Monday, 2 November 2015

"Winding up" in Toronto

If you are among those, like myself, who ever thought that insurance companies were too savvy to sell liability insurance to tobacco companies, then today's hearing at an Ontario Superior Court might offer you a few surprises.

Justice Frank Newbould who handles files on the commercial list of that Court was today on the receiving end of arguments why he should - or should not - accept a deal that had been reached between two tobacco companies facing dozens of lawsuits in Canada and an Insurance company that was willing to buy peace instead of defending its right to deny those claims.

Strongly objecting to this "settlement" were lawyers representing the Blais-Létourneau class members as well as lawyers representing Ontario and six other provinces whose lawsuits are in play.

The background:
Winding up Reliance in Canada

In 2001, the U.S. parent of Reliance Insurance went bankrupt and its Canadian branch had its assets put under third party management (in compliance with the federal Winding Up and Restructuring Act, WURA).

In the intervening years, the Liquidator (KPMG) has been paying off the thousands of claims of former policy holders and trying to resolve all outstanding business in Canada. Only when things are truly wound up will it be able to return the money left over to its American corporate parents.

Among the policy holders were Rothmans, Benson and Hedges and Imperial Tobacco Canada Ltd. Each company had each purchased liability insurance from this company between the late 1980s and the end of the century, with a maximum coverage of about $100 million. (Policies were purchased from another 34 other insurers - the list is appended to the end of this blog)

These policies, we were told, contain exclusion for coverage for diseases that result from tobacco consumption, but it is not clearcut (according to all sides except the insurance company) that these exclusions would apply to some of the wrongdoings for which the companies are being held liable (i.e. conspiracy, failure to warn).

This spring, shortly before (RBH) and shortly after (ITL) Justice Riordan's ruling against them, the two companies informed the KPMG Liquidator that they had Potential Occurring Claims.

Insurance company lawyers and tobacco industry lawyers settled down to talk and soon cut a deal. The "settlement agreement" they reached was made public mid-August (including in the Canada Gazette).
  • Reliance agreed to pay $9 million to RBH and $10 million to ITL. This represents about about 10 cents on the dollar of the maximum insured claim. 
  • RBH and ITL would receive the money whether or not they ever paid any money in damages. They could do with the money they wished.
  • The tobacco companies would relinquish any other future claims against Reliance.
  • Neither party had to yield any ground. Reliance did not admit that the "tobacco exception" in the policies did not cover all of the wrongdoings committed by the companies and the companies did not admit that the claim was related to any wrongdoing. 
  • The settlement also stipulated that the future claims of all other parties related to the companies' actions would be erased. This included members of the Quebec class actions and also those behind the other 22 (RBH) and 26 (ITL)identified claims against the companies. 
Not surprisingly, the prospect of litigation leading to a payout to tobacco companies while smokers and the governments that pay their medical bills get nothing raised a few hackles among the many who are battling these companies in court.

Those hackles were expressed today before Justice Newbould, whose approval was needed before these contentious settlements could become a done-deal.

A crotchety hearing

I am not sure if it was ironic or fitting that the hearing took place in a court room that was refashioned out of the former headquarters of an insurance company. Certainly the Canada Life Building is a beautiful spot to spend a day.

The large eighth-floor courtroom was full, but not crowded. Fourteen lawyers sat (gowned) in front of the bar. On the right hand side sat the team for KPMG, silently supported by lawyers representing Reliance USA, ITL and RBH. On the left were lawyers representing the Quebec Class Actions, the Ontario Government and the Consortium of provinces working together.

Although the room was equipped with plentiful video screens, there was nothing up-to-date in the way the hearing was managed. Thick cerlox-bound factums and books of authorities were hauled out, fumbled through, misplaced, sought and traded.

It was not only the paperwork which lent a clunkiness to the day. The presentations were far from fluid. Some lawyers were told to speed up, others told to slow down. Between these admonishments, long silences would stretch as Justice Newbould reviewed the material presented to him. Stop and go. Go and stop.

This judge did not make it easy for the lawyers to put their case, frequently directing them away from their speaking notes and towards his specific areas of concern. This was especially true for the lawyer representing KPMG (Mr. Graham Smith) and the Ontario government (Mr. Bill Manuel). Whether his grumpiness towards these men, and his apparent difficulty in following their arguments, was sincere or strategic is hard to guess.

In fits and starts by the end of the day four sides had made their case. Judge Newbould was left with three competing suggestions for what he should do.

The Liquidator's view:
a decision in the interests of efficiency

The background to the settlement and the Liquidator's recommendation was initially laid out in the reports filed on August 14 and available on the web-site that houses filings on this case.

Today, Mr. Smith filled in some of the missing pieces. He said it would be in the best interests of everyone legitimately concerned for the settlements to be approved so that the insurance company could avoid lengthy litigation and the winding up could be more quickly completed.

As a result of notifying the provinces and class action suits of the proposed settlement, he was aware of their concerns, but he was not sympathetic to them and he did not think they were well placed. The Ontario insurance law gave them no basis to have their claims considered. Nor was the Crown given any special consideration in cases like these. The Quebec law was irrelevant since the policies ha been sold and bought within Ontario.

Once these legally irrelevant considerations were dispensed with, then the settlement still reflected the best fit of those whose interests were protected under the law. He asked the judge to approve the settlement agreements as they had been negotiated -- and to keep under seal all of the supporting documentation from the companies.

The Quebec Class Actions:
give us the money instead

There were no familiar faces speaking on behalf of Quebec Smokers. A new counsel - Mr. Mark Meland - had been hired to represent the concerns of the Blais-Létourneau classes in this issue.

Mr. Meland offered the judge several reasons to hesitate before making a pronouncement on the settlements. He identified two areas where the law was too complex and proper evidence was needed before it could be said that the proposal from the Liquidator could be considered fair. These were 'Choice of law' - whether Quebec law applied and 'Coverage' - whether the policies covered the class action claims.

He suggested that there was a fix in the works by pointing out that years of silence had been followed by a quickie settlement.

He appealed to the inherent injustice of the situation. It was because of the Class Action suits that the companies were making claims. yet the victims were being deprived of any process in the proceedings. "The companies are receiving a windfall of $19 million and the victims are receiving zero." "Is that fair and reasonable? Or even permissible.?"

Having raised the "complex" issues about Choice of Law and Coverage, he did not encourage the judge to resolve them. The solution he proposed was that instead of giving the $19 million to ITL and RBH, it should be handed over to the victims in the Quebec class actions.

The government claims:
the settlement can't touch our rights to make future claims

The governments of Ontario and six other provinces offered a third option offered to the judge.

On behalf of Ontario, Mr. Bill Manuel said he did not oppose the settlement reached between the insurer and the companies, but he would not accept that it would bind or restrict the government of Ontario. For him, "the sole issue is Crown immunity. The (WURA) act does not bind the crown."

He felt that the exclusion clauses in the insurance policies were unlikely to cover the claims by the governments, given that these claims were newly invented after the policies had been in place. The government was using a "statutory cause of action", therefor the policies would have covered any damages.

The government claims could not be extinguished by the settlement. If and when they got a judgment, they wanted the right to make their own claim on the assets of Reliance.

And, if push came to shove, it would be the government claims which would take precedence over the U.S. owners. A claim by the government would even have bumping rights over the Quebec class action claim, he said. "The crown has a higher priority than other creditors". (This seemed to be news to Justice Newbould, who asked at least twice for clarification).

These points were supported by Jeff Leon, who spoke on behalf of the other provinces participating in this hearing. He supported the view that the Insurance company should have sought a separate declaration from the court about the jurisdictional issues and the extent of the coverage, a process which would have gathered the evidence needed for such a decision.

And if Reliance were completely wound up before the provincial cases were heard? It seemed less of a concern that the money might be gone than that the court would establish a precedent for such a settlement "We take our chances. If the assets are gone, they are gone." ... "You are being asked to put the Court's imprimatur on the settlement and to decide a whole bunch of issue that you cant decide based on this record."

The last words?

Even the fun of bankruptcy court could not keep me in Toronto for another day. The short hearing scheduled for Tuesday morning, when the Liquidator replies to the concerns raised about the settlement, will go unreported here.

And an interesting footnote

Justice Newbould once represented the third defendant in the Blais-Létourneau case: JTI-Macdonald.

Recommended reading and a Montreal historical footnote

In an unsuccessful search on Legacy for copies of insurance policies in Canada, I came across versions of a readable history of insurance and tobacco companies

For many years, it would seem, tobacco companies bought insurance, but didn't make claims. They didn't want the risk of insurance company lawyers interfering in their litigation strategies and they didn't want disputes with insurance companies to result in document disclosure that might support more claims against them. 

All that changed in Montreal in 1996, when Imperial Tobacco filed a case against American Home Insurance ad the Commercial Union Company seeking coverage for defense costs and potential damages associated with the Caputo case.
In its coverage cases Imperial Tobacco, a subsidiary of Imasco Limited,24, alleges that American Home issued several excess umbrella liability policies to Imasco and that Commercial Union issued comprehensive general liability policies to Imasco. Imperial Tobacco contends it is covered by the policies issued by American Home and Commercial Union for any defense costs and any amounts awarded in a judgment or settlement which Imperial Tobacco may incur from third-party liabilities such as those alleged by the Caputo plaintiffs. Neither American Home nor Commercial Union has assumed the defense or acknowledged a duty to indemnify Imperial Tobacco, Imperial Tobacco claims it has had to pay in excess of $1,000,000 in defense costs in Caputo.
It was this act by Imperial Tobacco that triggered a reflection within the insurance industry about their vulnerability to successful lawsuits.

This might explain the eagerness of Reliance Insurance to put an end to future claims. It might also explain why lawyers representing insurance companies were a constant presence in Justice Riordan's court when RBH or ITL were presenting their case.

List of insurance companies who have sold policies to RBH and ITL, as reported by the Liquidator in Reliance:

ACE MI Insurance
Affiliated FM Insurance Company
AIG Commercial Insurance Company of
AllState Insurance Company of Canada
American Home Assurance Company,
American Re-Insurance Company
Canadian Indemnity
Chards Insurance Company of Canada
Cigna Insurance Company of Canada
Continental Insurance Company
General Accident Assurance Company
Guardian Insurance Company of Canada
Hartford Fire Insurance Company
Home of New York
INA Insurance Company of Canada
Intact Financial Corporation
Kansa General Insurance Company
La Nordique Compagnie D'Assurance Du Canada
Liberty Mutual Insurance Company
Lloyd's of London Toronto Office
Markel Insurance Company of Canada
New Hampshire Insurance Company
Northbridge Insurance
Northumberland General Insurance Company
Royal & Sun Alliance Insurance Company of Canada
Royal Insurance Company of Canada
Scottish & York Insurance Company Limited
Sun Alliance Insurance
The Commonwealth Insurance Company
The Continental Insurance Company of Canada
The Halifax Insurance Company
United States Fire Insurance Company
Zurich Canada
Zurich Insurance Company