Insured‑Versus‑Insured Exclusions, Derivative Claims, and the Canadian Case Law That Governs Internal Corporate Disputes
Under Canadian insurance law, liability insurance is generally intended to respond to claims brought by others—not to internal disputes recast as third‑party claims. A director or shareholder therefore cannot ordinarily “sue themselves for coverage” by bringing an action against their own company.
Whether insurance responds depends on two closely related questions: whether the claimant and the defendant are legally distinct insureds under the policy, and whether the policy contains an insured‑versus‑insured exclusion (D&O provision) or a relevant exception. Canadian courts, including those in Saskatchewan, consistently emphasize that the answer is policy‑specific and turns on the precise wording used.
Liability Insurance Covers Liability to Others, Not One’s Own Loss
The starting point is always the liability‑insuring agreement. As the Saskatchewan Court of Appeal explained in Royal & Sun Alliance Insurance Company of Canada v Community Electric Ltd., 2020 SKCA 17, liability insurance responds only where the insured is legally liable to another party. The Court quoted the standard CGL wording as follows:
“We will pay those sums that the insured becomes legally obligated to pay as ‘compensatory damages’ because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.”
(para 42)
The Court immediately summarized the operative principle:
“in order for the loss suffered by Community to fall within the scope of coverage of the CGL policy, it had to be … ‘property damage’ … and … result[] in Community being legally obligated to pay a sum as compensatory damages.” (para 43.)
As a matter of principle, a party does not create liability coverage simply by relabelling its own loss as a claim. Internal losses do not become insured third‑party liabilities by pleading alone.
Insured‑Versus‑Insured Exclusions: The Central Obstacle
When directors or shareholders attempt to recover through company insurance, insured‑versus‑insured exclusions are usually decisive. Canadian courts have most often addressed this issue in the context of directors’ and officers’ liability policies.
In Goodfellow v CUMIS General Insurance Company, 2021 ONSC 3604, the Ontario Superior Court held that coverage was excluded because the underlying claim was brought on behalf of the insured corporation:
“The language of the exclusion, when the D&O Policy is read as a whole, is not ambiguous. The ‘Insured vs. Insured’ exclusion applies because the Underlying Claim is brought by FSRA on behalf of PACE.” (para 26.)
The policy wording expressly excluded claims “by or on behalf of” the corporation:
“The D&O Policy expressly provides that it shall not apply to loss based upon, arising out of, or attributable to a claim ‘by or on behalf of’ of PACE, except for claims specified.” (para 22.)
For director‑shareholder disputes, this language is critical. If the claim is substantively for the corporation’s benefit, it may be treated as one brought “by or on behalf of” an insured, even if an individual shareholder is the named plaintiff.
Derivative Actions Can Restore Coverage—If the Policy Allows It
Importantly, Goodfellow also confirms that insured‑versus‑insured exclusions are not absolute. Where a policy includes a derivative‑action carve‑out, coverage may be restored.
The court characterized the underlying proceeding this way:
“The Underlying Claim is one brought by FSRA in the name of and on behalf of PACE for wrongs allegedly done to the corporation itself. This is, by its nature, a derivative action.” (para 58.)
Applying the exception, the court concluded:
“When I give the words used in the exception their plain meaning, I conclude that the Underlying Claim is ‘a derivative action brought or maintained by or on behalf of the “CORPORATION by a person who is not a DIRECTOR OR OFFICER …’” (para 59.)
The lesson is straightforward: the question is not whether a director or shareholder can ever trigger coverage, but whether the policy text preserves a genuine derivative or representative claim.
Why Insured‑Versus‑Insured Exclusions Exist
The Ontario Court of Appeal articulated the rationale behind these exclusions in Onex Corporation v American Home Assurance Company, 2013 ONCA 117:
“This exclusion is designed to protect the insurer from having to provide coverage in relation to a legal proceeding by one insured party against another insured party. The ‘Insured versus Insured’ exclusion is designed to prevent collusive proceedings whereby ‘an insured company might seek to force its insurer to pay for the poor business decisions of its officers or managers’.” (para 121.)
This explanation captures why courts view attempts by directors or shareholders to access corporate insurance through internal disputes with skepticism.
Representative Capacity and Wording Still Matter
Canadian courts have also emphasized that the identity of the claimant depends on the policy wording, not labels. In Onex, the Court of Appeal refused to equate a litigation trustee with the insured corporation where the exclusion did not clearly do so:
“While [the Georgia Action] asserts claims which originally belonged to Magnatrax and its subsidiaries, it is brought by the Trustee on behalf of the Magnatrax Litigation Trust and not Magnatrax.” (para 126.)
And further:
“Had the parties intended that the exclusion was to apply to Loss arising from a Claim brought by assignees, trustees, or other representatives asserting Magnatrax’s claims, they would have specifically said so.” (para 128.)
A director or shareholder proceeding in a formal representative capacity may therefore fall inside—or outside—an exclusion depending entirely on how broadly the insurer drafted it.
Saskatchewan Authority: Overlap Between Insureds Is Not Automatically Fatal
Saskatchewan courts reject blanket rules that insureds can never sue one another. In Wawanesa Mutual Insurance Co. v Hewson, 2004 SKCA 112, one insured sued another insured under the same policy. The insurer denied coverage, but the Court of Appeal disagreed. The case arose from an injury claim within a farm family insured under one farm liability policy. The specific legal question was not whether insured-versus-insured claims are always impossible, but whether this policy clearly excluded them.
This issue was framed simply:
“The insurer said that an exclusion clause in the policy excluded liability coverage for an insured in respect of a claim brought by another insured.” (para 1.)
The relevant exclusion noted: “Section 11 Liability Coverage … Exclusions: You are not insured for claims made or actions brought against you for: … (3) bodily injury to you or to any person residing in your household other than an employee;” (para 5).
The Court’s central holding was that the exclusion was not clear enough to remove coverage for a claim by one insured against another insured, stating that:
“The difficulty in interpreting Exclusion (3) is that the word ‘you’ as used therein is inherently ambiguous.“ (page 15)
…
“Given the existence of three different possible interpretations of the exclusion clause respecting coverage for claims by one insured against another, and the problems with each interpretation, it cannot be said that coverage was clearly excluded or that the exclusion clause was unambiguous.” (para 23.)
The result was clear:
“It follows from these conclusions that the insurer was under a duty to defend the claim of Dayton Hewson against Larry Hewson and to indemnify Larry Hewson against it.” (para 26.)
Although Hewson was not a corporate control case, it confirms a key principle: the Court did not adopt a general rule that an insured cannot sue another insured. Instead, it held that if the insurer wants to exclude that situation, the policy must do so clearly.
Saskatchewan Guidance on Insured Status and Anti‑Subrogation
Saskatchewan courts also stress that insider status alone does not confer insured status. In Goertz v Owners of Condominium Plan No. 98SA12401, 2023 SKKB 95, the court described the anti‑subrogation rule:
“It is a principle of insurance law that an insurer may not subrogate against its own insured in respect of an insured loss.” (para 16.)
However, that principle did not apply, as the claimant was not actually an insured. The Saskatchewan Court of Appeal accepted analysis was:
“He found as a fact that Mr. Goertz was not an insured … He also found that the plain text of the Policy indicated that a condo unit owner … was insured only for liability arising out of ‘common property’ …” (para 32.)
The analogy is direct: a director or shareholder must fall within the policy definition of insured. Corporate connection alone is not enough.
Conclusion
Canadian law does not permit an insured to manufacture liability coverage by suing itself. For directors and shareholders, insured‑versus‑insured exclusions usually block attempts to access company insurance through internal disputes, because those exclusions are designed to prevent “a legal proceeding by one insured party against another insured party” (Onex Corporation v American Home Assurance Company, 2013 ONCA 117 at para 121).
That said, the rule is not absolute. Coverage remains a matter of contract. Courts will enforce derivative‑action carve‑outs and other exceptions where the policy text provides them, as in Goodfellow, and Saskatchewan courts will not read exclusions more broadly than their language permits, as shown in Wawanesa Mutual Insurance Co. v Hewson. The decisive factor, in every case, is the wording of the policy itself.
*The law may have changed since this article was first published. You should consult with your lawyer to confirm the current state of the law*
For further information please contact:
| Denim R. Martyn Direct Line: (306) 477-7261 Email: dmartyn@cuelenaere.com |