Interpreting a D&O policy in a CCAA proceeding

Overview: In this case, the Court considered the interpretation of a D&O insurance policy entered into concurrently with a CCAA filing. A class action representative plaintiff sought an order directing the insurers to pay amounts for unpaid wages and benefits said to be owing under the policies. The insurers argued that the claims predated the CCAA filing and were excluded from coverage. The court agreed. Protecting directors and officers from their post-filing liability was the main purpose of the insurance coverage. As a result, it could not be contrary to the parties’ reasonable expectations that the policies would exclude coverage for losses arising prior to the CCAA filing.

Haidar Omarali (“H.O.”) was the representative plaintiff in a class action against Just Energy, in which claims were made for unpaid wages and benefits under the Employment Standards Act, resulting from a misclassification by Just Energy of sales agents as independent contractors instead of employees during 2012 to 2016. On March 9, 2021, before commencement of the scheduled trial of the class action, Just Energy filed for protection under the Companies’ Creditors Arrangement Act (“CCAA”) and an order was made staying all proceedings against Just Energy, including the class action.

On the same day as the CCAA filing, three insurers (the “Insurers”) issued, respectively, a primary insurance policy and two excess policies (together, the “Policies”), providing coverage to directors and officers. The Policies specifically provided coverage for loss resulting from a statutory claim for unpaid wages, and included an endorsement called the “Prior Acts Exclusion”.

On October 9, 2021, H.O. filed a proof of claim (the “Claim”) asserting that the directors were jointly and severally liable for CAD $105,854,794.52 claimed to be owed to class members in the class action for unpaid wages and benefits pursuant to statutory provisions. H.O. moved as representative plaintiff in the class action for, among other things, an order directing the Insurers to pay amounts owed under the Policies. The Insurers moved for a declaration that under the Policies, the Prior Acts Exclusion applied to bar coverage for the Claim asserted against the D&Os, and related relief. H.O. opposed the Insurers’ motion.

The terms of a policy must be examined in light of the surrounding circumstances in order to determine the intent of the parties and the scope of their understanding. The factual matrix is gleaned from the context of the transaction and extends to the genesis of the policy, its purpose, and the commercial context in which the policy was made. The Supreme Court of Canada held that exclusions to coverage should be read in light of the initial grant of coverage. A policy may also contain exceptions to exclusions. Exceptions bring an otherwise excluded claim back within coverage, where the claim fell within the initial grant of coverage in the first place. As such, it is generally advisable to interpret the policy in the order described above: coverage, exclusions and then exceptions.

The Insurers and H.O. accepted that the Prior Acts Exclusion was not ambiguous. They simply argued in support of a different interpretation of the Prior Acts Exclusion when the Policies were read as a whole in light of surrounding circumstances. The Court accepted H.O.’s submission that the risks covered for the D&Os during Just Energy’s insolvency specifically included the risk of statutory claims brought against the D&Os for wages that were not paid by Just Energy. This was the basis in the Policies for an initial grant of coverage for H.O.’s claim. Once it is held that a claim falls within a policy’s initial grant of coverage, the onus shifts to the insurer to show that coverage of the claim is precluded by an exclusion clause. The Insurers relied on the Prior Acts Exclusion for their submission that coverage for H.O.’s claim was excluded.

In determining whether or not a given claim could trigger indemnity under an insurance policy, a court must decide, based on the pleadings, the true nature of the claims. The Claim was a statutory claim by class members against the D&Os for unpaid wages where their employer, Just Energy, failed to pay these wages during 2012 to 2016. The Insurers argued that the clear and unambiguous meaning of the language in the Prior Acts Exclusion excluded coverage for any Claim “based upon”, “arising out of”, “directly or indirectly resulting from”, “in consequence of or in any way involving” any act or omission that occurred, or allegedly occurred, before March 9, 2021. H.O. submitted that on the face of the Prior Acts Exclusion, the Claim was not excluded because unpaid wages were an obligation owed by Just Energy prior to March 9, 2021, which obligation the D&Os only became liable for on that date, due to Just Energy’s insolvency.

The Court held that the timing of the liability imposed on D&Os for unpaid wages did not assist it to interpret the scope of the Prior Acts Exclusion. The effective date of the Policies was the commencement date of the CCAA proceeding. The CCAA proceeding and the issuance of the Policies in connection therewith provided the essential, overall, commercial context and purpose for the Policies. The Court did not accept that the evidence of the surrounding circumstances supported the conclusion that the Policies, if they excluded coverage for prior acts or omissions, by anyone, before March 9, 2021, would have provided no comfort to the D&Os such that they would have refused to continue to serve and Just Energy would not have continued to operate. The protection that the D&Os would reasonably need for them to serve during the period of Just Energy’s insolvency would be for their exposure to risk of liability during this period of insolvency. The language of the Prior Acts Exclusion was clear and unambiguous when read in the context of the Policies as a whole and having regard to the surrounding circumstance of the issuance of the Policies at the time of Just Energy’s CCAA filing. Protection of D&Os for their post-filing liability during Just Energy’s insolvency is the main purpose of the insurance coverage provided by the Policies. Given this main purpose of the insurance coverage, it would not be contrary to the reasonable expectations of the ordinary person as to the coverage purchased to exclude coverage for loss resulting from claims based upon or arising out of any act or omission, committed by anyone, prior to Just Energy’s filing for protection under the CCAA on March 9, 2021.

The Court declared that the Prior Acts Exclusion barred coverage for the Claim and denied the relief sought by H.O. against the Insurers.

Judge: Justice Cavanagh

Counsel: Nina Bombier and Evan Linn of Lenczner Slaght for XL Specialty Insurance Company; Jason Mangano and David Ullman of Blaney McMurtry for Tokio Marine HCC Syndicate 4141; Marcus Snowden and Pearl Rombis of Snowden Law Professional Corporation for Lloyd’s Underwriters (Hiscox D&O Consortium 4632)); Vlad Calina and Caitlin Leach of Koskie Minsky for Haidar Omarali, the representative plaintiff; Jeremy Dacks of Osler for the Just Energy Group; and Rebecca Kennedy of TGF for FTI as monitor