Case information

Insurance — Fidelity insurance — Interpretation of contract — Role of evidence of pre-contractual communications — Courts below concluding insured’s loss resulting from fraud not covered by insurance policy — Whether evidence of negotiations should be admissible in the interpretation of a contract — If so, in what circumstances should evidence of negotiations be admissible in the interpretation of a contract.

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The applicant, Surefire Dividend Capture, LP (“SDC”), lost investments that it had made, or acquired, in Broad Reach Capital, LP (“BRC”), a hedge fund. Unknown to SDC when it decided to do business with BRC, BRC’s CEO was operating a fraudulent Ponzi scheme. SDC brought an action to recover these losses under a fidelity bond issued by the respondent National Liability & Fire Insurance Company (“Berkshire”). In the lead up to the issuance of the fidelity bond, SDC had made it known to Berkshire that it was seeking coverage for the risk of theft and fraud by sub-advisors including BRC. Even so, the trial judge concluded that the fidelity bond was not worded to allow SDC to claim on the bases it asserted. The trial judge found that BRC’s CEO was not SDC’s “employee” within the meaning of the fidelity bond. He dismissed the action. The Court of Appeal dismissed SDC’s appeal. It determined that in light of the trial judge’s findings, the pre-contractual communications showed that Berkshire never indicated that the coverage was on offer. The pre-contract communications did not assist SDC or demonstrate a palpable and overriding error in the trial judge’s interpretation of the fidelity bond.