It is a common practice for a board of directors to have as members, professionals such as lawyers to bring specialized knowledge to governance of the corporation. Often, the corporation has its own Directors and Officers Liability Insurance to cover these professionals. The professional’s firm may have its own Outside Directors Liability insurance policy to cover its members who serve on outside boards.

The court recently considered the question of which of these two insurance policies should defend or pay the defence costs of lawyers who were sued in their capacity as directors of an insolvent insurance company. In that case, AIG provided directors and officers liability insurance to the company as the primary insurance. Lloyd’s provided excess insurance to the lawyers under their firm’s Outside Directors Liability insurance. The AIG policy did not provide a duty to defend but provided reimbursement for defence costs incurred. On the other hand, the Lloyd’s policy stipulated that it would follow the form of the underlying AIG insurance with respect to indemnity, and that it would defend the insureds in the even that the underlying insurance did not provide a defence. The AIG policy had an “other insurance” clause that specifically made it excess over any other insurance that provided a duty to defend.

Lloyd’s refused to defend the lawyers or pay their defence costs. Lloyd’s argued that its “follow form” provision in the insuring agreement transformed the Lloyd’s policy into one that reimbursed defence costs similar to the AIG policy, and this negated its duty to defend which was set out in a separate section of the policy.

AIG settled the claim without contribution from Lloyd’s with respect to indemnity.

The lawyers sought a court declaration that either AIG, Lloyd’s, or both should pay their defence costs. Despite the lawyers’ stated neutrality as to which insurer is ordered to pay, they adopted and argued Lloyd’s position that AIG alone should pay. The court commented that this position might be attributed to the notion that the law firm’s premiums could be affected by having its own insurer pay, as opposed to AIG.

The court accepted AIG’s interpretation of the Lloyd’s policy. The “follow form” provision only applied to Lloyd’s duty to indemnify. Lloyd’s duty to defend was contained in a separate section of the policy and was not affected by the “follow form” provision. The court agreed with AIG that the lawyers’ and Lloyd’s interpretation would render the “duty to defend” provisions meaningless since the Lloyd’s policy will always follow the form of the underlying insurance, and there could be no instance that would trigger a duty to defend. The court cited general principles established in case law that a duty to defend is separate from the duty to indemnify, and interpreted the Lloyd’s policy in a manner that was commercially reasonable.

AIG was represented by Ramon V. Andal of Keyser Mason Ball LLP.

Goodman and Reeve v. AIG Commercial Insurance Company of Canada, American Home Assurance Company and Lloyd’s Underwriters, 2009 CanLII 57159 (Ont. S.C.)

If you have any questions or require any additional information please contact:

Ramon Andal
Insurance Lawyer
Tel: 905.276.0415
Email: randal@kmblaw.com