An insurer is responsible for paying for the defence of an insured claim, but may not have to pay costs associated with an uninsured portion of an insured claim

Dunn, an executive covered by a Liability and Indemnification policy issued by Chubb with a policy period commencing November 1999, sought to have defence costs in respect of allegations of fraud and misconduct that took place in 2001, as well as misconduct allegations that took place in 2002/2003 paid for by Chubb. The claim was dismissed.

Dunn v. Chubb Insurance Co. of Canada, [2009] O.J. No. 720, February 11, 2009, Ontario Superior Court of Justice, C.L. Campbell, J.

Dunn and Beatty, were executives at Nortel during the period of 1999 through 2003. They were charged with falsification of books and records and publishing false prospectus contrary to the Criminal Code in 2008. The allegations of fraud and misconduct were made in respect of activities that took place in the period of 2000 – 2001, as well as misconduct allegations in respect of activities that took place in the period of 2002 – 2003. Indemnity for defence costs incurred in the defence of claims is included in the coverage for Wrongful Acts, as well as Inter-related Wrongful Acts which originate in the policy. The policy states that where there is a loss that is covered by the policy and a loss that is not covered, 90% of defence costs are to be allocated to the covered costs.

In adopting the ruling made in the case of Hanis v. Tevan [2008] ONCA 678, the Judge held that defence costs covered by the 2001 policy are related exclusively to the defence of covered claims, therefore allocation of costs is required. The Judge found that the language of this policy did not contain express language providing for the payment of defence costs relating to uncovered claims. Therefore in order to give rational meaning to the terms of Wrongful Act and Inter-related Wrongful Act, the Judge held they must be in respect of a claim made during the policy period in 2001. A claim made with respect to 2003 financial statements was not a claim that was made during the 2001 policy.

Chubb allocated 50% of the defence costs to the 2001 policy, and 50% to the 2003 policy. Chubb had rescinded and denied coverage under the 2003 policy period with respect to Dunn and Beatty. The Judge found that since defence costs under the 2001 policy can only relate to claims under that policy, allocation was appropriate and dismissed Dunn’s claim.

This case was originally summarized by Neil J. MacDonald and originally edited by David W. Pilley.

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