COURT FILE NO.: 05-CV-298186PD2
DATE: 20060316
RE: Cassels Brock & Blackwell LLP v. LawPro
BEFORE: Justice Farley
COUNSEL: Jerome R. Morse, for the Applicant, Cassels Brock (CB)
Warren H.O. Mueller, Q.C., for the Respondent, LawPro
HEARD: March 15, 2006
[1] Cassels Brock & Blackwell LLP (CB) applied for declarations and orders:
1. A declaration that CB, is an insured person as defined in the LawPro insurance policy 2005-001 (the ‘LawPro policy’);
2. A declaration that CB is entitled to payment by LawPro of the costs of defending the action prosecuted against CB as set out in the Statement of Claim issued in Toronto on March 7, 2005 bearing Court File Number 05-CV-285434PD2 (the ‘Bruno Action’), pursuant to the coverage afforded by the LawPro policy.
3. In the alternative to 2. a declaration that CB is entitled to a defence in the Bruno Action provided by LawPro pursuant to the coverage afforded by the LawPro policy.
4. A declaration that CB is entitled to retain and instruct counsel of its choice at LawPro’s expense to defend its interests in the Bruno Action;
5. An Order that LawPro will pay forthwith the reasonable defence costs incurred by CB to date in the Bruno Action on a solicitor and own client basis;
6. A declaration that LawPro will pay when due from time to time all reasonable future defence costs incurred in the Bruno Action on a solicitor and own client basis;
7. An Order for costs of this application on a substantial indemnity basis;
8. Such further and other relief as to this Honourable Court may deem just.
[2] The Bruno Action contains allegations of what can only be objectively described as bizarre facts.
[3] Notwithstanding that this application was brought October 7, 2005 (and CB was aware of LawPro’s position of non-coverage since Mr. Mueller’s letter of May 17, 2005), it appears that counsel did not discuss even mechanical matters such as timing of filings. The result was that material was handed up in the middle of the hearing. Part of this material was the case Palmieri v. Misir, [2003] O.J. No. 3518 (S.C.J.), where Mr. Morse was successful counsel. It seems to me that the following passages by Sanderson J. are instructive:
10. Counsel for Misir submitted that as the Plaintiffs have alleged in their Statement of Claim that he was negligent and breached his fiduciary duty to them in his capacity as their lawyer, and as the Supreme Court of Canada has directed this court to give the widest latitude to allegations in the pleading in determining whether a claim is within the policy, the insurer must defend this claim. Whether or not these allegations are subsequently proven at trial is immaterial. Ellis v. McQueen, [1967] 2 O.R. 399 (Ont. H.C.J.); Campbell v. Campbell (1979), 24 O.R. (2d) 379 (Ont. Sup. Ct.); Bhaduria v. Board of Governors of Seneca College (1979), 27 O.R. (2d) 142 (C.A.); Diggs v. Royal Insurance Co., [1986] O.J. No. 1642 at paragraph 5 (Ont. Dist. Ct.). LawPro’s duty to defend must be determined at an early stage in the proceedings solely on the basis of the content of the Statement of Claim and the coverage provisions in the Policy. He referred to McLachlin J.’s direction in Nichols, supra at 327 that the insured need not prove that the obligation to indemnify will in fact arise in order to trigger the insurer’s duty to defend. The mere possibility that a claim within the policy may succeed suffices. This statement has been recently adopted by the Ontario Court of Appeal in Trafalgar Insurance Co. of Canada v. Imperial Oil Ltd., (2001), 57 O.R. (3d) 425 (C.A.) and Cooper, supra.
…
35. While a plaintiff cannot use manipulative pleadings (i.e., mislabel something that is patently something else in order to improperly gain access to an insurer’s deep pocket), pleadings will generally be assumed to be true. The Supreme Court of Canada has directed lower courts hearing applications relating to the obligation to defend (a) to give the widest latitude to allegations in pleadings in determining whether they raise a claim within a policy, (b) not to conduct ‘a trial within a trial’ at such an early stage, (c) not to fact-find on matters at issue in the underlying tort obligation, (d) not to pre-determine issues in the underlying claim. See Cooper, supra at 422; Monenco, supra at 717, Nichols, supra at para. 17; Trafalgar, supra at para. 17.
36. In their Statement of Claim, the Palmieris have clearly alleged a legal retainer, Misir’s undertaking to advance and protect their legal interests and rights in respect of all their lottery winnings, and their understanding that he was acting as their lawyer. The Plaintiff allege that Misir’s firm provided them with a full range of legal services, including preparation of their wills and incorporation of an investment company, etc. Indeed, they allege his firm provided all legal services they were receiving during that time, consistent with their understanding and expectation that they had retained Misir to protect and advance their legal interests. The Plaintiffs have alleged they suffered losses as a result of Misir’s failure to do so. If, as the Plaintiffs allege, Misir held himself out as a lawyer capable of providing them with legal protection and if they retained him in advance to protect their legal interests in connection with all the lottery monies, a Court could find, for example, that he was required (a) to provide legal advice with respect to the debentures, (b) to provide or arrange due diligence and/or (c) to warn of the risks that would accompany the making of such investments, (d) and/or that he had a duty as their lawyer to advise them of his conflict of interest and they should obtain independent legal advice. On some or any of those bases, he could be found to be liable to the Plaintiffs in his capacity as their lawyer and to have caused them the losses claimed.
37. The Ontario Court of Appeal has made it clear in Alie, supra, that where more than one reasonable interpretation of an insurance contract is possible, the interpretation that favours the insured by recognizing a duty to defend will carry the day. While courts are not to rewrite insurance contracts, they may vigorously interpret ambiguities in insurance contracts in favour of an insured.
(emphasis added)
A further case handed up was Zurich Insurance Co. v. 686234 Ontario Ltd. 2002 CanLII 33365 (ON C.A.), (2002), 62 O.R. (3d) 447 (C.A.). In that case Borins J.A. for the court stated at para. 24:
24. The principle that coverage should be interpreted broadly in favour of an insured and that exclusion clauses should be strictly and narrowly interpreted against the insurer was affirmed by Major J. on behalf of the Supreme Court of Canada in Amos v. Insurance Corp. of British Columbia, 1995 CanLII 66 (S.C.C.), [1995] 3 S.C.R. 405 at p. 414, 127 D.L.R. (4th) 618. Citing as authority Excel Cleaning Services v. Indemnity Insurance Co., [1954] S.C.R. 169. [1954] 2 D.L.R. 721, Major J. added at p. 414 S.C.R. that “the construction given to a policy of insurance must not nullify the purpose for which the insurance was sold”.
He went on at para. 28:
28. From Weston Ornamental Iron Works it is clear that this court has concluded that even though an exclusion clause may be clear and unambiguous, it will not be applied where: (1) it is inconsistent with the main purpose of the insurance coverage and where the result would be to virtually nullify the coverage provided by the policy; and (2) where to apply it would be contrary to the reasonable expectations of the ordinary person as to the coverage purchased. As I noted earlier in discussing the American authorities, these principles are used by American courts in interpreting the absolute pollution liability exclusion in CGL policies. See, also, Re Pettit v. Economical Mutual Ins. Co. (1982), 40 O.R. (2d) 344, 143 D.L.R. (3d) 752 (H.C.J.); Wigle v. Allstate Insurance Co. of Canada 1984 CanLII 45 (ON C.A.), (1984), 49 O.R. (2d) 101, 14 D.L.R. (4th) 404 (C.A.), leave to appeal to S.C.C. refused 1984 CanLII 45 (ON C.A.), (1985), 14 D.L.R. (4th) 404n; Brissette Estate v. Westbury Life Insurance Co., 1992 CanLII 32 (S.C.C.), [1992] 3 S.C.R. 87, 96 D.L.R. (4th) 609.
[4] What has to be done however is to look at the claim against CB in context. The alleged scam is set out as a surefire, no risk, get rich quick proposal. It is set out at paras. 11-12 of the Bruno Statement of Claim:
11. Under the fraudulent scheme, potential investors were offered extremely high yields in a relatively short period of time through access to ‘bank guarantees’. The bank guarantees were purportedly bought at a discount and then were to be sold shortly thereafter for a premium. The scheme was premised on the theory that large banks around the world lend each other money by issuing notes with face values of $100 million or more, which are then resold a number of times at a profit. The term notes varied from 30 days to a year or more. For example, the group would purchase the note for 80 cents on the dollar and then resell it for 82 cents and then for 84 cents. Accordingly, within a one month period the investors were promised a substantial profit, as much as 20% per month.
12. The Investors were advised by Hyrniak, Cranston, Peebles and their associates, that the funds would be secured and that there was no risk of losing their money as the money was being held in a non-depletable trust account, which would be returned to the investor on 30 days notice.
Having been advised to wire $1 million US to CB in trust, Bruno at para. 21 of the Statement of Claim asserts:
21. Bruno decided to investigate the scheme that was being proposed before proceeding with the investment.
Bruno then goes on to allege that he met with Peebles, a then partner of CB, to discuss the investment. As indicated at para. 23, Bruno wanted “to ensure that the investment had the approval of [CB]”. Bruno then alleges at para. 26 that:
26. …During the course of the meeting Peebles advised Bruno of the following:
i. that Peebles was an agent of the investment group, acting in his capacity as a senior partner at [CB];
(emphasis added)
[5] The Statement of Claim then deals with the alleged negligence of CB and Peebles at section F commencing with para. 50:
50. In the alternative, at all material times Peebles and Cassels Brock were providing the Plaintiff advice and owed the Plaintiff a duty of care to ensure that they did not make representations about the scheme that were negligent.
It further goes on at section G commencing with para. 54 to deal with alleged breach of contract by Peebles and CB:
54. In the alternative, the Plaintiff states that, at all material times, it retained [CB] and Peebles to provide it with accurate and reliable advice about the investment between Hyrniak and Cranston.
55. The Plaintiff states that [CB] and Pebbles failed to provide accurate and reliable advice about the investment and that this constituted a breach of contract.
As will be seen from sections F and G, there is no allegation explicitly and directly that there was a retainer for legal services, rather it would appear that the only reasonable interpretation to be given to the Statement of Claim was that Bruno wanted to determine the soundness and safety (in the sense of return of capital and income thereon) of this investment scheme. It would have to be a most oblique and slanted interpretation in my view to determine that the Statement of Claim was alleging that the plaintiff/Bruno had retained CB and Peebles for legal advice (which just incidentally involved investment advice). This was not a Palmieri v. Misir situation or anything close thereto. Indeed the Statement of Claim is careful not to state that there was a legal retainer or that advice other than investment advice sought.
[6] Professional Services as a term is defined in the LawPro policy as follows:
PROFESSIONAL SERVICES means the practice of Law of Canada, its provinces and territories, and specifically, those services performer, or which ought to have been performed, by and on behalf of an INSURED in such INSURED’S capacity as a lawyer and member of the Law Society of Upper Canada or the law society of a RECIPROCATING JURISIDICTION, subject to Part II Special Provision A; and shall include, without restricting the generality of the foregoing, those services for which the INSURED is responsible as a lawyer arising out of such INSURED’S activity as a trustee, administrator, executor, arbitrator, mediator, patent or trademark agent.
(emphasis added)
It should be noted that the reference to the Insured’s activity as a trustee is with respect to “services for which the Insured is responsible as a lawyer arising out of the Insured’s activity as a trustee…”. It does not appear to me to be a reasonable interpretation of the Statement of Claim allegations that any Insured was providing legal services in connection with or arising out of any activity as a trustee. That is, while the funds were apparently wired to a CB trust account, there was no indication that CB and/or Peebles was providing plaintiff with legal services in respect of the holding of these funds. As a side note, I would observe that the Statement of Claim in para. 53 v alleges that CB “failed to put into place a system that would monitor the activities of Peebles and his use of the firm’s trust account”; this implicitly acknowledges that it was Peebles, not some other person at CB, who redirected the funds out of the trust account. (As a further side note, given that the funds had been redirected allegedly, then it would be difficult to see how in paragraph 53 vi CB could be criticized specifically for not ensuring that the instructions of Bruno with respect to the release of funds could be followed.)
[7] While the mere possibility that a claim within the policy may succeed is enough to impose a duty to defend upon the insurer and it is recognized that the policy be given a liberal purposive interpretation as to coverage, it would seem to me that there should not be an unnatural forced stretching of the words of the policy beyond justifiable reason so as to require coverage. See Mantini-Atkinson v. The Cooperators General Insurance Company 2005 CanLII 15455 (ON C.A.), (2005), 75 O.R. (3d) 442 (C.A.) at para. 20. Rather what is required is what is/are the reasonable interpretations of the policy and of the claim in the Statement of Claim. I do not see that this interpretation which I have come to would defeat the purpose of the LawPro insurance which is mandatory for LSUC lawyers – the coverage is there for lawyers/law firms as to their activities qua lawyers and in that respect with regard to legal advice and activities (plus matters of a non legal nature but which are ancillary to that in the sense of being a direct consequence of the legal work that investment advice and/or services is provided), but not with respect to investment advice and activities (or other entrepreneurial advice and activities). A person who is a lawyer may wear more than one hat, but just because at most times that person wears the hat of a lawyer does not mean that he always acts qua lawyer.
[8] Direct consequence means substantially more than “in connection with” or “related to”. It is more than one link in the chain, a necessary link; it is the proximate cause situation resulting in a particular outcome.
[9] Given that I have found (based on the allegations in the Statement of Claim being taken as true) that “Professional Services” were not provided to the plaintiff by Peebles/CB, then I do not see that the question of the $250,000 coverage of Endorsement No. 5 comes into play.
[10] In the end result the application for coverage by CB is dismissed. Counsel were agreed that the victor should be awarded costs of $15,000. CB is to pay LawPro $15,000 costs forthwithand in no event later than April 19, 2006.
___________________________
J.M. FARLEY
DATE: March 16, 2006
