Principles Of Subrogation

By Brian C. Atherton
Atherton Barristers

The Basic Principles
Subrogation is a common law right that exists independent of statute, or the provisions of an insurance policy.

Subrogation is based upon the concept of indemnity — that is, making the other person whole. Subrogation will not arise where the payment is gratuitous or does not necessarily reflect the loss incurred by the insured. For example, accident sickness policies that pay a lump sum, regardless of the actual loss incurred by the insured. Most subrogation rights arise pursuant to a contract of insurance. The rights of the insurer to be subrogated can be modified or in fact eliminated by the insurance policy. A most common example is where the insurer agrees not to take any subrogated action against others named in the policy of insurance.

A large body of case law has developed around the concept of "unnamed insureds," and more recently whether third parties (strangers to the contract) can rely upon waiver of subrogation rights in a contract of insurance.

A common example is a situation where a tenant is obligated to provide fire insurance on the premises or the landlord agrees to assume the obligation of providing such insurance. Under those circumstances, the courts will find that the other party is an "unnamed insured" under the policy of insurance, thereby prohibiting the subrogation rights of the insurer.

More recently, the Supreme Court of Canada has determined, in the case of Fraser River Pile & Dredge Ltd. v. Can-Dive Services Limited that a stranger to a contract of insurance may also be an "unnamed insured" prohibiting rights of subrogation. In that case, there was a provision in the insurance agreement that waived rights of subrogation against "any charter." A third party to the insurance policy chartered a dredging barge, which it damaged. The insurer paid the owner of the barge pursuant to the policy and decided to subrogate against the charterer. The Supreme Court held that the insurer must have intended not to exercise rights of subrogation against charters by the expressed term of the contract.

This is seen as a departure from the common law rule that strangers to the insurance contract "are not entitled to take advantage of the provisions in the policy."

If, however, subrogation does exist, it is not effective until the insured has been fully indemnified for its loss. A statutory exception to the common law is found in Section 152 of the Ontario Insurance Act, wherein it states that an insurer is subrogated to the rights of the insured upon "making a payment." It is has been held that this provides the insurer with the right of subrogation before the insured is fully indemnified for its losses.

However, this seems to only apply to policies of fire insurance. It should be noted that multi-peril policies have been held to not be policies of fire insurance, although rights to subrogation are incorporated into the policy. Under the multi-peril policies the insured would still have to be fully indemnified before a subrogated claim could be commenced against the third party.

The insurer stands in the shoes of the insured and gains no greater rights concerning the third-party than the insured. Accordingly, limitation periods that would be applicable to the insured are also applicable to the insurer. No new "statutory rights of subrogation" are created even if there is a clarification and a right provided to insurer in the Insurance Act (Section 152).

All actions against the third parties must be joined in one proceeding. Therefore, if an insured person brings an action against the third party for losses, some of which are covered and some are not, it owes a duty of good faith to the insurer not to make an improvident settlement for the insured portion of the claim.

If the insurer has fully indemnified the insured it may bring an action in the name of the insured against the third party, but must include a claim for all losses sustained by the insured. It owes a duty of good faith not to make an improvident settlement of the non-insured losses. If the insurer assumes carriage of the action, the insured is not responsible for any costs associated with the action. The insurer also has the right to retain counsel of its choice with respect to that action.

If there is insufficient recovery from the third party for all the losses sustained by the insured, then the amounts recovered are distributed pro rata between the insurer and the insured in proportion to the loss and coverage.

If the insured sues a third party, and recovers 100% from the third party before the insurer makes any payment, then the insured has no right to call upon the insurer for payment as he would have been "fully indemnified."

If the insured sues a third party, recovers payment, and the insurer has made a payment, then the insurer may also commence action on its own against the insured for recovery of the money received from the third party.

If the third party pays the insured, after commencement of a civil action, the insurer can withhold payment of the insured loss, but must reimburse the insured for the expenses of the lawsuit.

If the insured breaches the duty of good faith and does not settle for the full amount that could be recovered from the third party, then it is liable to the insurer for the difference between the actual amount recovered and what could have been recovered from the third party. The test for entitlement under these circumstances is as follows:

Considering the possibility of not establishing liability and chances in expenses involved, did the insured take less than he honestly and in good faith thought it wise and prudent to accept.

If an insurer fully indemnifies the insured, but decides not to pursue the third party, and the insured has commenced action against the third party, the insured must still diligently pursue the third party and account to the insurer for any amounts received from the third party.

Statutory Conditions Found in the Insurance Act re: Subrogation

• Section 152 - Subrogation pursuant to the contract of fire insurance;
• Section 263(5) - Restrictions and recovery for motor vehicle property damage;
• Section 265(6) - Subrogation by insurer against uninsured motorists;
• Section 267.8(17) and (18) - No rights of subrogation for payment of Statutory Accident Benefits except to the Ministry of Health, where the other parties are not insured by a policy of motor vehicle insurance;
• Section 278 - General rights of subrogation (subject to other exclusion clauses found in the Insurance Act).

Overview of Statutory Conditions
Section 263(5) - This provision deals with the direct compensation - property damage, provisions of the Insurance Act. As a general proposition an insured person has no right of recovery against any other person for damage to his car, or its contents. The insurer is also prohibited from exercising its subrogation rights against other persons, provided they are insured pursuant to a policy of motor vehicle insurance. This provision must be linked with Section 265(6) which provides the insurer with rights of subrogation against those who "use or operate" an uninsured vehicle.

Section 263(5)(a.1) is a recent amendment to the Insurance Act. This provision was the subject of the recent decision in Wawanesa Mutual Insurance Company v. Ontario Provincial Police (Commissioner). Madame Justice Kovacs held that this section did not create a new right of subrogation against other persons (subject of course to the provisions regarding uninsured motorist coverage) for property damage or contents. However she went further in that case and held that Section 267.8(17) and (18) did provide a right of subrogation for the payment of Statutory Accident Benefits against persons other than those operating an insured automobile.

Section 267(17) and (18) require further comment. Subsection (18) would appear to be a conjunctive exception i.e. there is no right of subrogation unless the person who made the payment is the Ministry of Health, and the third party is a person other than a person insured under a policy of motor vehicle insurance. This would seem to suggest that only the Ministry of Health has the right to pursue claims against persons for whom payments for medical expenses are made pursuant to the provisions of the Statutory Accident Benefits Schedule.

In her decision, Madam Justice Kovacs seems to have ignored the significance of the word "and". She accepted the arguments of counsel for Wawanesa that the amendments to the Insurance Act under Bill 59 were to provide a right of recovery against "non-automobile insurers" as otherwise this would "be subsidizing an automobile insurer whose policyholder has caused the accident. This would not be in keeping with the purpose and intention of the legislation to stabilize and reduce the cost of automobile insurance rates."

This argument seems to fly in the face of her decision not to permit recovery of property damage, as pay-outs of property damage are equally significant to those involving the payment of Statutory Accident Benefits.

O.P.F. Endorsement #44
This endorsement is often referred to as "under insured coverage." The purpose of this endorsement is to provide additional coverage to insured's who are injured by "inadequately insured motorists." For example, if you are injured in a motor vehicle accident caused by another insured person, and you sustain serious injuries such that a general damage assessment would be, for example, $1 million, and the at fault motorist only has third party policy limits of $500,000, then under the #44 Endorsement, you would recover the additional $500,000 difference between the third-parties' limits and your own limits.

The amounts paid pursuant to the #44 Endorsement are subject to reductions for payments from a number of other sources.

However if the #44 Endorsement does make any payments, then your insurer has a right of subrogation against the inadequately insured third party motorist. This provision is found in Section 20 of the O.P.F. #44 Endorsement.

Uninsured Motorists Claims
A right of subrogation also exists under the Motor Vehicle Accident Claims Fund Act. This Act is designed to ensure compensation to individuals who are injured by uninsured motorists, who have no other source of insurance. Under those circumstances the Superintendent will pay accident benefits, and if the insured person has a tort claim against the uninsured or unidentified driver, it will pay the insured up to $200,000.

The Ministry has rights of subrogation for third party payments pursuant to Section 4(6) of the Motor Vehicle Accident Claims Act.

Case Law Pertaining to Principles of Subrogation

• Principles of indemnity versus "gratuitous payments" - Schittone v. George Minkensky Limited et al. - 36 O.R. (3`d) 75; London Life Insurance Company v. Forget 3 O.R. (3rd) 559.
• Insurer bound by limitation periods - Royal Insurance Company of Canada v. Aguiar 48 O.R. (2nd) 705.
• Distinction between "fire policy" and "multi-perils policy" re: no subrogation before fully indemnified - Fire Stone v. Chubb Insurance Company of Canada [1995] I.L.R. 1-3162.
• Unnamed Insureds and Third Party Beneficiaries to Contract - Greenwood Shopping Plaza Limited v. Beattie [198012 S.C.R. 228 (Case of limited application due to Fraser River Pile and Dredge Limited v. Can-dive Services Limited [1999] I.L.R. I-3717. See also Mattison Developments Limited et al. v. Plan Electric Company et al. 36 O.R. (3rd) 80 re: unnamed contractor's covered by General Contractors policy of insurance. See also Rose et al. v. Borisko Brothers Limited (1983) 41 O.R. (2"d) 606 re: discussion of principles of subrogation and when it will apply. Further examples of coverage for subcontractors found in Janeland Developments v. Michelin Masonry Inc. [1996] O.J. 513.

Statutory Provisions

• Section 263 - Wawanesa Mutual Insurance Company v. Ontario Provincial Police (Commissioner) 47 O.R. (3rd) 332; Mayberry v. General Motors of Canada Limited [2000] O.J. 3082, following the decision of Wawanesa regarding no subrogated rights of property damage.
• Section 267 - Quebec (Regie) v. Soloway, Wright, 31 O.R. (3rd) 254 - no right of subrogation by Regie against Ontario insurers pursuant to Section 267. See also Osborne (Litigation Guardian of) v. Bruce (County) [1999] O.J. 50 re: subrogated claim by Ministry of Health pursuant to Section 267(4) where one of the defendant's is insured under a policy of motor vehicle insurance. This case must be read more carefully it pertains to Pre-Bill 59 legislation.
• Section 278 - Villeneuve v. Scott et al.; Wawanesa Mutual Insurance Company third party 38 O. R. (3`d) 89. Case involves the situation of one insurer paying its insured pursuant to uninsured motorist coverage and seeking contribution from another insurer who may also have insured the claimant under another policy of insurance. Court granted such rights pursuant to Section 278(1) of the Act and at common law.

#44 Endorsements

• Harris v. Floyd et al. [1992] I.L.R. 1-2836 Insurer named in action by insured for recovery under #44 Endorsement cannot cross-claim in its own name against under insured third party.
• Burns v. Ferri 16 O.R. (3`d) 569 - Stands for principle that insured cannot restrict insured's right of subrogation without the insurer's expressed consent. A release in favour of a third party was rectified to omit references to preventing any further actions against other parties.

For more information on how we can assist you, please contact us at Atherton Barristers at (416) 365-1030 or toll free (866) 237-1030.

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