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Insurer relies on “Interrelated Wrongful Acts” exclusion in attempt to escape its duty to defend

Arch Insurance Canada Ltd. v. Financial and Consumer Services Commission et al., 2016 NBCA 53

The Financial and Consumer Services Commission is a provincial crown corporation charged with, among other things, regulating and enforcing securities legislation. To protect itself and its employees from claims arising from its activities, the Commission purchases liability insurance. From 2010 to 2012, the Commission purchased its liability insurance from Encon Group Inc. (“Encon”). In 2012, the Commission changed its liability insurer from Encon to Arch Insurance Canada (“Arch”).

In 2011, Armel Drapeau brought an action against employees of the Commission alleging they defamed him in the media. The employees told various media outlets that Mr. Drapeau had operated a Ponzi scheme with investors’ money. The Commission reported Mr. Drapeau’s lawsuit to Encon, who accepted coverage and appointed a solicitor to defend the lawsuit.

In 2013, Mr. Drapeau brought a second action against the Commission itself and Investia Financial Services Inc. (“Investia”). In this action, Mr. Drapeau alleges that the Commission intimidated Investia into wrongfully terminating agreements between Investia and Mr. Drapeau. Both Encon and Arch refused to defend this lawsuit on the Commission’s behalf.

The Commission applied to the New Brunswick Court of Queen’s Bench for a declaration that either Encon or Arch must defend it against Mr. Drapeau’s 2013 lawsuit. Encon argued that it need not defend the Commission because Arch was the Commission’s insurer at the time the lawsuit was filed. Arch argued that Mr. Drapeau’s 2013 lawsuit was attributable to the same interrelated wrongful acts as the 2011 lawsuit, and therefore Encon must defend the lawsuit.

Justice Rideout ordered Arch to defend the Commission against Mr. Drapeau’s 2013 lawsuit and reimburse the Commission for any legal fees already incurred. Justice Rideout stated that the two claims were based on different torts, sought different relief and referenced different times. As such, the two claims were not “interrelated” and Arch could not avoid its duty to defend.

Arch appealed. The New Brunswick Court of Appeal dismissed the appeal. The Court of Appeal stated that although there may be some potential overlap with respect to the damages claimed in both actions, the 2011 action and the 2013 action involve distinct underlying wrongful conduct.

You can read Arch Insurance Canada Ltd. v. Financial and Consumer Services Commission et al., 2016 NBCA 53, in its entirety here.

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