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THE INSURANCE CONTRACT - Interpretation - Coverage provisions and exclusion clauses

Thursday, January 25, 2018 @ 8:34 AM  


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Appeal by the defendant insurers from partial summary judgment granted in favour of the plaintiff, TB Bank, N.A. (Bank). The Bank sued for a declaration that it was entitled to indemnity under the professional liability section of an insurance policy for loss relating to a Ponzi scheme and damages for breach of contract. The Bank was a named insured under a Bankers’ Comprehensive Crime, Professional Indemnity and Directors’ and Officers’ Liability Programme (insurance policy) issued by the appellants, a syndicate of insurers. A Florida lawyer and customer of the Bank ran a Ponzi scheme. Substantial funds placed by investors in the scheme flowed through the law firm’s accounts at the Bank. After the scheme collapsed, about 19 investor groups sued the Bank. One investor group obtained judgment against the Bank. The Bank settled the other investor claims. The Bank then sought indemnity under both the professional liability coverage and fidelity coverage sections of the insurance policy for amounts paid to the investor groups. The appellants denied coverage under both sections. In its motion, the Bank sought a declaration concerning the interpretation of one element of the preamble to the fidelity coverage section of the insurance policy relating to the conduct of one former employee in relation to three of the investor groups. The motion judge granted partial summary judgment, declaring that the Bank sustained a direct financial loss within the meaning of the insurance policy regarding at least some of the funds deposited in the law firm’s accounts at the Bank by three of the investor groups.

HELD: Appeal allowed. In granting partial summary judgment, the motion judge made material errors, rendering the judgment fundamentally flawed. The kind of partial summary judgment granted was not available under Rule 20 of the Rules of Civil Procedure. The Bank broke down its claim for indemnity under the fidelity coverage section of the insurance policy into its constituent elements and sought partial summary judgment on only one of the elements. It also sought an interpretation of that element only as it might apply to the damages it paid out to just three of the 19 investor groups. Such a request was not a proper request for summary judgment on part of the claim in the statement of claim. The result of the judgment was that no claim for which the Bank had sought relief had been granted, nor had any of its claims been dismissed. The motion judge ignored the fundamental principle of contractual interpretation that a provision in a contract must be interpreted in light of the contract as a whole. The motion judge completely ignored how the provisions of the professional liability coverage section of the insurance policy might inform the interpretation of the insuring clause in the fidelity coverage section. His interpretive analysis failed to take into account how the remaining elements of the insuring clause might inform the interpretation of the few elements put in issue by the Bank on the motion. In concluding that the judgment and settlements paid to three of the investor groups constituted “a direct financial loss sustained by the Assured” in that it was a “loss of funds or Property” of the Bank within the meaning of the fidelity coverage section’s “ownership” clause, the motion judge adopted a theory not pleaded or advanced by the parties, namely that the Bank held the funds deposited by investors into the law firm’s accounts as a constructive trustee. The motion judge’s theory went well beyond the Bank’s reliance on the doctrines of knowing assistance in a breach of trust and knowing receipt of trust funds. The motion judge’s view that the insurers were asking him to grant reverse summary judgment and thus were effectively acknowledging that this was an appropriate case for summary judgment, was not supported by the record.

TD Bank N.A. v. Lloyd's Underwriters, [2017] O.J. No. 6722, Ontario Court of Appeal, J.M. Simmons, D.M. Brown and J.M. Fairburn JJ.A., December 21, 2017. Digest No. TLD-January222018009