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Zurich Insurance Company Ltd. v Ison T.H. Auto Sales Inc1

October 2011

Featured in an MB Subrogation Newsletter

McCague Borlack LLP Lawyer Hillel David represented the Insurers before Strathy J. and the Ontario court of Appeal - Docket: C53568.

The Ontario Court of Appeal recently released this important decision on the position of an insurer whose subrogated claim is combined, as it must be, with the insured's uninsured loss claim in a single action.

The decision on appeal affirmed the decision made by Strathy J. on an application made by insurers seeking carriage and control of an action that had been commenced by the insured, in which both the uninsured loss and subrogated claims were advanced.2 The underlying action arose out of a fire and explosion as a result of which numerous new cars belonging to the insured, an automobile dealer, were damaged. The insurer paid out the net sum (after credit for salvage recovery) of $1.1 million to the insured under the first party property loss coverage in the policy. The uninsured loss claim was in the amount of $700,000, representing alleged loss of profit and goodwill that was excluded under the policy.

The matter was somewhat complicated by the fact that a class action had been commenced as a result of the loss event, and the insured had opted out of that class action, although the separate action commenced by the insured was ordered to be tried together with the class action and the two actions were being jointly case-managed. In fact, the same counsel were acting both for the class action plaintiffs and for the plaintiff in the separate action that was the subject matter of the application and the appeal.

On the first issue (who is entitled to control the underlying action), there was no dispute that the common law rule, which has been in effect for more than a century, was that the insured is entitled to control until it has received full indemnity for all of its losses, including any uninsured loss, the most common type of uninsured loss being a deductible. The question was whether a subrogation clause in the policy, which mirrored the language of s. 152 of the Ontario Insurance Act, had the effect of overcoming the common law rule and providing control to the insurers, notwithstanding the fact that the insured had not yet received full indemnity for all of its losses.

The insurers made two arguments on the control issue: The first was that the common law rule does not survive, and therefore cannot be relied upon, when its foundation and rationale (what was described in one decision as its "entire underpinning") have been contractually removed. The second was that the subrogation clause affirmatively conferred on the insurer the right to control the underlying litigation.

The relevant language of the policy subrogation clause was:

Release from Liability and Subrogation Clause

The Insurer, upon making any payment or assuming liability therefore under this Policy, shall be subrogated to all rights of recovery of the Insured against any person, and may bring action in the name of the Insured to enforce such rights.

...

Where the net amount recovered after deducting the costs of recovery is not sufficient to provide a complete indemnity for the loss or damage suffered, that amount shall be divided between the Insurer and the Insured in the proportion in which the loss or damage has been borne by them respectively.

It was the position of the insurers that those contractual provisions eliminated the insured's common law right to be made whole before any right of subrogation arose for an insurer, and thereby eliminated the foundation and rationale of the common law rule conferring the right of control of an underlying action against the wrongdoer on the insured. The insurers made the alternative argument that the language of the clause, and particularly the words "shall be subrogated to all rights of recovery of the Insured... and may bring action... to enforce such rights" (emphasis added), affirmatively conferred the right of control on the insurer.

The insurers took the position that the subrogation clause ought not to be applied literally, but rather that it should be interpreted to mean that the right of an insurer to have carriage and general control of the underlying action should be treated with flexibility, subject to modification in light of the facts and circumstances, because that would accomplish the general purpose of attaining the fair and sensible result. The insurer's prima facie right to have control should generally be relinquished only where the insured has demonstrated a compelling reason to have the right transferred to it, and that normally would only occur where the insured has shown that its uninsured loss claim has a real value significantly greater than that of the insurer's subrogated claim. The result otherwise would be that an insured with an uninsured loss claim of, say, $10,000, would have the right of control despite the fact that the insurer's subrogated claim amounted to $990,000. That, argued the insurers, would be both unfair and non-sensible.

The insured relied on the decision in Farrell Estates Ltd. v Canadian Indemnity Co.,3 while the insurers relied on Somersall v Friedman,4 saying that the former decision was inconsistent with and impliedly overruled by the latter.

The application judge distinguished the Somersall decision and adopted and applied Farrell, and the Court of Appeal agreed with that view. The only concession made by the application judge, and adopted on appeal, was that control might be transferred to the insurer where its interest is "so vastly disproportionate to the insured's interest that it would be unreasonable to allow the latter to have control of the litigation". Suppose the uninsured loss claim is $100,000 and the subrogated claim is $900,000—does that meet that test? What if it were $300,000 as compared to $700,000? Where is the dividing line that identifies what is "vastly disproportionate"? No assistance was given on that question.

On the second major issue (right of participation control of a party's own claim), the insured took the position that its right of control essentially gave it the right to determine the scope and extent of the insurers' right of participation, and that the insured had the unilateral right to settle all of the claims in the underlying action, including the subrogated claim, subject only to consultation with, but not any veto by, the insurers. The insurers, on the other hand, asked the court at both levels to set ground rules on these matters. The basic principles that the insurers asked the court to adopt were that the junior party should have a right to full and meaningful participation in the underlying action, and to full control of its claim, except on issues of liability common to both parties.

The application judge did not deal with this issue, saying that it would be "inappropriate for the court to micromanage the ongoing relationship between the insurer and the insured and that , subject to the [insured's] undertaking [to keep the insurers informed of the status of the litigation and to consult with the insurers on its prosecution, including any settlement offers], they are best left to their common law obligations, however they may interpret them, and to their common law remedies." The Court of Appeal similarly refused to establish any general principles or set out ground rules, saying that the application judge was case-managing both the underlying action and the associated class action and was "well-positioned to deal with any complaints about the insured's carriage and control of, and the insurers' participation in, the [underlying] action as it moves forward."

What about those cases where there is no associated class action, or no case-management judge? Is the insurer in those cases to be placed in the position of a bystander at the entire mercy of the other party (particularly where the uninsured loss claim is a fraction of the value of the subrogated claim)? Would the insurer be entitled to nothing more than periodic reports and infrequent and empty consultation, with no decision-making capability (particularly as regards settlement of its own subrogated claim)? Is that a commercially sensible (even apart from whether it is fair) result? These are important questions that were left unanswered.

Should you wish to obtain further information concerning this decision, please contact Hillel David, Member of McCague Borlack LLP's Subrogation Practice Group.


1 2011 ONCA 663.
2 The decision on the application is reported at 106 O.R. (3d) 201.
3 (1989) 59 D.L.R. (4th) 67, B.C.S.C., affirmed (1990) 69 D.L.R. (4th) 735, B.C.C.A.
4 [2002] 3 S.C.R. 109.


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