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"Before You Settle" - Lockhard v. Quiroz v. C.A.A. Insurance Co. (Ontario)1

January 2010

First published in MB's Transportation Newsletter

In Lockhard, the plaintiff Lockhard was injured in a single-vehicle accident when her vehicle was being driven by the defendant Quiroz with her consent. At the time of the accident, the plaintiff's vehicle was insured by the third party C.A.A. Insurance Co. (Ontario) ("CAA"). The plaintiff sued the driver for damages.

CAA alleged that the plaintiff was in breach of the policy by permitting the defendant to operate the vehicle on Highway 401 when he was not authorized by law to do so. The third party also alleged that the defendant was an unnamed insured under the plaintiff's policy and drove the vehicle when not authorized by law. CAA then exercised its rights under s. 258(14) of the Insurance Act to deny liability under the policy and were made a third party to the action.

Thereafter, CAA settled with the plaintiff for $275,000.00 plus costs, but failed to obtain an assignment of the plaintiff's claim against the defendant, or the defendant's consent to the settlement, or a judgment against the defendant. CAA sought reimbursement from the defendant for the amount of the settlement paid to the plaintiff.

No Privity Between an Insurer and Defendant at Common Law

At common law, without an assignment of rights from the plaintiff, there is no privity between the insurer and the defendant. Therefore, the Ontario Superior Court in Lockhard reviewed the Insurance Act (the "Act") to determine whether the insurer's claim for reimbursement from the defendant could be found in statute.

Section 258

The Court first considered s. 258(1) of the Act which provides for the application of insurance money in or towards satisfaction of a judgment recovered against an insured. The court held that it was plain from the language of the section that absent an agreement between the insurer and the insured to the contrary, the recovery of a judgment is a prerequisite to any entitlement under s. 258(1) to access available insurance monies.2 In Lockhard, there was no judgment obtained against the defendant. As such, the Court held that s. 258(1) was inapplicable.

This failure to obtain a judgment was also determined to prevent an insurer from seeking reimbursement from a defendant under s. 258(13) for any amount paid to a plaintiff under s. 258(1).

In other words, should an insurer wish to obtain reimbursement of a payment made to a plaintiff under s. 258(13), the plaintiff first must obtain judgment against the defendant after trial or by a settlement consented to by the defendant. If settlement is completed between a plaintiff and an insurer without obtaining a judgment against the defendant, or a consent from the defendant, or an assignment of the plaintiff's rights against the defendant, the insurer will have made a payment it cannot recover under s. 258(13) of the Act.

Section 244

Pursuant to s. 244 of the Act, the defendant was held to be an unnamed insured under the plaintiff's policy and thereby deemed a party to the contract solely for the purpose of recovering indemnity for losses caused to others through his negligent driving. However, the court held that s. 244 does not grant an insurer privity to sue a defendant directly for a breach of the policy. Rather, s. 244 provides a term in the policy that third-party liability occasioned when a named insured's vehicle is driven by someone else, with the named insured's consent, is covered.

As a result of this lack of privity between the insurer and the defendant, if an unnamed insured forfeits his right to indemnity, the insurer's recourse, if it nonetheless makes a payment to the plaintiff, must be found in s. 258, through the plaintiff obtaining judgment against the defendant, which may then be recovered under s. 258(13), or by proceeding to trial against the defendant with an assignment of the plaintiff's rights.

Conclusion

In light of the foregoing, insurers who are contemplating settlement with a plaintiff and seeking reimbursement from the defendant for same should (i) obtain an assignment of rights from the plaintiff against the defendant as part of its settlement; (ii) obtain the defendant's consent to the settlement; or (iii) require the plaintiff to obtain a judgment against the defendant after trial or by settlement to preserve the insurer's rights under s. 258.

Without an assignment of rights, consent to settlement or judgment against the defendant, there is no recourse for the insurer to seek reimbursement from the defendant under common law or statute.


1 92 O.R. (3d) 232 (ON S.C.J.)

2 Lockhard v. Quiroz (2006), 83 O.R. (3d) 797, [2006] O.J. No. 4613 (C.A.) at paras. 6, 7 and 10]


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