Ontario Court Of Appeal Releases Decision Concerning Compliance With The Insurance Companies Act

On Thursday November 3, 2011, the Ontario Court of Appeal released its long-awaited decision in Jeffery v. London Life Insurance Company, 2011 ONCA 683. Jeffrey is an important case concerning the regulation of financial institutions in Canada for two main reasons. First, it demonstrates that approval of a transaction by the Office of the Superintendent of Financial Institutions ("OSFI") is not a guarantee that a court might not substitute its own assessment of the legality of the transaction. Second, it recognizes that the Insurance Companies Act ("ICA"), unlike business corporations statutes, does not provide a broad remedial platform to encourage litigation aimed at vindicating policyholder expectations. The remedial section of the ICA exists to enforce compliance with the ICA and not to serve a broader punitive or even compensatory purpose.

The decision in Jeffrey resulted from an appeal from a decision of Justice Morissette released in October 2010 in a class action commenced by certain participating policyholders of both Great-West Life and London Life. The policyholders claimed that certain transactions entered into when Great-West Life acquired London Life in 1997 violated the ICA. The trial judge found that the transactions violated the ICA and ordered that they be unwound and that some $390 million be paid into a litigation trust for the participating policyholders of both companies. The Court of Appeal found that the trial judge was right to conclude that the transactions breached the ICA, but significantly curtailed the remedy granted.

The challenged transactions involved the participating policy accounts of both companies (the "PAR accounts") and are referred to throughout the Court's reasons as the PAR account transactions, or "PATs". The PATs involved an exchange of some $220 million in the PAR accounts for account entries referred to as pre-paid expense assets ("PPEAs") which were intended to represent the expense savings to the par policyholders occasioned by the acquisition.

The business reason for the PATs was that the PAR accounts stood to benefit from the synergies resulting from the transaction, just as the shareholders of the two companies did, it was difficult to ensure that the PAR accounts paid for any of these synergies given the restrictions in the ICA...