,000 per CLAIM and in the aggregate per POLICY PERIOD, shall apply…”
The creditors argued the phrasing was ambiguous. It suggested the $500,000 sublimit applied “per claim.” And so, since there were two creditors, they argued the $500,000 policy sublimit would apply to each of them.
The Superior Court rejected that line of argument, noting the policy language regarding the sublimit clearly stated “in the aggregate.” Moreover, the court stated in its reasons for judgment, interpreting the $500,000 sublimit to apply to each claim would lead to an absurd result.
“Say that there were ten (10) separate and distinct claims, and that the insured committed a dishonest act, the available coverage would increase to $5 million, being the sublimit of $500,000 multiplied by ten (10) claims,” the Ontario Superior Court ruled. “This would effectively remove all together the aggregate.”
The creditors argued the policy aggregate of $2 million remained in place.
“I disagree,” Ontario Superior Court Justice Marc Smith wrote. “That argument is flawed because the $2 million aggregate limit of liability pertains to a negligent lawyer, not a dishonest one.”
Finally, the creditors argued that LawPro’s defence costs, which exhausted the $500,000 sublimit, were unreasonable. But the court disagreed, noting that this particular misappropriation case required a great deal of investigation.
“There were nine (9) proceedings commenced against McEnery and the firm,” the court noted. “Some claims were straightforward while others were complex.
“McEnery was not helpful in the defence of these claims because he had no memory of what had transpired [because of a stroke]. At one point, the Public Guardian and Trustee needed to be appointed as litigation guardian. McEnery was not able to explain or provide context regarding any of the claims made against him or advise what happened to the funds that had been advanced by the clients. This caused a significant challenge for defence counsel.”