Clark Wilson LLP Insurance Bulletin
Case Law Review Archive
Breach of Contract Claim Covered as "Wrongful Act", But Coverage Denied for Non-Disclosure in Application
Earlier this month, the British Columbia Supreme Court
issued reasons holding that a breach of contract claim
was covered under an Information Technology Errors and
Omissions policy, but that coverage should still be
denied, because the plaintiff failured to disclose
material information in its policy application.
The decision in Agresso Corporation v. Temple Insurance
is significant for a number of reasons:
it contains a very useful short summary of the
principles regarding both the duty to defend and
interpretation of insurance policies;
it confirms that breach of contract claims are
generally covered under liability policies, unless
they are expressly, and clearly, excluded;
specifically, it holds that breach of a contract was
covered under the definition of "wrongful act" in
the E&O policy in question; and
it underscores the need for full disclosure by
applicants (and therefore their brokers) of
'circumstances' which might give rise to a claim,
when applying for coverage - particularly under
claims made policies.
THE INFORMATION TECHNOLOGY E&O POLICY
Agresso Corporation designs, installs and maintains
computer software systems.
On February 21, 2003, Agresso applied for Information
Technology Errors and Omissions insurance from Temple
Insurance and two other carriers.
The insurers issued a policy for the period from
March 28, 2003 to March 28, 2004. Under the Insuring
Agreements in the policy, the insurers agreed to "to
defend the Insured against any Claim seeking Damages
payable under this policy." Some of the defined terms
of the policy were as follows.
First, a “claim” was defined as:
Written or oral notice received by the Insured
from any party advising that it is the intention
of such party to hold the Insured responsible for
a Wrongful Act or Infringement" which occurred
during the policy period.
Second, "Damages” were defined as:
Compensatory damages and, where insurable by law,
punitive damages which the Insured is legally
obligated to pay as a result of a judgement or
settlement...
Third, "Wrongful Acts” was defined as:
Any actual or alleged negligent act, error or
omission committed solely in the performance of
or failure to perform Insured Services.
Next, "Insured Services” was defined to "include one
or more of the following:
(a) the development, design, installation,
modification or servicing of computers, computer
hardware, firmware and/or software, computerized
networks or similar electronic information systems
or Internet services for a fee,
(b) the provision of computer system or network
related consulting, analysis, programming,
training or support for a fee, or
(c) the sale, leasing, licensing, distribution or
installation of computers or computer hardware,
firmware and software,
(d) any other computer related services provided for
others."
Further, clause 7 of the policy excludes claims based on
any:
(a) delay in the performance of any contract or
agreement, unless such delay is due to a
Wrongful Act on the part of the Insured;
(b) express or implied warranty or guarantee;
(c) cost guarantee or cost estimate; or
(d) disputes involving the Insured’s fees or
charges.
Finally, in the policy application, Agresso was required
to answer a number of questions regarding knowledge of
prior errors or claims. The most significant questions,
to which the applicant answered "No", were:
42. Please attach a list and status of all claims,
disputes, suits or allegations of non-performance
made during the past five years against the
Applicant or any director, officer, employee or
partner of the Applicant.
43. Is the Applicant or any of his/her employees aware
of any facts, circumstances or situations which
may reasonably give rise to a claim other than as
advised above?
This section of the application included the following
exclusion:
Without limitation of any other remedy available
to the insurer, it is agreed that if there be
knowledge of any such fact, circumstance or
situation, any claim or action subsequently
emanating therefrom is excluded from coverage
under the proposed insurance.
THE CLAIM, AND THE 'CIRCUMSTANCES' THE POLICYHOLDER
FAILED TO DISCLOSE IN ITS APPLICATION
In September and October 2000, Agresso entered software
licence, implementation and maintenance agreements with
Sault College of Applied Arts and Technology for an
academic management information system, using software
known as Agresso InTuition. The maintenance agreement
was to continue until September 24, 2005, or when
cancelled by one of the parties.
Agresso considered the implementation agreement with
Sault College to be successfully completed by
May 30, 2002, after the College had 'turned the switch'
and started using the software for its student
administration requirements. Before then, it had been
involved with Sault College in implementing the system
and working out problems. Agresso was aware of various
complaints about the software, but only became aware
that Sault College believed it was not able to solve
a key issue on January 20, 2003, when Ron van der Wees,
Agresso’s project manager, wrote to Andrew Clark, a
Vice-President, about a telephone conversation with
Jim Erb, the registrar of Sault College. Mr.
van der Wees reported that the registrar, on behalf of
Sault College:
strongly expressed their dissatisfaction with the
rate of progress on solving the whole issue of
students accounts receivable. It is their belief
at this point that we are unable to solve the issue.
Jim expressed many of the same ideas that we are
accustomed to (i.e. no resolution to outstanding
items, no partnership, lengthy implementation,
poor support) including the long held belief that
we don’t know how to support them.
I believe however that we may well have identified
the need to change the mechanism by which the
college’s issues are resolved and it stems from
their viewpoint that we did not implement the
product to their satisfaction...
If we continue to use the support mechanism, we
may potentially never deal with the core issue
(see below)...
Using a process based description, there is only
one real issue to deal with: students account
receivable is not achieving the results required.
...
... I believe we can take a project approach to
this but its not going to be billable work...
On February 19, 2003, Mr. Clark received information in
an e-mail that Sault College was going back to its older
system for invoicing and billing, but would continue
with the Agresso system for student records "at least
for the time being".
However, Agresso did not disclose such 'dispute or
allegations of non-performance', 'facts, circumstances
or situation', in its policy application of
February 21, 2003.
In April 2003, less than a month after the inception of
the policy, and two months after the application, Sault
College abandoned the Agresso contract. On June 30, 2003,
counsel for Sault College wrote to Agresso advising that
his firm had been retained to initiate legal proceedings
"for losses sustained as a consequence of the failed
implementation" of the InTuition software, and inquiring
whether Agresso was interested in resolving the matter by
meeting with Sault College on a "without prejudice" basis.
On January 20, 2004, Agresso notified its insurers of
a potential claim and a voluntary mediation with Sault
College. On February 10, 2004, the insurers denied
coverage, on the basis of non-disclosure in the policy
application. And, when Sault College sued Agresso for
misrepresentation and breach of contract, on July 28, 2004,
the insurers refused to defend the action.
Agresso then sued the insurers for coverage, and
specifically a declaration that they had a duty to defend
the action by Sault College.
DUTY TO DEFEND AND POLICY INTERPRETATION PRINCIPLES
Paragraphs 31-38 of the decision summarizes the main
principles regarding both the duty to defend and
interpretation of insurance policies. They are well
worth reading by anyone interested in a short summary
of such principles.
COVERAGE FOR BREACH OF CONTRACT - THE EXCEPTION;
NOT THE RULE
It is quite commonly - but mistakenly - believed that only
negligence or other tort claims are covered by liability
policies, and that claims for breach of contract either
fall outside the scope of standard insuring agreements, or
are generally excluded. This misconception was largely put
to rest, in the context of a CGL policy, by the B.C. Court
of Appeal in Cultus Lake v. Gestas.
That case holds, in essence, that the broad words "damages
which the Insured is legally obligated to pay" found in
standard insuring agreements like the one in Agresso v.
Temple (quoted above), include damages for breach of
contract.
The decision in Agresso underscores this point, citing
Cultus Lake, and applying it in the context of an E&O policy.
COVERAGE FOR BREACH OF CONTRACT, AS "WRONGFUL ACT"
UNDER E&O POLICY
In Agresso, the Court considered both the insuring agreement
and the relevant exclusion (clause 7, quoted above), stating
as follows:
The contract of insurance in this case provides
coverage for "wrongful acts", which are defined as
"[a]ny actual or alleged negligent act, error or
omission committed solely in the performance of or
failure to perform insured services." "Insured
services" by their definition must include services
provided under contract. In my view, there is
coverage for claims alleging a failure to perform
contractual services if the failure is due to a
wrongful act. There is no general exclusion for
claims framed in breach of contract. There are
however, exclusions from matters that arise from
breach of contract. Clause 7 excludes claims based
on express or implied warranties or guarantees, and
claims based on delay in the performance of a
contract, but it specifically does not exclude a
delay that is due to a wrongful act.
The Court then noted that Sault Colleges' Statement of
Claim was "imprecise" (as is often the case), and went on
to consider various of the specific allegations against
Agresso, in some detail. At the end of such analysis, the
Court held that:
While many of the claims arise from events [which
are not covered], there are a number of alleged
failures to address and remedy problems..., which
are based on failures in the performance of the
contracted services. In my view, those alleged
failures arise from "wrongful acts" as defined in
the policy...
...
Considering the substance and true nature of the
claims in the pleadings, as well as the context and
scope of the contracts between Agresso and Sault
College as referred to in the pleadings, I conclude
that the Sault Action alleges, in part, a state of
facts that, properly construed, would support an
action that could potentially fall within coverage.
As such, subject to non-disclosure or other defences to
coverage, the insurers owed Agresso a duty to defend the
Sault College action.
DENIALS OF COVERAGE FOR MATERIAL NON-DISCLOSURE IN
THE POLICY APPLICATION
Just like it did with the duty to defend and interpretation
of insurance policies, the Court succinctly summarized the
principles regarding non-disclosure in policy applications.
Namely:
A failure to disclose information in an
application for insurance does not render an
insurance contract void or voidable unless the
failure to disclose is material to the contract.
Whether such a failure is material is a question
of fact... The test for determining materiality
is objective. The question is whether, if the
information had been disclosed, it would have
influenced the judgment of a reasonable or prudent
insurer in fixing the premium or accepting the
risk... The onus is on the insurer to prove both
the failure to disclose and that the failure was
material...
The Court’s recitation of the facts was considerably more
detailed than the brief summary at the beginning of this
bulletin. However, the critical points are noted above.
Namely, although Agresso considered the implementation
agreement with Sault College to be successfully completed
by May 30, 2002, there were on-going problems, and by
January 20, 2003, Agresso was aware that Sault College
was not satisfied with its progress on solving a major
problem and believed that Agresso was not able to solve
it.
Comparing these facts to those in two of the leading
cases, the Court held as follows:
I am satisfied that a reasonable person in
Agresso’s position at the time the application
for insurance was made would have been of the
opinion that the circumstances indicated that
there was a reasonable likelihood that a claim
would be made against it by Sault College. I am
also satisfied that if the [insurers] had been
informed of the situation with Sault College,
they would have acted differently by refusing to
accept the risk or imposing special conditions.
Accordingly, the defendants have established that
Agresso failed to disclose information that was
material to the contract. Under the terms of the
policy, any claim emanating from this is excluded
from coverage, and under s. 13 of the Insurance
Act, the insurance contract is void.
So, having satisfied the Court that it was otherwise
entitled to a defence, the policyholder fell on its own
sword, by failing to make full disclosure in the
application form and, specifically, providing a complete
answer to question 42. The need to do so is particularly
acute under claims made policies. This is given both the
typically much more detailed application forms used by
E&O and D&O insurers, especially regarding prior events,
and the fact that such questions are asked on each
application, for every year of coverage.
This is to be distinguished from CGL policies, which are
written on an occurrence, as opposed to claims made basis.
In practice, CGL insurers often require the completion of
detailed forms only on the initial application by their
policyholders. Such coverage is generally renewed with
a minimum of updated information (if any) being requested.
As the Agresso case indicates, denial of coverage due to
non-disclosure or misrepresentation in the policy
application may be a greater risk for applicants under
claims made E&O (and D&O) policies. As such, a higher
standard of due diligence will be required in disclosing
not merely claims, but disputes or allegations, facts,
circumstances or situations, which may result in a claim
being made. And this should not be of concern only to
applicants/policyholders, but to the brokers who place
coverage on their behalf, and therefore advise or assist
them with respect to completing application forms, or not.
The reasons for judgment in Agresso Corporation v. Temple
Insurance can be accessed on the BCCA website.
If you have any questions about this decision, or other
insurance related issues, please contact Neo Tuytel (tel:
604.643.3180, email: njt@cwilson.com), or any other member
of the Clark Wilson LLP Insurance Practice Group.
