Breach of trust by a third party may void coverage for losses incurred by the insured

02. November 2012 0

Insured was denied coverage for intentional breach of trust.

Ernst & Young Inc. v. Chartis Insurance Co. of Canada, [2012] O.J. No. 4399, September 17, 2012, Ontario Superior Court of Justice, T.R. Lederer J.

This case involved a complicated motion for summary judgment brought by Ernst & Young against Chartis.  Ernst & Young was the receiver appointed on behalf of International Warranty Company Limited which sold extended warranties to the purchasers of certain automobiles.  Central Guaranty Trust Company received the premiums as Trustee for the purchasers of the warrantees and Chartis was the insurer of Central Guaranty Trust.  As a result of allegations that the Trust had been breached, Ernst & Young sued Central Guaranty Trust and eventually obtained judgment.  Ernst & Young attempted to realize on its judgment through a policy of insurance held by Chartis.  Chartis refused to pay.

The issue was whether Ernst & Young had standing to bring the application for summary judgment and, if so, whether the insurance policy issued by Chartis provided coverage.  The Court found that Ernst & Young had standing to bring the action but that the policy did not provide coverage due to exclusions for dishonest, fraudulent, criminal or malicious acts or omissions committed by the insured as well as conflict of interest, acting in bad faith, gaining of any profit or advantage to which one is not legally entitled, or intentional non-compliance with any statute or regulation committed by the insured.  Accordingly, the Court found that there was no coverage given the findings of the trial judge with respect to Ernst & Young’s action against Central Guaranty Trust.  The trial judge found that Central Guaranty Trust had deliberately breached its trust; it misappropriated funds and engaged in subversion and complicity for its own benefit.

This case was originally summarized by Cameron B. Elder and originally edited by David W. Pilley of Harper Grey LLP.

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