It is always a good idea for companies to obtain insurance to cover any liabilities or disputes that might arise in the course of doing business. Sometimes, it is necessary to obtain insurance from multiple companies to help increase the amount of coverage. Certain insurance policies may be for the express purpose of providing additional coverage to a primary insurance provider.
In a recent case before the Ontario Court of Appeal, a company’s insurance provider declined the company’s attempts to exercise an option in its excess policy to extend its coverage period.
The company was insured under two policies
A global cannabinoid company, Cronos, was insured under its primary Executive and Corporate Securities Insurance Policy (“the Primary Policy”), issued by AXA XL. The Primary Policy provided its directors and officers coverage for claims made during the policy period, from February 27, 2019, to February 27, 2020.
Cronos had a secondary Excess Directors’ and Officers’ Liability Policy (“the Excess Policy”) issued by Assicurazioni Generali S.P.A. (“Generali”). The Excess Policy was issued for the same period as the Primary Policy and covered claims above the Primary Policy limit.
Under the Primary Policy, if the insured or insurer did not agree to renew the policy, the insured could exercise the Optional Extension Period option within 30 days of the the policy’s expiration. The extension would allow the insured, whose policy was not renewed, to maintain the same coverage that was available prior to its expiry, for any claims made against the insured as a result of conduct that occurred during the original policy period.
The Excess Policy was subject to the same terms and conditions as the Primary Policy with some exceptions
The Excess Policy provided that it was subject to the same terms, conditions, exceptions, and limitations as the Primary Policy – with certain exceptions. The option for an Optional Extension Period was not an identified exception under the Excess Policy. The Excess Policy did not specifically refer to an Optional Extension Period option nor any applicable premiums. However, Condition 2 of the Excess Policy stipulated that it functioned as a “follow form” policy to the Primary Policy. Condition 2 stated:
This Policy is subject to the same terms, conditions, limitations, and exceptions (except as regards the premium, the amount and limits of liability, any deductible or self-insurance provision, the obligation to investigate and defend and the renewal agreement (if any)) as are contained in the Primary Policy. The Primary and Underlying Policy will be maintained in full effect during the currency of this Policy… [Emphasis added.]
Further, Condition 8 of the Excess Policy provided terms for making amendments to the policy:
No amendment to the Primary or Underlying Policy during the Period of Insurance, in respect of which the primary or underlying insurers require an additional premium or a deductible, shall be effective in extending the scope of cover of this Policy unless and until agreed in writing by the Company.
The company sought to exercise the Optional Extension Period option
Cronos wanted to renew both the Primary and Excess Policies in January 2020. It received quotes from AXA XL and Generali, which both companies later withdrew just ahead of each policy’s expiration date. Before the expiration of the Primary Policy, Cronos negotiated with AXA XL for a 13-month extension in exchange for an additional premium. Cronos’ representative also asked Generali for a seven-day extension before the Excess Policy’s expiration. Generali did not agree to an extension.
In March 2020, two class action claims were commenced against Cronos and two of its officers in the United States. The alleged wrongful acts pre-dated the expiration of the policy. Cronos notified Generali of the claims and advised it wished to exercise the Optional Extension Period option under the Excess Policy. It sent a bank draft in an amount that was twice the annual premium for the Excess Policy. Generali held that the Excess Policy was not eligible for the Optional Extension Period option and destroyed Cronos’s bank draft. Cronos applied for a declaration that it was entitled to purchase the Optional Extension Period under the Excess Policy.
At the initial hearing, the company was found to be entitled to exercise the Optional Extension Period option
The application judge decided in favour of Cronos. In coming to her conclusion, the application judge relied on the fact that the Excess Policy did not have specific provisions that excluded the Optional Extension Period. Although the Primary Policy had been extended for another 13 months without Generali’s consent, the scope of coverage provided by the Excess Policy was deemed unchanged. Cronos had complied with all requirements to exercise the Optional Extension Period, including the requirements concerning notice. Therefore, Cronos was entitled to exercise the Optional Extension Period option in the contract.
Generali appealed the application judge’s decision to the Ontario Court of Appeal. The main grounds of Generali’s appeal were that Cronos was not entitled to purchase the Optional Extension Period option, and Cronos was incorrect about the amount of the premium for the option to exercise the Optional Extension Period.
The Court of Appeal found no errors in the initial judgment
Generali submitted that the application judge erred in her decision and made the following arguments:
The Court of Appeal rejected this argument and agreed with the application judge’s conclusion that the insured was entitled to the extension once it had paid the additional premium. It found this was plain upon reading the Primary Policy and the Excess Policy’s terms.
In response to this argument, the Court of Appeal agreed with the application judge’s finding that Cronos’s exercise of the Optional Extension Period option did not trigger a policy renewal. In fact, non-renewal was the trigger for the right to exercise the option under Condition 2. The Court of Appeal agreed that the language of the Primary Policy described the Optional Extension Period differed from the renewal of a policy.
Condition 8 of the Excess Policy prevents Cronos from electing to make unilateral extensions of coverage
The application judge found that the amendment extending the Primary Policy did not reduce or abrogate its coverage limits. When Cronos communicated the terms of the extension of the Primary Policy, Generali did not dispute this action. Nor did it assert that the extension invalidated the option to exercise the Optional Excess Period. In fact, this was supported by Condition 8. As a result, the Court of Appeal agreed with the application judge’s reasoning on this point.
The Excess Policy lacks an express mechanism, or formula, for calculating a premium for the Optional Extension Period option
The Court of Appeal reviewed the application judge’s decision reasoning that because the Optional Extension Period option was not listed as an exclusion in Condition 2, it was a “follow-form term.” The Court of Appeal agreed with this conclusion.
Generali’s interpretation that the Excess Policy did not contain an Optional Extension Period option was consistent with that of Cronos’s broker
Generali argued that its interpretation that the Excess Policy did not contain an Optional Extension Period option was consistent with the view expressed by an employee of Aon (Cronos’s insurance broker), not at the time of the execution of the policies but at the time Cronos sought to exercise the Optional Extension Period option.
In response to this argument, the Court of Appeal indicated that it did not understand the relevance of non-party views on the interpretation of a contractual provision. As such, the Court did not find an error with the application judge’s conclusion of the availability of the Optional Extension Period option in the Excess Policy.
The premium for the Excess Policy’s Optional Extension Period was not specified
There was no mention in the Excess Policy about the amount of premium payable if Cronos exercised its option for the Optional Extension Period. The Court of Appeal agreed with the application judge’s determination that the basic premium for the Excess Policy and Optional Extension period should follow the amount set out in the Primary Policy. It is clear that the word “premium,” as it was used in Condition 2, refers only to the premium paid at the time the Excess Policy was first purchased. Generali did not have the right to fix the premium once a loss arises and the insured exercises the option for Optional Extension Period. Accordingly, the appeal was dismissed.
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