October 1, 2002
Thomas H. Ferguson
R. Barry Fraser
Daniel W. Payette
William G. Scott
September 11, 2001 will remain in our memories for a long time. The consequences of the events that occurred that day are numerous and far reaching. The insurance sector was one of the economic sectors hit hard. These events have been called "the largest single insured event in history." An estimate of losses ranges from 30 to 70 billion U.S. dollars. In comparison, the second largest insured event, hurricane Andrew, had caused approximately 15 to 20 billion U.S. dollars of damages.
These events will have an impact on many insureds. Already rates are increasing. Another consequence of the events is the advent of new "terrorism exclusions."
In January 2002, approximately 70 per cent of reinsurance treaties came up for renewal. While reinsurers do not insure the public, the "front line" insurance carriers do. Realizing that the standard "war exclusion" would most probably be inapplicable, the reinsurers indicated that they would impose the exclusion of the damages caused by terrorism as a condition to the renewal of their treaties.
This, in addition to September 11th, has led "front line" insurers to issue "terrorism exclusions." While most insureds may not feel concerned with these exclusions, many should. Both the ISO in the United States and the IBC in Canada have issued proposed terrorism exclusion forms for commercial insurance. The language of these forms varies and insurers are not bound to use them. Even before the ISO and IBC forms, many insurers issued their own personal exclusion form. Written in the frenzy that followed the events of September 11th, some of these forms are very wide ranging and may exclude events other than "terrorism" as it is usually understood. Indeed, terrorism in some policies is defined as:
. . . any actual or attempted malicious or violent act by any person, group, organisation or government (. . .) which has the effect of ... disrupting any segment of any economy.
The language of some of these forms may be so broad as to exclude the consequences of so-called "internet terrorism." One of the ISO proposed endorsements defines terrorism as:
Activities against persons, organisations or property of any nature . . . that involve . . . committing an act that interferes with or disrupts an electronic system, communication network, electronic data network or mechanical system . . . when . . . the effect is to interrupt, obstruct or otherwise disrupt any segment of the economy. . . .
Of course these are only examples as exclusions vary from one insurer to the other and may include thresholds as suggested by the ISO and so on. In some cases, such as commercial crime coverage or some CGL policies, the form "war exclusion" has been modified to include terrorism and to restrict coverage for liability arising from war even further.
In conclusion, as usual when dealing with insurance coverage, it is essential to read the policy, ensure that it is compatible with the applicable legislation and discuss its potential implications with knowledgeable counsel.
Can Your Insurer Keep a Secret?
by: William G. Scott
Generally, communications made in confidence between solicitor and client for the purpose of obtaining legal advice are permanently protected from disclosure. This "solicitor-client" privilege is fundamental to our legal system, facilitating the necessary relationship of trust and candour between solicitor and client. Accordingly, the privilege yields only in rare and unusual instances.
One instance is where it is either expressly or implicitly waived. Traditionally, the privilege can only be waived by the party asserting it, usually by putting its own state of mind in issue. For example, when an insured alleges that the insurer has acted in bad faith, an insurer may waive privilege by voluntarily pleading lack of bad faith or by expressing reliance on legal advice in its decision to deny the claim.
The protection afforded by solicitor-client privilege was significantly challenged by two recent decisions of the Ontario Superior Court of Justice motions court. The first decision, Davies v. American Home Assurance Company ("Davies"), limited the application of solicitor-client privilege in bad faith claims. The Motions Judge ordered production of legal opinions obtained by the insurer regarding coverage. The court found that the legal opinions were relevant and producible. The Motions Judge concluded, that due to the insured’s allegation of bad faith against the insurer, solicitor-client privilege did not attach to the legal opinions.
The second decision, Samoila v. Prudential of America General Insurance Co. ("Samoila"), significantly broadened the waiver exception. Production of legal opinions (and other documents) were ordered based on a finding that solicitor-client privilege had been waived. Waiver was found in the discovery transcript of the insurer’s representative wherein he agreed that the insurer should base a decision to deny a potentially fraudulent claim on a legal opinion.
The appeal from the motions court decision in Davies was heard by the Divisional Court. In reasons released on July 9, 2002, the Divisional Court unequivocally overruled the motions court decision in Davies. The Divisional Court held that, in the absence of express or implied waiver, legal opinions are protected by solicitor-client privilege and immune from attack. The nature of the claim — even a bad faith claim — does not affect the question of whether solicitor-client privilege attaches.
The Divisional Court also considered Samoila. Without explicitly finding that Samoila was improperly decided, the Divisional Court affirmed the requirement that privilege must be waived voluntarily and cannot be forced on a party by responses to interrogatories or by answers in cross-examination.
This is in keeping with the decisions rendered in Québec where the principle of nondisclosure of confidential information has gained
quasi-constitutional status by being incorporated in the Charter of Human Rights and Freedoms, (R.S.Q. c.12.)
In the La Municialipalité de St-Alban v Récupération Port-Neuf Inc., decision rendered in 1999, the Québec Court of Appeal cautioned Québec courts about referring to decisions rendered in other provinces that do not give the privilege such quasi-constitutional protection. In that case, the court concluded that a municipality that was charged with bad faith within the context of civil litigation, could not be forced to turn over the legal opinions obtained regarding the subject matter unless it positively alleged it in support of its good faith argument.
Business Interruption Insurance: Are Your Needs Covered?
by: Thomas H. Ferguson and Barry R. Fraser
Most businesses that have all risk property policies also have business interruption endorsements. The purpose of such coverage is to indemnify business for lost earnings during the period repairs are to be completed. Special attention should be paid to the form of coverage clause in the policy because it will have a profound effect on the recovery of lost earnings.
Unlike claims for tangible damage or destruction of property under the policy, the measurement of loss of earnings in the future is both intangible and hypothetical. To a large extent, the measurement of such loss is determined by past production and earnings. Since the coverage clause frequently contains specific formulas, it is important that your business has the appropriate coverage clause for your needs. For instance, gross earnings clauses for manufacturing operations would be inappropriate for a mercantile or non-manufacturing operation.
This coverage is known either as valued or "per diem" since it provides for a value in the policy to be paid out per day, week or month when a business interruption occurs. Although there is no formula stipulating how it should be ascertained, the amount is usually limited to a proportionate amount of annual earnings for each day, week or month while repairs are being conducted.
The greatest advantage is the ease with which the amount of loss can be calculated in contrast to the open policy, which usually has a formula for determining loss of earnings. The valued method has usually made insufficient allowance for seasonal or other fluctuations of trade as well as for its partial interruption. Although this form of coverage was once very popular in the United States and Canada it is not always available.
Gross earnings coverage usually provides for a formula that endeavours to indemnify an insured for an amount equalling the business income that would have accrued but for the interruption of operating expenses. There are two common forms of "gross earnings" coverage clauses each has its own separate formula: net "sales" and "production." In some policies the coverage clause includes both mercantile or non-manufacturing (net sales) and manufacturing.
The gross earnings production clauses endeavour to indemnify the insured for an amount equalling the business income that would have accrued, plus continuing operating expenses. Under such a clause, interruption occurs from the date of the damage until the premises can be repaired, rebuilt or replaced with reasonable speed and similar quality. Unlike the coverage provided under profits policies, it does not continue to the point where sales match the previous level.
When based on sales value of production gross earnings will be equivalent to the value of production rather than actual earnings. Charges and expenses that do not continue during the period of interruption are deducted under the formula so that the insured will not be over-indemnified. As a general rule fixed charges are not deducted. However, issues frequently arise as to whether fixed charges, such as depreciation, depletion allowances and royalties are to be deducted.
The manufacturing form of gross earnings valuation is similar to the mercantile, except that the definition of "gross earnings" is based on the sales value of production, not on sales.
Net Profits (Net Sales): U.K. Approach
The difficulty defining the word "profit" in the common law has led to many reported court decisions. The net profit policy form covers both manufacturing and non-manufacturing businesses. However, these are substantially different earnings forms. These policies base the business income calculation on turnover where "turnover" is designed as money paid or payable to the insured for goods sold and delivered. Following this, the formula then ascertains the amount by which the turnover during the indemnity period falls short of the standard turnover as a consequence of the damage.
This form of coverage indemnifies for losses until the net sales reach the
pre-interruption amount, which should to be contrasted to the gross earnings form where the indemnity is limited to a reasonable amount of time to affect repairs.
On reviewing your insurance, you should take the time to determine whether the form of coverage fits the needs of your business. Few businesses can afford the loss of earnings that accompany a physical loss to the premises resulting in damaged or destroyed equipment.
Interprovincial Establishments: Where to Purchase Insurance?
by: Daniel W. Payette
The purchase of an insurance policy can be a highly complicated act. The identification of your specific needs and requirements is essential. Considerable thought must be given not only to the contents of the policy, but also to where and even why it is purchased. Knowledge of the legal principles involved is helpful in reaching a decision.
In Canada, the law of insurance falls under provincial jurisdiction. This means that the compulsory dispositions governing insurance contracts may vary from province to province. Consequently, the fact of purchasing an insurance policy in Québec will have different repercussions than purchasing it in Ontario. A company with inter-provincial establishments should consider this aspect when purchasing insurance.
Let us take the example of a company that has offices in different provinces, including Québec, which would want to purchase liability insurance. This could be Directors’ and Officers’ liability insurance, Errors and Omissions insurance, etc.
In Québec, insurance contracts are governed by the Civil Code of Québec. It’s provisions are probably amongst the most consumer-friendly in Canada. Moreover, these provisions are of public order. In other words, any clause in a non-marine insurance contract that grants the insured, policy holder, etc., fewer rights than are granted by the mandatory provisions of the Civil Code of Québec is null.
When an insured purchases liability insurance, there are often two concerns he wants to address. Firstly, that he will be insured in case judgment is rendered against him. Secondly, but as important, the insured usually wants that the defence costs be paid for by the insurer and most often that the insurer assume a duty to defend. In other provinces, this is subject to negotiation. Frequently, the defence costs will be included in the limits of liability. This means that if one holds a liability insurance policy with a $1,000,000 limit, and $200,000 are spent defending a case, only $800,000 is left to satisfy a judgment.
In Québec, the law states that a liability insurer is bound to take up the interests of any person entitled to the benefit of the insurance and assume his defence in any action brought against him. Moreover, costs and expenses resulting from actions against the insured, including those of the defence, and interest on the proceeds of the insurance are borne by the insurer over and above the proceeds of the insurance. This may prove quite interesting for an insured.
The Civil Code of Québec also states that notwithstanding any agreement to the contrary, a contract of insurance respecting property or an interest situated in that province or subscribed there by a resident in Québec, is governed by the province’s law if the policy holder applies in Québec or the insurer signs or delivers the policy there.
Of course, there are other considerations that may govern where and why you purchase insurance. This example is only one of many. However, it illustrates that one of the questions companies, which operate in more than one province, have to think about is where to purchase insurance in order to obtain the best guarantees possible.
How Far Will Your Insurer Defend You?
by: William G. Scott
When it comes to determining whether or not an insurer has a duty to defend a claim under a third-party liability policy, the claimants’ allegations are more important than the underlying facts. When determining whether there is a duty to defend, the court normally does not go beyond the pleadings and applicable insurance policy wording to determine whether there is a duty to defend. This means that to a large degree, you are at the mercy of the claimants’ pleading.
In contrast, when it comes to determining whether or not an insurer has a duty to indemnify under a
third-party liability policy, the underlying facts are more important than the allegations. The underlying facts may be determined by the outcome of the third-party claim. If the claim is settled it may be necessary to conduct a subsequent hearing with the insurer to determine whether the established underlying facts give rise to a duty to indemnity.
Even if there is a determination at the outset that there is a duty to defend, that may not be the end of the matter. The insurer may still argue that it has the right to allocate defence costs between legal services performed for covered and non-covered allegations. While this type of allocation will usually be debated after the third-party claim has been resolved, it may come up as early as upon service of the Statement of Claim.
The first issue will be to decide whether allocation is warranted or not. In the absence of specific allocation clauses, some courts, while recognizing a priori the principle of allocation, have refused to apply it in the absence of any firm factual foundation for any given proration formula to be selected.
The issue is further compounded in Québec where the dispositions on insurance contained in the Civil Code of Québec are of public order. Article 2503 of the Civil Code of Québec (the "Code") provides that the insurer is bound to take up the interests of any person entitled to the benefit of the insurance and assume his defence in any action brought against him. No provision for allocation is made there. For example, in an extremely important decision rendered by the court of Appeal in Boréal Assurances inc. c. Réno-Dépôt inc.,  R.J.Q. 46, the court, having concluded that certain aspects of the action may have been uncovered, still found that the insurers had a full duty to defend and did not allocate the defence costs.
In cases where allocation will occur, the onus will be on the insurer to show that certain legal services were specifically performed for non-covered allegations. In the context of defending an action with multiple allegations, this sometimes is difficult for the insurer to do.
Care must be taken to determine whether or not the duty to defend is an obligation that is above or included in the policy limits. In certain types of third-party claims, defence costs can be as significant as the actual indemnity amount. As stated previously, this situation cannot occur for policies governed by Québec law. Accordingly, it is very important that an insured check to determine whether or not defence costs are above or included in the coverage limits of the policy.