Sawyer v. Canadian Lawyers Insurance Association, 2013 ABQB 616

Court of Queen ’ s Bench of Alberta Citation: Sawyer v. Canadian Lawyers Insurance Association, 2013 ABQB 616 Date: 20131021 Docket: 1201 08274 Registry: Calgary Between: Susan Sawyer (nee Daigneault) Plaintiff - and - Canadian Lawyers Insurance Association and Alberta Lawyers Insurance Association Defendants _ ________________________________________ ______________ Reasons for Judgment of J.T.

Prowse , Master in Chambers _________________________________________ ______________ [ 1 ] The Plaintiff Susan Sawyer, formerly Susan Daigneault, obtained a judgment against her former lawyer, Robert Mears, in July of 2010 in the amount of approximately $333,000. She brings this action for recovery of this amount directly against Mr. Mears’ insurer, the Canadian Lawyers Insurance Association (the “Insurer”). The Insurer applies to summarily strike out the Sawyer claim. [ 2 ] The Insurer issued professional liability policies to Mr. Mears.

One policy covered the time period from July 1, 1995 to July 1, 1996, and the second policy covered the time period from July 1, 1996 to July 1, 1997. I will refer to this two year period as the ‘Policy Period’. [ 3 ] The policies state that the Insurer will pay on behalf of Mr. Mears all sums which Mr. Mears became legally obligated to pay as damages arising from an error or omission which occurred in the provision of professional services. On the face of it, the policies

cover the type of claim brought by Ms. Sawyer, as she was a client of Mr. Mears, and he neglected to file a statement of defence on herbehalf to a motor vehicle accident claim brought against her. [4] Because Mr. Mears neglected to file a defence, default judgments were entered against Ms. Sawyer by the injured parties.Ms. Sawyer in turn sued and entered default judgment against Mr. Mears. [5] A judgment creditor of Mr. Mears, such as Ms. Sawyer, is entitled to bring a direct action against an insurer under Section534(1) of the Insurance Act.

The Insurer does not dispute this, but points out that it can raise against Ms. Sawyer any defences or equitiesthat it could have asserted against Mr. Mears. [6] The Insurer’s defence is quite simple: the policies it issued did not insure Mr. Mears for all claims, regardless when made.The policies provided two types of coverage to Mr. Mears: (

i) firstly, coverage for claims made against Mr. Mears during the Policy Period, and (ii) coverage for claims arising after the Policy Period, but only if, during the Policy Period, the Insurer was notified ofcircumstances which may reasonably give rise to the future claim. [7] Ms. Sawyer’s claim was not made during the Policy Period, nor was the Insurer notified of the circumstances which led tothe claim during the Policy Period. [8] On the face of the policies, Ms. Sawyer’s claim does not fall under the coverage provided by the policies.

However, Ms.Sawyer seeks relief from forfeiture to prevent her from losing coverage due to the lateness of the reporting of her claim. [9] In order to discuss relief from forfeiture, it is first necessary to discuss two important distinctions: (

i) the distinction betweenan occurrence based liability policy and a claims made liability policy (the policy issued to Mr. Mears was a ‘claims made’ policy), and(ii) the distinction between a coverage clause and a reporting clause.

The distinction between occurrence based policies and claims made policies [10] The commercial background to these two types of policies is set out in the 1993 Supreme Court of Canada decision of ReidCrowther & Partners Ltd. v Simcoe & Erie General Insurance Company, (SCC), [1993] 1 S.C.R. 252, 99 D.L.R.(4th) 741, 1993 CarswellMan 96, [1993] 2 W.W.R. 433. [11] Liability policies are not issued for life. A premium is paid for a policy period, which is typically one year. [12] Most liability policies used to be occurrence based.

So, for example, if a lawyer acted carelessly during the policy period thenhe/she would be covered for claims arising from that carelessness, even if the claim was made after the policy period. If the policiesissued to Mr. Mears had been occurrence based then Ms. Sawyer would be entitled to collect against the Insurer, as Mr. Mear’scarelessness in failing to defend Ms. Sawyer occurred during the Policy Period. [13] The problem with occurrence based policies, from a commercial perspective, was that a lawyer might act carelessly one year,but the damage might only be uncovered and a claim brought many years later.

The insurer, therefore, would not know how to set thepremiums for this type of coverage as it would not know for years how many claims arose during a given annual period. [14] As a result, insurers began issuing ‘claims made’ policies, which is the type of policy issued to Mr. Mears. Under claimsmade policies, an insurer typically covers claims made during the policy period, or claims made later provided that the insurer is given awarning about this impending claim during the policy period.

In this way, the insurer learns the number and extent of claims made andpending during a policy period, and uses those statistics to set its premiums for following years. The distinction between a coverage clause and a reporting clause [15] The distinction between a coverage clause and a reporting clause is most easily shown in a property policy. [16] In a property policy, the insurer will typically cover claims for damage to or loss of property where the damage or loss occursduring the policy period.

This is the coverage clause. [17] The property policy will typically give the insured a set limited time following the damage or loss to report the loss andprovide a detailed proof of loss to the insurer. This is the ‘reporting’ clause. [18] Maintaining the distinction between a coverage clause and a reporting clause proves difficult under a claims made policywhere the act of reporting a claim or potential claim is typically the basis for coverage, and therefore part of the coverage clause.

The statutory authority for relief from forfeiture [19] The statutory authority for relief from forfeiture applies both to property policies and liability policies, and is found in Section520 of the Insurance Act, which states (emphasis added): [20] If the Court considers it inequitable that there has been a forfeiture or avoidance of insurance, in whole or in part, on theground that there has been imperfect compliance with (

a) a statutory condition, or (

b) a condition or term of the contract

as to the proof of loss to be given by the insured or the claimant or another matter or thing done or omitted to be done by the insured orthe claimant with respect to the loss, the Court may relieve against the forfeiture or avoidance on any terms it considers just. [21] As can be seen from this wording underlined above, the concept of relief from forfeiture is meant to apply to things to be doneby the insured with respect to the loss, that is, failure to comply with reporting clauses.

Relief from forfeiture is not intended to extend tocoverage clauses. [22] For example, if you insure your house for 2012, and it burns down in 2012, but you omit to promptly report the loss, the courtmay grant relief from forfeiture and require the insurer to pay for the loss arising from the 2012 fire.

However, the court cannot applyrelief from forfeiture to require the insurer to pay for the loss if the fire occurred in 2013, which is outside the coverage period. [23] Again, if you obtain an occurrence based liability policy for 2012, and your carelessness occurs during 2012 but you omit topromptly report the claim to your insurer, the court may grant relief from forfeiture and require the insurer to indemnify you for theclaim. However, the court cannot apply relief from forfeiture to require the insurer to provide indemnity if the act of carelessnessoccurred in 2013, outside the coverage period.

Relief from forfeiture with respect to claims made during the Policy Period [24] The primary coverage provided to Mr. Mears was: To pay on behalf of [Mears] all sums … which [Mears] shall become legally obligated to pay as damages arising out of an Occurrence… This part A of the policy applies to any Occurrence where the original claim is made during the policy period. [25] And so, this primary coverage applies if the [Sawyer] claim is made during the Policy Period i.e. between July 1, 1995 andJuly 1, 1997. Ms. Sawyers’ claim was not made until August 23, 2002.

Relief from forfeiture cannot compel the Insurer to cover a claimmade in 2002 when the insurer only agreed to cover claims made between 1995 and 1997. [26] Contrast this with situations where the claim is in fact made during the coverage period, but not reported until later.

This iswhat occurred in the following two cases. [27] In the 1989 Ontario Court of Appeal case of McNish & McNish v American Home Assurance Co., (ONSC), 68 O.R. (2d) 365, 1989 CarswellOnt 654, the policy provided the following coverage “This insurance applies to acts or omissionscommitted by an Insured in connection with his/her practice as a member of the Law Society of Upper Canada provided the originalclaim or suit for damages is brought during the policy period”. In McNish the claim by the bank against the insured lawyer was broughtduring the initial policy period, but not reported until later.

The court ultimately provided relief from forfeiture for late reporting. [28] In the 2004 decision of Justice Burrows of the Court of Queen’s Bench of Alberta in Qualiglas Holdings Inc. v ZurichIndemnity Co. of Canada, 2004 ABQB 577, 2004 CarswellAlta 1013, 368 A.R. 171, 47 Alta.L.R. (4th) 325, the claim was also madeduring the initial policy period and relief from forfeiture for late reporting was given. [29] Ms. Sawyer’s claim was not made against Mr. Mears during the initial coverage period and so McNish and Qualiglass do notapply. Relief from forfeiture cannot be granted.

Relief from forfeiture with respect to the additional coverage provided to Mr. Mears [30] The policy provided to Mr.

Mears provided additional coverage to Mears by means of the wording set out below (theunderlining has been added by me for emphasis): If, during the policy period, [Mears] becomes aware of any circumstance which may reasonably give rise to a claim being made againstit in respect of any Occurrence, and [Mears] shall, during the policy period, give written notice to the insurer … then any such claimsubsequently made against [Mears] arising therefrom shall, for the purposes of Part A of the Policy, be deemed a claim made during thepolicy period. [31] Mears did not give written notice to the Insurer of the circumstances surrounding the potential claim by Ms.

Sawyer, eventhough Mears was aware of those circumstances and could have provided notice to the Insurer. Can relief from forfeiture be granted? [32] The wording underlined above is contained in the coverage clause, not in a reporting clause. Relief from forfeiture cannot begranted to expand a coverage clause.

This is the ruling, with which I agree, of the Ontario Court of Appeal in the 1998 decision in Stuartv Huchins, 40 O.R. (3d) 321, (ON CA), 164 D.L.R. (4th) 67, 1998 CarswellOnt 3540. [33] In the Stuart case the insured was ReMax, which knew of a potential claim on December 7, 1993, but did not report it untilafter its claims made policy expired on December 31, 1993.

The issue centered on whether this late reporting was “imperfectcompliance” from which relief from forfeiture could be granted, or “non-compliance” for which relief from forfeiture was unavailable.The trial judge granted relief from forfeiture, but this was overturned by the Ontario Court of Appeal which stated, at para 37: A review of the cases cited by McLachlin J. for the proposition that “failure to give notice of claim in a timely fashion constitutesimperfect compliance” reveals that the insurance policies in question were all of the “occurrence” type. Unlike the cases at hand, the

notice requirement in those policies did not form an integral part of the event triggering coverage. That distinction is crucial because, in my opinion, it has the effect of transforming Re/Max’s failure to give notice from one of imperfect compliance to non-compliance. The existence of prejudice to the Insurer [ 34 ] If I am incorrect in the analysis set out above, I would in any event decline to provide relief from forfeiture under

section 520 of the Insurance Act, as providing relief from forfeiture would result in prejudice to the Insurer. [ 35 ] There are many different types of property loss insurance policies and occurrence based liability policies where it makes sense to inquire whether, in the specific circumstances of the case, the insurer has suffered prejudice from belatedly learning of the claim or details of the loss.

But in a case such as this, involving claims made policies, prejudice flows as a matter of course from late reporting. [ 36 ] The whole reason that claims made policies were created was to ensure that the insurer would learn of claims and pending claims during a policy period so that it could accurately set premiums for future policy periods. The commercial foundation for the policies is undermined if late claims can be made and, through relief from forfeiture, belatedly be brought under coverage.

Accordingly, on this ground as well, I decline to grant relief from forfeiture. [ 37 ] Accordingly, I summarily dismiss Ms. Sawyer’s claim against the Insurer. Costs [ 38 ] If the Insurer decides to seek costs and the parties cannot agree as to costs then they may approach me for a ruling in that regard. Heard on the 31 st day of July, 2013. Dated at the City of Calgary, Alberta this 21 st day of October, 2013. J.T. Prowse M.C.C.Q.B.A. Appearances: Anne L. Kirker, Q.C. and D. Aaron Stephenson Norton Rose Fulbright Canada LLP for the Defendants Meenu Ahluwalia Merani Reimer LLP for the Plaintiffs