Canadian Underwriter

Ontario court rules for insurers in Onex D&O liability case

February 26, 2013   by Greg Meckbach, Associate Editor

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The Ontario Court of Appeal this week ruled in favour of several insurance companies in dismissing an appeal, from Toronto private equity firm Onex Corp., of a ruling from a lower court ordering American Home Insurance to pay $15 million on a directors and officers’ liability claim.

In a decision published Monday, Judges Dennis O’Connor, Mark Rosenberg and Janet Simmons allowed an appeal from American Home and dismissed a cross appeal from Onex and four individuals, including Onex chairman and CEO Gerald Schwartz. The case is returning to Ontario Superior Court.

The Court of Appeal ruled an endorsement in one  D&O policy was ambiguous, and therefore the court should rule on the reasonable expectations or intentions of the parties in adopting the endorsement. It is now open to the parties “to decide whether to renew motions for summary judgment or to proceed by way of a trial of the issues that we have identified in these reasons.”

In 2011, Judge Laurence Pattillo of the Ontario Superior Court ruled in favour of Onex in a motion against American Home but dismissed motions against Liberty Mutual Insurance Co., Houston Casualty Co., Brit Syndicates Ltd. (Lloyd’s Syndicate 2987), Heritage Managing Agency Ltd. (Lloyd’s Syndicate 3245) and XL Company Ltd., all of which provided excess D&O coverage to Onex.

The main issue in the case is whether Onex is entitled to reimbursement for defence and settlement costs under multiple D&O policies.

The Court of Appeal this week ruled one of the endorsements in one of Onex’s D&O policies was ambiguous, disagreeing with Judge Pattillo ‘s conclusion that it was clear and unambiguous.

“We find that we are not in a position to decide the factual issues that need to be determined in order to resolve the interpretative dispute,” the Court of Appeal stated, explaining why it is sending the case back to Superior Court. “Having found that Endorsement #14 was unambiguous, the motion judge did not make findings of fact with respect to the issues we consider relevant to the resolution of the interpretation exercise. 

Endorsement 14, dubbed the “specific entity/subsidiary exclusion,” in Onex’s 2002-03 policy with American Home, excluded some continuing coverage for Onex with a subsidiary, Magnatrax Corp, which, according to court records, acquired several American and Canadian makers of pre-engineered metal building and construction products in 1999 and 2000.

In May 2003, Magnatrax sought bankruptcy protection in a Georgia court. When it emerged from bankruptcy protection in 2004, it was no longer owned by Onex, but a committee of Magnatrax’s creditors had made several allegations against Onex and officers and directors of Onex and Magnatrax, including breach of fiduciary duty and unjust enrichment.

“The breach of fiduciary duty count alleges that Onex was the de facto board and alter ego of Magnatrax and its subsidiaries,” according to court records. “The count further alleges that the defendants exploited their positions as directors and officers of Magnatrax, as de facto directors and officers of Magnatrax, or as the alter ego to the board of Magnatrax, to further their own benefit and in breach of their duties owed to Magnatrax.”

The creditors sued Onex, Schwartz and three managing directors: Chris Govan, Mark Hilson and Nigel Wright. Govan is still with Onex, Hilson is now managing general partner of Romspen Investment Corp. and Wright is now chief of staff to Prime Minister Stephen Harper.

The lawsuit against Onex, Schwartz, Hilson and Wright was settled for US$9.25 million and Onex spent about US$35 million defending itself and its directors and officers.

American Home paid Onex $15 million, the limit of its so-called Magnatrax Run-Off Policy, issued in May 2003. That policy “was issued in anticipation of Magnatrax ceasing to be an Onex subsidiary and therefore ceasing to be covered under the Onex 2002-2003 Policy,” the court of appeal stated.

At the time, Aon Reed Stenhouse had been acting as agent and broker for both Onex and Magnatrax in obtaining and negotiating the various D&O policies. In November 2003, Aon had forwarded a letter from the lawyers of the Magnatrax creditors’ committee to American Home, noting it contained “information on a situation which could in future give rise to a claim.” Onex had also renewed its US$15 million D&O coverage with American Home after 2003.

The 2002-03 policy included Endorsement #14, the major issue in the appeal, which excludes continuing coverage under the policy for certain Magnatrax-related losses. It states, among other things, that “the Insurer shall not be 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 2011, Judge Pattillo ruled that because Onex gave notification in 2003 of circumstances giving rise to a claim in the 2002-03 policy, Onex and the four individuals were not entitled to reimbursement for defence costs under a 2004-05 policy, which initially had an exclusion for claims covered under a prior policy.

But after Aon reviewed the 2004-05 policy in 2005, it asked American Home to delete both the Specific Entity/Subsidiary Exclusion, which was Endorsement #14 in the Onex 2002-2003 Policy, and replace it with a “Prior Acts Exclusion,” giving Onex coverage for wrongful acts committed by Magnatrax directors and officers between May, 2003 (when Magnatrax filed for bankruptcy protection) and January, 2004, when it was no longer an Onex subsidiary.

In 2005, Aon sent a document from the Magnatrax creditors’ lawsuit to American Home as a notice of a claim under its 2004-05 D&O liability policy but American Home denied coverage because the allegations pre-dated May, 2003.

“American Home also contended that the Claim is excluded because the allegations relate to the personal defendants’ actions in a capacity other than as an Executive of Onex and subsidiaries of Onex,” according to background information provided in the Ontario Court of Appeal decision of February, 2013. However, in 2006, an American Home lawyer indicated D&O insurance would be covered under a previous policy. So American Home paid US$15 million, the limit under that policy.

In 2008, Onex, Schwartz, Govan, Hilson and Wright went to court in Ontario seeking coverage under the Onex 2004-2005 Policy and under the 2004-2005 Excess Policies. 

“In the alternative, the plaintiffs sought coverage under the Onex 2002-2003 Policy,” the court stated. “American Home and the Excess Insurers defended and also counterclaimed for declarations that they had no obligation to provide coverage.”

In 2010, Judge Pattillo dismissed Onex’s motion against the excess insurers but “rejected American Home’s argument that Endorsement #14 of the Onex 2002-2003 Policy excluded Onex’s claim for reimbursement of defence costs in connection with the Georgia Action.”

Therefore Judge Pattillo ordered American Home to pay Onex US$15 million for defence costs under the Onex 2002-2003 Policy. He found that the Onex 2004-2005 Policy excludes American Home from having to pay any defence costs in connection with the lawsuit, and that the “follow-form 2004-2005 Excess Policies” excluded the excess insurers “from any liability” in the Magnatrax creditors’ lawsuit.

He also found that Endorsement #14 of the Onex 2002-2003 Policy “does not exclude coverage for any claim by a third party against Onex’s directors and officers in their capacity as such for their wrongful acts in relati
on to Magnatrax, and thus, under the Onex 2002-2003 Policy, American Home is required to indemnify Onex and the personal defendants for defence costs incurred” in relation to the lawsuit.

“In reaching these conclusions, the motion judge found .. that the terms of the D&O policies in issue are clear and unambiguous and that evidence of intention adduced by the various parties was inadmissible,” the Court of Appeal stated in its Feb. 25, 2013 decision, adding it disagreed with the lower court.

“We are of the view that the wording of Endorsement #14 in the Onex 2002-2003 Policy is susceptible of more than one meaning and is therefore ambiguous,” the Court of Appeal wrote, adding that in in arguing their appeal, the parties “paid little attention to the issues that we now find must be determined – what were the reasonable expectations or intentions of the parties in adopting Endorsement #14 of the Onex 2002-2003 Policy?”

The appeal court added it will not express an opinion on the evidence of the parties’ expectations.

“Suffice it to say that there is evidence of discussions and correspondence that took place in January 2003 and again at the time of the issuance of the Magnatrax Run-Off Policy and the issuance of Endorsement #14. “

The appeal court quoted from a 2010 decision from the Supreme Court of Canada, in the case of Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, in which the court determined that Lombard had a duty to defend a construction contractor against a lawsuit by the British Columbia Housing Management Commission (BCHMC).

“Courts should prefer interpretations that are consistent with the reasonable expectations of the parties,” the Supreme Court of Canada stated, “so long as such an interpretation can be supported by the text of the policy. Courts should avoid interpretations that would give rise to an unrealistic result or that would not have been in the contemplation of the parties at the time the policy was concluded.”