An Insured under a Directors and Officers Liability Policy (“Alofs”) was entitled to a defence for claims relating to the time period after he ceased to be a director, where the Court found the claim did allege a breach of duty of disclosure in the discharge of Alofs’ duties as a director

12. October 2005 0

Alofs v. Temple Insurance Co., [2005] O.J. No. 4372, Ontario Superior Court of Justice

Alofs was a director of KremeKo Inc. until his resignation on June 25, 2003. At that time, Alofs had completed the sale of his shares in a transaction with a number of shareholders. The directors of KremeKo were insured under a Directors and Officers Liability Policy issued by, among others, Temple Insurance Company (“Temple Insurance”).

After the sale, some of the purchasing shareholders brought an action against Alofs alleging a failure to make complete disclosure of the business and condition of KremeKo before the completion of an equity offering in August 2003. Temple Insurance submitted that the claims asserted against Alofs in the underlying action included breach of contract, oppression, and miscellaneous torts including misrepresentation and deceit. The Court disagreed indicating that while Alofs’ actions may be characterized as misrepresentation or deceit, the true nature of the claims asserted were limited to breach of contract and oppression.

To determine whether a duty to defend existed, the Court assessed the pleadings to ascertain the “true nature” or the “substance of the claims” based on the principles set out in Monenco Ltd. v. Commonwealth Insurance Co., [2001] 2 S.C.R. 699. With respect to the apportionment of defence costs between covered and uncovered claims, both parties referred to the Ontario Court of Appeal decision in Daher v. Economical Mutual Insurance Co., [1996] O.J. No. 4394. In that case, it was held that where there are multiple causes of action based on discrete actions or omissions, it may be possible to divide the costs of defending the various causes of action between those that are covered and those that are not. This is most easily accomplished where the causes of action are based on discrete events that are separated in time. If, on the other hand, there are one or more causes of action that exhibit different theories of liability in respect of each such cause of action, it may not be possible to apportion the costs of defending the causes of action. Where the theories of liability that would entitle an Insured to coverage are so intertwined with the theories that do not attract coverage, the Court may order an Insurer to assume all defence costs until it is possible to identify a principal basis for apportionment.

Temple Insurance conceded that the claims relating to Alofs’ actions before June 25, 2003 involved one or more causes of action having multiple theories of liability – oppression claims as a director and breach of contract claims as a shareholder. Temple Insurance also conceded that it may not be possible to arrive at an apportionment between these claims for the time period prior to Alofs’ resignation as a director on June 25, 2003. However, Temple Insurance took the position that allegations relating to the actions of Alofs after June 25, 2003 were not covered. Temple Insurance submitted that it was possible to split the defence costs at this time based on a “time on risk” approach to allocation.

The Court agreed that Alofs was not entitled to coverage under the policy in respect of claims arising out of his actions after June 25, 2003, unless the claims alleged a “D & O Wrongful Act”. The Court noted that under Section 248 of the Business Corporations Act, R.S.O. 1990, c. B. 16, the only persons who may be the subject of an “oppression action” are the subject corporation and its directors and officers at the time of the alleged actions giving rise to the claim for oppression. The Court agreed that the essence of the claim against Alofs was an oppression action and found that the breach of contract claims based on breach of the shareholders agreement were “derivative” claims in that they were subsidiary to the oppression claims. With respect to the allegations concerning actions taken by Alofs after his resignation as director on June 25, 2003, the Court found it difficult to comprehend how Alofs breached a duty in his capacity as a director in taking steps after his resignation. However, the fact that the claim appeared to be without merit did not affect the fact that, because the claim based on these actions was an oppression claim, it must be read as an allegation that Alofs breached the duty to which he was subject in his capacity as a director. As such, the claim was, at least potentially, within coverage.

In the result, the Court held that Temple Insurance had a duty to defend Alofs in the underlying action.

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