The Quebec Court of Appeal ordered five insurance companies to pay approximately $4.1 million to a bailiff’s firm after it refused to cover its losses and legal fees in a case that clarifies when professional indemnity claims can be triggered and reiterates yet again the principle that lawyers should not have two masters.
In a dense and complex 30-page ruling dealing with an insurance claim arising out a “very complicated and very unusual underlying facts,” the Quebec Court of Appeal maintained its trend of broadly interpreting claims and professional liability insurance policies in favour of claimants, according to insurance lawyer experts.
“In the most general way, this ruling is part of a trend that gives rights to the insured,” observed Valérie Lemaire, an insurance lawyer with Langlois Kronström Desjardins LLP in Montreal. “Is it to the detriment of insurers? I don’t think so. Insurers are being asked to analyze its policies in the most liberal fashion possible. It invites insures to be very transparent with its insured.”
The long legal saga began in 2006 when the courts ordered Ronald Weinberg, co-founder of the animation company Cinar, to sell his homes in Montreal and Magog in the Eastern Townships as part of a legal dispute with the new owners of the entertainment firm. A bailiff’s firm was given a mandate to proceed with the “forced sale” and collect monies to be disbursed to creditors upon approval by the courts. About $5.8 million was recouped from the sale of the two homes, some of which was distributed to creditors who did not contest the legal process. Monies that were not disbursed were transferred from the bailiff’s trust account to another account, which invested in short-term asset-backed commercial paper.
On February 2008, the lawsuit between Weinberg and Cinar was settled. However the bailiff informed the two parties that the monies recouped from the sale of the homes were not available because they were invested in short-term asset-backed commercial paper, something that was done without the consent of the creditors or the court. Following a series of legal maneuvers by creditors and several lower court judgments against the bailiffs, the bailiffs turned to its insurers on February 2008 and filed a notice of claim under its professional liability insurance policy. The insurers denied coverage and refused to defend the bailiffs but did provide the services of a lawyer ex gratia, meaning that the insurers offered legal services to the insured without prejudice or as part of the coverage mandate. After a ruling Quebec Court of Appeal in April 2009 which compelled the bailiffs to pay the monies back, coupled with by the refusal of the insurers to provide coverage, the bailiffs had no choice but to borrow nearly $4.5 million to pay off the creditors. On February 2010 the bailiffs sued the insurers, and more than a year later on December 2011 won their case before Quebec Superior Court who ordered the insurers to pay the bailiffs $4.2 million. The lower court held that the bailiffs were “justified” in claiming insurance coverage. It also held that the insurers failed to comply with their obligation to provide legal services to the bailiffs – findings that were upheld by the Quebec Court of Appeal.
The appeal court, after examining the conduct of the insurers, upheld the lower court finding that the insurers created an “ambiguous and confusing situation” by giving a law firm the double mandate of protecting the interests of the insurers and the insured. That led to situations where the bailiffs made decisions that were not to their advantage but favoured the insurers. “The insurers placed their commercial interest before the interests of the insured,” succinctly noted appeal court Justice Lorne Giroux in a unanimous ruling in Continental Casualty Company v. Taillefer 2014 QCCA 2001.
“That conflict is a structural conflict, and whether it was in the context of an ex gratia gesture or in the context of an acknowledgement of partial coverage situation, the same problems exist,” noted Nick Krnjevic, a Montreal insurance lawyer with Robinson Sheppard Shapiro LLP. “You can’t have an attorney wearing both hats because inevitably conflict situations come up. You need to be upfront and have very clear communications between the parties, explaining what is happening, and who’s acting for whom to make sure that these problems don’t arise.”
Surprisingly, the appeal court also applied the principle of estoppel, a doctrine in which a court prevents a litigant from taking an action the litigant normally would have the right to take in order to prevent an inequitable result. In this case, the appeal court concluded that because of its conduct the insurers were estopped or forbidden from invoking the argument that they had no obligation to defend the bailiffs, said Lemaire. “The principle of estoppel is normally used in situations where an insurer is forbidden from invoking an argument when it denies coverage to a policyholder,” explained Lemaire. “But in this case it was used to prevent the insurers from arguing that it had no obligation to defend the insured because it acted in a reprehensible manner. That’s an important development because very few rulings have taken such a position when it comes to an insurer’s obligation to defend.”
The appeal court also provided clarity over the difference between a claim in respect to a contract to deposit compared to a claim for damages stemming from professional services, said Krnjevic. The insurers argued that they had no obligation to provide coverage to the bailiffs under its professional indemnity policy because it was a simply a case of handing back to creditors the money that was placed in the trust account. But the situation was much more complicated. When the bailiffs were given the mandate by a judge to sell the homes, Weinberg launched a variety of legal challenges against creditors. Moreover, the identity of the creditors was not determined nor was their status. The money generated from the proceeds of the sale of the homes was put into trust pending the resolution of determining who the creditors were and how much they were owed. “In this case, the creditors were not the guys that deposited any money so there was no contract,” said Krnjevic.
By the same token, the appeal court held that bailiffs were covered by their professional indemnity services policy because even though the bailiffs erroneously invested the proceeds from the sale of the homes in a manner that they were not supposed to, they were investing the trust money for the benefit of the creditors, pointed out Krnjevic. “If you do something that you are not supposed to, that you don’t have the authority to do while you are acting in the course of rendering professional services, that omission in this context could be reasonably seen as professional errors,” said Krnjevic. “That’s practical. When you think of the purpose of insurance, it is to provide a source of indemnity to third-party victims. So you need to have a reasonably liberal and expansive interpretation of the coverage.”
The appeal court did however reduce the award granted by the lower court. The appeal court held that the interest that the bailiffs incurred when borrowing the $4.5 million, which amounted to approximately $112,000, is not something that should be paid by insurers. “That’s a new development,” says Bernard Larocque, a litigator with Lavery, de Billy in Montreal. “The fact that you don’t have the money to pay creditors at the moment when it is due is not the fault of the insurer. That’s a question that often comes up, and this ruling provides guidance over what is payable and what is not.”