The Ontario Court of Appeal’s (the “Court“) recent decision in Davies v AIG Insurance Company of Canada, 2024 ONCA 509 (“Davies“), deals with an insurance coverage dispute related to the defense of a Ponzi scheme fraud claim. Notably, the Court’s decisions underscores the significance of full and frank disclosure by insureds when applying for coverage.
In Davies, the subject Applicants acted as the principals of related Ontario real estate development companies (the “Companies”). AIG Insurance Company of Canada (“AIG”) issued directors’ and officers’ liability insurance policies (the “Policies”) to the Companies. As part of this action, the Applicants were named as defendants in two separate lawsuits alleging that they used the Companies to conduct a Ponzi scheme and that the Companies’ alleged real estate developments were funded by millions of dollars in syndicated mortgages (the “Underlying Actions”).
Soon after being named as defendants in the Underlying Actions, the Applicants sought coverage under the Policies for their legal costs of defending same. AIG initially covered the Applicant’s defence costs but later withdrew coverage on the basis that the Applicants’ applications for coverage contained material misrepresentations by failing to disclose that certain syndicated mortgages financed the Companies. The parties to the matter brought applications to determine whether AIG was responsible for covering the defense costs of the Applicant. The application judge presiding over the matter determined that AIG did have a duty to cover the costs, as there was no misrepresentation during the application process for coverage.
On appeal, the Court ultimately found the application judge erred by failing to find a material misrepresentation. The appeal judge noted the complete absence of any discussion regarding syndicated mortgages as the financing mechanism employed by the Applicants and highlighted the failure of the application judge to consider all “relevant evidence” in determining whether the Applicants misrepresented the facts when applying for coverage.
Furthermore, the Court concluded that the application judge had erred by failing to recognize the importance of the misrepresentation, stating that the judge’s materiality assessment was flawed because they did not consider the misrepresentation when making their determination. The Court determined that AIG had no obligation to cover the Applicants’ defense expenses due to the exclusions outlined in the Policies’ “representations and severability clauses.” Consequently, AIG was granted a declaration for same and was awarded damages for the defense costs already incurred.
Significantly, the ruling in Davies stresses the importance of insured parties being transparent and forthcoming in their disclosures when obtaining insurance coverage. Additionally, Davies suggests that even seemingly harmless misrepresentations can have far-reaching effects, potentially resulting in the absence of coverage for insureds.
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