Republished with permission from the Insurance Brokers Association of Alberta’s magazine The Alberta Broker (February/March 2023).
Many corporate insureds have both primary and excess policies to ensure appropriate monetary coverage in the event of a loss. When a loss occurs, the primary policy responds to the loss, with the excess policy only being required if the monetary limits of the primary policy are exhausted.
What happens when a primary insurance policy includes an optional extension period clause, but the excess insurance policy does not? And what if the excess policy does not expressly exclude such an extension? Can an insured extend both the primary and excess policies by paying the requisite premium under each policy, or can the excess insurer deny coverage due to the lack of an optional extension of coverage clause in the excess policy?
The Ontario Court of Appeal has recently rendered a helpful coverage decision in relation to an optional extension clause which was present in the primary but not in the excess policy in Cronos Group Inc. v Assicurazioni Generali S.p.A, 2022 ONCA 525.
Cronos Group Inc. (“Cronos”) is a company which manufactures and markets cannabis and related products. Cronos held a primary Executive and Corporate Securities Insurance Policy with AXA XL (“Primary Policy”) and an excess Directors’ and Officers’ Liability Policy with Assicurazioni Generali S.P.A (“Excess Policy”) for the same policy period.[1]
The Primary Policy included an Optional Extension Period (“OEP”) clause that allowed Cronos to extend the coverage period beyond the expiry date within 30 days of its expiry. The premium for the OEP was twice the value of the policy’s basic premium.
The Excess Policy was subject to the same terms, conditions, limitations and exceptions as contained in the Primary Policy, with certain exceptions. The OEP was not an exception in the Excess Policy.[2]
In January 2020, Cronos attempted to renew both the Primary and Excess Policies. When Cronos delayed its disclosure of earnings, both insurers withdrew their quotes to renew the policies which then expired. In February 2020, Cronos and AXA XL negotiated a 13 month extension of the Primary Policy, which extended coverage for claims premised on wrongful acts which occurred after the expiry of the original policy. Assicurazioni Generali S.P.A (“Assicurazioni”) did not extend the Excess Policy.[3]
On March 11 and 12, 2020, two securities class action law suits were commenced in the United States naming Cronos and two of its officers as defendants. In March 2020, Cronos released its financial statements and notified Assicurazioni of the two lawsuits and its desire to exercise its OEP opinion under the Excess Policy and it forwarded the payment of the premium which was twice the amount of the basic premium.[4]
Assicurazioni rejected coverage for the two claims on the basis that the Excess Policy did not contain any clause that gave Cronos a right to an OEP. Cronos applied to the Court for a declaration that under the Excess Policy it was entitled to purchase OEP coverage.[5]
The Applications Judge granted Cronos’ request for a declaration. The Court held that the Excess Policy followed form with the Primary Policy except as set out in specific provisions, which in this case did not exclude the OEP option. The Judge further held that Cronos had paid the correct premium amount and had complied with all notice requirements.[6]
Assicurazioni appealed several of the Judge’s findings, including that (1) Cronos was entitled to purchase an OEP under the Excess Policy; and (2) the premium for the Excess Policy’s OEP was twice the amount of the basic premium.[7]
In relation to whether Cronos was entitled to purchase an OEP under the Excess Policy, Assicurazioni argued the following:
(a) The Excess Policy did not expressly contain an OEP option;
(b) Condition 2 of the Excess Policy excludes renewal agreements;
(c)Condit ion 8 of the Excess Policy prevents Cronos from unilaterally extending coverage;
(d) The Excess Policy does not contain a mechanism to calculate the premium for the OEP option; and
(e) Its interpretation that the Excess Policy did not include an OEP option was consistent with the interpretation of an employee of the insurance broker at the time Cronos sought to exercise the option.[8]
In relation to the above 5 arguments, the Court of Appeal held as follows:
1.The Primary Policy clearly states that if the policy is not renewed, the insured has the option of extending the coverage upon payment of the additional premium. The Excess Policy follows form with the Primary Policy and Condition 2 of the Excess Policy did not expressly exclude the OEP option. As such, the OEP option was included.[9]
2. The extension of coverage afforded by the OEP did not constitute a renewal so the exclusion in relation to renewal agreements did not apply. The OEP was only applicable if the insurer did not renew the policy.[10]
3. The extension of the policy period for 13 months did not affect the policy’s coverage amounts and, as such, was not offside Conditions 2 or 8 of the Excess Policy.[11]
4. While the Excess Policy did not contain an express payment for an OEP option, the Judge gave effect to the policy in a way that was commercially reasonable. As the OEP was not excluded and the Excess Policy was subject to the same terms as the Primary Policy except premium and the limits of liability, the premium payment was a follow form term.[12]
5. The view of a non-party to the contract about the meaning of a provision that was made prior to their involvement had no relevance.[13]
While the Excess Policy did not provide a mechanism to calculate the premium for the OEP option, the Judge held that the Excess Policy’s premium would follow the 1:2 ratio set out in the Primary Policy.[14]
Based on all of the above, the appeal was dismissed and the declaration that the OEP was effective under the Excess Policy was upheld such that Assicurazioni had to respond to any monetary excess owing after the Primary Policy was exhausted in relation to the two claims made during the extended policy period.
The Take-Away
When an excess insurer intends to exclude extended coverage, such as an OEP option, the language contained in the policy must be explicit, as otherwise the Excess Policy will generally follow the form of the Primary Policy. This is consistent with the court’s general approach to construe exclusionary clauses narrowly, while clauses provided coverage are interpreted broadly. An insurer’s failure to specifically exclude an OEP option under an Excess Policy where a Primary Policy provides for an OEP option can lead to unexpected and unintended coverage consequences resulting in potential substantial monetary exposure for any loss falling within the extended policy period.
[1] Cronos Group Inc. v Assicurazioni Generali S.p.A, 2022 ONCA 525 (“Cronos Group”) at para 3.
[2] Ibid, at para 4.
[3] Ibid, at paras 19-22.
[4] Ibid, at paras 23-26.
[5] Ibid, at paras 27-28.
[6] Ibid, at paras 29-30.
[7] Ibid, at para 31.
[8] Ibid, at para 38.
[9] Ibid, at para 40.
[10] Ibid, at paras 41-42.
[11] Ibid, at para 43.
[12] Ibid, at para 44.
[13] Ibid, at paras 46-47.
[14] Ibid, at paras 49-58.
