Ontario: Court rules bankrupt condo developer who deceived a condominium corporation and a purchaser is not entitled to legal defence under the corporation's insurance policy

Boland v. Allianz Insurance Company of Canada, 2006 CanLII 16539 (ON S.C.)

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Date:2006-05-19
Docket:05-CV-297819PD1

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COURT FILE NO.:  05-CV-297819PD1

DATE:  20060519

 

 

 

SUPERIOR COURT OF JUSTICE – ONTARIO

 

RE:                       LAWRENCE ALLAN BOLAND (Applicant) v. ALLIANZ INSURANCE COMPANY OF CANADA and GERLING GLOBAL GENERAL INSURANCE COMPANY and GCAN INSURANCE COMPANY (Respondents)

BEFORE:            Justice C. Horkins

COUNSEL:         Richard Macklin, for the Applicant

                                    Leslie A. Wright, for the Respondent Allianz Insurance Company of Canada

DATE HEARD:   March 29, 2006

E N D O R S E M E N T

 

introduction

[1]               This is an application pursuant to rules 14.05(3)(d) and (h) of the Rules of Civil Procedure seeking a declaration that a duty to defend is owed pursuant to a policy of insurance.

[2]               On two occasions the applicant Lawrence Allan Boland was a member of the board of directors of Metropolitan Toronto Condominium Corporation 1056 ("MTCC 1056"): July 1993 to June 1994 and September 1997 to November 1998. MTCC 1056 has commenced action 05-CV-290574PD2 against Mr. Boland for intentionally or negligently failing to disclose his knowledge about the illegal construction of condominium unit 113.

[3]               Mr. Boland seeks an order requiring the respondent Allianz Insurance Company of Canada (now ING Insurance Company of Canada) to defend him and that he be permitted to appoint his own counsel at ING’s expense. The application against the other respondents has been abandoned.

The Legal Framework

[4]               The pleadings govern the duty to defend. If the claim alleges facts which if proven would fall within the coverage of the policy, then the insurer is obliged to defend.  It is not necessary to prove that the obligation to indemnify will in fact arise to trigger the duty to defend. As stated in Nichols v American Home Assurance, [1990] S.C.J. No. 33 (at para. 17) “The mere possibility that a claim within the policy may succeed suffices. In this sense … the duty to defend is broader than the duty to indemnify.”

[5]               To determine if a duty to defend exists, there must be an assessment of the statement of claim to ascertain the substance and true nature of the claim. The duty to defend is not triggered by labels used in the claim but it is the true nature of the claim that matters. See Non-Marine Underwriters, Lloyd's of London v. Scalera, 2000 SCC 24 (CanLII), [2000] 1 S.C.R. 551 (at para 50).

[6]               Coverage for intentional conduct is excluded. When both intentional and negligent conduct is properly pleaded, the issue is whether the negligent conduct is derivative of the intentional conduct and therefore excluded. In Scalera the court explained how to resolve this issue:

¶ 85     Having construed the pleadings, there may be properly pleaded allegations of both intentional and non-intentional tort. When faced with this situation, a court construing an insurer's duty to defend must decide whether the harm allegedly inflicted by the negligent conduct is derivative of that caused by the intentional conduct.  In this context, a claim for negligence will not be derivative if the underlying elements of the negligence and of the intentional tort are sufficiently disparate to render the two claims unrelated. If both the negligence and intentional tort claims arise from the same actions and cause the same harm, the negligence claim is derivative, and it will be subsumed into the intentional tort for the purposes of the exclusion clause analysis. If, on the other hand, neither claim is derivative, the claim of negligence will survive and the duty to defend will apply. Parenthetically, I note that the foregoing should not preclude a duty to defend simply because the plaintiff has pleaded in the alternative.  As Pryor, "The Stories We Tell: Intentional Harm and the Quest for Insurance Funding", supra, points out at p. 1752, "[p]laintiffs must have the freedom to plead in the alternative, to develop alternative theories, and even to submit alternative theories to the jury". A claim should only be treated as "derivative", for the purposes of this analysis, if it is an ostensibly separate claim which nonetheless is clearly inseparable from a claim of intentional tort.

¶ 86     The reasons for this conclusion are twofold. First, as discussed above, one must always remember that insurance is presumed to cover only negligence, not intentional injuries. Second, this approach will discourage manipulative pleadings by making it fruitless for plaintiffs to try to convert intentional torts into negligence, or vice versa. While courts should not concern themselves with whether or not pleadings are designed to generate insurance coverage, following the guidelines set out above will provide insurers with sufficient protections against manipulative pleadings.

[7]                  In Scalera Iacabucci J. provides a three step process to determine if a claim could trigger indemnity:

¶ 50   Determining whether or not a given claim could trigger indemnity is a three-step process. First, a court should determine which of the plaintiffs legal allegations are properly pleaded. In doing so, courts are not bound by the legal labels chosen by the plaintiff. A plaintiff cannot change an intentional tort into a negligent one simply by choice of words, or vice versa. Therefore, when ascertaining the scope of the duty to defend, a court must look beyond the choice of labels, and examine the substance of the allegations contained in the pleadings. This does not involve deciding whether the claims may have any merit; all a court must do is decide, based on the pleadings, the true nature of the claims.

¶ 51   At the second stage, having determined what claims are properly pleaded, the court should determine if any claims are entirely derivative in nature. The duty to defend will not be triggered simply because a claim can be cast in the terms of both negligence and intentional tort. If the alleged negligence is based on the same harm as the intentional tort it will not allow the insured to avoid the exclusion clause for intentionally caused injuries.

¶ 52     Finally, at the third stage, the court must decide whether any of the properly pleaded non-derivative claims could potentially trigger the insurer's duty to defend.

[8]               In summary this is the legal framework that will be used to consider whether the policy should respond to provide a defence to Mr. Boland. The relevant provisions of the policy follow.

The Insurance Policy

[9]               The ING policy is a Comprehensive Condominium Policy that includes a “Directors’ and Officers’ Liability Section”. The insuring agreement provides coverage for claims that are made against officers and directors during the policy period for a wrongful act that occurs during the policy period. The policy period is April 30, 2005 to April 30, 2006. This policy was a renewal of a previous policy but each renewal contract of insurance of this type is considered to be a separate contract. See Toronto General Trusts Corp. v. Gooderham, [1936] 2 D.L.R. 545 (S.C.C.) at p. 555.

[10]           The Insuring Agreement states (at p. 64):

The Insurer agrees with the Directors and Officers of the Corporation and with the Corporation in consideration of the payment of the premium and in reliance on the statements made to the Insurer in the Application forming a part hereof, and subject to all the terms and conditions of this Policy as follows:

with the Directors and Officers of the Corporation that if, during the Policy Period any claim or claims are made against any of the Directors or Officers, individually or collectively, for a Wrongful Act which occurs during the Policy Period, the Insurer shall pay on behalf of such Directors and Officers any loss which such Directors and Officers shall become legally obligated to pay except for such loss as to which the Corporation shall indemnify such Directors and Officers;

[Emphasis added]

[11]           Wrongful Act is defined as follows (at p. 64):

"Wrongful Act” shall mean any actual or alleged breach of duty, neglect, error, mis-statement, misleading statement or act or omission by the Directors or Officers while acting solely in their respective capacities as Directors and Officers of the Corporation.

[12]           All of the allegations in the claim occurred long before the Policy Period and so they do not fall within the Insuring Agreement. However, coverage is extended to wrongful acts occurring prior to the policy period, if the claim is made during the policy period and provided (at. p. 64):

(a)                that the Directors and Officers of the Corporation, at the Effective Date of the Policy, had no knowledge of, and could not reasonably foresee, any circumstances which might result in a claim, and;

(b)               that there is no other insurance applicable to such Wrongful Act.

[13]           If Mr. Boland can establish that the plaintiff’s allegations could, if proven, fall within the extension of the insuring agreement, the onus shifts to the insurer to show that the claim falls outside of coverage because of an applicable exclusion. 

[14]           There are two relevant exclusions (at p. 65):

6.         EXCLUSION

The Insurer shall not be liable to make payment for loss in connection with any claim made against the Directors or Officers:

                        ….

(d)       for liability based upon or attributable to any Director or Officer gaining in fact any personal profit, remuneration or advantage to which they were not legally entitled

(e)        for any dishonest, fraudulent, criminal or malicious act or any deliberate error or omission committed by or with the knowledge of or consent of any Director or Officer”

[15]           The duty to defend set out in paragraph 3 states (at p. 64):

With respect to such Insurance as is afforded by this Policy the Insurer shall defend any civil suit against:  (a) the Directors and Officers of the Corporation, or any of them; (b) the Corporation, but only with respect to the acts or omissions of the Directors and Officers of the Corporation, alleging any Wrongful Act which is covered by this Policy even if such suit is groundless, false or fraudulent, but the Insurer may make such investigation, negotiation and settlement of any claim or suit as it deems expedient. The insurer shall not be obligated, however, to pay any claim or judgment or to defend any suit after the Limit of Liability has been exhausted by payments of Loss. [Emphasis added.]

[16]           In summary a defence will be provided to Mr. Boland for a wrongful act that is covered by the extension of the insuring agreement and covered by the policy.

is the EXTENSION OF the insuring agreement triggered?

[17]           It is the position of ING that no extension of coverage is available because at the effective date of the policy, Mr. Boland had knowledge of the illegal use of the attic space in unit 113 and could reasonably foresee that this might result in a claim.

[18]           Mr. Boland argues that mere knowledge of the illegal use of the attic space is not enough to trigger the exclusion to the extension. However, this argument alone is not enough to escape the excluding effect of section 2(a). The allegations in the statement of claim, which are assumed to be true, must be considered and they demonstrate that Mr. Boland could reasonably foresee that the illegal attic space might result in a claim. The consequences of the illegal use of the attic space are described in the claim as foreseeable. In paragraph 25 the claim alleges that Mr. Boland turned a blind eye to the foreseeable consequences of Weldon’s use of the attic space. At paragraph 26, the plaintiff alleges that Mr. Boland failed to act on what he knew or ought to have known. This is simply another way of saying that he failed to act on what he knew or could reasonably have foreseen. Further it is alleged in paragraph 29 that Mr. Boland knew that the true legal status had not been disclosed before the sale of unit 113 in January 1998.

[19]           For these reasons I conclude that Mr. Boland is not covered by the extension to the Insuring Agreement and so no defence is owed to him under the policy. However should another court disagree with this conclusion, I will assume that the extension applies and proceed to consider if a defence should be provided. This requires me to review the claim and follow the three-step process to determine if the claim could trigger indemnity.

A Review of the Statement of Claim

[20]           The claim seeks a declaration that Mr. Boland “intentionally or negligently breached his legal duties” to MTCC 1056, while Mr. Boland was a director of MTCC 1056. The sole basis for the breach is set out in the “overview” section of the claim (at paras. 4-6):

4.       MTCC 1056 sues Boland because as a director of MTCC 1056 he intentionally or negligently failed to disclose to MTCC 1056 his knowledge that Richard Weldon (“Weldon”), the original owner of another unit (Townhouse 113) had incorporated common elements attic space as third floor living space for Townhouse 113, contrary to the Declaration.

5.       When Weldon subsequently sold Townhouse 113 to Kelly-Jean Orr (“Orr”) in January 1998 the illegality of the third floor was unknown to MTCC 1056 and all of its directors at the time, excluding Boland. Orr subsequently sued MTCC 1056, Boland, and other parties.

6.       But for the conduct of Boland, the status of the third floor Townhouse 113 would have been known earlier, and MTCC 1056 would not have incurred any potential liability to Orr, and its legal costs in connection with her litigation. The particulars of paragraphs 4 to 6 are set out hereafter.

[21]           The claim then provides the following background facts in paragraphs 7 to 21.

[22]           Mr. Weldon and Mr. Boland were officers and directors of Grand Harbour, the developer and declarant of MTCC 1056. They were also owners of Rylar, one of Grand Harbour’s parent companies.

[23]           Grand Harbour developed financial difficulties. Prior to July 5, 1993, the declaration date for MTCC 1056, Messrs. Boland and Weldon negotiated financial arrangements with the lenders of Grand Harbour that eliminated liability on the part of Messrs. Weldon and Boland, and Rylar for all losses on the project and allowed Messrs. Boland and Weldon to each purchase a townhouse unit in the project. Mr. Weldon purchased unit 113.

[24]            Mr. Boland knew that the boundary of unit 113 stopped at the ceiling of the second floor, that the attic space above it was a common element which could not be incorporated into the unit, that the available zoning was at its maximum, and that the size of the unit could not be expanded without consent of the Committee of Adjustment. 

[25]           Mr. Boland knew that the lenders were anxious to obtain an early declaration date, that the lenders would not accept any delay caused by steps taken to legally redefine the unit boundary for unit 113, and that Grand Harbour could not delay the declaration date. Mr. Boland also knew that any attempt to delay the declaration date would jeopardize his deal to acquire a unit.

[26]           Prior to the declaration date, Mr. Weldon caused Grand Harbour to construct his unit to incorporate the common element space of the attic. On the declaration date, July 5, 1993, MTCC 1056 was registered with the boundary for Unit 113 ending at the ceiling of the second floor. This was done with the knowledge of Messrs. Boland and Weldon. Construction of the third floor in unit 113 continued after the declaration date.

[27]           Mr. Boland spoke to Mr. Weldon about the attic space above unit 113 and reminded Mr. Weldon that the space was part of the common elements and not zoned for residential use. Mr. Boland told Mr. Weldon to “take care of legalizing this problem.”

[28]            Mr. Boland took no other steps during his first term as a director (July 1993 to June 1994) to determine what Mr. Weldon did to remedy the status of the third floor or to alert other members of the board of directors or the property manager that the third floor of Mr. Weldon’s unit contravened the declaration. 

[29]           In January 1998, Mr. Weldon sold unit 113 to Kelly-Jean Marie Orr. This sale occurred during Mr. Boland’s second term on the board of directors. Mr. Boland took no steps before this sale to determine what, if anything, Mr. Weldon had done to legalize the status of the third floor and never told the other directors of his prior knowledge or his conversation with Mr. Weldon concerning the illegal use of the attic space.

[30]           On April 1 1998, the solicitors for MTCC 1056 informed the Board of Directors of MTCC 1056, that the third floor of unit 113 contravened the Declaration. Mr. Boland never told the other Board members about his prior knowledge or his conversation with Mr. Weldon concerning the attic space.

[31]           In March 2001, Ms. Orr sued MTCC 1056, Mr. Boland and others as a consequence of the illegal status of the third floor of unit 113. The Orr action is still pending. Mr. Boland did not disclose his knowledge about the attic space until he was examined for discovery in the Orr litigation in January 2005.

[32]           Mr. Boland’s legal duties are set out in paragraph 24. The claim alleges that Mr. Boland had a fiduciary duty of honesty, loyalty and candor as a director. He was not to allow his own interests to conflict with these duties. He owed a duty of skill and care pursuant to section 24 of the Condominium Act, 1998, S.O. 1998, c. 19 and a “common law duty to exercise reasonable care in the management of the affairs of MTCC 1056 to the standards of a reasonable person in the similar circumstances.”

[33]           Mr. Boland’s breach of his duties is set out in paragraphs 25 through 32. A review shows several clear allegations of intentional conduct. In contrast allegations of negligent (non-intentional) conduct are not obvious. The only reference to negligent conduct is in paragraph 1 that alleges Mr. Boland “intentionally or negligently breached his legal duties” and this is repeated in the “overview” paragraph 4. The claim does not follow the typical format where the allegation of negligence is followed by a list of the particulars of the negligence. It is Mr. Boland’s position that I should look at paragraphs 17(c), 18, 19, 20, 21, 26 and 27 to find the particulars of how he negligently breached his duties as a director.

[34]           Paragraph 17(c) states that Mr. Boland took no steps to determine what if anything Mr. Weldon had done to remedy the status of the third floor space. Paragraphs 18 to 21 state that Mr. Boland took no steps during his second term as a director to determine what if anything Mr. Weldon had done to remedy the status of the third floor or to alert other members of the board to the problem. He did not disclose his knowledge until he was examined for discovery in the Orr litigation.

[35]           Paragraph 25 alleges that Mr. Boland deliberately breached each of his duties by “turning a blind eye to the foreseeable consequences of Mr. Weldon’s conduct”. Alternatively Mr. Boland failed to meet his common law duty of care. It is this alternative claim that Mr. Boland submits is a claim based in negligence.

[36]           Paragraph 26 alleges that Mr. Boland failed to act on what he knew or should have known during his first term. Mr. Boland points to these itemized allegations to say that the particulars of negligence have been pleaded. Paragraph 26 (a) to (h) states:

(a)               The only methods for Weldon to legalize the third floor was either to ask MTCC 1056 to amend the Declaration or to ask the Board of Directors of MTCC 1056 to grant Boland a license over common elements pursuant to By-law No. 2 of MTCC 1056.

(b)               The lenders or other unit purchasers would not agree to an amendment of the Declaration and would have opposed a license from the Board of Directors.

(c)               An amendment to the Declaration or a license to use the attic each required zoning compliance and the written approval of the Board of Directors of MTCC 1056.

(d)               Weldon had not made any application to the Board of Directors either for an amendment or a license, and the Board before June 23, 1994 could not have granted a license without the approval of the purchasers.

(e)                Boland understood Weldon's character and that Weldon would conceal the status of the third floor of his unit unless confronted with the problem and forced to take a step.

(f)                 The other directors of MTCC 1056 would not take any steps, either because they were unaware of the true legal status of the third floor or because they still regarded Boland and Weldon as their superiors and would not hold them to account for their actions.

(g)               Pelican was unaware of the legal status of the third floor in Weldon's unit and as receiver-manager would transfer title to Weldon for the unit without any further or other inquiry.

(h)               After the turnover meeting on June 23, 1994 the new directors of MTCC 1056 and any property manager hired by MTCC 1056 would be unaware of the status of the third floor unless Boland formally communicated this information to MTCC 1056.

[37]           Paragraph 27 states that Mr. Boland was obliged to disclose the truth in order to fulfill his duties. Specifically he should have called a meeting to ensure that Mr. Weldon's violation of the declaration was recorded. He should have proposed a motion to the Board of Directors to commence enforcement proceedings against Mr. Weldon unless Mr. Weldon requested an amendment to the declaration or requested a license for the third floor or agreed to return the third floor to common elements. Mr. Boland also should have informed Pelican, the lenders and the property manager of the true status of the third floor. He also should have informed the owners at the turnover meeting about the status of the third floor or told the new Board of Directors after the turnover meeting.

[38]           All of the allegations about what Mr. Boland should have done what he knew or should have known and what he did not do, must be read in conjunction with paragraph 28 which states that Mr. Boland made a “deliberate decision to remain silent.  His silence was a breach of all of his legal duties to MTCC 1056.”

[39]           The claim alleges that personal gain was the reason for Mr. Boland’s deliberate decision to remain silent. Paragraph 28 (a) to (d) particularizes those reasons as follows:    

(a)               He decided to protect the personal and financial interests of Mr. Weldon, his business associate, in preference to his legal duty to MTCC 1056.

(b)                He knew or believed that if Mr. Weldon was forced to apply for a license or an amendment, other unit owners would oppose it, and Mr. Weldon would be unsuccessful.

(c)               He knew or believed that a conflict between Mr. Weldon and other unit owners would or could affect the marketing image of the unsold units in MTCC 1056 and would cause difficulty for the lenders; and that this in turn would or could affect his potential financial liability to the lenders or his acquisition of Townhouse 117.

(d)               He knew that remaining silent about the status of the third floor of Townhouse 113 would protect his own financial interest by permitting the lenders to cause Pelican [the lenders’ monitor] to transfer ownership of Townhouse 117 to him and to continue to maintain his release from any personal liability to the lenders.

[40]           There are no factual allegations pleaded as the reason for Mr. Boland’s actions other than a deliberate decision on his part to remain silent for personal gain and protection.  

[41]           Paragraphs 29 to 32 deal with Mr. Boland’s second term as a director. Once again it is alleged that Mr. Boland knew that the status of the third floor was unknown to the Board of Directors of MTCC 1056 and its property manager or alternatively that Mr. Boland was willfully blind to whether or not they knew about the status of the third floor.

[42]           Paragraph 30 alleges that Mr. Boland had an obligation to disclose the truth and in paragraph 31 it is alleged that he “deliberately remained silent about his past knowledge of the legal status of the third floor, and by doing so breached his legal duties to MTCC 1056.” The intentional nature of the conduct is reinforced in paragraph 32 which states that Mr. Boland “deliberately chose to remain silent.”

[43]           At the conclusion of claim, MTCC 1056 pleads that Mr. Boland’s conduct was “willful, deliberate, and a betrayal of his legal duties to MTCC 1056 for personal reasons.” But for the deliberate conduct of Mr. Boland MTCC 1056 alleges that it would not have incurred any potential liability to Ms. Orr nor the legal costs in connection with her litigation.

the three step analysis

Is the negligence claim properly pleaded?

[44]           The statement of claim alleges only deliberate conduct on the part of the applicant. There are no facts pleaded as an explanation or reason for Mr. Boland’s omissions other than his deliberate decision to remain silent for purposes of personal gain. 

[45]           The word “negligently” is only used in the prayer for relief (paragraph 1(a)) and in the overview paragraph 4. The claim, when read as a whole, does not set out a factual basis for a claim based on negligent or careless conduct. Deliberate conduct undertaken for the purpose of personal gain, as alleged, cannot support a claim in negligence. 

[46]           For the reasons that I have set out above in my review of the statement of claim, it is questionable in my view whether the allegations of negligence and breach of fiduciary duty are properly pleaded. There is no clear presentation of these allegations.

Are the negligence claims derivative in nature?

[47]           Even if the negligence claims are properly pleaded, I conclude that these claims are entirely derivative in nature. The allegations are based on the “same harm as the intentional tort.”

[48]           The negligent and intentional tort claims arise from the same actions, specifically Mr. Boland’s knowledge of the illegal use of the attic space and his decision to remain silent about this knowledge rather than disclosing it to the Board of Directors. Both the negligent and intentional claims have resulted in the same alleged harm: exposing the MTCC 1056 to potential liability in the Orr action and the costs to defend that action.

[49]           In this case the claim of negligence is subsumed into the intentional tort claim for the purpose of determining the applicability of the exclusion in issue. The wording of exclusion 6(e) is clear and unambiguous. Coverage is excluded for any claim made against a director for any deliberate error or omission committed by that director. Given my decision it is not necessary to consider the applicability of exclusion 6(d), nor step three of the analysis.

conclusion

[50]           There is no duty to defend Mr. Boland in the MTCC 1056 action. Mr. Boland’s application is dismissed. If the parties cannot agree on costs, ING will provide brief written submissions by June 9, 2006 and Mr. Boland will respond by June 23, 2006.

 

___________________________

C. Horkins J.

 

DATE:            May 19, 2006