FAILING TO DISCLOSE AND THE IMPACT ON INSURANCE COVERAGE

Saying nothing when there is an obligation on a council member to disclose could result in a loss of insurance coverage for that council member if a claim later arises against him. In Boland v. Allianz Insurance Co. of Canada, the Ontario Courts recently ruled in favour of an insurer who sought to deny coverage to a council member who had been sued by the condominium corporation.

The claim brought by the condominium corporation made various allegations, including the following (in italics). Allan Boland and Richard Weldon were the officers and directors of the developer of a Toronto-area condominium corporation. Before the project was completed, the developer ran into financial problems. As part of the settlement of those financial problems, Mr. Weldon took title to one of the strata lots. To Mr. Boland’s knowledge, prior to the filing of the documents to create the condominium corporation, Mr. Weldon caused the developer to incorporate some of the attic common property space into his unit in order to create a third floor. The disclosure documents were not amended to reflect this alteration and the change was not noted in the declaration (the document creating the condominium, which is similar to BC’s strata plan). Mr. Boland was aware that the lenders wanted to ensure an early filing date for the declaration and that any delay required to redefine the unit would not be tolerated by the lenders, in turn jeopardizing his own deal to acquire a condominium unit in the project.

After the declaration was filed, construction in the attic area incorporated into Mr. Weldon’s unit continued. Following the filing of the declaration, Mr. Boland became one of the board members. Other than advising Mr. Weldon to take the necessary step to "legalize the problem", Mr. Boland took no further steps to ensure that Mr. Weldon did in fact address the problem or advise the other board members or the property manager as to what had occurred.

In January 1998, and during Mr. Weldon’s second term on the board, Mr. Weldon sold his unit to a third party. Prior to the sale, Mr. Boland took no steps to see if the problem with the attic space had been addressed and did not advise the other board members of his conversation with Mr. Weldon. In April of 1998, the condominium corporation’s lawyers advised the board that the third floor contravened the declaration. Mr. Boland still did not disclose his knowledge or discussions with Mr. Weldon to the other board members.

In March 2001, the third party sued the condominium corporation and others, including Mr. Boland, with respect to the illegal status of the third floor of the unit (the "Orr Litigation"). It was not until January 2005, when he was being examined for discovery in Orr Litigation, that Mr. Boland disclosed his knowledge regarding the attic space.

As a result, the condominium corporation commenced its own action against Mr. Boland claiming that, in breach of his legal duties as a board member, he had failed to disclose his knowledge regarding the illegal construction in the subject unit. Mr. Boland sought coverage under the condominium’s directors and officers insurance policy. When it was denied, Mr. Boland then sued the insurer, seeking an order requiring the insurer to defend him in the condominium corporation’s action against him.

In deciding that the insurer was not required to defend Mr. Boland, the Court reviewed the nature of the claim being made against Mr. Boland (for intentionally or negligently failing to disclose his knowledge about the illegal construction in the unit) and noted that the insurance policy did not provide coverage for intentional conduct.

As is not uncommon in directors and officers insurance policies, the policy provided that coverage was available in respect of wrongful acts that occurred during the policy period, with coverage being extended to wrongful acts that occurred prior to the policy period if the claim was made during the policy period and "the director … of the Corporation … had no knowledge of, and could not reasonably foresee, any circumstances that might result in a claim". The Court held that, assuming the allegations made in the condominium corporation’s statement of claim were true, Mr. Boland could have foreseen that the illegal third floor might result in a claim, but instead turned a blind eye to the foreseeable consequences of Mr. Weldon’s use of the attic space.

The policy also provided that the insurer was not liable to pay in respect of any claims against the board member "for liability based upon or attributable to any [board member] gaining in fact any personal profit, remuneration or advantage to which they were not legally entitled." The condominium board’s claim alleged that Mr. Boland deliberately failed to say anything about the attic space for personal reasons.

The Court concluded by noting that, although the lawsuit did make unspecified allegations of negligence (which typically trigger insurance coverage), the negligence claims derived from the intentional act claims and, as a result, there was no coverage.

As a result of this decision, council members should be aware that if they have knowledge of infractions of the applicable strata legislation or the Strata Corporation’s bylaws, and they fail to raise the issue with the other council members or take steps to end the infraction, resulting in loss to others, they may not be able to rely on the Strata Corporation’s directors and officers insurance policy to provide coverage should a claim arise against them. And although the Court did not consider this issue, following the reasoning of this case, where the Council has an obligation to share information with the owners, and deliberately fails to do so, resulting in loss to the owners, it is likely that council members will be similarly denied coverage in respect of any claims brought against them arising from that failure.

Allyson L. Baker