On June 1, 2006, the Supreme Court of Canada delivered Reasons for Judgment in Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21. The case dealt specifically with the question of what constitutes a “claim” in the context of a claims-made errors and omissions insuring provision. However, because of the court’s discussion on the rules applicable to insurance policy interpretation, the case is also of general significance to all types of insurance policies.
Background
From 1913 to 1958, the Jesuits operated a residential school in Ontario. In 1991, a former student alleged that he had been sexually abused by one of the school priests. This led to the Jesuits conducting their own investigation, an investigation by a social worker and a police investigation. As a result of these investigations, by January 1994 the Jesuits became aware of both general and specific allegations of abuse of students, including the names of ten possible victims and the names of other teachers who had allegedly abused students.
The Jesuits were insured under a Comprehensive General Liability policy issued by Guardian Insurance which covered the period September 30, 1988 to September 30, 1994. The policy included errors and omissions coverage for professional services for “claims which are first made against the Insured during the policy period.” However, unlike many E&O policies, the Guardian CGL policy did not define what a “claim” was.
During the policy period, the Jesuits received only one written demand from a former student, Peter Cooper. This came in the form of a letter dated January 27, 1994 from Mr. Cooper’s lawyer. On March 18, 1994, the Jesuits’ lawyer Mr. Zimmerman wrote to Guardian to advise that the Jesuits could face nine additional sexual abuse claims. The “Zimmerman Letter” identified the names of the offending Jesuits, provided dates and locations of the acts in question, and provided the names of the anticipated claimants.
After expiration of the policy on September 30, 1994, the Jesuits received approximately 100 additional sexual abuse claims and notice of these were forwarded to Guardian. Guardian took the position that, with the exception of the Cooper claim, all of the other claims were excluded because there had been no “claim” made during the policy period.
The Decisions of the Ontario Superior Court and Court of Appeal
The Ontario Superior Court of Justice was asked to consider whether Guardian had a duty to defend the Jesuits in respect of all of these claims. The crux of the issue was determining when an allegation becomes a “claim” and when the Jesuits had received notice of such claims.
The court found that Cooper’s claim was sufficiently communicated to trigger Guardian’s duty to defend. Further, the court found that the details of the potential claims communicated in the Zimmerman Letter were sufficient to constitute claims under the policy, and thus a duty to defend arose. Finally, the court held that no duty to defend arose with respect to the additional 100 claims because they were made after the expiration of the policy. The Jesuits’ general understanding of the potential problem during the policy period was not sufficient to trigger coverage.
The Ontario Court of Appeal, in brief Reasons for Judgement, upheld the lower court’s decision.
The Decision of the Supreme Court of Canada
The only issue before the Supreme Court of Canada was whether the insurer had a duty to defend the 100 claims. The insurer conceded that it had a duty to defend the Cooper claim, and the claims referred to in the Zimmerman Letter had become moot.
The court examined the nature of the policy and concluded it was a claims-made policy with an occurrence based element. The latter arose from a policy condition requiring the insured to provide to the insurer notice of an accident or occurrence as well as notice of any claim or suit. The condition did not change the nature of the E&O coverage but simply entitled the insurer to be provided with certain information so that it could anticipate potential future claims and make any necessary financial preparations. As such, this occurrence based element did not expand the scope of the E&O coverage as was argued by the insured, but rather restricted that coverage.
Because the policy did not define “claim”, the court looked at the policy as a whole to see if other provisions offered any meaning. In somewhat of a departure from cases such as Derksen v. 539938 Ontario Ltd., 2001 SCC 72, [2001] 3 S.C.R. 398 and Pavlovic v. Economical Mutual Insurance Co. (1994), 28 C.C.L.I. (2d) 314 (B.C.C.A.), in which the courts refused to adopt an insurer-favourable interpretation of exclusion clauses in the absence of clear and precise language, the court in Jesuit was able to give meaning to the term “claim” by reference to other provisions in the policy. The court concluded that there was a clear distinction in the policy between an occurrence and a claim, and further there was a suggestion that a claim had to involve an actual demand or other legal process received by the insured.
The court then turned to the common law and concluded that a “claim” requires a third party to communicate an intention to hold the insured responsible for damages. The claim can be communicated through a representative such as a lawyer, teacher or friend, but the key is that the representative must “be accurately communicating the intent of the claimant and that it be done with the claimant’s full knowledge and approval.”
The court then returned to the question of whether there was coverage under the Guardian policy for the 100 sexual abuse claims. The court held that these claims were not covered because, other than in the case of Peter Cooper, during the time that the Guardian policy was in force no one had come forward to the Jesuits and advised of an intention to hold the Jesuits responsible for damages arising from the situation at the school.
Finally, although the issue of the nine claims arising from the Zimmerman Letter were moot, the court commented on whether those claims would have been covered. The names of the nine potential victims were identified during an investigation by a social worker. There was no evidence that the social worker had permission from the victims to communicate any information on their behalf, and in any event, the social worker never communicated an intention to hold the Jesuits responsible for damages. As a result, even though the Zimmerman Letter was sent to the insurer while the policy was in force, the social worker had not, nor could she make a “claim” under the policy and thus there was no coverage.
Impact of the Decision
This case has obvious implications for the interpretation of any E&O insuring provision, whether found in a typical E&O policy or added to some other type of policy such as the Guardian CGL in the Jesuit case. As stated by the court, the key is that in order for a claim to be made which will trigger coverage, a demand must be made by the victim or his or her representative, and there must be a clear expression of an intention to hold the insured liable for damages. Anything short of that likely will not constitute a “claim” for the purpose of a claims-made policy. Further, information developed or discovered by the insured about potential claims, although it may give rise to an obligation under a policy condition to give notice of an occurrence, will not typically trigger coverage.
The Jesuit case also dispels any notion that claims-made errors and omissions insurance policies are intended to provide an uninterrupted continuum of coverage. Following the expiration and non-renewal of the Guardian policy, the Jesuits obtained coverage from a different insurer. However, the sexual abuse claims were expressly excluded under that policy. Although there is no discussion of the terms of that policy, the insurer’s decision to exclude coverage for those claims is consistent with a condition found in many E&O policies, including the Guardian policy, which excludes coverage for any claim arising from circumstances known by the insured prior to the coverage period. The court characterized this as “an occurrence-based restriction on the claims-made coverage”.
As a consequence of the above, on the one hand the Jesuits had insufficient information upon which to establish that the nine claims referred to in the Zimmerman Letter and the additional 100 claims constituted “claims” which triggered coverage under the Guardian policy. On the other hand, the Jesuits’ knowledge of the circumstances surrounding the potential claims ultimately had the effect of excluding coverage under their subsequent E&O policy. In sanctioning this gap in coverage, the court wrote at paragraph 25:
…Many claims-made policies offer even more restricted coverage. For example, the policy might exclude from coverage any negligence of which the insured is aware prior to the coverage period even if no claims have been made. This leaves the insured in the situation where, although consistently insured over a period of years, there are still certain claims that do not fall within the purview of the policy — namely, claims where the underlying damages (and related negligence) are discovered in one policy period but the claim is not made by a third party until a subsequent period. The current insurer may then be off the hook, while a new insurer will require an exclusion of the potential claims in its policy. The insured will fall between two stools.
Finally, for two reasons the Jesuit case serves as a refreshing restatement of the principles applicable to the interpretation of all insurance policies.
First, the case confirmed that contra proferentum and the notion that insuring provisions are to be read broadly and exclusions are to be read narrowly are simply interpretive tools to be applied when there is ambiguity in the policy. These interpretive tools have been the subject of discussion in prior Supreme Court of Canada decisions such as Brissette v. Westbury Life Insurance Co., [1992] 3 S.C.R. 87, Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., [1993] 1 S.C.R. 252 and Non-Marine Underwriters Lloyds of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551. The Jesuit decision simply amplifies the basic interpretive principles laid out in those earlier decisions, and emphasizes that in the absence of ambiguity, the interpretive tools noted above are not to be used, but rather, one is to simply read the policy as a whole and apply its ordinary meaning.
Second, the court further emphasized that where ambiguity does exist, application of the contra proferentum principle does not mean that the policy is to be construed against the insurer, rather it is to be construed against the drafter of the policy. While the drafter of the policy will often be the insurer, and while there will often be an imbalance of bargaining power in favour of the insurer regardless of who drafted the policy, the court acknowledged the possibility that the contra proferentum principle could be applied against an insured in circumstances where, through a broker, an insured has been involved in negotiating the terms of the policy.