The policy covers claims made by clients for errors committed by their lawyers
The NL Supreme Court has clarified the rule on pro rata distribution in an insurance policy dispute involving multiple claimants.
In Canadian Lawyers Insurance Association v. Drover, 2023 NLSC 106, the Canadian Lawyers Insurance Association (CLIA) provides errors and omissions insurance to the Law Society of Newfoundland and Labrador and its members. The insurance covers claims made by clients for errors lawyers commit when they provide professional services.
Michael Drover faced claims from four clients concerning his negligent certification of marketable property title to a property in Conception Bay South (CBS) owned by CBS Holdings. Additionally, one client claimed Drover’s negligent certification of marketable title to a property in St. Johns.
CLIA raised the matter to the NL Supreme Court, seeking direction on interpreting the policy. The policy defines an error as an “Occurrence,” but two or more “substantially related” errors are a single occurrence, even if arising from more than one retainer. CLIA’s liability to the claimants is limited to an aggregate amount of $2 million, but each occurrence has a limit of $1 million.
After carefully analyzing the evidence and existing case law, the NL Supreme Court ultimately ruled that each claim constituted a separate “Occurrence,” all of the “Occurrences” were within the policy period, and payments to the claimants would be made pro rata.
Each claim is a separate ‘Occurrence.’
The court found that Dover had four different unrelated clients for the CBS property, not one. Each had a different interest in the CBS property for different reasons. One claimant was the owner and developer of the property. The other claimants were the primary lender, contractor, and provider of general financing. There was no evidence that all claimants had the same financing terms, and each likely had different risk tolerances.
The court pointed out that Drover had instructions from each client, and he acted for both the owner and mortgagees. He gave each one a different title certificate at other times.
The court further said that the only commonality was the underlying land title was not marketable, and Drover was the lawyer. In the circumstances, the court concluded that the claims were not “substantially related”.
Payment on a pro-rata basis
One of the primary issues that confronted the court was whether CLIA should make payments to the claimants on a first-past-the-post or pro rata basis.
The policy states that CLIA will pay on behalf of the insured, Drover, and the Law Society damages that either is legally obliged to pay because of an “Occurrence.” The policy provides coverage on a “claims-made” basis. Accordingly, if a person gives notice of a claim in a particular policy period, it does not matter when Drover’s error occurred.
The policy is silent on how CLIA will deal with claims when they exceed the policy limits. CLIA claimed that the policy is consistent with an interpretation to allocate funds based on a first-past-the-post basis. Consequently, CLIA will pay claims as a court of competent jurisdiction or written statement finally determines them.
CLIA asserted that it should pay two claimants first because either CLIA settled with the claimant or the claimant obtained a judgment. CLIA contended that the other claimants had done neither. CLIA said it would only pay them once they have done so, and only to the extent that the policy limits have not been exhausted.
However, the court disagreed that payment should be on a first-past-the-post basis. Rather, the court said that a pro rata basis should be applied. Section 14(3) of the Insurance Contracts Act grants the court the authority to apportion the insurance money.
Since all the claims arose out of Drover’s negligent title certifications, the court considered it a factor favouring pro rata distribution. The court likewise gave weight to the fact that the claimants pursued their claims with due diligence and that it is unlikely that new claims will arise.
The court concluded that ordering distribution on a pro rata basis is proper. The court acknowledged that recovery on a first-past-the-post basis could encourage resolution and allow CLIA to settle with claimants and cap its liability earlier than might otherwise be the case; the court found that none of these factors are significant in this case.
The court emphasized that CLIA knows of all claimants. It also knows its liability cap, and no one seriously contests the underlying error.
The court wrote in its decision, “In these specific circumstances, first-past-the-post distribution allows CLIA to settle matters as it sees fit in a manner that may benefit it, to the detriment of unresolved claimants. This is inconsistent with the purposes of this insurance.” Accordingly, the court ordered pro rata distribution.