Honesty is the Best Policy: Court of Appeal Emphasizes Insured Parties’ Responsibility for Full Disclosure

Introduction and Background

It is a trite law of human nature that honesty is the best policy. And it is trite law, as in the actual law, that this is especially true for parties entering insurance agreements.

In Davies v. AIG Insurance Company of Canada, 2024 ONCA 509,[1] the Ontario Court of Appeal (the “Court”) reversed a decision regarding an insurance coverage determination. The Court found that the insurer, AIG Insurance Company of Canada (“AIG”), did not have a duty to cover costs for the insured because of the insured’s nondisclosure that amounted to material misrepresentation.

The Parties, Policies, and the Facts

I. Parties and Policies

Mr. and Ms. Davies owned several real estate development companies. Mr. Davies was the principal for these companies (both referred to as the “Insured,” unless specified). The Insured sought for liability coverage under the Directors’ and Officers’ Liability Insurance Policies offered by AIG (the “Policies”).

Importantly, the Policies contained an exclusionary clause:[2]

“[If] any of the statements, warranties or representations is not accurately and completely disclosed in the application and materially affects either the acceptance of the risk or the hazard assumed by the Insurer, no coverage shall be afforded for any Claim [related to the inaccurate or incomplete disclosure]…”

Investors in the real estate development companies brought several actions against the Insured. The Insured accordingly sought coverage to defend against these actions and AIG paid over $1 million in legal costs. The investors alleged that the Insured led a Ponzi scheme fraud operation, and that the Insured misappropriated monies gathered through syndicated mortgages advanced by the investors (the “Underlying Actions”).

AIG resiled from its duty to cover costs on the basis that there was a material misrepresentation. Neither the Insured nor their insurance broker (the “Broker”) disclosed that these syndicated mortgages financed the companies in question (see footnote 4 for a quick summary of “syndicated mortgages”).[3] [4]

II. The Facts

On behalf of the prospective Insured, the Broker submitted the Insured’s companies’ financial statements (the “Financial Statements”) to AIG’s underwriting group.

The Financial Statements indicated the Insured’s companies possessed a significant amount of inter-company loans and long-term debt to external lenders. Yet, the external lenders’ sources or identities were undisclosed. AIG’s underwriters refrained from responding with a price quote due to the missing information.[5] 

An important exchange of emails was sent where AIG’s underwriters requested this necessary information. The Broker’s email responded in point form, but failed to mention that the companies were financed by syndicated mortgages. AIG’s underwriters did not ask for clarification, and AIG continued the insurance application process without this knowledge.