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Law Times • sepTember 13, 2010 against their best friends, the cops. The Tories want to abol- I ish the gun registry. The cops want to keep it going as they use it all the time. But Prime Minister Ste- phen Harper made a promise to gun lovers, hunters, and the big gun companies. Now he has to live up to it. It's tricky because Harper doesn't want to end up with a pro-gun image as it could hurt his crime-fighter credentials. Bill C-391, which would abolish the gun registry, comes up for a final vote in the House of Commons on Sept. 22. The results will be close. It's not clear how putting more unregistered guns into more people's hands fits with Harper's agenda to put more people in jail and leave them there for longer periods. But that's another issue. Last week, Tom Flanagan, Harper's mentor and former chief of staff, slammed the cops for supporting the gun registry. He described the cops as gun haters trying to take the weapons away from honest, law-abiding people. "Police have a long his- tory of taking positions against citizens' rights of self-defence," Flanagan wrote in the Kingston Whig-Standard on Sept. 3. "I think the registry fits right into that tableau." In a way, Flanagan is right. Cops have never been keen on citizens taking self-defence into their own hands. They would prefer that we leave shooting sessions to them. Call up 911 one night and tell them you hear a noise downstairs and you think it could be a burglar. Then ask them whether you should whip out your trusty hunting rifle and go down to investi- gate. See the answer you get. It won't include: "Blast away, little buddy!" Self-defence isn't big with cops. Ask bank tellers. Cops don't allow them to be armed in self-defence. They once were back in the old cowboy days, but that era is long gone, even in Calgary. Cops have nothing against guns. Most of them are gun owners themselves. They love hunting, but it's unregistered guns they don't like. When they find a gun at a crime scene, they like to be able to trace it back to the owner. Fingerprints on a gun are useful, but a name and address are even better. It may be too late to save any- one's life but it could help catch the crook. The registry costs about $10 million a year. Cops access it on their computers about 11,000 times a day. That amounts to four mil- lion times a year. Altogether, Harper v. the cops The t was the last thing we expected: federal Conservatives turning Hill By Richard Cleroux it works out to about $2.50 a pop, a small price for knowing if there's a registered gun be- hind that door before you go through it. The Conservatives are se- rious. A year ago, they kept secret a police report that said the cops were using the gun registry more than ever in their work. They hid the report until after a preliminary Commons vote, which they won. Later, the RCMP officer in charge of the gun registry spoke out strongly in favour of it. So they dumped him on the grounds he didn't speak French well enough. Nobody had ever complained about his language skills. That gambit backfired. The cops got angry. At their recent convention, the coun- try's 3,500 police chiefs unani- mously endorsed the gun reg- istry. It's useful for their work and helps solve crimes and saves lives, they said. Conservative MP Garry Breitkreuz then came back with an attack against police chiefs in an online magazine on Aug. 20. According to him, the chiefs "won't admit it, but it appears they don't want Ca- nadians to own guns." Of course, it's more likely the chiefs don't want Canadi- ans to own unregistered guns. "It's about public control," Breitkreuz said. Did he mean public con- trol as in a police-state con- spiracy? Actually, Breitkreuz may be partly right about the control thing. Cops do like to think they have some measure of control over guns in our soci- ety. That's why they support laws on the ownership and use of the weapons and why they arrest people who use them il- legally. Police like other kinds of public control as well. They insist people register their ve- hicles and that drivers have permits, for example. That doesn't necessarily mean the cops are against cars. In fact, many of them have cars of their own, but no offi- cers worth their badges would ever favour abolishing the reg- istry of motor vehicles. The big vote on Sept. 22 will be close. In a preliminary one last spring, eight Liberals and 12 New Democrats sided with the Conservatives. Some of them are now saying they've had second thoughts. As a re- sult, it will be an interesting is- sue to watch. LT Richard Cleroux is a freelance reporter and columnist on Par- liament Hill. His e-mail address is richardcleroux@rogers.com. COMMENT Lawyers serving as directors get less coverage despite extra premium W BY FRANK PALMAY & R. NAIRN WATERMAN For Law Times hen Markham General Insurance Co. went into liquidation in 2002, its cur- rent and former officers and directors, including Cassels Brock & Blackwell LLP lawyers Gordon Goodman and Brian Reeve, were sued for $40 million. Markham General had directors and officers insurance with AIG Commercial Insurance Co. of Canada. Cassels Brock had an outside director liability policy with Lloyd's Under- writers. Everyone agreed that the company's policy was an underlying policy within the definitions of the firm's policy and that both covered defence costs. The matter set- tled within the underlying policy limits. The narrow issue before the courts recently was whether Good- man and Reeve's defence costs, which their firm had paid, were to be reimbursed by AIG under the com- pany's policy or by Lloyd's under the firm's policy. The courts at both the trial and appellate levels (see Goodman v. AIG Commercial Insurance Co. of Canada) held that reimbursement of the defence costs was the responsibility of Lloyd's under the firm's policy. The decisions turned on a narrow con- tractual interpretation of the "follow form" language of the firm's policy and the contrast between the company's policy which, like most directors and of- ficers policies, provides that the insurer pays defence costs, and the firm's policy that had Lloyd's assum- ing the defence under certain circumstances. The decisions acknowledge that they may be a surprise to the insurance marketplace. Law firms pur- chase outside director liability policies to protect their lawyers serving on boards in the event that both the corporate indemnity fails and the corporate directors and officers insurance is exhausted or doesn't exist. Until this decision, neither the firms nor the outside director liability insurers would have thought that the two policies could interact in the way that the courts found. Since outside liability coverage is a part of most directors and officers policies, the implications of this decision are much broader and include: • The right and duty to defend: The ability to defend claims is an important protection feature of all insurance policies and a fundamental feature of directors and officers policies. For these policies, be- ing able to mount an effective defence is the best way to avoid or minimize the exposure to a claim against the insured director. Most personal lines policies have the insurer assuming the defence. For directors and officers policies, the insureds want to control the defence. These policies normally provide that once the insurer has approved the counsel cho- sen by the insured, it pays the defence costs. Courts have held that the duty to defend is broad- er than the indemnification provisions in that they are determined at different points in time, with the former based on the pleadings and the latter based on the findings of the trial. However, both ultimately depend on and are inextricably linked to the indem- nity provisions of the policy. The Court of Appeal's treatment of the duty to defend as distinct from the insuring agreements seems inconsistent with what the Supreme Court of Canada held in Non-Marine Underwriters, Lloyd's of London v. Scalera. Most insurance companies have sizeable boards. Markham General, for example, had seven directors and a number of former directors. This case suggests that rather than having a unified defence even when directors have a common interest, there are likely to be multiple counsel. In the simplest iteration of the Markham General case, Goodman and Reeve would be required to have Lloyd's provide them with a de- fence with Lloyd's picking the counsel. The other directors of Markham General would have the right to pick their own counsel and have AIG pay for it. The situation becomes even more fractured if other directors of Markham General also had similar out- side director liability policies. The result is multiple www.lawtimesnews.com Speaker's Corner counsel while Goodman and Reeve, who paid an ex- tra premium, get less control over the defence than the other directors of Markham General. • Notices and preliminary actions: When directors get sued, they should and normally do give notices under all policies that may respond. As a practical matter, if one insurer provides a defence or agrees to pay defence costs, even if it does so under a reser- vation of rights, insureds will accept other insurers declining to do so. But this decision raises questions about this approach and appears to require the reso- lution of disputes dealing with the obligation to de- fend at the beginning. If Goodman and Reeve hadn't notified and given Lloyd's an opportunity to defend, then presumably Lloyd's and AIG could argue the insureds breached their obligation under the Lloyd's policy, meaning both AIG and Lloyd's could refuse to reimburse them. If notice was given and Lloyd's refused to provide a defence, the lawyers would have to challenge that decision rather than look to their indemnity rights. In light of the importance of defence costs, the challenge is likely to occur at the beginning, at which point no one is willing to fund the de- fence. The insureds will have to fund the costs of the challenge. Even if they win, they'll only get reimbursed for a portion of those costs and their defence of the main action may be delayed and disrupted. It's another curious result of paying for what was thought to be additional coverage. • Policy limits: All insurance policies have poli- cy limits. The company's policy had a $10-million limit and the firm's policy a $5-million cap. Most policies provide that the defence costs paid by the insurer erode the policy limits. Especially in the directors and officers and outside director liability field, the erosion or cannibalization of policy limits is of central concern. Directors and officers poli- cies frequently cover inside and outside directors, former directors, officers, former officers, and the company for its indemnity obligations to directors and officers and for employment, securities, and whatever other indemnities may be provided un- der what's called side C coverage. Outside director liability policies frequently cover many insureds and many directorships. Defence costs in compli- cated cases can quickly mount. In this case, the policy limits of the firm's pol- icy were eroded by the amount of Goodman and Reeve's defence costs to the detriment of the firm and its partners. Again, it's a surprising result for paying the extra premium. Equally perplexing is that if AIG tendered less than its remaining policy limit to effect the settlement, it and its group of insureds got the benefit of Lloyd's having to pay part of the directors' defence costs. Overall, these decisions suggest a broad interpre- tation of the duty to defend, a narrow reading of "provide a defence," and a restrictive approach to the impact the business context or layers of risk will have on the interpretation of a policy and restric- tions on an insurer's subrogation rights. This sug- gests that insureds, insurers, and underwriters must reconsider how outside director liability and prima- ry directors and officers policies will respond. The decisions also suggest that the policy wording could be changed to make the outside director liability coverage inapplicable if there's unused underlying in- surance or by converting the duty to defend to a duty to pay defence costs. Alternatively, outside director li- ability insurers may increase their premium to reflect any perceived additional risk. The underwriters, insur- ers, and their customers can determine which is nec- essary or preferable. In the interim, insureds, insurers, and their lawyers will have to assume that a duty to defend is separate coverage that may supersede an in- demnity obligation to pay defence costs and therefore act accordingly in drafting, underwriting, and purchas- ing policies and in responding to claims. LT Frank Palmay and R. Nairn Waterman are both partners at Lang Michener LLP. PAGE 7