By Zachary Sherman
In Kestenberg Siegal Lipkus LLP v Royal & Sun Alliance Insurance Co of Canada, the Ontario Court of Appeal confirmed that relief from forfeiture is unavailable to insureds who fail to report a claim to their insurer under a “claims made and reported” policy. The decision also affirms that the language requiring reporting as a prerequisite to coverage need not be included in the policy’s insuring agreement clause, but can be contained elsewhere in the policy wording and still constitute a “claims made and reported” policy. Accordingly, this decision highlights the importance of insureds understanding what type of professional liability policy they have, as it informs the obligations they must satisfy before coverage is triggered.
Background
The Appellant law firm and lawyer (the “Appellants”) were insured under three professional liability policies, the “Primary”, “First Excess”, and “Second Excess” policies.[1] The policy at issue was the Second Excess Policy, which provided the Appellants with coverage up to $50 Million once their Primary and First Excess policies were exhausted.[2]
Due to an issue that arose during the representation of a client, the Appellants were alerted to a potential professional liability claim against the them by said client.[3] The firm informed their insurance broker, and instructed them to notify their excess insurers of the claim.[4]
Unfortunately, the Broker only reported the claim to the insurers of the Second Excess Policy (the “Respondents”) more than two years after said policy had expired.[5] The insurers denied coverage due to having been given notice of the claim outside the policy period. As a result, the Appellants brought an application seeking a declaration that the Respondents were responsible for covering the claim.[6]
Trial Decision
The trial judge, Justice Morgan, dismissed the application, determining that the Second Excess Policy was a “claims made and reported” policy and not merely a “claims made” policy. Therefore, Justice Morgan found that notice/reporting of the claim was a condition precedent to coverage, with relief from forfeiture not being available to cure the breach.[7]
On Appeal – The Parties’ Positions
The Appellants contended that Justice Morgan erred, arguing that relief from forfeiture is only precluded where the insured’s breach is substantial and causes prejudice to the insurer.[8] The Appellants also argued that in order for reporting to constitute a prerequisite to coverage, the requirement to report must be found in the policy’s insuring agreement clause.[9]
The Respondents argued that despite the “claims made and reported” provision not being located in the policy’s insuring agreement clause, the policy was nevertheless claims made and reported. Under this type of policy, the Respondents argued that failure to report a claim constitutes non-compliance rather than imperfect compliance with a policy term, and that relief from forfeiture is unavailable where the former has occurred.[10]
On Appeal – The Analysis
Justice Copeland, writing for the panel including Justices Gillese and Wilton-Siegel, began by articulating the distinctions between occurrence-based, claims made, and claims made and reported policies. She found that the distinctions are important, as they inform the obligations an insured is under in order to trigger coverage.
Justice Copeland went on to interpret the relief from forfeiture provision in the Insurance Act (s. 129) and its related jurisprudence. She found that relief from forfeiture is available where coverage is triggered but the insured fails to comply with a policy term. However, it is not available where the insured fails to comply with a condition precedent to coverage.[11]
Relying on the reasoning from the Ontario Court of Appeal in Stuart v Hutchins, Justice Copeland found that under a claims made and reported policy, failure to report a claim during the policy period constitutes non-compliance with a condition precedent to coverage rather than mere non-compliance with a policy term.[12] This position is consistent with upholding the sanctity of the bargain that is struck between insured and insurer under a claims made and reported policy, as the insured pays a lower premium in exchange for heightened obligations to trigger coverage. To hold that reporting the claim is not a prerequisite to coverage under a claims made and reported policy would thus have the effect of rewriting the contract that was entered into.[13] Justice Copeland rejected the Appellants’ argument by holding that this is the case whether or not the insurer suffered prejudice as a result of the insured’s failure to report the claim.[14]
Accordingly, Justice Copeland held that relief from forfeiture was not available in this case.
Justice Copeland also rejected the Appellants’ argument that the absence of a reporting requirement in the policy’s insuring agreement clause rendered it a “claims made” policy. Specifically, she emphasized general principles of contract interpretation requiring the policy be read as a whole. Doing so led her to find language in the insuring agreement clause of the Second Excess Policy which anticipates that coverage triggers may be located in other provisions within the policy.[15] The policy contained another clause that explicitly required the claim to be reported during the policy period for coverage to attach. This was sufficient to satisfy Justice Copeland that, despite not appearing in the insuring agreement clause itself, there was adequate language in the policy to confirm that it was in fact a claims made and reported policy.[16]
The Court dismissed the appeal, concluding that reporting is a condition precedent to coverage under a claims made and reported policy, and that language to that effect need not be contained in the insuring agreement clause (provided it exists elsewhere in the policy) for the policy to be claims made and reported.
Takeaways
The primary takeaway from this decision is that both insurers and insureds must be aware of the type of policy they have and how coverage is triggered thereunder. The Appellants in this case were fortunate that their Broker who failed to report the claim to the Second Excess Insurers accepted liability for their negligence, thus avoiding a massive financial loss as a result.[17]
However, others may not be so fortunate, and must remain vigilant in ensuring that they have adhered to the conditions of their policies. Those who are concerned with the added obligations of a claims made and reported policy should consider paying higher premiums for claims made or occurrence-based policies in order to mitigate against a situation where their loss goes uncovered.
Furthermore, the holding in this case suggests that the insuring agreement clause alone may not be determinative of the type of policy. Parties should look to the whole of the agreement to determine both the type of policy they have and the conditions that trigger coverage thereunder.
Edited by Dakota Forester
[1] Kestenberg Siegal Lipkus LLP v. Royal & Sun Alliance Insurance Company of Canada, 2024 ONCA 607 at para 3.
[2] Ibid.
[3] Ibid at para 5.
[4] Ibid at para 7.
[5] Ibid at para 10.
[6] Ibid at para 11.
[7] Ibid at para 13.
[8] Ibid at para 16.
[9] Ibid at para 17.
[10] Ibid.
[11] Ibid at para 29.
[12] Ibid at para 43.
[13] Ibid at para 33.
[14] Ibid.
[15] Ibid at para 55.
[16] Ibid at para 57.
[17] Ibid at para 12.
