No duty to defend the insured for claims arising out of prior litigation

The prior and pending litigation clause excluded coverage and there was no duty to defend the insured for claims arising out of prior litigation.

Insurance law – Liability insurance – Wrongful acts – Duty to defend – Interpretation of policy

Spinks v. Lloyd’s Underwriters, [2024] O.J. No. 34, 2024 ONSC 42, Ontario Superior Court of Justice, January 2, 2024, R. Centa J.

The insured sought a declaration that the insurer had a duty to defend it in an action brought by the plaintiff, the insured’s former business partner. The insured and the plaintiff’s business relationship had broken down in 2017 and they engaged in litigation. In 2018, the parties entered into a settlement agreement that resulted in the insured purchasing shares from the plaintiff. In 2020, the insured purchased a management liability policy from the insurer. In 2021, the plaintiff commenced the action against the insured alleging breach of the confidentiality provisions in the settlement agreement because the insured had allegedly disclosed the share purchase price to the plaintiff’s ex-wife. The plaintiff later amended his claim to also allege that the insured had made negligent or fraudulent misrepresentations to the accounting firm who prepared a valuation of the company that formed the basis of the resolution in the earlier litigation.

The Court found that the claims advanced by the plaintiff fell within the policy’s initial grant of coverage because both the confidentiality and valuation claims were “wrongful acts” within the meaning of the policy. Specifically, the Court found that a breach of duty of confidence fell within the meaning of “breach of duty” within the definition of “wrongful act”. Similarly, a breach of contract fell within the meaning of a “wrongful act”. Further, because the valuation claims were also based in negligent misrepresentation, as opposed to just fraudulent misrepresentation, at least some of the valuation allegations fell within the meaning of “wrongful act”.

However, the Court ultimately found that the duty to defend was not triggered because both the confidentiality and valuation claims were excluded from coverage by the prior and pending litigation exclusion clause given there was no doubt both claims arose from the earlier round of litigation between the plaintiff and the insured. The other exclusions relied on by the insurer, namely the breach of contract, known matters, and professional services exclusions did not apply.

This case was digested by Michael J. Robinson, and first published in the LexisNexis® Harper Grey Insurance Law Netletter and the Harper Grey Insurance Law Newsletter. If you would like to discuss this case further, please contact Michael J. Robinson at [email protected]