Directors And Officer's Insurance Policies: Pay Attention To The Details

In the recent decision of Onex Corporation v American Home Assurance Company, the Ontario Court of Appeal discussed two prominent issues relevant to the interpretation of directors' and officers' (D&O) liability insurance policies.1 The first was how an insured vs. insured exclusion clause should be interpreted. The second was whether the insured had provided adequate notice of the claims against them in accordance with the policy terms.

What happened

This case revolves around an action brought by Onex Corporation ("Onex"), an Ontario-based company, and several of its officers and directors against its primary insurer (American Home Assurance Company) and excess insurers for costs associated with defending a previous action in the U.S. (the "US Action"). The U.S. Action related to a subsidiary of Onex, Magnatrax Corporation (the "US Subsidiary"), which later filed for reorganization under U.S. bankruptcy law. The U.S. Subsidiary's trustee in bankruptcy began an action in the State of Georgia, U.S., against directors and officers of Onex, resulting in millions of dollars spent on defense costs – this is what Onex sought to recover from both its primary and excess insurers.

The decision

With respect to the insured vs. insured exclusion, the Ontario Court of Appeal concluded that the exclusionary clause did not preclude coverage for derivative actions brought by a trustee in bankruptcy. The Court focused on the precise language used in the policy and noted that it should be interpreted narrowly. In addition, the Court evaluated the circumstances surrounding the adoption of the exclusion, particularly the fact that the U.S. Subsidiary faced imminent bankruptcy proceedings, and noted that: had the parties intended to exclude coverage of claims against the directors by a trustee in bankruptcy or representative asserting the U.S. Subsidiary's rights, the policy would have clearly provided as such.

With respect to adequate notice of claims in accordance with the insurance policy's reporting clause, the Ontario Court of Appeal relied on a holistic objective test to determine whether the insured had complied with the notice provision in the policy. The Court concluded that the notice provided, though not corresponding precisely with the requirements of the reporting clause, was enough to meet the specificity requirements. The key here was that Onex was providing specifics of the claims/potential claims to its insurers as such information was being...