Ontario Court of Appeal confirms "claims-made and reported" coverage requires claims to be —well—made and reported

In the recent case of Furtado v Lloyd's Underwriters^[1], the Court of Appeal for Ontario considered whether an insured was entitled to coverage for two claims under their company's directors and officers policy. The insured failed to promptly report the circumstances giving rise to the claims, but asked the Court to grant relief from forfeiture.

Background

The insured purchased a directors and officers liability policy for their business, Go-To. The policy period was Oct. 6, 2018, to Oct. 25, 2019. The policy was written on a claims-made and reported basis.

In May 2019, the Ontario Securities Commission ("OSC") summonsed the insured to an examination and ordered the insured to produce documents under s.11 of the Ontario Securities Act.^[2] At that time, S.16 of the Securities Act provided that a person subject to an order under s.11 was prohibited from disclosing the nature or content of the order to anyone except his or her counsel. A person under a s.11 order could also obtain leave to disclose the nature or content of an order under s.17 of the Act.

On Dec. 10, 2019, s.16 (1.1) of the Securities Act was enacted. The new s.16 (1.1) provided that a person under a s.11 order could now disclose the nature or content of the order to his or her insurer or insurance broker, subject to certain notice conditions.

The OSC continued to investigate the insured through to 2021. On three separate occasions, the OSC mentioned s.16 (1.1) of the Act in correspondence to the insured.

Finally, on Dec. 6, 2021, the OSC commenced a receivership application against the insured and Go-To. The OSC later commenced an enforcement proceeding against the insured and Go-To on March 30, 2022.

The insured reported the receivership proceeding to his insurer in February 2022, and the enforcement proceeding in March 2022. It was undisputed that both proceedings were "claims" within the meaning of the policy.

The insurer denied coverage of the claims. The insurer took the position that the insured ought to have reported the OSC investigation earlier, and the "claims" were not made or reported during the policy period.

The insured unsuccessfully applied to the Ontario Superior Court of Justice for relief from forfeiture. The insured then appealed the application judge's decision to the Court of Appeal for Ontario

The mechanics of a claims-made and reported policy

Every insurance policy must provide a mechanism for determining which claims are covered in a temporal sense.^[3] Typically, policies are either occurrence policies or claims-made policies. Occurrence policies require the insurer to cover claims arising from wrongful acts that occur during the policy period, regardless of when the claim is made to the insurer. This creates a significant long-tail risk for insurers, who may be required to cover claims arising out of decades-old events.

Claims-made policies instead focus on when the claim is made against the insured. The insurer is required to cover claims that are made against the insured during the policy period, regardless of when the underlying wrongful act occurred. Claims-made policies also typically require insureds to report the claim during the policy period in order for there to be coverage. ^[4]

Claims-made policies usually include language that requires the insured to give the insurer prompt notice of "facts or circumstances" that may give rise to a claim, even though no claim has been commenced against the insured. Often, these policies provide that the insurer will cover claims arising from circumstances reported during the policy period, even if the eventual claim is not made during the policy period. The policy in this case required the insured to promptly report claims and circumstances to the insurer, and covered claims arising from circumstances first reported during the policy period.

Relief from forfeiture

If an insurer declines to provide coverage to an insured, s.129 of the Ontario Insurance Act^[5] provides that a court may grant relief from forfeiture where there "has been an imperfect compliance" with a statutory condition as to the proof of loss. The insured's imperfect compliance must go to those policy conditions that relate to proof of loss; s.129 does not provide the court with a free-standing power to grant relief from forfeiture.

S.98 of the Ontario Courts of Justice Act^[6] also provides that a court may generally grant relief against forfeiture or penalties. However, in the insurance context the court may only exercise this power if an insured has imperfectly complied with a policy term. If the insured has not complied with a condition that gives rise to coverage in the first place (a so-called "condition precedent to coverage"), there can be no relief from forfeiture.^[7]

The Court's decision

The Court of Appeal decided that the application judge had correctly declined to grant relief from forfeiture in this case.

It was undisputed that no claim was made against the insured during the policy period. The Court also held that the May 2019 summons and order from the OSC was a "circumstance" within the meaning of the policy that the insured would have had to report but for s.16 of the Securities Act.

However, the addition of s.16 (1.1) to the Securities Act in December 2019 removed any barrier that prevented the insured from reporting the OSC investigation to the insurer. Accordingly, the policy required the insured to promptly provide notice of the OSC investigation in order to trigger coverage for any subsequent claims. The insured failed to do so and only reported the claims in February and March 2022, long after the policy period had ended. Consequently, the insured could not obtain coverage under the policy for the claims that later arose out of the OSC investigation.

This was also not a case for relief from forfeiture. The language and intent of the policy indicated that it was a condition precedent to coverage that the insured report any claims or circumstances within the policy period. Indeed, the making and reporting of a claim were the triggering events for coverage under the policy. The insured's failure to comply with the reporting provisions of the policy meant that coverage was never triggered. As coverage was never triggered, the Court could not provide relief from forfeiture in this case. To do so would be to re-write the parties' contract to extend the insurer's grant of coverage.

Takeaways

This decision is a useful reminder of the fundamental differences between occurrence-based and claims-made and reported policies. It also clarifies some previous uncertainties with respect to the availability of relief from forfeiture of claims under claims-made and reported policies. This decision also serves as an important reminder for insureds to carefully review their policies' reporting provisions, and to promptly report any claims or circumstances to their insurer.