The Ontario Superior Court of Justice’s decision in Cronnox Inc. v. Lloyd’s Underwriters serves as a lesson to insurers and those they insure to be diligent about reporting and covering claims under professional liability policies.
In this case, an engineering firm (Cronnox Inc.) changed professional liability insurers and neglected to inform the first insurer of a potential claim before the policy with the first insurer expired. Justice Cavanagh held that neither the current nor a former insurer had a duty to defend or indemnify Cronnox, despite there being no gap between the start and end date of the insured’s professional liability policies.
Cronnox had switched insurers on November 11, 2013, moving their “claims-made-and-reported” policy from Lloyd’s Underwriters to Liberty Mutual Insurance Company.
Cronnox received correspondence in September 2013 from the subrogated insurer of the owner of the Holiday Inn hotel in Oakville advising that it intended to make a claim against Cronnox. The claim involved a May 13, 2012, explosion in the hotel’s mechanical room, allegedly caused by a faulty electrical cable.
Cronnox was asked to notify its insurer. However, Cronnox refused to do so, as it was not the installing contractor. In the September 2013 correspondence, Cronnox was invited to attend an inspection of the electrical cable. While awaiting notice of the inspection date, Cronnox took no other steps to report the potential claim to Lloyd’s.
Shortly thereafter, on November 11, 2013, the Lloyd’s policy expired. Cronnox entered into a new policy of insurance with Liberty that provided coverage beginning the same date.
Cronnox was ultimately named as a defendant in the action arising from the explosion. When the claim was served in February 2014 the second insurer, Liberty, denied coverage invoking a “prior notice” exclusion in the policy.
When Cronnox looked to the first insurer (Lloyd’s), the insurance adjuster assigned to handle the claim initially appointed counsel to defend Cronnox in the underlying litigation. He had not reviewed the policy declarations at the time and mistakenly believed that the Lloyd’s policy was a “claims made” policy and that it provided for a duty to defend. In fact, the policy required the insured to give written notice of potential claims and included only a right – but not a duty – to defend.
Over two years after Lloyd’s insurance adjuster appointed defence counsel, Lloyd’s notified Cronnox that there was no coverage available to respond to the claim in the underlying litigation.
After a failed claim against Liberty challenging their denial of coverage, Cronnox sought a judicial declaration of coverage against Lloyd’s.
Among other things, Cronnox argued that, as a result of Lloyd’s delay in investigating whether there was coverage for this claim under the policy, Lloyd’s was precluded by its representations and conduct from denying coverage and withdrawing from the defence.
Justice Cavanagh of the Ontario Superior Court agreed with Lloyd’s, holding that the insurer did not owe Cronnox a duty to defend or indemnify.
The Court held that Lloyd’s acts and omissions in failing to promptly investigate the claim to determine whether there was coverage did not preclude the insurer from withdrawing from the defence and denying coverage. The Court held that there was no legal relationship between Lloyd’s and Cronnox when the insurance adjuster mistakenly appointed counsel to defend the claim in February 2014. Consequently, no underlying legal relationship could have been affected by the insurance adjuster’s actions. Cronnox, therefore, was not able to rely on the insurance adjuster’s mistake to require Lloyd’s to continue to defend the action.
This case is a reminder that, when considering switching insurance policies, it is important for an insured with a “claims-made-and-reported” policy to report any claims – even dubious ones – to their current insurer promptly.
As for insurers, this case indicates that mistakenly providing coverage and appointing counsel to defend a claim will not necessarily preclude the insurer from later denying coverage if there is no longer a policy in place.
Emma Romano is an associate at Bersenas Jacobsen Chouest Thomson Blackburn LLP, with a focus on media and defamation, aviation, commercial and general civil litigation.