Great American Insurance Company v Ramsoondar, 2016 ABQB 73

Court of Queen ’ s Bench of Alberta Citation: Great American Insurance Company v Ramsoondar, 2016 ABQB 73 Date: 20160208 Docket: 1503 06417 Registry: Edmonton Between: Great American Insurance Company Applicant - and - Fredy V. Ramsoondar Respondent _______________________________________________________ Reasons for Decision of the Honourable Mr. Justice Eric F. Macklin _______________________________________________________ I. Introduction [ 1 ] The Applicant, Great American Insurance Company (“Great American”) seeks a declaration that the Respondent Fredy V.

Ramsoondar is not insured under a policy of liability insurance issued by Great American with respect to claims made against him by Faunus Group International Inc. (“FGI”) in a proceeding commenced in the State of New York (“the FGI action”).

[ 2 ] Great American says that it did not insure the Respondent against his liability to FGI which has arisen from his personal guarantee of contractual obligations owed to FGI by a company in his control. [ 3 ] The Respondent, having been duly served with copies of the Originating Application, the Affidavits filed in support and the Applicants Written Brief, failed to appear at this Application. II.

Facts [ 4 ] The following facts are set out in Affidavits filed on behalf of Great American. [ 5 ] Great American issued a policy of Directors and Officers Liability Insurance to United Protection Services Group Inc. (“UPSG”) as Policy no.

CDO5641353 (“the Policy”). [ 6 ] The application form submitted by UPSG to obtain the policy named the Respondent as its Chief Financial Officer and listed United Protection Services Inc. (“UPSI”) as a wholly owned subsidiary of UPSG. [ 7 ] On or about September 30, 2013, FGI commenced proceedings against the Respondent in civil action no. 13-CV-69271, in the United States District Court, Southern District of New York, New York Registry (“the FGI action”). [ 8 ] In that action, FGI alleged that the Respondent was liable to FGI pursuant to a personal guarantee he granted to FGI dated October 13, 2011 to secure the performance by UPSI of an agreement between UPSI and FGI dated October 5, 2011. [ 9 ] Neither UPSG nor UPSI are parties to the FGI action. [ 10 ] The Respondent notified Great American about the FGI action on or about October 16, 2013.

Great American responded on November 12, 2013 stating that it would cover the Respondent with respect to the FGI action, subject to certain reservations of rights, including: a. The right to contend that all or part of the amounts FGI was claiming against the Respondent pursuant to the Guaranty did not constitute a “Loss”, as that term is defined in the Policy, and thus are not covered under the Policy. b.

The right to contend that FGI did not assert in the FGI action that the Respondent was responsible for any “Wrongful Act” in his capacity as, or by reason of being, a director of UPSI or UPSG and thus, the relief sought by FGI against the Respondent was not covered under the Policy. [ 11 ] Great American began paying for the Respondent’s defence in the FGI action, but by September 19, 2014, it had determined that the Respondent was not covered under the Policy because FGI’s claims against him did not constitute a “loss” and were not made against him in his capacity as Director or Officer of UPSG.

Great American says that they were made against him in his personal capacity as a Guarantor of UPSI obligations. Great American asserts that the Policy only covers UPSG’s Directors and Officers for liability allegedly arising in their capacity as Directors and Officers of UPSG. [ 12 ] On July 22, 2015, the Court in the FGI action concluded that the Respondent was liable to FGI pursuant to his guarantee and granted

summary judgment to FGI against him. The decision of the Court included a finding that the Respondent had executed a guarantee on October 13, 2011 of a Sales Agreement dated October 5, 2011 between FGI and UPSI (Page 2 of the Court Judgment). [ 13 ] The Court further found that the execution of the guarantee by the Respondent served as a condition precedent to the effectiveness of the Sales Agreement between FGI and UPSI.

With respect to the Respondent’s liability, the Court confirmed that the guarantee provided an agreement by the Respondent to indemnify and hold FGI harmless from any loss caused by a breach or violation of any of the covenants or warranties contained in the sales agreement and would pay to FGI the total amount of such loss within ten days of written demand. The Court stated that the liability was made “absolute, unlimited, direct and unconditional” and FGI had the right to enforce the guarantee without first being obligated to resort to any other person, right, remedy or security (Pages 3 to 4 of the Judgment).

The Court ultimately found that the Respondent was liable to FGI and that the Respondent had guaranteed that UPSI would be solvent and “able to pay its debts”. FGI’s inability to collect the amounts owing from UPSI due to its insolvency was a direct consequence of the Respondent’s breach of his representation that UPSI would remain solvent and “able to pay its debts” (Pages 16 to 17 of the Judgment). [ 14 ] On August 4, 2015, the Respondent assigned himself into Bankruptcy.

Goth & Company Ltd. were appointed as the Respondent’s Trustee in Bankruptcy. [ 15 ] On September 30, 2015, the Court in the FGI action quantified the Respondent’s liability to FGI and granted judgment against him personally in the sum of $2,688,303.68. FGI has filed a claim in the Bankruptcy for $2,700,000. Its claim comprises approximately 93% of the total value of all liabilities that the Respondent listed in his Statement Affairs (they totaled $2,899,570.67). [ 16 ] Great American has paid the sum of $451,555.37 US to counsel on behalf of the Respondent.

This amount is the subject matter of a reimbursement claim by Great American. [ 17 ] On January 4, 2016, Great American obtained an Order lifting the Stay of Proceedings in respect of the Respondent’s Assignment into Bankruptcy of August 4, 2015 to allow it to proceed with this Originating Application for Declaration. However, the lift of the Stay of Proceedings does not apply with respect to the concurrent application by Great American seeking a monetary judgment against the Respondent for the recovery of defence costs. As a result, the latter application is not proceeding at this time. III.

The Insuring Agreement [ 18 ] The Insuring Agreement provides in

section I.A as follows:

Section I. Insuring Agreements A. The Insurer shall pay on behalf of the Insured Persons all Loss which the Insured Persons shall be legally obligated to pay as a result of a Claim . . . first made against the Insured Persons during the Policy Period or the Discovery Period for a Wrongful Act, except for any Loss which the Company actually pays as indemnification. [ 19 ] The Policy defines the term “Loss” in

Section III. N to include “settlements and judgments, pre-judgment and/or post- judgment interest, compensatory damages, punitive, aggravated or exemplary damages or the multiple portion of any multiplied damage award and Costs of Defence . . .”. [ 20 ] The term “Wrongful Act” is defined in

Section III.T of the Policy as follows:

(1) Any actual or alleged act, omission, error, misstatement, misleading statement, neglect or breach of duty . . . by any Insured Persons in their capacity with the Company [and] . . .

(3) Any matter claimed against any Insured Persons solely by reason of their status with the Company . . . [ 21 ] Counsel for Great American submitted that the Reservation of Rights letter was sent by Counsel to the Respondent on November 12, 2013 after being notified of the Claim by its Insured on October 16, 2013. It was in September 2014 that Great American determined that the FGI Claim was outside the scope of coverage it provided and denied coverage to the Respondent. IV. Analysis A.

Is the Respondent’s liability to FGI a “Loss” under the Policy? [ 22 ] The definition of loss as set out above does not include the payment of amounts owed by an insured to a creditor pursuant to any commercial contract.

Directors and Officers liability insurance is intended to cover fortuitous losses that injure the insured, not commercial risks that the insured has chosen to assume and is later called upon to pay in the course of business. [ 23 ] The contract entered into between FGI and UPSI on October 5, 2011 was a contract for the benefit of the Respondent or, at least, for the benefit of a company in which the Respondent had an interest.

To indemnify the Respondent for the amounts he agreed to guarantee on behalf of the company in which he had a personal interest would result in a financial benefit to him. [ 24 ] The action against the Respondent by FGI is an attempt to force the Respondent to disgorge, or repay, amounts that had been wrongfully acquired and retained by his company and for which he guaranteed. This is not a loss that was intended to be covered, or is actually covered, by a Directors and Officers liability insurance policy and is not a loss within the meaning of that term as set out in the Contract.

The Respondent, in this case, did not suffer any loss within the meaning of the Policy by being compelled to return money that was provided to his company on the strength of his promise to indemnify FGI for any loss. [ 25 ] Indeed, if the Policy was intended to provide coverage for such claims, there would be nothing to prevent or dissuade any corporate officer or director from guaranteeing a loan made to the company for which he acts as a director or officer and for any amount for which he had sufficient insurance coverage to indemnify him. [ 26 ] In this case, the Respondent’s liability results directly from his personal guarantee of UPSI’s representations and agreements.

He willingly assumed the risk that he might be compelled to indemnify FGI in the event that UPSI breached its representations of solvency and, as stated in the Court Judgment, his liability was “absolute, unlimited, direct and unconditional”. His liability does not arise from a fortuitous loss and is, therefore, not covered under the policy. B.

Did the alleged Loss arise out of a Wrongful Act? [ 27 ] It is also my view that the Respondent’s liability would not be covered by the Policy on the basis that it did not result from any actual or alleged “Wrongful Act” by the Respondent in his capacity as a Director or Officer of UPSI. Directors and Officers liability insurance protects directors and officers from the risk of liability they may incur in the execution of their duties as directors and officers. The insurance is not intended to underwrite an insured’s failure or refusal to pay outstanding commercial obligations.

Such non-payment by an insured does not constitute a “Wrongful Act” under the policy (see Thunder Bay Masonic Foundation v Sovereign General Insurance Company, 2014 ONSC 4142 at para 18 to 19 ). [ 28 ] FGI claimed against the Respondent, not in his capacity as director or officer, but rather in his personal capacity as the guarantor of UPSI’s obligations.

He had personally warranted that, among other things, the representations concerning the accounts that FGI was purchasing from UPSI were accurate and he agreed that, in the event of any breach of representations and warranties, he would pay FGI for all actual and threatened losses. His liability arises out of his failure to honour his obligations under the guarantee.

That is, he breached the terms of his guarantee to FGI by failing to indemnify it and remains liable to FGI under the terms of the guarantee. [ 29 ] It was not alleged in the claim by FGI that the Respondent had executed the guarantee in his capacity as a director or officer of UPSG or UPSI. The claim was issued against the Respondent under his guarantee to FGI which was his personal contract with FGI.

The Respondent agreed to indemnify FGI in the event of a default by UPSI and his liability to FGI, therefore, arises by way of contract and not because of any “act, error, misstatement, misleading statement, neglect or breach of duty”. [ 30 ] The personal contractual liability of an insured under a guarantee is not the type of liability that a Directors and Officers

liability insurance policy covers or is intended to cover. Such liability does not result from a wrongful act. The Respondent’s liability arises from his capacity as a guarantor and not from his capacity as a director or officer of UPSI. [ 31 ] It is neither alleged nor established that the Respondent committed a wrongful act in his capacity as a director or officer of UPSG or UPSI. Accordingly, the claim by FGI is not a wrongful act as defined by the Policy. V.

Conclusion [ 32 ] The Respondent’s liability to FGI under the terms of the guarantee provided by the Respondent to FGI is not a “loss” as contemplated and defined by the Directors and Officers Liability Insurance Policy. Further, the Respondent’s liability to FGI does not arise from any alleged wrongful act as that term is intended or defined by the Policy. [ 33 ] The Respondent decided to assume personal responsibility for UPSI’s performance of its agreement with FGI and that decision has resulted in his own personal liability to FGI.

Great American is not required to indemnify him for his having entered into that risk or being liable to FGI as a result of it. [ 34 ] Great American is entitled to a Declaration that the Respondent is not insured under the Policy of Directors and Officers Liability Insurance with respect to the claims made against him by FGI. Heard on the 26 th day of January, 2016. Delivered orally on the 26 th day of January, 2016. Dated at the City of Edmonton, Alberta this 26 th day of January, 2016. Eric F. Macklin J.C.Q.B.A. Appearances: Cecilia Hoover of Dolden Wallace Folick LLP for the Applicant