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“First Past the Post” Principle Upheld
Published in the November 2007 issue of Litigation Notes - View Article
Synopsis: D&O insurance; settlement of class action and coverage litigation deemed to exhaust limits although limits not actually paid; settlement deemed reasonable despite possibility that coverage would not be available for director
The Ontario Superior Court of Justice recently released an interesting decision involving insurance coverage and arising from the ongoing litigation involving Conrad Black and his various companies. Sun-Times Media Group Inc. (“STMG”), which was formerly known as Hollinger International Inc. and Ravelston Corporation Limited had $130 million worth of executive and organization liability insurance. The primary layer and two excess layers, totalling $50 million, were exhausted in the settlement of a derivative action brought against Hollinger International Inc., leaving $80 million of coverage available in the third and fourth excess layers. (the insurers on the third and fourth excess layers will be referred to herein as the “Excess Insurers”).
STMG and its former officers and directors were seeking indemnification from the Excess Insurers in connection with various class actions commenced in the United States and ultimately consolidated in a single action in Illinois, as well as class actions commenced in Ontario, Quebec and Saskatchewan. The Excess Insurers denied coverage and coverage actions were commenced in Ontario and Delaware. The Excess Insurers attempted to stay the Delaware action unsuccessfully and the Delaware court made an order requiring them to fund the insureds’ defence expenses.
In late 2006, the parties entered into a mediation process, which ultimately resulted in the settlement of the class actions and of the coverage issues. The settlement agreement involved the Third Layer Excess Insurer paying $30 million of its $40 million of available insurance and the Fourth Layer Excess Insurer paying $24.5 million of its $40 million of available insurance. It was an express term of the settlement that the limits of the Excess Insurers’ policies be deemed to be exhausted.
The parties sought approval from the Ontario Superior Court of Justice for the settlement and the Application was served on 70 persons and entities who might be affected by the settlement. Only one, an individual named Ralph Barford, intervened to oppose the Application. Barford was not a defendant in the underlying litigation which was the basis of the settlement agreement, but had been sued by Hollinger International Inc. in a separate action. He had incurred substantial defence expense and anticipated that he may incur further expense for which he should be entitled to be indemnified by the Excess Insurers. If the settlement were approved and the limits deemed to be exhausted, there would not be money available to satisfy his claims.
The Court was faced with deciding whether the settlement was “…in all the circumstances within the range of reasonableness, recognizing that it was a compromise”. The Court considered the factors adopted by the Ontario Superior Court of Justice in Ontario New Home Warranty Program v. Chevron Chemical, (1996) 46 O.R. (3d) 130 being: 1) likelihood of recovery or likelihood of success;
2) amount and nature of discovery, evidence or investigation; 3) settlement terms and conditions; 4) recommendation and experience of counsel; 5) future expense and likely duration of litigation; 6.) recommendation of neutral parties, if any; 7) number of objectors and nature of objections; and 8) the presence of arms length bargaining and the absence of collusion.
Everyone accepted the “first past the post” principle, which establishes that claims under insurance policies will be paid as presented on a first come, first served basis. Counsel for Barford argued, however, that the principle is only applicable when the insurer has exhausted its limits in the settlement and that a settlement that compromised the ability of a non-settling insured to claim against the full limits of the policy would be bad faith on the part of the insurer.
However, the Court was of the opinion that the settlement was reasonable. It stated that there was little doubt “…that if the class actions and coverage issues were all to go forward to conclusion, the Excess Insurers policy limits would be more than exceeded by the claims made against them”. It also felt that the settlement was reasonable because
1) There had been no judgment in settlement made that would require the insurers to make payments on behalf of Barford. 2) There was a viable argument that the ‘insured vs. insured’ exclusion in the Policies might operate to deny coverage to Barford 3) The Court could always intervene to protect any rights Barford may have to indemnity under the policy of insurance prior to completion of the settlement agreement. 4) The concept of ‘first past the post’ is based on the premise that the rights of respective insureds are several rather than joint rights, which permits the claims of individual insureds to resolve claims independent of one another.
Sun-Times Media Group Inc. v. Royal & Sunalliance Insurance Company of
Canada, 2007 CanLII 50287