The Ontario Court of Appeal has upheld a lower court decision, ruling that an insurance policy taken out by failed investment bank Coventree Inc. does cover part of the $12 million in legal fees incurred in defending the Ontario Securities Commission’s enforcement action against the firm and two executives.

Lloyds Syndicate 1221 was appealing an order from a lower court which found that a director’s and officer’s insurance policy provided coverage for a claim made by Coventree concerning the $12 million it spent defending the OSC’s case against it.

In its decision released Thursday, the Ontario Court of Appeal found that in the initial hearing on Sept. 13, 2011, Justice Lederer of the Superior Court of Justice considered the language of the policy, as well as circumstances underlying the negotiation and issuance of the policy, and concluded that the policy afforded coverage. The appeal court found no basis to interfere with his conclusion.

As stated in the appeal court’s decision, before the collapse of the non-bank asset backed commercial paper market in August 2007, Coventree and its directors and senior officers had been insured under a policy issued by Great American Insurance Company with a coverage limit of $1 million. Great American decided not renew that policy, which was due to expire in October 2007.

That policy included coverage for claims made after the expiration of the policy, if Coventree had given notice of the potential claims during the policy period. So, before it expired, Coventree gave notice to Great American of all of the potential claims it could envision relating to the market collapse.

Coventree then sought a new policy from Lloyds, and, in September 2008, Lloyds issued a policy providing $10 million in coverage, with coverage for ‘prior acts’ capped at the first $5 million of the $10 million limit.

In 2009, the OSC issued a notice of hearing and statement of allegations against Coventree and two of its senior officers, which cost them over $12 million to defend (ultimately unsuccessfully). Great American accepted that its policy responded to the claim and paid $1 million. But Lloyds denied coverage, arguing that there were three provisions in the policy that excluded coverage for acts referred to in the notice to Great American.

However, the lower court judge found that the Lloyds policy did provide $5 million worth of coverage for the ‘prior acts’ referred to in the notice to Great American. The appeal court has upheld that ruling.