S.C.C. Weighs In on Claims-Made Policies

The Supreme Court of Canada released its decision in Jesuit Fathers of Upper Canada v. Guardian Insurance last Thursday. This is an important decision for anyone working or practising in the field of insurance law. In addition to its adjudication of the particular case before it and its comments on “claims made” policies, the Court also had a number of observations about insurance law generally. In what we feel may turn out to be one of the most important parts of the judgment, the Court discussed the “reasonable expectations” doctrine and the extent to which the context of a particular insurance contract can properly be considered in evaluating coverage. These tea leaves will be studied closely by practitioners looking for clues to the Court’s outlook on insurance issues.

The decision is also of importance for its analysis of what is meant by the word, “claim”.

We have summarized the more general aspects of the decision at the end of this post. First, we’ll look at this particular dispute.

The Spanish School

This case arose out of abuse that was alleged to have taken place at a residential school near Spanish, Ontario in the 1940’s and 1950’s. The students at the school were Aboriginal. The school had been operated by an order of Catholic priests, the Jesuit Fathers of Upper Canada.

In 1988, the Jesuits had a comprehensive general liability policy with the Guardian Insurance Company (which has since been acquired by ING Insurance). The policy included errors and omissions coverage in relation to professional services. It was a claims-made policy.

In the early 1990’s, the Jesuits became aware that allegations of abuse had been made. They appointed an investigator. The OPP was also looking into the situation. The Jesuits’ investigator named ten former students whom she believed had been abused.

One fof these, a former student named Peter Cooper, actually made a claim for compensation against the Jesuits in 1994. On March 18, 1994, the lawyer for the Jesuits wrote to Guardian Insurance to raise the possibility that the order might be facing a number of other claims. The letter identified ten victiims, including Mr. Cooper, and provided other particulars of the potential (or in the case of Peter Cooper, actual) claims.

Guardian agreed to cover the Cooper claim. It then refused to renew the Jesuits’ policy beyond 1994. Thereafter, about 100 additional claims were made against the Jesuits by former students at the Spanish School. Guardian refused to defend those claims. It took the position that they were “first made” after the expiry of the policy. By the time of the appeal, the Jesuits had paid some $1.2 million to settle those claims and had incurred more than $1.8 million in legal fees. In this litigation, the order took the position that the Cooper claim had been part of a single claim–the “Spanish School claim”–whcih included all of the claims for compensation stemming from abuse at the school. In other words, the fact that the Cooper claim had been made in time to trigger coverage meant, argued the Jesuits, that coverage had been triggered for all of the other claims, even those in which the claimants had not come forward until after the lapse of the Guardian policy.

Court’s Analysis of Coverage: Meaning of “Claim”

The Supreme Court discussed the characteristics of “occurrence” and “claims made” policies, a commentary that we have not summarized here.

It noted that coverage under the Guardian policy was for claims “first made against the Insured during the policy period”. But although the Court was satisfied that this was indeed a claims-made policy, it agreed with the trial judge, that the policy also had “certain occurrence-based elements”.

A key part of the dispute before the Supreme Court was the meaning of the word, “claim”. This term was not defined in the policy itself. The Jesuits argued that “claim” should be interpreted to mean, “the set of circumstances (here, the lack of supervision at the Spanish School) potentially giving rise to demands for compensation”. Since Guardian had been made aware of those circumstances within the policy period, through the Cooper claim, such an interpretation would have meant that all of the other claims had been “made” while the policy was in force.

However, the Court rejected that interpretation. It reviewed the common law and held that a claim “requires a third party to communicate an intention to hold the insured responsible for damages” and that “for an assertion or notice to the insured to be a claim it must be made by the party whose rights have allegedly been violated”. That was not the case here. Other than Peter Cooper, no one had conveyed to the Jesuits, during the Guardian policy period, an intention to hold the Jesuits responsible for damages.

In fact, the trial judge had concluded that in addition to Cooper, there had been claims made during the policy on behalf of nine other victims because a letter from the Jesuits’ counsel to Guardian contained particulars of the other potential claims, including the victims’ names. However, although this was not an issue on the appeal, the Supreme Court made a point of disagreeing with the trial judge’s view, that identification of these nine additional victims also constituted “claims”. There had been no evidence that the victims themselves had authorized anyone to communicate to the Jesuits an intention to seek compensation. Absent evidence of such an intention, there could be no “claim” by these persons.

In the result, the Supreme Court of Canada held that, apart from the Cooper claim, Guardian had owed no duty to defend any other action arising from the administration of the Spanish School.

General Insurance Law Principles

As we have mentioned above, the Supreme Court’s analysis was not limited to the specific wording of this claims-made policy. It also made some more general comments that we think will be relevant in other contexts:

  • it discussed the underwriting considerations (e.g., “long tail” liability) that led to the introduction of claims-made policies in the first place (paras. 24-25);
  • it took note of the insurance industry’s response to potential coverage “gaps” resulting from the use of both occurrence and claims-made polciies (para. 26);
  • the principles that govern interpretation of insurance contracts were reviewed (contra proferentem rule, narrow construction of exclusions and broad construction of coverage provisions), but the Court made it clear that these principles only apply if the policy is ambiguous (para. 29);
  • the Court said that “the courts should try to give effect to the reasonable expectations of the parties, without reading in windfalls in favour of any of them”. It added that “the courts should be loath to support a construction which would enable either the insurer to pocket a premium without risk or the insured to achieve a recovery which could neither be sensibly sought nor anticipated at the time of the contract” (para. 29);
  • the Court acknowledged that in interpreting coverage provisions, it is appropriate to take into account the context of the particular risk. In this case, the Jesuits had laid emphasis on “the public purpose served by insurance”, which included ensuring that “the needs and expectations of third parties who are injured accidentally or through negligence are met by giving them access to a compensation fund”. But in a passage which we think may turn out to be one of the most important ones in the judgment, the Court said that “in the long run, a contextual but unprincipled approach would render a disservice not only to the industry, but also to insureds and victims. It would lead to further difficulies in obtaining coverage and compensation. Both parties to an insurance contract are entitled to expect that well-established principles will be reflected in the interpretation and application of that contract. In this respect, another form of public interest is also at stake. For these reasons, courts must pay close attention to the structure and actual wording of the policy, read as a whole”. (para. 33).
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