Canadian Underwriter

Ontario appeal court rules against AIG Canada in disputed D&O liability claim

August 19, 2015   by Canadian Underwriter

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The Court of Appeal for Ontario recently dismissed an appeal, from American Home Assurance Company, of a disputed directors’ and officers’ liability claim. The insurer must now pay the $15-million limit on one policy – in addition to $13.89 million already paid out on a different policy – to cover legal costs of four Canadians who were personally sued 10 years ago in the United States. All figures are in U.S. dollars.

AIG Canada must now pay the US$15 million limit on one policy, in addition to the US$13.89 million already paid on a different policy

American Home (later renamed Chartis Insurance Company of Canada and now known as AIG Canada) wrote D&O policies for Onex Corp., a Toronto private equity firm whose holdings include USI Insurance Services LLC and the Tropicana hotel in Las Vegas. From 1999 through 2003, Onex owned Magnatrax Corp., an American manufacturer of custom metal building systems. Magnatrax went through bankruptcy proceedings in the U.S. in 2003 and is now owned by Nucor Corp. Onex and several other parties were sued in the U.S., in 2005, by Richard Kipperman, a trustee who represented unsecured creditors of Magnatrax.

Kipperman alleged in 2005 that Onex, “acting through its directors, directed Magnatrax to make a number of highly leveraged acquisitions that benefited Onex and its directors at the expense of the Magnatrax creditors.” Kipperman’s allegations included breach of fiduciary duty to Magnatrax.

Ontario court records indicate the lawsuit by Kipperman was settled for $9.25 million and Onex spent about $35 million on legal fees.

Defendants in the Kipperman lawsuit included Onex chairman and CEO Gerry Schwartz (who also essentially controls the majority of voting shares in Indigo Books & Music Inc., which is not owned by Onex). Three other defendants were: Onex managing director Nigel Wright, who also served as chief of staff to Prime Minister Stephen Harper until May, 2013; Onex chief financial officer Chris Govan (an Onex managing director at the time Onex owned Magnatrax); and Mark Hilson, who no longer works for Onex and was an Onex managing director at the time Onex owned Magnatrax.

Wright and Hilson were at one time on the Magnatrax board of directors while Govan and Schwartz were alleged – by creditors of Magnatrax – to have been “de facto” directors of Magnatrax.

In 2003, AIG had issued a temporary and conditional binder of coverage for Magnatrax, which was a run-off policy. AIG paid to the $15 million limit on that policy to cover six individuals for legal costs in the Kipperman lawsuit. A combined total of $13.89 million went towards legal costs for Schwartz, Govan, Hilson and Wright. The other $1.22 million went towards legal costs for two other Magnatrax directors – Charles Blackmon and Robert Ammerman – who were not Onex officials.

Related: Policy Interpretation

In 2008, Onex asked an Ontario court for a summary judgement requiring AIG to pay legal costs, under a different AIG D&O policy, for Onex. That policy was in effect from 2004 to 2005 and Onex also asked for coverage under excess policies associated with it. Onex’s co-plaintiffs against AIG were Schwartz, Wright, Govan and Hilson.

In the alternate, Onex asked the Ontario Superior Court of Justice for coverage under a 2002-03 policy, under which AIG “covered officers and directors of Onex and its subsidiaries in respect of liability for claims first made against them and reported during the policy period and had an aggregate limit of liability for all loss, including defence costs, of US$15 million,” wrote Mr. Justice Laurence Patillo, in a decision released in 2011.

AIG argued that only the Magnatrax run-off policy applied to those legal fees, and that neither its 2002-03 policy nor its 2004-05 policy applied.

In his decision in 2011, Justice Patillo ruled that AIG must pay $15 million — under the 2002-03 policy, but not under the 2004-05 policy.

In December 2014, Madam Justice Mary Sanderson, of the Ontario Superior Court of Justice, also ruled that AIG must pay $15 million under the 2002-03 policy, on top of the $13.89 million already paid under the Magnatrax run-off policy. AIG’s appeal of Justice Sanderson’s ruling was dismissed, in a ruling released Aug. 14, 2015, by the Court of Appeal for Ontario.

Both sides had appealed Justice Patillo’s 2011 ruling.

In February, 2013, the Court of Appeal for Ontario had allowed AIG’s appeal, sending the case back to the Superior Court of Justice in order to determine the “reasonable expectations of both parties,” or their intentions, in adopting Endorsement 14 in the 2002-03 D&O liability policy that AIG wrote for Onex. That was why Justice Sanderson heard the case in 2014.

“In arguing the appeal, the parties each took the position that the interpretation they urged on the court was unambiguous,” the appeal court wrote in 2013, adding the parties, in 2011, “paid little attention to the issues that we now find must be determined.”

In the same ruling, the appeal court dismissed Onex’s cross appeal, meaning Onex is not indemnified under the Onex 2004-05 policy or the excess policies associated with that. Excess insurers included several Lloyd’s syndicates, XL Insurance Company Ltd., Liberty Mutual Insurance Company and Houston Casualty Company.

In April, 2013, Onex unsuccessfully applied for leave to appeal with the Supreme Court of Canada.In April, 2013, Onex unsuccessfully applied for leave to appeal with the Supreme Court of Canada

Endorsement 14 in Onex’s 2002-03 policy — which the Court of Appeal for Ontario found was ambiguous — made AIG not liable “for any Loss alleging, arising out of, based upon or attributable to or in connection with any Claim brought by or made against … Magnatrax Corp.”

In referring the case back to the Superior Court of Justice, the Court of Appeal, in 2013, directed that the lower court resolve whether Endorsement 14 excludes “those claims advanced in the Kipperman action alleging wrongful acts on the part of the Onex directors said to have been committed in their capacity as Onex Directors.”

The Superior Court of Justice also had to resolve whether Endorsement 16 in the Magnatrax policy gives AIG the right to set off the amounts owing in the Onex policy against the $13.89 million already paid in the Magnatrax policy.

Endorsement 16 stipulates that “with respect to any Claim under this policy for which coverage is provided by one or more other policies the Limit of Liability provided by virtue of this policy shall be reduced by the limit of liability provided by said other AIG policy.”

In 2014, Justice Sanderson heard the case on two questions. One was of the meaning of the word “claim”
in Endorsement 14 of the Onex policy and Endorsement 16 of the Magnatrax policy. The other was whether the total coverage available to Onex and directors, under both policies, is $15 million or $30 million.

AIG and Onex “agreed that the parties intended that whatever coverage for Onex directors was provided by the Magnatrax Policy would be taken away from the Onex 2002-2003 Policy,” Justice Sanderson wrote. “However, they disagreed as to what coverage was provided to Onex directors acting in their capacity as Onex directors under the Magnatrax Policy, and what coverage was taken away from Onex directors acting in their capacity as Onex directors under the Onex Policy.”

Justice Sanderson reviewed correspondence between officials at AIG and Aon, Onex’s D&O liability broker. She decided that Endorsement 14, in the policy AIG wrote for Onex in 2002-03, “does not exclude coverage under that policy for wrongful acts of Onex directors acting in their capacity as Onex directors in connection with Magnatrax.”

She found that AIG and Aon “understood the Magnatrax Policy would provide US$15 million coverage to Magnatrax directors [including Onex directors acting as Magnatrax directors] for wrongful acts committed before May 12, 2003 in that capacity AND the Onex Policy would cover Onex directors acting as Onex directors for wrongful acts committed in that capacity before and after May 12, 2003, and Magnatrax directors for wrongful acts committed in the capacity as Magnatrax directors between May 12, 2003 and January 20, 2004 for US$15 million.”

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