An Ontario court has upheld an insurance company’s decision to deny errors and omissions (E&O) coverage to a former fund salesman who was sued by former clients alleging that he involved them in a fraudulent investment.
The insurer denied coverage on the basis that the lawsuit didn’t involve products covered by its policy, such as mutual funds.
In Yanaky v. Arch Insurance, the Ontario Superior Court of Justice dismissed an application from former fund salesman Dan Yanaky, which sought a declaration that he is entitled to E&O coverage under a policy issued by Arch Insurance (Canada), and would have directed the company to compensate him for legal costs incurred in defending and settling a lawsuit from former clients alleging fraud.
According to the decision dated August 27, Yanaky, who was a rep at Mississauga, Ont. branch of Investment Planning Counsel (IPC), was sued by clients, John and Janice Baxter, alleging that he introduced them to a fraudulent investment scheme. According to the Baxters’ claim, the scheme, known as the “Western Project”, allegedly involved setting up a charity in order to apply for the proceeds of a $30 million fraud that had been recovered by the RCMP. The couple alleged that the scheme was completely fictitious and a fraud, and claimed that between April 2009 and June 2011 they contributed a total of $476,300 to it.
Those allegations have not been proven. The case was settled after Arch denied insurance coverage.
The court was subsequently asked to consider whether Arch had an obligation to provide Yanaky with a defence in the case, and to pay his costs.
“Yanaky is required to show that there is a possibility that the Baxter claim is covered under the policy. If the claim alleges facts that, if true, would require Arch to indemnify Yanaky, then Arch is required to defend the claim,” the court saide in its decision.
However, the court found that “the Baxter claim does not fall within the coverage provisions of the policy. It therefore does not trigger a duty to defend as submitted by Yanaky.”
The decision said that Yanaky argued that the Baxters allege that he was providing them with financial planning and advice about mutual funds. However, the court said that it agrees with the insurers’ position, which is that the so-called Western Project is not an investment product covered under its policy.
“Any planning advice referred to in the claim is not related or connected to the solicitation, sale, or servicing of [products covered by the policy],” the decision said. “As a result, there is no possibility that the Baxter claim is covered under the policy. The claim cannot trigger indemnity.” It also ruled that the insurer is not required to indemnify Yanaky for the settlement of the Baxter action, as it did not involve covered products.
Earlier this year, the Mutual Fund Dealers Association of Canada (MFDA) also launched a disciplinary proceeding against Yanaky, alleging that he failed to cooperate with its investigation into complaints about the Western Project. Those allegations have not been proven either. A hearing is set for January 19-21, 2015.