What is a "Claim" Under a Claims-Made Policy?

The Supreme Court of Canada has noted on several occasions that there is an "unequal bargaining power at work in the negotiation of an insurance contract" and hence,

1. coverage provisions should be construed broadly and exclusions should be interpreted narrowly; and
   
2. any ambiguities in the policy should be interpreted against the insurer and in favour of the insured.

Sometimes forgotten, however, is that the Supreme Court of Canada has also said these rules "apply only where there is an ambiguity in the terms of the policy". Just because a particular word, perhaps even a critical word, in a policy is not expressly defined, does not necessarily mean ambiguity exists and that the above rules must be applied (usually to the insurer’s detriment).

On June 1, 2006, the Supreme Court of Canada reminded us of all the above in Jesuit Fathers of Upper Canada v. Guardian Insurance, when it ruled that the undefined word "claim" in a professional services E&O form of coverage was not ambiguous and the insured’s attempt to enforce coverage was dismissed.

At issue in the case was a CGL policy obtained by the insured which, in addition to the usual occurrence-based type of coverage, also extended separate additional coverage under which the insurer agreed,

The policy contained the usual "Notice of Accident of Occurrence" and “Notice of Claim or Suit” conditions and went on to expressly exclude,

The case involved various abuse claims arising out of the Jesuits' operation of a residential school near Spanish, Ontario. Alleged abuse had been reported and certain investigations were carried out by social workers, the police, and the Jesuits themselves. The Jesuits' own investigation resulted in a report dated October 18, 1993 naming at least 10 possible victims including a certain Peter Cooper. At that time, the Jesuits were covered by the CGL policy referred to above for the period September 30, 1993 to September 30, 1994. In January 1994, a lawyer for Peter Cooper sent a letter to the Jesuits detailing the abuse against her client and inquiring about the possibility of settling the matter without litigation. The policy expired September 30, 1994. By that time, even though the Jesuits were well aware of both general and specific allegations of student abuse, the only person on whose behalf a claim for compensation had actually been made was Mr. Cooper.

Mr. Cooper eventually issued a lawsuit in 1995. Numerous other claims and lawsuits (approx. 100) emerged after the expiration of the policy. The insurer acknowledged coverage for, and a duty to defend, the claim by Mr. Cooper. However, the insurer denied coverage for all of the other claims on the basis that they were not "first made" during the policy period.

In these circumstances, the Court was called upon to determine what constituted a "claim" for coverage purposes. As noted, there was no express definition of the term in the policy. The Jesuits argued that all requests for compensation resulting from abuse at the Spanish School were essentially one claim, i.e. a set of circumstances (lack of supervision at the school) which provided the basis for compensation demands.

The Supreme Court of Canada rejected the claim for coverage and held that only Mr. Coopers Claim was “first made” within the policy term.

Even though the policy did not define the term "claim" the Court noted that at common law it required a "communication by or on behalf of a third party to hold the insured responsible for damages". The court emphasized that "the claimant must be the source of the claim", i.e. it must be made by the particular party whose rights have allegedly been violated or by someone else on his behalf with his full knowledge and approval. Knowledge by the insured of circumstances which might give rise to future compensation demands, even if the names of the potential claimants were known, did not meet the test.

The Court concluded that this common law definition of "claim" was supported by the structure of the policy itself. It relied in particular on the exclusion respecting “circumstances already known to the Insured and liable to give rise to a claim” and noted that the exclusion illustrated an important distinction in wording (between a claim and circumstances giving rise to it). It also noted that the Limit of Liability section of the policy contemplated multiple claims in the same year arising from the same circumstances, and the distinct "Notice of Occurrence" and "Notice of Claim or Suit" policy conditions which also drew distinctions between a "claim" and the circumstances giving rise to it.

In the result, the Court held that the language of the policy was not ambiguous, notwithstanding the absence of a definition of the word "claim", that the intent of the parties could be clearly drawn from the policy wording and that, in this particular case, there was no coverage for the claims presented.

This case is a refreshing departure from previous decisions of the Supreme Court of Canada dealing with policy wording that is difficult to construe. The courts have said on numerous occasions that, if the insurers wish to achieve specific results, they should use plain language to accomplish that end. The absence of a definition clause for such a key word as "claim" in a claims-made type of coverage would be thought by many observers to open the door to all sorts of arguments respecting ambiguity, usually a losing proposition for insurers. This decision reminds us that not every interpretation difficulty is an ambiguity and that the fundamental principle of interpreting contracts "as a whole" can be sufficient to resolve the issue.

The full text of the Supreme Court's judgment is available at:
http://scc.lexum.umontreal.ca/en/2006/
2006scc21/2006scc21.html

If you have any questions about the decision or any other insurance matter, please contact Nigel Kent (tel: 604.643.3135 email: npk@cwilson.com), or any other member of the Clark Wilson LLP Insurance Practice Group.