The Court of Appeal for Ontario (Court) has reinforced certain interpretive rules governing follow-form excess insurance policies, including the requirement that any exclusions from the coverage terms of the primary policy must be clearly worded. The Court has also confirmed that the interpretation of insurance contracts, like the interpretation of all contracts, generally involves questions of mixed fact and law. Decisions at first instance are, therefore, entitled to considerable deference from appellate courts. While the Court’s reasons concerning the standard of appeal and principles of contract interpretation have broad application, the decision will be of particular interest to excess insurers and policy holders.
In Cronos Group Inc. v. Assicurazioni Generali S.p.A., the respondent was the named insured under a primary directors’ and officers’ liability policy (Primary Policy) and a corresponding excess policy (Excess Policy). The appellant insurer had issued the Excess Policy.
The Primary Policy included an Optional Extension Period (OEP) that allowed the insured to extend the period of coverage beyond the expiration date of the Primary Policy for wrongful acts alleged to have occurred during the policy period. The Excess Policy was subject to the same terms as were contained in the Primary Policy, with certain exclusions, which did not include the OEP.
Towards the end of the policy period, the insured negotiated an extension of the Primary Policy, but the appellant insurer did not agree to extend the Excess Policy. Shortly after the expiry of the original policies, securities class actions claims were commenced against the respondent insured and affiliated individuals. The alleged wrongful acts predated the expiry of the Excess Policy.
The insured elected to exercise the OEP under the Excess Policy. The insurer took the position that the Excess Policy did not give the insured the right to elect the OEP, arguing that there was no provision for an OEP in the Excess Policy and no provision setting out the premium applicable to the excess OEP. The insurer refused to identify any premium amount that it would accept for the OEP. The insured provided the insurer with a payment for the excess OEP premium calculated in accordance with the same ratio of the original premium to the OEP premium provided for under the Primary Policy, but the insurer refused to accept the payment and insisted that coverage was denied.
The insured applied to the Ontario Superior Court of Justice for a declaration that the Excess Policy provided the insured with a contractual right to exercise the OEP and that it had successfully exercised this right. Justice Dietrich, the application judge, found in favour of the insured on both issues, and the insurer appealed the decision.
COURT OF APPEAL DECISION
Justice David Brown, writing for the unanimous panel, dismissed the appeal and held that the Excess Policy incorporated the OEP terms set out in the Primary Policy and that the insured had successfully exercised the option.
The Court first addressed the appellant’s argument that the application judge failed to properly apply principles of contractual interpretation in concluding that an OEP was available under the Excess Policy. The Court rejected this argument, noting that contractual interpretation is generally a question of mixed fact and law subject to deference on appeal. In so doing, it followed the Supreme Court of Canada’s decision in Sattva Capital Corp. v. Creston Moly Corp. The Court emphasized that the circumstances in which a question of law can be extricated from the contractual interpretation process — and, therefore, subjected to a less deferential standard of review on appeal — will be rare.
The Court also rejected the appellant’s argument that the Excess Policy did not include an OEP. As the Excess Policy was in “follow form,” the terms of the Primary Policy, including the OEP, applied to the excess coverage in the absence of clear wording excluding them. While the insurer argued that the Excess Policy’s exclusion of “renewal agreements” excluded the OEP, the Court of Appeal rejected this argument on the basis that an OEP does not constitute a policy renewal. An OEP extends the coverage limits under an expiring policy to wrongful acts occurring prior to the expiry of the policy, but which result in claims that are made after expiry of the policy. Unlike a renewal, the exercise of an OEP does not result in fresh coverage limits or apply to wrongful acts alleged to have occurred after the expiry of the policy. The Court noted that the insured had exercised the OEP precisely because the appellant insurer had refused to renew the Excess Policy.
Excess insurers must be clear and specific about any exclusions from follow-form terms. Where an excess insurance policy follows the form of the primary policy, the excess policy will incorporate all of the terms of the primary policy other than those that are expressly excluded. If there are aspects of the primary coverage that the excess insurer does not wish to provide, it must make the exclusions clear when the policy is negotiated and before a claim is made.
Appellate intervention on matters of contract interpretation will be rare. Where a court proceeding involves the interpretation of a contract, it is imperative to fully develop all arguments at first instance. Appeals will be reserved for rare “extricable” errors of law and are not an opportunity to relitigate the case.
Insurance contracts are to be interpreted according to the same “practical, common-sense approach” as other contracts. The Court followed well-settled jurisprudence holding that courts should apply general rules of contract interpretation to insurance contracts. Justice Brown emphasized that the interpretation of contracts “involves a practical, common-sense approach not dominated by technical rules of construction.”
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